I presented this paper 25 years ago - I haven’t changed my mind.
This is Part 1 – hopefully it won’t take another 25 years to get around to publishing the second part.
Orbital Economics: Engineering Growth
Twentieth Space Congress
Cocoa Beach, Florida
Private Enterprise in Space
April 26, 1983.
Copyright 1983, Terry Bain
Government funding is usually too irregular and inefficient to sustain Orbital Industrial Operations. Economic history indicates that America’s Moon landing was probably engineered by the Kennedy Tax Rate Reductions of 1964-66. Taxation, directly and indirectly, has always affected the aerospace industry: rate cuts engineer growth.
Economic “Bad Medicine” is the primary causation of most problems delaying Private Enterprises’ expansion into space. Rate cuts increase government revenues: tax hikes seem to precipitate budget cuts that can kill projects, or people. Unnecessarily high tax rates almost always force private sources of capital “underground”. Mankind needs access to its “second worlds”. One-world, “fractional economics” is obsolete.
Introduction: the Malthus Mistake
Aviation people understand the crashes are usually the result of an uncorrected chain of small mistakes. Each isolated error often seems far too minor to be singled out as an accident’s cause. A long train of minor errors, however, can have results that are fatal.
America‘s economy “stalls out “occasionally.” Any good pilot knows how to recover from a stall; they simply nose their ship down, and trade off a little altitude for airspeed to regain lift. If the machine isn’t damaged, a stall should only be a relatively minor problem – unless, of course, it happens a little too close to the ground.
Good economic “navigation” is essential, if the captains and crews of American commerce choose to avoid “pilot error”. Today’s economists, for the most part, are not navigating effectively: their tools still work, but their charts are out of date. All forms of Malthusian, or controlled growth economics (Mercantilism) are dangerously obsolete – since July 20, 1969, Earth’s expanding population has had potential access to a “second world.” Mercantilism is too slow; economic “bad medicine” is the only barrier, in 1983, to unrestrained frontier growth.
Mercantilism became obsolete in 1776, when Adam Smith published Wealth of Nations. (Figure 1). Smith advocated minimum governmental intervention, free enterprise, and free trade, based on the assumption that the labor of individuals (rather than the national hoard of gold) was, and is, the only real source of all wealth. Smith felt that the interests of society, as a whole, are best served by allowing every individual to pursue his own self–interests.
Classical economics began veering off course in 1798, when Thomas Malthus published An Essay on the Principle of Population. He observed, correctly, that unrestrained populations tend to grow geometrically, while resources seem only to rise at an arithmetical rate. Malthus feared that more and more people, competing more each year, for ever-smaller per-capita shares of the planet, would someday leave Earth hip-deep in hungry people.
Later European economists, including Jeremy Bentham and David Ricardo, attempted to deal with the projected Malthusian “evils” of unrestrained growth. Classical economics became the “gloomy science,” and mainstream economic philosophy gradually began reverting back towards controlled growth.
Income redistribution and social reform were advocated, in the 19th century, to ration out the alleged “dwindling resources” of the planet. John Stuart Mill advocated “progressive taxation,” socialization of land rent, and compulsory education, while paradoxically insisting on limited governmental power, to preserve individual freedom. Karl Marx pondered Ricardo’s “gloomy science” and came to the conclusion that only political revolution could save society.
John Maynard Keynes wrote The End of Laissez-Faire, in 1926. Later, he became the first economist to argue that increased government spending (Monetarism) would solve the Great Depression of the 1930s. Monetarists were “… all Keynesians”; but by the 1970s, severe inflation had forced a few economists to begin having second thoughts. Milton Friedman, in Free to Choose, re-examines Smith’s classical economics to find solutions that government spending, alone, couldn’t seem to cure.
While working as an editorial writer for the Wall Street Journal, Jude Wanniski noticed two economists, who seemed to be “navigating” correctly. Wanniski observed, in The Way the World Works that Robert Mundell and Arthur Laffer foretold the rapid inflation of 1973, and correctly predicted the recession of 1974-75.
In the summer of 1974, Wanniski writes, President Ford proposed a 5% surtax on personal income. (1) The nation’s economy. “stalled and crashed”. At first glance, the cause of that crash might be dismissed as a coincidence. Ford’s surtax and the “Crash of ’75,” probably wasn’t the only time in economic history that bad economics had “grounded” the aviation industry.
