For people who are interested in answers to those questions, I have two suggestions: read Free People, Free Markets by retired Wall Street Journal editor George Melloan, and read this review.
Melloan’s breezy history of the Journal and its various controversies over the years is entertaining and informative. Starting in the early 1970s, he followed closely and often wrote about major developments and events, including supply-side economics and tax cuts, the fall of the Soviet Union, the various wars that the U.S. government got into, and last decade’s financial crisis. His thoughts are sometimes insightful and it’s heartening to see how he and the Journal editors have held firm, for good reasons, on free trade and immigration. Also, he tells how he disagreed with his one-time boss, the late Journal editorial page editor Bob Bartley, about the war on drugs. At times, however, I was surprised by Melloan’s apparent ignorance of basic economics; that ignorance does, though, explain why the Journal’s editorial page has had somewhat of a tin ear on issues such as the causes of oil price increases and the reasons for low interest rates.
Supply-side economics / Although Melloan tells the whole history of the editorial page (now pages), what I found most interesting was the parts of the book that he devoted to the early 1970s. I started reading the Journal in 1972 at the suggestion of Benjamin Klein, one of my UCLA economics professors, and haven’t stopped. As it happens, one of the biggest changes in the page took place in 1972: 34-year-old Bartley was chosen as editorial page editor. That was not an unalloyed positive.
We can thank Bartley for making supply-side economics understandable, popular, and influential. Supply-side economics, as he and other Journal writers describe it, is the idea that high marginal tax rates discourage work, saving, and investment. It still shocks me how little emphasis academic economists placed on that insight before Bartley came along. Remember that the top marginal tax rate on individual income in the 1970s was a whopping 70%, so the idea that marginal tax rates matter should not have been so controversial.
The Journal’s persistent call for lower marginal tax rates helped strengthen President Ronald Reagan’s hand. From 1981 to 1987, Reagan and Congress cut the tax rate paid by the highest-income people from 70% to 28%. For that, those of us who believe in giving people incentives to produce and those of us who believe that people should keep more of their income should thank the Journal.
But there was a downside to this advocacy. First, many of the Journal’s unsigned editorials (under the heading “Review and Outlook”) and guest op-eds during the Bartley era suggested that the economic growth sparked by tax cuts would result in higher federal tax revenues than if tax rates weren’t cut. Reasonable back-of-the-envelope calculations showed that this was highly unlikely. As economist Lawrence Lindsey demonstrated with a careful examination of the data, more taxes were paid by the highest-income people, whose marginal tax rates were cut in the early 1980s from 70% to 50%. But it was not true for taxpayers overall.
Second, because the Journal’s editors did not worry much about the revenue effects of large cuts in tax rates, they didn’t put much emphasis on proposals for reining in federal government spending. Imagine, for example, that the editors had advocated in 1972 that federal spending rise by 0.5 percentage points less per year than it actually did. In 1972, federal government spending was $244.3 billion. In 2016, it was $3,852.6 billion. That’s a compounded annual growth rate of 6.5%. If our imaginary editors had gotten their way and federal spending had instead risen by “only” 6% annually, it would have been $3,172.4 billion in 2016. The result, with taxes the same as they are, would have been a federal budget surplus of $95.6 billion rather than the actual budget deficit of $584.7 billion.
Immigration, trade, and foreign policy / Two issues on which the Journal’s editors have been steadfastly in favor of free markets are international trade and immigration. The Journal was a very prominent supporter of the North American Free Trade Agreement and, whatever level of restrictions on immigration we have, the editors have always wanted less. Indeed, Bartley once proposed the following constitutional amendment as an immigration policy: “There shall be open borders.” A quick look at the country’s immigration policy shows that we started moving away from liberalized immigration even before President Trump. By contrast, over the four decades since Bartley became editor, the United States has moved, on net, closer to free trade.
Melloan is at his best when he analyzes the microeconomic details of an economy. Reporting on a late 1980s trip through the Midwest, for example, he tells of big steel companies “moaning over their losses and demanding that Congress protect them from imports.” But he then discovered “that smaller steelmakers using electric furnaces were competitive with foreign producers and were making money.” When exploring the changes in the railroad industry, he found entrepreneurs “picking up abandoned trackage and running short lines to serve local needs.”
Some of my colleagues who read the Journal’s frequent neoconservative foreign policy op-eds and attacks on Ron Paul’s noninterventionist views refer to it as the “War Street Journal.” But one pleasant surprise, to me at least, was Melloan’s documentation of the Journal’s earlier opposition to—or at least criticism of—war. He quotes a prescient 1912 editorial by William Peter Hamilton that was critical of what he worried would be a major war in Europe:
War is a waste. One country cannot dissipate its savings in gunpowder smoke without hurting all the rest of us. In modern conditions of easy communications and international exchange, the misfortune of one is the misfortune of all.
