[Politech] Ronald Reagan, R.I.P.: a critique of Reaganomics

From: Declan McCullagh (declan@private)
Date: Wed Jun 09 2004 - 10:43:09 PDT

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    As is natural when a prominent president dies, columnists and 
    politicians laud that person's accomplishments. Just look at the fond 
    farewells in the Wall Street Journal's editorial pages this week. The 
    only problem is that they ignore many of the negatives. Without 
    understanding those negatives, society may be doomed to repeat them.
    
    In hopes of presenting a balanced view of Ronald Reagan's legacy, here's 
    the following contemporaneous account by economist Murray Rothbard. He 
    concludes:
    > "The burden and the scope of government intervention under Reagan has increased, not decreased. Reagan's rhetoric has been calling for reductions of government; his actions have been precisely the reverse. Yet both sides of the political fence have bought the rhetoric and claim that it has been put into effect."
    
    -Declan
    
    ---
    
    http://www.mises.org/fullstory.asp?control=1544
    
    Wednesday, June 09, 2004
    The Myths of Reaganomics
    by Murray N. Rothbard
    
    [This memo to Mises Institute members was written in late 1987, and 
    published in "The Free Market Reader," LH Rockwell, Jr., ed., 1988, pp. 
    3342–362 and is posted on Mises.org in an edited edition.]
    
    I come to bury Reaganomics, not to praise it.
    
    How well has Reaganomics achieved its own goals? Perhaps the best way of 
    discovering those goals is to recall the heady days of Ronald Reagan's 
    first campaign for the presidency, especially before his triumph at the 
    Republican National Convention in 1980. In general terms, Reagan pledged 
    to return, or advance, to a free market and to "get government off our 
    backs."
    
    Specifically, Reagan called for a massive cut in government spending, an 
    even more drastic cut in taxation (particularly the income tax), a 
    balanced budget by 1984 (that wild-spender, Jimmy Carter you see, had 
    raised the budget deficit to $74 billion a year, and this had to be 
    eliminated), and a return to the gold standard, where money is supplied 
    by the market rather than by government. In addition to a call for free 
    markets domestically, Reagan affirmed his deep commitment to free­dom of 
    international trade. Not only did the upper echelons of the 
    administration sport Adam Smith ties, in honor of that moderate 
    free-trader, but Reagan himself affirmed the depth of the influence upon 
    him of the mid-19th century laissez-faire economist, Frederic Bastiat, 
    whose devastating and satiric attacks on protectionism have been 
    anthologized in economics readings ever since.
    
    The gold standard was the easiest pledge to dispose of. President Reagan 
    appointed an allegedly impartial gold com­mission to study the problem—a 
    commission overwhelm­ingly packed with lifelong opponents of gold. The 
    commis­sion presented its predictable report, and gold was quickly 
    in­terred.
    
    Let's run down the other important areas:
    
    Government Spending. How well did Reagan succeed in cutting government 
    spending, surely a critical ingredient in any plan to reduce the role of 
    government in everyone's life? In 1980, the last year of free-spending 
    Jimmy Carter the fed­eral government spent $591 billion. In 1986, the 
    last recorded year of the Reagan administration, the federal government 
    spent $990 billion, an increase of 68%. Whatever this is, it is 
    emphatically not reducing government expenditures.
    
    Sophisticated economists say that these absolute numbers are an unfair 
    comparison, that we should compare federal spending in these two years 
    as percentage of gross national product. But this strikes me as unfair 
    in the opposite direc­tion, because the greater the amount of inflation 
    generated by the federal government, the higher will be the GNP. We 
    might then be complimenting the government on a lower percentage of 
    spending achieved by the government's gener­ating inflation by creating 
    more money. But even taking these percentages of GNP figures, we get 
    federal spending as percent of GNP in 1980 as 21.6%, and after six years 
    of Reagan, 24.3%. A better comparison would be percentage of federal 
    spending to net private product, that is, production of the private 
    sector. That percentage was 31.1% in 1980, and a shocking 34.3% in 1986. 
    So even using percentages, the Reagan administration has brought us a 
    substantial increase in government spending.
    