Mellon’s Medicine: Engineered Growth
Small-scale air-transport experimentation, wrote Hugh Knowlton in Air Transportation in the United States, was just getting underway from 1911 to 1921. In 1916, Congress authorized funds to the Post Office Department to advertise for private enterprise contracting bids. “No bids were received, because those who would have liked to bid found it impossible to obtain suitably constructed planes for such a service.” (2) During World War I, the War Department started the first experimental air-mail route, in May of 1918. After the war, the Post Office Department took over the entire operation in 1919, operating three routes. Congress authorized funds for the first transcontinental route, and it made its debut flight in February, 1921. (3) Early progress was slow; necessary venture capital was only available from the government.
Wanniski writes that Warren G. Harding won the 1920 presidential elections, following a severe post-war recession, by the largest landslide victory in history; his platform urged a “Return to Normalcy”. (4) His predecessor, Woodrow Wilson, had signed a $6 billion surtax into law, February 24, 1919, to pay off the nation’s war deficit. (5) America’s economy “stalled”; the League of Nations and many Democratic reelection bids “crashed”. Harding appointed Andrew Mellon as Secretary Of Treasury. In 1921, they urged Congress to eliminate the excess-profits surtax, and the economy began a slow recovery. (6) Following Harding’s death in office, in 1923, President Calvin Coolidge called for further income tax rate reductions in February, 1924 – the stock market began responding immediately. (7).
On Mellon’s advice, rates were reduced from 57% on upper-income tax brackets, towards a maximum rate of not more than 25%. (8 Between 1921 and 1929, Mellon’s tax rate cuts increased government revenue enough to reduce the national debt by more than 20%. (9) Wanniski writes, “It had taken four years for the New York Times index to rise from 90 to 106.” By December of 1924, it rose to 134, and by the end of 1925, it reached 181. After a plateau through 1926, it got to 245 by the end of 1927. The Times Industrials peaked on September 19, 1929, at 469 – the index, Wanniski notes, had quadrupled in five-and-a-half years. (10)
Commercial aviation “took off” too; Mellon’s medicine was the perfect prescription for Commercial Air Transport growth. “The Post Office had demonstrated the practicability of mail by air…”, wrote Knowlton, “but it did not wish permanently to perform the role of operator. “Rather, it wanted to turn over the operation of airmail service to private enterprise as soon as possible”. (11) In February, 1925, one year after Mellon’s income tax rate reductions began, Congress passed the Kelly act, which made provision for the transportation of airmail by private contractors. Ford Motor Company was first to enter the field. They had begun building airplanes in 1924, and in 1926 they began operating routes. By 1927, the Post Office Department was able to turn over its last route to private contractors. (12)
“Once placed on a private contract basis expansion of the airmail service was rapid, and more and more private capital came into the field,” Knowlton wrote, “New lines were established all over the country.” (13) on May 20, 1927, Charles Lindbergh flew to Europe. “New companies sprang up, and the securities of existing companies soared to fancy heights…by 1929 there were 44 listed operators of scheduled routes in the United States, nearly 2 1/2 times the number that are in existence….,” Knowlton wrote, in 1941. (14)
Wanniski writes, “None of the prevailing theories could explain the 1929 crash any better than they could explain the preceding boom. “Until this writing, no one has linked the crash with the breakdown of the anti-tariff coalition in the Senate in the last days of October of ‘29.” (15) “The stock market crash of ’29, writes Wanniski, “… and the Great Depression ensued because of the passage of the Smoot-Hawley Tariff Act of 1930.” (16)
Knowlton wrote “… 1929 began a period of mergers and consolidations, which became necessary with the collapse of the boom late that year.” (17) In April, 1930, Congress passed the McNary-Watres act that paid contractors by weight, instead of mileage: bonuses had to be instituted to “stimulate” passenger service. (18
Equilibrium had almost been recovered, according to Wanniski, when President Hoover tried to “balance the budget” by increasing income tax rates for fiscal year 1932. As usual, the economy stalled – and this time the banks crashed. As the March 15, 1933 income tax payment deadline approached, taxpayers all across the country were forced, simultaneously, to withdraw their savings, and the banking. “Panic of ’33” was the result. Roosevelt’s famous “Bank Holiday,” which he announced at his inauguration on March 4, 1933, merely enabled the Fed to reflow tax receipts to the nation’s “overtaxed” banking system. (19)
