President Bush, having successfully dealt with Saddam Hussein, is now turning his attention to the economy, and particularly to tax policy. Unfortunately, even here he has to deal with the Sahhaf Phenomenon--the tendency of people who have seen something with their very own eyes to protest that it didn't happen. The Iraqi minister of information, Mohammed al-Sahhaf, was a comical example of this, but there are many editorialists and commentators who seem to be victims of the same willful blindness on basic matters of national economic policy.

This observation is called to mind by the declarations we hear and read today, in many cases by people who have spent years either as elected officials or otherwise in the economic policy business, to the effect that the deficits forecast for the next five years are a reason to reduce the size of the president's tax proposal. Their argument is that high deficits cause high interest rates, and these rates in turn will weaken the economy or slow the economic recovery. However, unlike most ideas in economics, which are difficult to prove in the real world, this idea has been shown by actual experience to be false.

In 1981, shortly after the adoption of President Reagan's economic plan, which included substantial tax cuts, the country entered one of the most serious recessions since the Great Depression. At the time, inflation and interest rates were both deep in double digits. All through the last quarter of 1981, and well into 1982, the economy experienced high unemployment as the Fed sought to stem the rampant inflation that was the economic legacy of the Carter presidency. The recession then--as now--caused a decline in government revenues, and deficits were projected at unprecedented levels in the year after the Reagan tax cuts were enacted. According to David Stockman's book, The Triumph of Politics, President Reagan was being urged by virtually everyone around him to abandon his economic plan and endorse a tax increase. Why? Because the economic theory of the time was that deficits--which Mr. Stockman was predicting would extend "as far as the eye could see"--would keep interest rates high, and this would choke off or prevent any economic recovery. The Reagan deficits, in fact, were far larger as a percentage of Gross Domestic Product than the deficits projected after the Bush tax cuts. By 1983, the deficit was 4.2 percent of GDP; according to the Congressional Budget Office, the deficits in years to come will not exceed 3 percent.

Mr. Reagan, however, was not to be moved. He wrote in his diary, "Now my team is pushing for a tax increase to help hold down the deficits. I'm being stubborn. I think our tax cuts will produce more revenue by stimulating the economy. I intend to wait and see some results." He saw them, alright. A year later--with the deficits still soaring--interest rates declined from 18 percent to single digits, and the economy roared back. And Mr. Reagan was able to say, and it was all the gloating he would allow himself, "They don't call it Reaganomics anymore."

We can admire Mr. Reagan's tough-mindedness, but that is not the point. By sticking with his position, despite pressure even from his own staff ("my team"), Mr. Reagan demonstrated without question, that deficits did not cause high interest rates. There is simply no other way to explain why, if deficits of unprecedented size were projected as far as the eye could see, interest rates should decline. And this remained true even though the economy began to expand strongly in 1983, increasing demand for investment capital. Mr. Reagan's policy also suggested something else--that supply side tax reductions will cause economic growth. But, to be fair, that is still open to debate, largely because Keynesian economists could still argue that the stimulative effect of the deficits contributed something to economic growth during the Reagan years.

But on the question of deficits alone, you'd think that Ronald Reagan had demonstrated the absence of a credible link between deficits and high interest rates. If you thought that, however, you would be wrong. Some people believe so strongly in a particular proposition that they seem unable to absorb and assimilate what they have actually seen. So, when we hear that we shouldn't have tax cuts--or that the tax cuts should be smaller than recommended by the president--we should not think of Rubinomics or even Reaganomics. We should think of the hapless Mohammed al-Sahhaf, and his lying eyes.

Peter J. Wallison, resident fellow at the American Enterprise Institute, was White House counsel to Ronald Reagan.