    Also, the excuse cannot be used that Congress massively increased 
    Reagan's budget proposals. On the contrary, there was never much 
    difference between Reagan's and Congress's budgets, and despite 
    propaganda to the contrary, Reagan never proposed a cut in the total budget.
    
    Deficits. The next, and admittedly the most embarrassing, failure of 
    Reaganomic goals is the deficit. Jimmy Carter habitually ran deficits of 
    $40-50 billion and, by the end, up to $74 billion; but by 1984, when 
    Reagan had promised to achieve a balanced budget, the deficit had 
    settled down com­fortably to about $200 billion, a level that seems to 
    be perma­nent, despite desperate attempts to cook the figures in 
    one-shot reductions.
    
    This is by far the largest budget deficit in American his­tory. It is 
    true that the $50 billion deficits in World War II were a much higher 
    percentage of the GNP; but the point is that that was a temporary, 
    one-shot situation, the product of war finance. But the war was over in 
    a few years; and the cur­rent federal deficits now seem to be a recent, 
    but still perma­nent part of the American heritage.
    
    One of the most curious, and least edifying, sights in the Reagan era 
    was to see the Reaganites completely change their tune of a lifetime. At 
    the very beginning of the Reagan ad­ministration, the conservative 
    Republicans in the House of Representatives, convinced that deficits 
    would disappear im­mediately, received a terrific shock when they were 
    asked by the Reagan administration to vote for the usual annual 
    in­crease in the statutory debt limit. These Republicans, some literally 
    with tears in their eyes, protested that never in their lives had they 
    voted for an increase in the national debt limit, but they were doing it 
    just this one time because they "trusted Ronald Reagan" to balance the 
    budget from then on. The rest, alas, is history, and the conservative 
    Repub­licans never saw fit to cry again. Instead, they found them­selves 
    adjusting rather easily to the new era of huge permanent deficits. The 
    Gramm-Rudman law, allegedly designed to eradicate deficits in a few 
    years, has now unsurprisingly bogged down in enduring confusion.
    
    Reaganomics has been an uneasy and shifting coalition of several 
    clashing schools of economic thought. In particular, the leading schools 
    have been the conservative Keynesians, the Milton Friedman monetarists, 
    and the supply-siders.
    Even less edifying is the spectre of Reaganomists who had inveighed 
    against deficits—that legacy of Keynesianism—for decades. Soon Reaganite 
    economists, especially those staffing economic posts in the executive 
    and legislative branches, found that deficits really weren't so bad 
    after all. Ingenious models were devised claiming to prove that there 
    really isn't any deficit. Bill Niskanen, of the Reagan Council of 
    Eco­nomic Advisors, came up with perhaps the most ingenious discovery: 
    that there is no reason to worry about govern­ment deficits, since they 
    are balanced by the growth in value of government assets. Well, hooray, 
    but it is rather strange to see economists whose alleged goal is a 
    drastic reduction in the role of government cheering for ever greater 
    growth in gov­ernment assets. Moreover, the size of government assets is 
    really beside the point. It would only be of interest if the fed­eral 
    government were just another private business firm, about to go into 
    liquidation, and whose debtors could then be satisfied by a parceling 
    out of its hefty assets. The federal government is not about to be 
    liquidated; there is no chance, for example, of an institution ever 
    going into bankruptcy or liquidation that has the legal right to print 
    whatever money it needs to get itself—and anyone else it favors—out of 
    any fi­nancial hole.
    