In 1934, all airmail contracts were suddenly canceled by Presidential decree. Knowlton noted that charges of “collusion” between operators and the Post Office Department were cited. “The Army, forced overnight to carry the mail, a task for which it was technically unprepared, attempted to rise to the occasion and made a gallant effort to fill the bill, but the tragic results to many of its personnel are well-known.” (20) Subsequent contracts were set at prices that bidders knew in advance were inadequate to pay for the service. Knowlton observed that, “… revenues did not keep up with expenses. We thus have the spectacle of an industry growing by leaps and bands in volume of traffic, but losing money in the process – a sort of profitless prosperity.” (21)
By 1926, Robert Goddard had successfully demonstrated the liquid fuel rocket. Further developments, however, were slowed by the Depression. Major General Walter Dornberger, formerly the commanding officer of the Peenemunde Rocket Research Institute, writes in V-2, “As so often before in the history of technology, necessity in Germany after the first world war had forced a great invention to proceed by way of weapon development. (22) “Neither industry nor the technical colleges were paying any attention to the development of high powered rocket propulsion. There were only individual inventors who played about without financial support, assisted by more or less able collaborators… as we did not succeed in interesting heavy industry. There was nothing left to do but to set up our own experimental station for liquid propellant rockets….” (23) Lacking venture capital from any source other than the government, Dornberger noted that, “Research workers were obliged to serve the ends of war.” (24) The road to the stars was open, but the moon was still a tax cut away.
Camelot: Ticket to the Moon
Twenty years ago, in April of 1963, former President Dwight Eisenhower wrote, “The space program, in my opinion, is downright spongy. This is an area where we particularly need to demonstrate some common sense. “Specifically, I have never believed a spectacular dash to the moon, vastly deepening our debt, is worth the added tax burden it will eventually impose upon our citizens… I suggest that our enthusiasm here be tempered in the interest of fiscal soundness.” (25)
Ken Hechler writes, in Towards the Endless Frontier, “the very size and steep increases in the NASA budget alarmed many Congressmen….” (26) “Selling the space program to Congress was no easy task….up to 1962, this was comparatively easy; the shock of Sputnik and Gagarin’s flight had not yet worn off, and John Glenn, and the other Mercury astronauts had made the program easy to sell. “Congress in 1963 was reflecting incipient dissent from many groups in areas throughout the country, and this dissent expressed itself in several different ways.” Hechler notes that in FY 1963, the NASA budget was “trimmed” by $500 million. (27) Budget cuts always have hidden costs; the Mercury program concluded by 1963, but the Gemini program slipped back a year. (28
In February of 1964, President Johnson signed the Kennedy Tax Cut Bill. Increased revenues, as always, poured into the treasury from the expanding economy. Wanniski notes that the stock market slid up steadily until February 9, 1966. (29)
“1965…,” Hechler writes, “was a banner year.” Early in 1966, however, funding for future planning and post-Apollo programs were severely slashed by the Bureau of the Budget. (31)
“Instead of recommending return of the (revenue) surpluses via further rate reductions, Republicans watched in dismay as Johnson Democrats not only spent revenues in hand, but also committed anticipated future receipts to Great Society’s spending programs,” Wanniski writes. (32) “In the Decade 1964 to 1974, not a single Republican advocated tax-rate reductions. Instead, as Great Society and Vietnam spending increased in 1966, the Republican leadership pressured Johnson into proposing a 10% surtax on personal incomes in March of ‘66.” (33).
During NASA authorization debates on the House floor on May 3, 1966, Congressman Olin Teague said, “The war in Vietnam has already forced a substantial reduction in the NASA budget for the coming fiscal year. “Fortunately, however, thanks to our abundance of resources, it has not yet forced us to abandon our goals and our national requirements in space.” (34).
Hechler writes that the “… budget for NASA had already passed its peak, and it was touch and go whether the spending plateau could be maintained high enough to enable a successful moon landing by the end of the decade.” (35).
“Camelot” was beginning to stall, in July of 1966, when the House science committee published the results of its future planning studies under the title of “Future National Space Objectives.” Hechler notes, “The most important single recommendation made in the committee report was the opening gun which the committee fired in support of the space shuttle.” (36).
