Reagan's Cowboy Capitalism
With firmness and style, President Reagan has commandeered the rhetorical high ground by his "program for economic recovery." The phrases and concepts of Reaganomics--get government off our backs, tax cuts boost revenues and productivity, Federal spending and overregulation are destroying our economy--are about as catchy as anything since Franklin D. Roosevelt took off after the "economic royalists."
But will his program work? And where is the evidence? These questions are crucial, for the President is apparently placing all the hopes of his Administration in this single economic package. A dicey move, as Alexander Haig would say. So far all we have is repetition and assertion. The more one vainly looks for statistical and analytic support, the more Jack Kemp and Ronald Reagan seem to be economic Lysenkos, rather than our new Keynes and F.D.R.--the purveyors of a specious philosophy masking the real interests of corporatist ideology.
Let us take a closer look at the ten myths of the new Cowboy Capitalism:
§ Government Spending Is Too High. Federal, state and local governments spend 34 percent of our gross national product. Only in Australia and Japan among industrial nations is there less spending as a percentage of G.N.P. In France it is 40 percent; West Germany 42 percent; Britain 44 percent; the Netherlands 51 percent.
§ Federal Deficits Cause Inflation. The cumulative Federal, state and local budget is balanced right now. Federal debt as a percentage of G.N.P. fell from 103.5 percent in 1946 to only 27.1 percent in 1979. Of seven leading industrial countries, the United States had the lowest ratio of government deficits as a percentage of G.N.P.--1 percent in 1977-79, compared with 3 percent in West Germany and 6 percent in Japan, whose economies are far outperforming our own. The Congressional Budget Office has estimated that every $10 billion cut in Federal spending would reduce inflation by one-tenth of 1 percent.
§ America Has a Capital Shortage. Conservative economist Pierre Rinfret testified in 1977 that the capital markets were glutted. The next year Business Week said of the oil industry, "The prospect of big pools of incoming cash presents industry strategists with a compelling need to find outlets for that cash." Indeed, according to free-market theory, which in other circumstances is devoutly followed by this Administration, there can't be a capital shortage: if there's a need and a market, the capital will be there; otherwise, not.
§ Investment Is Dangerously Low. Director David Stockman of the Office of Management and Budget said the United States is "on the dangerous path of consuming its own capital and living off its own savings." Yet total investment (apart from housing) has risen from 9.5 percent of G.N.P. in 1950 to 9.6 percent in 1960, 10.5 percent in 1970 and 11.3 percent in 1980.
§ Individual Taxes Are Too High. America ranks eleventh of twelve major industrial nations in the share of personal income taken by the tax collector. In this country it is 29 percent; in France, 39 percent; in West Germany and Britain, 37 percent, and in the Netherlands, 46 percent. In his book The Zero-Sum Society, Lester Thurow argues that "All our empirical studies show that our current taxes are far below the levels that create disincentives to work...highly progressive tax systems (much more progressive than the tax system now in place) do not seem to reduce work effort."
§ Corporate Taxes Are Too High. In the Eisenhower years, receipts from corporate income taxes made up 20 percent of all Federal revenues; today they provide only 12 percent. According to the Congressional Joint Tax Committee, taxes on all capital contribute 43.5 percent of all revenues in Japan compared with 39.25 percent in the United States.
§ Lower Taxes Mean More Work, More Investment, More Revenues. The Government Accounting Office concluded that $19 billion of investment tax credits in 1978 affected investment decisions very little. A recent study by the Treasury's Office of Tax Analysis found that big investment tax credits "buy little or no additional equipment." Business invests if there is a profit to be made, not because one of its costs is reduced. Working Papers editor Bob Kuttner has written, "Lowering taxes is just as likely to encourage people to substitute leisure for work," as to encourage more work and saving. According to Walter Heller, President Kennedy's chairman of the Council of Economic Advisers, "The notion that a tax cut's prompt demand stimulus--let alone its long-delayed supply stimulus--could generate enough revenue to pay for itself, unfortunately finds no support in the available statistical evidence."
§ Costs of Regulation Hurt Industry. President Reagan said in 1976 Federal regulation of the auto industry cost $666 per car. Yet when the Federal auto safety agency asked car manufacturers how much the price would fall if there were no regulation, the answer was $80 per car. The President also estimated that all Federal regulation costs $120 billion a year in expenditures and "compliance costs," but $25 billion of that is Internal Revenue Service paperwork, which is hardly "regulation," as the term is commonly used. Only $32 billion is the kind of environmental and consumer regulation he so often attacks--or only 1 percent of G.N.P.
§ Our Society Is Too Egalitarian. While the number of poor fell by half in the 1960s, poor people continued to make up about 11 percent of the total population throughout the 1970s. The "progressive" tax system in this country, according to economists Joseph Pechman and Benjamin Okner, is really "proportional," taking roughly the same percentage bite out of an income of $20,000 as it does out of $200,000. According to the O.E.C.D. (Organization for Economic Cooperation and Development) only France among democratic industrial nations has a greater income inequality than the United States. West Germany and Japan have more equality--and more productivity.
§ We're Worse Off. President Reagan in his first economics address to the nation argued that "we're very much worse off" in 1980 than 1960. But per capita income after taxes rose some 80 percent, from $2,709 to $4,567 (in constant 1972 dollars) during those twenty years.
Exactly what, then, stands behind the Republicans' economic ideology--other than thirty years of after-dinner speeches to business and conservative gatherings by the President? Unless "God is a Republican," as Prof. John Kenneth Galbraith has put it, a successful economic program simply cannot be based on such faulty premises. The program's impact on inflation and unemployment in the real world--not Mr. Reagan's winning smile and adroit delivery--will be the only barometer of success. By then, it may become apparent that, like the last Administration, this one is better at getting elected than at managing the economy.