    There has also been a fervent revival of the old left-Keynesian idea 
    that "deficits don't matter, anyway." Deficits are stimulating, we can 
    "grow ourselves out of deficits," etc. The most interesting, though 
    predictable, twist was that of the supply-siders, who, led by Professor 
    Arthur Laffer and his famous "curve," had promised that if income tax 
    rates were cut, investment and production would be so stimulated that a 
    fall in tax rates would increase tax revenue and balance the budget. 
    When the budget was most emphatically not bal­anced, and deficits 
    instead got worse, the supply-siders threw Laffer overboard as the 
    scapegoat, claiming that Laffer was an extremist, and the only 
    propounder of his famous curve. The supply-siders then retreated to 
    their current, fall-back posi­tion, which is quite frankly Keynesian; 
    namely deficits don't matter anyway, so let's have cheap money and 
    deficits; relax and enjoy them. About the only Keynesian phrase we have 
    not heard yet from Reaganomists is that the national debt "doesn't 
    matter because we owe it to ourselves," and I am wait­ing for some 
    supply-sider to adopt this famous 1930s phrase of Abba Lerner without, 
    of course, bothering about attribution.
    
    One way in which Ronald Reagan has tried to seize the moral high road on 
    the deficit question is to divorce his rhetoric from reality even more 
    sharply than usual. Thus, the proposer of the biggest deficits in 
    American history has been calling vehemently for a Constitutional 
    amendment to require a bal­anced budget. In that way, Reagan can lead 
    the way toward permanent $200 billion deficits, while basking in the 
    virtue of proposing a balanced budget amendment, and trying to make 
    Congress the fall guy for our deficit economy.
    
    Even in the unlikely event that the balanced budget amendment should 
    ever pass, it would be ludicrous in its lack of effect. In the first 
    place, Congress can override the amend­ment at any time by three-fifths 
    vote. Secondly, Congress is not required to actually balance any budget; 
    that is, its actual expenditures in any given year are not limited to 
    the reve­nues taken in. Instead, Congress is only required to prepare an 
    estimate of a balanced budget for a future year; and of course, 
    government estimates, even of its own income or spending, are 
    notoriously unreliable. And third, there is no enforcement clause; 
    suppose Congress did violate even the re­quirement for an estimated 
    balanced budget: What is going to happen to the legislators? Is the 
    Supreme Court going to sum­mon marshals and put the entire U.S. Congress 
    in jail? And yet, not only has Reagan been pushing for such an absurd 
    amendment, but so too have many helpful Reaganomists.
    
    Tax Cuts. One of the few areas where Reaganomists claim success without 
    embarrassment is taxation. Didn't the Reagan administration, after all, 
    slash income taxes in 1981, and provide both tax cuts and "fairness" in 
    its highly touted tax reform law of 1986? Hasn't Ronald Reagan, in the 
    teeth of opposition, heroically held the line against all tax increases?
    
    The answer, unfortunately, is no. In the first place, the fa­mous "tax 
    cut" of 1981 did not cut taxes at all. It's true that tax rates for 
    higher-income brackets were cut; but for the average person, taxes rose, 
    rather than declined. The reason is that, on the whole, the cut in 
    income tax rates was more than offset by two forms of tax increase. One 
    was "bracket creep," a term for inflation quietly but effectively 
    raising one into higher tax brackets, so that you pay more and 
    proportionately higher taxes even though the tax rate schedule has 
    officially remained the same. The second source of higher taxes was 
    Social Security taxation, which kept increasing, and which helped taxes 
    go up overall. Not only that, but soon thereafter; when the Social 
    Security System was generally perceived as on the brink of bankruptcy, 
    President Reagan brought in Alan Greenspan, a leading Reaganomist and 
    now Chairman of the Federal Reserve, to save Social Security as head of 
    a bi­partisan commission. The "saving," of course, meant still higher 
    Social Security taxes then and forevermore.
    
    Since the tax cut of 1981 that was not really a cut, fur­thermore, taxes 
    have gone up every single year since, with the approval of the Reagan 
    administration. But to save the president's rhetorical sensibilities, 
    they weren't called tax in­creases. Instead, ingenious labels were 
    attached to them; rais­ing of "fees," "plugging loopholes" (and surely 
    everyone wants loopholes plugged), "tightening IRS enforcement," and 
    even revenue enhancements." I am sure that all good Reaganomists slept 
    soundly at night knowing that even though government revenue was being 
    "enhanced," the pres­ident had held the line against tax increases.
    
