Reagan Legacy Hurts Taxpayers, Business

IT is often said that today's generation in the United States is burdening future generations by piling up federal debt. That's the case, says Adrian Throop, an economist at the Federal Reserve Bank of San Francisco. He has calculated the size of the burden accumulated during the Reagan administration. For every adult, it amounts to $2,706 in today's dollars. This is what it would cost to restore the foregone capital stock (plant, equipment, etc.) and pay off in one lump sum the extra foreign debt incurred between 1980 and 1988.

If, as is likely, there is no sudden effort to rebuild productive capital stock and the debt is not repaid at once, future generations will pay interest on that sum. At the current 4 percent real bond rate (after inflation is deducted), it will cost each adult $110 per year in today's dollars forever. Mr. Throop calls it ``intergenerational inequity.''

During the Reagan years, Washington added approximately $1 trillion to the national debt, nearly tripling its size. A combination of huge corporate and personal tax cuts, a massive defense buildup, and the severe recession of 1981-82 pushed the federal budget deeply into the red.

Throop's research confirms the conventional view that the debt binge financed consumption, rather than investment. So taxpayers in that period were able to consume more domestic and foreign goods than they would have without those deficits. Less money was spent than would have otherwise been the case on new plant and equipment that provide production and incomes in the future. Some private capital spending was ``crowded out'' by new federal debt issues. Some of the capital needed was provided by foreign ers, buying up federal debt or making private investments in the US. This foreign money helped create factories, offices, etc. and jobs for the future, but the foreign investment must be serviced. Americans must trim consumption in order to pay interest and dividends on the foreign investments.

Some economists argue that lower marginal tax rates - the rates on a taxpayer's last dollar of income - that were introduced under Reagan stimulated private saving and investment and encouraged people to work harder. This, supply-side economists maintain, offset the damage of the deficits on the economy. But Throop finds little evidence to support such views. Business investment went up, but no more than usual during a long recovery. Nor is there any sign of a sustained inflow of foreign capital seeking a ``safe haven'' independent from the attraction of Uncle Sam's issues of debt.

Throop calculates the reduction in the capital stock due to the fiscal policy in the Reagan years at either $26.3 billion or $66.8 billion, in 1982 dollars. The difference stems from whether the calculation assumes the Federal Reserve system was targeting monetary policy according to the price level or the unemployment rate. More important, the buildup in federal debt resulted in an increase in indebtedness to foreigners by $362.5 billion, in 1982 dollars, or $370.7 billion, depending on the assumption made for Fed policy. Added up, the extra burden on future generations comes to $361.6 billion or to $410.3 billion. Throop does figure that the lower marginal tax rates prompted Americans to put in enough extra work to create an additional $27.2 billion in goods and services.

That total burden for future generations amounts to about 9 percent of the nation's current output.

Throop says that, as a result of the ``summit agreement'' between congressional leaders and the Bush administration last fall, ``the budget is on the right course.'' The budget deal has ``teeth,'' whereas earlier Gramm-Rudman-Hollings budget restraining measures did not, he says. Projections show a decline in the deficit from around $300 billion this year to $75 billion by 1995. Throop figures that a decline in defense spending with the end of the Gulf war, perhaps of 4 to 5 percent a year in real terms , should help Washington achieve its goal. If so, the lower deficit should reduce interest rates and the value of the dollar, stimulate domestic investment, and reduce net foreign capital inflows.

``As a consequence,'' says Throop, ``the burden on future generations from fiscal changes in the Reagan years would tend to be eliminated.''

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