Even much later, the Journal remained critical of war. Melloan points out that it “opposed JFK’s plan to send American advisers to aid the South [Vietnamese].” In October 1961, he notes, the editors wrote: “Perhaps we should all realize that there are certain things that the U.S., for all its military power, cannot do. One is to reshape the nature of people’s radical values.” Even today, Melloan—expressing his own views but probably also those of his former colleagues—opposes American politicians “setting up China as a bogeyman for their fear tactics designed to win votes.” It would be “dangerous and possibly damaging to world trade,” he writes “to put China back on the enemies list.”
Unfortunately, that same sense doesn’t seem to carry over to the Middle East. The editors were cheerleaders for both recent wars against Iraq. In late January 1991, during the Gulf War, Melloan advocated “a military occupation of Iraq by the United States, Britain and France, with sufficient power to intimidate Syria and, if necessary, Iran.” And looking back on their support of President George W. Bush’s invasion of Iraq, Melloan writes, “I see very little to regret.” He argues that destroying Saddam Hussein and his government “gave the United States a position in an Arab country from which to rally other Arab states against yet another U.S. enemy with ambitions for weapons of mass destruction, Iran.” Yet the obvious counterweight to Iran in the Middle East was Hussein. Melloan writes earlier in the book about the horror of the Iran–Iraq War during the first eight years of the 1980s, but he doesn’t seem to see the connection.
Melloan—and probably his former colleagues—opposes American politicians “setting up China as a bogeyman for their fear tactics designed to win votes.”
On one war, though, Melloan is on the side of the angels: the drug war. He notes that as early as 1972 he agreed with Milton Friedman that drug prohibition should be ended: “I took a Libertarian view.” Bartley, on the other hand, “believed that it is important to the health of a democracy to have a set of agreed-upon standards that covered human behavior.” A ban on drugs, claimed Bartley, was such a standard. The obvious counter, which unfortunately Melloan doesn’t give, is that threatening people with prison for using, producing, or selling drugs has nothing to do with “agreed-upon standards.” Those who go to prison did not, I am certain, agree with those standards. To his credit, though, Melloan points out fellow editor Mary O’Grady’s argument that U.S. intervention to suppress coca growing in Bolivia helped elect Evo Morales, a Fidel Castro admirer, as president. Melloan also points out the huge cost of the drug war to Mexico.
He notes that the young Bartley was chosen as editorial page editor over the more senior and more economically literate editor Lindley H. Clark Jr. Of course, we can’t know what would have happened if Clark had become the editor. One likely difference, though, is in the choice of junior personnel. Clark likely would have picked deputies who were more economically literate than many of Bartley’s picks.
Flubs / An issue on which Journal editors have exaggerated for decades is the link between monetary policy and exchange rates on the one hand and oil prices on the other. It’s clear that, with everything else held constant, printing more money will cause the value of the U.S. dollar to fall and the price of oil in dollars to rise. But Melloan continues the Journal tradition of writing as if the chief driver of higher oil prices is loose monetary policy and the resulting fall in the value of the dollar.
“The price of oil soared” after 2001, he writes, because of the dollar’s loss of purchasing power in international markets. That’s partly true. But there’s an easy way to see just how much, and it appears that editors who write in this vein have never done it: compare the increase in the price of oil in dollar terms and the increase in the dollar value of foreign currency over that same period. From 2001 to 2008, the price of crude oil rose from $23.12 to $94.10—an increase of 307%. Over those same years, the price of the euro, the world’s other main currency, rose from 90¢ to $1.47, an increase of 63%. Clearly, other factors were more important to oil’s rise than exchange rates. In oil markets as in other markets, the likely main causes of price increases, as energy economists know, are increases in demand or decreases in supply.
Another important example of lack of numeracy is on economic growth rates. Melloan writes that the 1970s were somewhat of a lost decade for the United States, in part because of slow growth. Like many observers, he probably is not aware that the average annual growth in real GDP in the 1970s was a healthy 3.2%, which is exactly what it was in the 1980s.
Also, Melloan attributes the low interest rates of last decade to the Federal Reserve’s monetary policy. But the real cause of the low interest rates—as former Federal Reserve chairman Ben Bernanke recognized and as Jeffrey Hummel and I described in “Greenspan’s Monetary Policy in Retrospect” (Cato Policy Report, November 2008)—was a surge of saving coming from Asian countries and elsewhere, resulting in more money available for lending and investment.
Despite these weaknesses, Free People, Free Markets is a valuable resource for those who want a better understanding of the world as the Journal editors saw it and an account of the Journal’s role in changing that world.