    Reagan's foreign economic policy has been the exact opposite of its 
    proclaimed devotion to free trade and free markets.
    The highly ballyhooed Tax "Reform" Act of 1986 was supposed to be 
    economically healthy as well as "fair"; sup­posedly "revenue neutral," 
    it was to bring us (a) simplicity, helping the public while making the 
    lives of tax accountants and lawyers miserable; and (b) income tax cuts, 
    especially in the higher income brackets and in everyone's marginal tax 
    rates (that is, income tax rates on additional money you may earn); and 
    offset only by plugging those infamous loopholes. The reality, of 
    course, was very different, In the first place, the administration has 
    succeeded in making the tax laws so complicated that even the IRS 
    admittedly doesn't understand it, and tax accountants and lawyers will 
    be kept puzzled and happy for years to come.
    
    Secondly, while indeed income tax rates were cut in the higher brackets, 
    many of the loophole plugs meant huge tax increases for people in the 
    upper as well as middle income brackets. The point of the income tax, 
    and particularly the marginal rate cuts, was the supply-sider objective 
    of lowering taxes to stimulate savings and investment. But a National 
    Bureau study by Hausman and Poterba on the Tax Reform Act shows that 
    over 40% of the nation's taxpayers suffered a marginal tax increase (or 
    at best, the same rate as before) and, of the majority that did enjoy 
    marginal tax cuts, only 11% got reductions of 10% or more. In short, 
    most of the tax reduc­tions were negligible. Not only that; the Tax 
    Reform Act, these authors reckoned, would lower savings and investment 
    overall because of the huge increases in taxes on business and on 
    capital gains. Moreover savings were also hurt by the tax law's removal 
    of tax deductibility on contributions to IRAs.
    
    Not only were taxes increased, but business costs were greatly raised by 
    making business expense meals only 80% deductible, which means a great 
    expenditure of business time and energy keeping and shuffling records. 
    And not only were taxes raised by eliminating tax shelters in real 
    estate, but the law's claims to "fairness" were made grotesque by the 
    retroac­tive nature of many of the tax increases. Thus, the abolition of 
    tax shelter deductibility was made retroactive, imposing huge penalties 
    after the fact. This is ex post facto legislation outlawed by the 
    Constitution, which prohibits making ac­tions retroactively criminal for 
    a time period when they were perfectly legal. A friend of mine, for 
    example, sold his busi­ness about eight years ago; to avoid capital 
    gains taxes, he in­corporated his business in the American Virgin 
    Islands, which the federal government had made exempt from capital gains 
    taxes in order to stimulate Virgin Islands development. Now, eight years 
    later, this tax exemption for the Virgin Islands has been removed (a 
    "loophole" plugged!) but the IRS now expects my friend to pay full 
    retroactive capital gains taxes plus interest on this eight-year old 
    sale. Let's hear it for the "fairness" of the tax reform law!
    
    But the bottom line on the tax question: is what hap­pened in the Reagan 
    era to government tax revenues overall? Did the amount of taxes 
    extracted from the American people by the federal government go up or 
    down during the Reagan years? The facts are that federal tax receipts 
    were $517 billion in the last Carter year of 1980. In 1986, revenues 
    totaled $769 billion, an increase of 49%. Whatever that is, that doesn't 
    look like a tax cut. But how about taxes as a percentage of the national 
    product? There, we can concede that on a percent­age criterion, overall 
    taxes fell very slightly, remaining about even with the last year of 
    Carter. Taxes fell from 18.9% of the GNP to 18.3%, or for a better 
    gauge, taxes as percentage of net private product fell from 27.2% to 
    26.6%. A large abso­lute increase in taxes, coupled with keeping taxes 
    as a per­centage of national product about even, is scarcely cause for 
    tossing one's hat in the air about a whopping reduction in taxes during 
    the Reagan years.
    
    In recent months, moreover; the Reagan administration has been more 
    receptive to loophole plugging, fees, and reve­nues than ever before. To 
    quote from the Tax Watch column in the New York Times (October 13, 
    1987): "President Reagan has repeatedly warned Congress of his 
    opposition to any new taxes, but some White House aides have been trying 
    to figure out a way of endorsing a tax bill that could be called 
    some­thing else."
    
