A Participant Looks at the Pros and Cons of Reaganomics
TEN years have elapsed since Congress enacted the substantial tax and budget changes that encompassed Reaganomics. A retrospective look is now appropriate. Friends and foes can agree that Reaganomics was the most ambitious economic reform in the United States since the New Deal. Its legacy is a fascinating mixture: lower inflation and higher budget deficits, fewer strikes and more government jobs, the deepest recession in half a century and the longest peacetime recovery ever.Many observers conclude that this variety of outcomes reflects serious internal contradictions. They are correct - in part. As a participant in the development of Reaganomics, I find it useful to distinguish between the original design and the ultimate execution. Ronald Reagan's economic program attempted to do a great many important things simultaneously - bring down escalating double-digit inflation, speed up sluggish economic growth, cut tax rates, strengthen the military establishment, reduce civilian spending and the budget deficit, and curb regulatory burdens. To succeed, delicate balancing was required. Monetary policy had to be tightened enough to bring down the inflation, but not so much as to create severe recession. Taxes had to be cut but without raising the specter of vast deficits that would scare the Fed into an excessively restrictive credit policy. Defense had to be expanded but not so rapidly as to offset the reductions in civilian spending. Regulation had to be cut enough to provide a significant boost to productivity, but without eliminating publ ic support for reform. In retrospect, delicate balance was hardly an accurate description of reality. The tax cuts enacted were much larger than the modest package originally proposed and the budget cuts were far smaller. Key regulators were more concerned with reducing the burdens on specific businesses than achieving cost-effective regulation for the economy as a whole. The interactions among the components of the president's economic program resulted in the disparate results described earlier. Enactment of tax cuts more generous than originally recommended and unmatched by comparable spending cuts scared the Fed into a monetary policy tighter than its own targets. Monetary restraint unwound the inflation but precipitated sharp recession (1981-82). Recession, in turn, delayed the beneficial effects of the tax cuts on investment and pushed the budget deficit into unprece dented triple-digits. But it is heartening to note the positive demonstration that resulted from the efforts to reduce the heavy hand of government. Witness the simultaneous spread of free-market economies in many parts of the globe. At home, a new sense of realism is evident in business and personal decisionmaking. Labor and management have become more cost-conscious and aware of the awesome term "productivity" in a society in which government does not rescue the losers in the marketplace. Within the public sector, the era of big dams and expensive water-power projects is drawing to a close. Also, the reduced flow of grants-in-aid from the federal government has led to a sea change in the expectations of state and local officials, who are again looking primarily to their own resources. In any event, the contradictions resulting from the reality of Reaganomics have provided the rare opportunity to get reluctant Americans to reconsider the ancient priorities embedded in the public sector. The alternative to reversing the tax cuts is to root out politically popular but economically unrewarding expenditure programs that have become fossilized in the budget over the years - the 167-year-old military forts with no current mission; the 5 percent loans to selected businesses; retirement pay to healthy 38-year-olds leaving the armed services; subsidies to farmers with annual incomes of $400,000, and more. A few modest lessons emerge from the recent past. Simple solutions tend to be simple-minded. The US has exhausted the easy answers to macroeconomic policy questions. We cannot rely solely on economic growth to bring down unemployment, interest rates, budget deficits, and trade deficits. It is wishful thinking to believe that the way to cut government spending is to cut taxes. Congress has to appropriate less.