Stall Warning: Budget Cuts Kill
Less than one year after Johnson’s surtax (March ‘66), an accidental fire claimed the lives of astronauts Virgil “Gus” Grissom, Edward White, and Roger Chaffee on January 27, 1967. Hechler reports that NASA was “stunned” by Congressman Teague’s initial reaction to the NASA Review Board report on the cause of this accident. (37).
“On the opening day of the committee hearing (at Cape Kennedy on April 21, 1967) Science Committee members clashed with (NASA’s) Webb over his allegation that appropriation cuts had caused the deficiencies which the Board of Review pointed out,” Hechler writes. ‘(Congressman) Daddario, in particular, documented the fact that there was no evidence to bear this out, and furthermore, that the most severe reductions had occurred at the Bureau of the Budget level.” (38
“The high-water mark for NASA appropriations had been reached in calendar year 1964,” Hechler notes, “… when NASA was furnished with $5.25 billion, and ever since then (as of 1979) the funds have dwindled every year.” (39).
Following the successful Moon landing, on July 20, 1969, surtax “stalls” (and the budget cuts that almost inevitably follow) have slowed aerospace developments to a crawl. Tight budget constraints (Design to Cost Approach) create very tight safety margins: additional funds taxed out from under private-sector contractors seem to sharply increase the possibility of an operational mission problem.
It seems less than coincidental that a broad spectrum of orbital hardware, ranging from large manned vehicles like Apollo, down to smaller vehicles, like Vought’s Scout; seem to show a lower operational success rates following periods of tax hikes, and/or budget cuts. (Figure 2) Extra quality-assurance might well prove cost-effective during periods of overtaxation.
Capitol Reformation: Freedom Works
Recent changes in the tax code, have given the IRS vastly expanded powers to police returns of “… the millions who each year cheat the government out of estimated $90 billion of taxes on some $250 billion of undeclared income,” according to a Newsweek article, dated April 11, 1983. “The IRS estimates that 15% of all dividends and 11% of interest income are never declared.” Newsweek reports that, starting this month, bar and restaurant owners are required to withhold taxes on tips declared by their employees; the IRS says, “… short of criminals, waiters and bartenders are the most chronic under reporters of income.” (40).
Tax evasion problems in 1924 with a specific economic problem that the Mellon tax rate cuts were designed to solve. Mellon knew that fairly taxed upper-incomes (on dividends and interest, for example) would obviously yield far greater revenues than any nationwide crackdown on tips from “outlaw waiters.” Mellon Bill supporters perceived that, then as now, when tax rates become too high-the wealthy simply stop paying. (Figures 3 and 4).
“It is, of course, impossible to accurately determine what rate of tax (a) taxpayer will submit to, rather than (to) avail himself of means of evasion. But experience has demonstrated very clearly that a 50% surtax cannot be collected, and that it results in a steadily diminishing revenue…. it becomes clear beyond dispute that we would actually collect more at a low rate upon a broad base then at the present high rate upon an extremely restricted and steadily narrowing one,” according to a New York Times article from 1924, in support of the Mellon plan. (41) The historic results of commercial aviation, from 1924-29 seem to verify that Mellon’s plan was economic advice worth listening to.
The article noted, “The only way that the income tax as applied to large incomes can be made an actuality, and not a pretense is by reducing the rate of tax to a sound level, thus lessening the incentive to taxpayers to avoid the tax.”
“The present rates interfere with the normal course of business and credit, and so, indirectly affects the great mass of the people who do not pay income taxes. A sound tax is one that can be collected with a minimum of economic disturbance. The income tax today does not conform to this rule.”
“We have noted the unfortunate effect upon revenue collections occasioned by the disappearance of taxable income under the pressure of higher rates. There are, however, other consequences arising from this avoidance of taxes, which, if they cannot be actually measured, should not be minimized. If the capital normally available for new investment in productive enterprise is diverted to unnecessary governmental expenditure under the stimulus of the tax-exempt privilege, an artificial restriction has been placed upon economic development.”
“In addition, the cost of production and distribution has been adversely affected by increasing the interest rate on capital actively employed. When men refuse to put their capital to its most productive use, because the risk appears too great in view of the limitation by taxation of profits; when, rather than divide with the government, they fail to take actual realizable profits, and so slow up the turnover of liquid assets; when the first instead of the last question to be considered in any new business transaction is that of taxes — then there are foreign forces at work in the economic field, which, if incalculable, are unquestionably potent….”