    In addition to closing loopholes, the White House is nudging Congress to 
    expand the usual definition of a "user fee," not a tax because it is 
    supposed to be a fee for those who use a government service, say 
    national parks or waterways. But apparently the Reagan administration is 
    now expanding the definition of "user fee" to include excise taxes, on 
    the as­sumption, apparently, that every time we purchase a product or 
    service we must pay government for its permission. Thus, the Reagan 
    administration has proposed not, of course, as a tax increase, but as an 
    alleged "user fee," a higher excise tax on every international airline 
    or ship ticket, a tax on all coal producers, and a tax on gasoline and 
    on highway charges for buses. The administration is also willing to 
    support, as an alleged user fee rather than a tax, a requirement that 
    employ­ers, such as restaurants, start paying the Social Security tax on 
    tips received by waiters and other service personnel.
    
    In the wake of the stock market crash, President Reagan is now willing 
    to give us a post-crash present of: higher taxes that will openly be 
    called higher taxes. On Tuesday morning, the White House declared: 
    "We're going to hold to our guns. The president has given us marching 
    orders: no tax increase." By Tuesday afternoon, however, the marching 
    or­ders had apparently evaporated, and the president said that he was 
    "willing to look at" tax-increase proposals. To greet a looming 
    recession with a tax increase is a wonderful way to bring that recession 
    into reality. Once again, President Reagan is following the path blazed 
    by Herbert Hoover in the Great Depression of raising taxes to try to 
    combat a deficit.
    
    Deregulation. Another crucial aspect of freeing the market and getting 
    government off our backs is deregulation, and the administration and its 
    Reaganomists have been very proud of its deregulation record. However, a 
    look at the record re­veals a very different picture. In the first 
    place, the most con­spicuous examples of deregulation; the ending of oil 
    and gaso­line price controls and rationing, the deregulation of trucks 
    and airlines, were all launched by the Carter administration, and 
    completed just in time for the Reagan administration to claim the 
    credit. Meanwhile, there were other promised deregulations that never 
    took place; for example, abolition of natural gas controls and of the 
    Department of Energy.
    
    Overall, in fact, there has probably been not deregulation, but an 
    increase in regulation. Thus, Christopher De Muth, head of the American 
    Enterprise Institute and a former top official of Reagan's Office of 
    Management and the Budget, concludes that "the President has not mounted 
    a broad offen­sive against regulation. There hasn't been much total 
    change since 1981. There has been more balanced administration of 
    regulatory agencies than we had become used to in the 1970s, but many 
    regulatory rules have been strengthened."
    
    In particular, there has been a fervent drive, especially in the past 
    year; to intensify regulation of Wall Street. A savage and almost 
    hysterical attack was launched late last year by the Securities and 
    Exchange Commission and by the Depart­ment of Justice on the high crime 
    of "insider trading." Dis­tinguished investment bankers were literally 
    hauled out of their offices in manacles, and the most conspicuous inside 
    trader received as a punishment (1) a fine of $100 million; (2) a 
    lifetime ban on any further security trading, and (3) a jail term of one 
    year, suspended for community service. And this is the light sentence, 
    in return for allowing himself to be wired and turn informer on his 
    insider trading colleagues. [Editor's note: Ivan Boesky was sentenced to 
    three years in prison.]
    
    All this was part of a drive by the administration to pro­tect 
    inefficient corporate managers from the dread threat of takeover bids, 
    by which means stockholders are able to dis­pose easily of ineffective 
    management and turn to new man­agers. Can we really say that this 
    frenzied assault on Wall Street by the Reagan administration had no 
    impact on the stock market crash [October 1987]?
    
    And yet the Reagan administration has reacted to the crash not by 
    letting up, but by intensifying, regulation of the stock market. The 
    head of the SEC strongly considered clos­ing down the market on October 
    19, and some markets were temporarily shut down—a case, once again, of 
    solving prob­lems by shooting the market—the messenger of bad news. 
    October 20, the Reagan administration collaborated in an­nouncing early 
    closing of the market for the next several days. The SEC has already 
    moved, in conjunction with the New York Stock Exchange, to close down 
    computer program trading on the market, a trade related to stock index 
    futures. But blaming computer program trading for the crash is a Luddite 
    reaction; trying to solve problems by taking a crow­bar and wrecking 
    machines. There were no computers, after all, in 1929. Once again, the 
    instincts of the administration, particularly in relation to Wall 
    Street, is to regulate. Regulate, and inflate, seem to be the Reaganite 
    answers to our eco­nomic ills.
    
    Agricultural policy, for its part, has been a total disaster. Instead of 
    ending farm price supports and controls and returning to a free market 
    in agriculture, the administration has greatly increased price supports, 
    controls and subsidies. Furthermore, it has brought a calamitous 
    innovation to the farm program; the PIK program ["Payments In Kind"] in 
    which the government gets the farmers to agree to drastic cuts in 
    acreage, in return for which the government pays back the wheat or 
    cotton surpluses previously held off the market. The result of all this 
    has been to push farm prices far higher than the world market, depress 
    farm exports, and throw many farmers into bankruptcy. All the 
    administration can offer, however, is more of the same disastrous policy.
    
    Foreign Economic Policy. If the Reagan administration has botched the 
    domestic economy, even in terms of its own goals, how has it done in 
    foreign economic affairs? As we might expect, its foreign economic 
    policy has been the exact opposite of its proclaimed devotion to free 
    trade and free markets. In the first place, Adam Smith ties and Bastiat 
    to the contrary notwithstanding, the Reagan administration has been the 
    most belligerent and nationalistic since Herbert Hoover. Tariffs and 
    import quotas have been repeatedly raised, and Japan has been treated as 
    a leper and repeatedly de­nounced for the crime of selling high quality 
    products at low prices to the delighted American consumer.
    
    In all matters of complex and tangled international eco­nomics, the only 
    way out of the thicket is to keep our eye on one overriding question: Is 
    it good, or bad, for the American consumer? What the American consumer 
    wants is good qual­ity products at low prices, and so the Japanese 
    should be wel­comed and admired instead of condemned. As for the alleged 
    crime of "dumping," if the Japanese are really foolish enough to waste 
    money and resources by dumping—that is selling goods to us below 
    costs—then we should welcome such a pol­icy with open arms; anytime the 
    Japanese are willing to sell me Sony TV sets for a dollar, I am more 
    than happy to take the sets off their hands.
    
    Not only foreign producers are hurt by protectionism, but even more so 
    are American consumers. Every time the administration slaps a tariff or 
    quota on motorcycles or on textiles or semiconductors or clothespins—as 
    it did to bail out one inefficient clothespin plant in Maine—every time 
    it does that, it injures the American consumer.
    
    It is no wonder, then, that even the Reaganomist Bill Niskanen recently 
    admitted that "international trade is more regulated than it was 10 
    years ago." Or, as Secretary of Treas­ury James Baker declared proudly 
    last month: "President Reagan has granted more import relief to U.S. 
    industry than any of his predecessors in more than half a century." 
    Pretty good for a Bastiat follower.
    
    Another original aim of the Reagan administration, under the influence 
    of the monetarists, or Friedmanites, was to keep the government's hand 
    completely off exchange rates, and to allow these rates to fluctuate 
    freely on the mar­ket, without interference by the Federal Reserve or 
    the Treas­ury. A leading monetarist, Dr. Beryl W. Sprinkel, was made 
    Undersecretary of the Treasury for Monetary Policy in 1981 to carry out 
    that policy. But this non-intervention is long gone, and Secretary 
    Baker, aided by the Fed, has been busily engaged in trying to persuade 
    other countries to intervene to help coordinate and fix exchange rates. 
    After being removed from the Treasury after several years, Sprinkel was 
    sent to Siberia and ordered to keep quiet, as head of the Council of 
    Economic Advisors; and Sprinkel has recently announced that he will 
    leave the government altogether. [Editor's note: Sprinkel was later 
    rehabilitated, and given Cabinet status, in return for his agreement to 
    take part in the disas­trous Baker dollar policy.]
    