“Finally, while taxes on net profits or not, as a general rule, passed on, this general observation is subject to modification. The effort will always be made to pass on a tax, and when conditions are favorable, it will succeed….one fact is undeniable. Any influence which high taxes exert on the price structure must be in an upward direction; and this is true, whether they are actually paid or whether, in order to evade them, business and credit are diverted from their normal channels.” (42)
Frontier Economics: “Expectations Rise.”
Economies grow only through increased freedom, not legislative control. Lower individual tax rates motivate individuals to produce by allowing them to keep more of what they earn. Technological progress is neither the result of governmental good intentions, or even massive corporations: only inventors invent. In 1924, several professional organizations actively endorsed the Mellon plan. (Appendix A.).
In the 1960s, it wasn’t massive government spending that got us to the moon. Congressman Teague’s, “… abundance of resources,” were generated by private enterprises, and efficiently invested private venture capital, generated by comparatively reasonable tax rates.
Thomas Paine, in Common Sense, forewarned frontier Americans of 1776, “as to government matters,… the business of it will soon be too weighty and intricate to be managed with any tolerable degree of convenience by a power so distant from us, and so very ignorant of us;…waiting four or five months for an answer, which, when obtained, requires five or six more to explain it in, will in a few years be looked upon as folly and childishness — there was a time when it was proper, and there is a proper time for it to cease.” The American Revolution was, (naturally) a revolt against British war taxes. Mercantilism, then and now, moved far too slowly to keep up with an open frontier.
Malthus was wrong. Mankind has access to “second worlds”: we need no longer fear growth. The Malthusian population to resource growth ratio need not remain a fraction – “War Taxes” seem to be the mysterious, cyclical force that historically retards the rate of growth of mankind’s resources. Perhaps Wanniski has discovered a “universal history”.
Dr. Laffer offers an excellent “navigational plot” for reengineering frontier economic growth. “I would like to see taxes in real terms, not just schedules. I would like to see them as they were in 1965….,” Laffer said. (43) (figure 5), Private Enterprise in Space “will never fly” without another tax cut. America, and the aerospace industry deserve “Rising Expectations”. A healthy growing world badly needs a little extra room.
(1) Wanniski, Jude. The Way the World Works, New York: Basic Books. (1978, p. 288.
(2) Knowlton, Hugh. Air Transportation in the United States, Chicago: University of Chicago press (1941) p. 2
(3) Knowlton, pp. 1-4.
(4) Wanniski, p. 100.
(5) Halsey, Francis Whiting. History of the World War, New York: Funk and Wagnalls Co. (1919) volume VI, p.406.
(6) Wanniski, p. 119
(7) Wanniski, pp. 120-122.
(8 Wanniski, p. 119.
(9) American People’s Encyclopedia, New York: Grolier Incorporated (1968 p. 329, Vol. 12
(10) Wanniski, p. 122.
(11) Knowlton, p. 4.
(12) Knowlton, pp 4-5.
(13) Knowlton, p.5.
(14) Knowlton, p. 8.
(15) Wanniski, p. 150.
(16) Wanniski, p. 125.
(17) Knowlton, p. 8.
(18, Knowlton, pp. 8-9.
(19) Wanniski, p. 141
(20) Knowlton, p. 8.
(21) Knowlton, p. 11.
(22) Dornberger, Walter. V-2 New York: Bantam Books (1979) p. 290.
(23) Dornberger, p. 21.
(24) Dornberger, p. 20.
(25) Hechler, Ken; Toward the Endless Frontier, Washington: Government Printing Office (1980)p. 171
(27) Hechler, p. 170.
(28 Hechler, p. 179
(29) Wanniski, p. 201
(30) Hechler, p. 184
(31) Hechler, p. 190
(32) Wanniski, p. 214.
(33) Wanniski, p. 215.
(34) Hechler, pp. 192-193.
(35) Hechler, p. 193.
(36) Hechler,p. 191.
(37) Hechler, p. 196
(38 Hechler, p. 197.
(39) Hechler, p. 208.
(40) Newsweek, April 11, 1983, p. 54.
(41) New York Times, February 12, 1924, p. 12
(43) UPI, September 23, 1981