    Moreover, the policy of foreign aid and foreign lending conducted or 
    encouraged by the government has proceeded more intensely than even 
    under previous administrations. Reagan has bailed out the despotic 
    government of Poland with massive loans, so that Poland could repay its 
    Western creditors. A similar policy has been conducted in relation to 
    many shaky or bankrupt third world governments. The spec­tre of bank 
    collapse from foreign loans has been averted by bailouts and promises of 
    bailout from the Federal Reserve, the nation's only manufacturer of 
    dollars, which it can pro­duce at will.
    
    Wherever we look, then, on the budget, in the domestic economy, or in 
    foreign trade or international monetary rela­tions, we see government 
    even more on our backs than ever. The burden and the scope of government 
    intervention under Reagan has increased, not decreased. Reagan's 
    rhetoric has been calling for reductions of government; his actions have 
    been precisely the reverse. Yet both sides of the political fence have 
    bought the rhetoric and claim that it has been put into effect.
    
    Reaganites and Reaganomists, for obvious reasons, are trying desperately 
    to maintain that Reagan has indeed ful­filled his glorious promises; 
    while his opponents, intent on attacking the bogey of Reaganomics, are 
    also, and for oppo­site reasons, anxious to claim that Reagan has really 
    put his free-market program into operation. So we have the curious, and 
    surely not healthy, situation where a mass of politically interested 
    people are totally misinterpreting and even misrep­resenting the Reagan 
    record; focusing, like Reagan himself, on his rhetoric instead of on the 
    reality.
    
    What of the Future? Is there life after Reaganomics? To assess coming 
    events, we first have to realize that Reagan­omics has never been a 
    monolith. It has had several faces; Reaganomics has been an uneasy and 
    shifting coalition of several clashing schools of economic thought. In 
    particular, the leading schools have been the conservative Keynesians, 
    the Milton Friedman monetarists, and the supply-siders. The monetarists, 
    devoted to a money rule of a fixed percentage increase of money growth 
    engineered by the Federal Reserve, have come a cropper. Fervently 
    believing that science is noth­ing else but prediction, the monetarists 
    have self-destructed by making a string of self-confident but disastrous 
    predic­tions in the last several years. Their fate illustrates the fact 
    that he who lives by prediction shall die by it. Apart from their views 
    on money, the monetarists generally believe in free markets, and so 
    their demise has left Reaganomics in the hands of the other two schools, 
    neither of whom are particul­arly interested in free markets or cutting 
    government.
    
    The conservative Keynesians—the folks who brought us the economics of 
    the Nixon and Ford administrations—saw Keynesianism lose its dominance 
    among economists with the inflationary recession of 1973-74, an event 
    which Keynesians stoutly believed could never possibly happen. But while 
    Keynesians have lost their old eclat, they remain with two 
    preoccupations: (1) a devotion to the New Deal-Fair Deal-Great 
    Society-Nixon-Ford-Carter-status quo, and (2) a zeal for tax increases 
    to moderate the current deficit. As for gov­ernment spending, never has 
    the thought of actually cutting expenditures crossed their minds. The 
    supply-siders, who are weak in academia but strong in the press and in 
    exerting enormous political leverage per capita, have also no interest 
    in cutting government spending. To the contrary, both con­servative 
    Keynesians and supply-siders are prepared to call for an increasing 
    stream of goodies from government.
    
    Both groups have also long been keen on monetary infla­tion. The 
    supply-siders have pretty much given up the idea of tax cuts; their 
    stance is now to accept the deficit and oppose any tax increase. On 
    foreign monetary matters, the conserva­tive Keynesians and the 
    supply-siders have formed a coali­tion; both groups embrace Secretary of 
    Treasury Baker's Keynesian program of fixed exchange rates and an 
    interna­tionally coordinated policy of cheap money.
    
    Politically, the Republican presidential candidates can be assessed on 
    their various preferred visions of Reaganomics. Vice-President Bush is, 
    of course, a conservative Keynesian and a veteran arch-enemy of 
    supply-side doctrine, which he famously denounced in 1980 as "voodoo 
    economics." Secre­tary of Treasury James Baker is a former Bush campaign 
    aide. White House Chief of Staff Howard Baker is also in the 
    con­servative Keynesian camp, as was Paul Volcker, and is Alan 
    Greenspan. Since former White House Chief of Staff Donald Regan was a 
    fellow-traveller of the supply-siders, his replace­ment by Howard Baker 
    as a result of Iranscam was a triumph of conservative Keynesians over 
    the supply-siders. This year, in fact, our troika of Economic Rulers, 
    Greenspan and the two Bakers, has all been squarely in the conservative 
    Keynes­ian camp.
    
    Senator Robert Dole, the other Republican front-runner for president, is 
    also a conservative Keynesian. In fact, Bob Dole carried on the fight 
    for higher taxes even when it was relatively unfashionable inside the 
    administration. So de­voted to higher taxes is Bob Dole, in fact, that 
    he is reputed to be the favorite presidential candidate of the Internal 
    Revenue Service. So if you like the IRS, you'll love Bob Dole.
    
    Congressman Jack Kemp, on the other hand, has been the political 
    champion of the supply-siders ever since supply-side was invented in the 
    late 1970s. Kemp's call for higher govern­ment spending, and approval of 
    deficits, monetary inflation, and fixed exchange rates, all attest to 
    his supply-side devotion.
    
    Jack Kemp, however, has for some reason not struck fire among the 
    public, so Mrs. Jeanne Kirkpatrick stands ready in the wings to take up 
    the cause if Kemp should fail to rally. I confess I have not been able 
    to figure out the economic views of the Reverend Pat Robertson, although 
    I have a hunch they do not loom very large in his world outlook.
    
    Although there are a lot of Democratic candidates out there, it is hard 
    at this point to distinguish one from another, on economic policy or 
    indeed on anything else. As Joe Klein recently wrote in a perceptive 
    article in New York magazine, the Republicans are engaged in an 
    interesting clash of differ­ent ideas, while the Democrats are all 
    muddily groping to­ward the center. To make the confusion still greater, 
    Klein points out that Republicans are busily talking about 
    "com­passion," while the Democrats are all stressing "efficiency." One 
    thing is fairly clear; Congressman Gephardt is an all-out protectionist, 
    thoroughly jettisoning the old Democratic commitment to free trade, and 
    is the most ardent statist in agricultural policy.
    
    On monetary and fiscal policy, the Democrats are the classic party of 
    liberal Keynesianism, in contrast to the Re­publican policy of 
    conservative Keynesianism. The problem is that, in the last decade or 
    two, it has become increasingly dif­ficult to tell the difference. Apart 
    from supply-sider Kemp, we can expect the president of either party to 
    be a middle-of-the-road liberal/conservative Keynesian. And so we can 
    expect the next administration's economic policies to be roughly the 
    same as they are now. Except that the rhetoric will be differ­ent. So we 
    can, therefore, expect diverse perceptions and responses to a similar 
    reality by the public and by the market. Thus, if Jack Kemp becomes 
    president, the public will wrongly consider him a champion of hard 
    money, budget cutting, and the free market. The public will therefore 
    underestimate the wildly inflationist reality of a Kemp administration. 
    On the other hand, the public probably perceives the Democrats to be 
    wilder spenders relative to the Republicans than they really are. So 
    should the Democrats win in 1988, we can ex­pect the market to 
    overestimate the inflationary measure of a Democratic administration.
    
    All of this, along with the universal misperception of Reaganomics, 
    illustrates once more the wisdom of those incisive political 
    philosophers, Gilbert and Sullivan: "Things are not always what they 
    seem; skim milk masquerades as cream."
    
    ###
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