The Free Market Reader

 

8 REAGANOMICS

A Walk on the Supply Side

Murray N. Rothbard

Establishment historians of economic thought—they of the Smith-Marx-Marshall variety—have a compelling need to end their saga with a chapter on the latest Great Man, the latest savior and final culmination of economic science. The last consensus choice was, of course, John Maynard Keynes, but his General Theory is now a half-century old, and economists have for some time been looking around for a new candidate for that final chapter. For a while, Joseph Schumpeter had a brief run, but his problem was that his work was largely written before the General Theory. Milton Friedman and monetarism lasted a bit longer, but suffered from two grave defects: (1) the lack of anything resembling a great, integrative work; and (2) the fact that monetarism and Chicago School Economics is really only a gloss on theories that had been hammered out before the Keynesian Era by Irving Fisher and by Frank Knight and his colleagues at the University of Chicago. Was there nothing new to write about since Keynes?

Since the mid 1970s, a school of thought has made its mark that at least gives the impression of something brand new. And since economists, like the Supreme Court, follow the election returns, “supply-side economics” has become noteworthy.

Supply-side economics has been hampered among students of contemporary economics in lacking anything like a grand treatise, or even a single major leader, and there is scarcely unanimity among its practitioners. But it has been able to take shrewd advantage of highly placed converts in the media and easy access to politicians and think tanks. Already it has begun to make its way into last chapters of works on economic thought.

A central theme of the supply-side is that a sharp cut in marginal income-tax rates will increase incentives to work and save, and therefore investment and production. That way, few people could take exception. But there are other problems involved. For at least in the lands of the famous Laffer Curve, income tax cuts were treated as the panacea for deficits; drastic cuts would so increase revenue as allegedly to yield a balanced budget. Yet there was no evidence whatever for this claim, and indeed, the likelihood is quite the other way. It is true that if income-tax rates were 98% and were cut to 90%, there would probably be an increase in revenue; but at the far lower tax levels we have been at, there is no warrant for this easy assumption. In fact, historically, increases in tax rates have been followed by increases in revenue and vice versa.

But there is a deeper problem with supply-side than the inflated claims of the Laffer Curve. Common to all supply-siders is nonchalance about total government spending and therefore deficits. The supply-siders do not care that tight government spending takes resources that would have gone into the private sector and diverts it to the public sector. They care only about taxes. Indeed, their attitude toward deficits approaches the old Keynesian “we only owe it to ourselves.” Worse than that: the supply-siders want to maintain the current swollen levels of federal spending. As professed “populists,” their basic argument is that the people want the current level of spending and the people should not be denied.

Even more curious than the supply-sider attitude toward spending is their viewpoint on money. On the one hand, they say they are for hard money and an end to inflation by going back to the “gold standard.” On the other hand, they have consistently attacked the Paul Volcker Federal Reserve, not for being too inflationist, but for imposing “too tight” money and thereby “crippling economic growth.”

In short, these self-styled “conservative populists” begin to sound like old-fashioned populists in their devotion to inflation and cheap money. But how to square that with their championing of the gold standard?

In the answer to this question lies the key to the heart of the seeming contradictions of the new supply-side economics. The “gold standard” they want provides only the illusion of a gold standard without the substance. The banks would not have to redeem in gold coin, and the Fed would have the right to change the definition of the gold dollar at will, as a device to fine-tune the economy. In short, what the supply-siders want is not the old hard-money gold standard, but the phony “gold standard” of the Bretton Woods era, which collapsed under the bows of inflation and money management by the Fed.

The heart of supply-side doctrine is revealed in its best-selling philosophic manifesto, The Way the World Works by Jude Wanniski. Wanniski’s view is that the people, the masses, are always right, and have always been right through history.

In economics, he claims, the masses want a massive welfare state, drastic income-tax cuts, and a balanced budget. How can these contradictory aims be achieved? By the legerdemain of the Laffer Curve. And in the monetary sphere, we might add, what the masses seem to want is inflation and cheap money along with a return to the gold standard. Hence, fueled by the axiom that the public is always right, the supply-siders propose to give the public what they want by giving them an inflationary, cheap-money Fed plus the illusion of stability through a phony gold standard.

The supply-side aim is therefore “democratically” to give the public what they want, and in this case the best definition of “democracy” is that of H. L. Mencken: “Democracy is the view that the people know what they want, and deserve to get it good and hard.”

The Case Against the Flat Tax

Murray N. Rothbard

1. “Special Interests”: Good or Bad?

The flat tax draws virtually unanimous support from the right-thinking intellectuals in our society, including academics, writers, and media pundits. By “right-thinking” I mean all people who have managed successfully to identify their own views, whatever they may be, with the general welfare. By this time, however, the cautious should be on the alert: any policy that draws unanimous support from these people can’t be all good. There must be a catch somewhere.

The flat tax has been cleverly labeled a tax “reform,” the very word “reform” being heavy with the implication that no man or woman of good will, be they liberal or conservative, Democrat or Republican, can possibly stand opposed to such a plan. My favorite writer, H. L. Mencken, once wrote that he had learned at his father’s knee in Baltimore what “reform” in politics really meant: “mainly a conspiracy of prehensile charlatans to mulct the taxpayer.”

So convinced are the flat-taxers that only they have a pipeline to interpret the general welfare, that they invariably charge that any and all critics of their scheme are simply spokesmen for a sinister and shadowy group they commonly refer to as “the special interests.” “Special interests” seems to be an effective way to write off substantial opposition to the flat-tax, especially since the convenient tendency of intellectuals is to dismiss all other interests but their own as “special” and hence somehow narrow and sinister.

But are special interests all bad? Some undoubtedly are. Take, for example, the sugar program to which all of us have been subjected for a half-century. In order to maintain and expand the inefficient U.S. sugar industry, the sugar interests have for decades propped up sugar prices by use of government, and lobbied for severe quotas on the import of sugar. As a result, American consumers (to say nothing of foreign sugar producers) have been hurt severely, the supply of sugar sharply restricted, and the price artificially raised—so that the support price of sugar in the U.S. is now no less than seven times higher than the world market price. Here is a clear-cut example of aggression by special interests.

But there are also cases of special interests acting defensively, rather than aggressively. Several years ago, for example, the movie theaters circulated petitions urging that a new tax on movie admissions be repealed. I was happy to sign that petition both because I believed that the cause of the theaters was just and also that my own and other movie consumers’ rights and interests were being invaded by the government.

But wasn’t this special pleading on the part of the movie theaters? Yes, and so what? There is no reason to expect that movie theaters will be in the forefront of actions to protect the rights and incomes of, say, restaurants. In all cases where special interests are acting defensively, the front fighters for the rights of consumers will naturally be the particular firms or industries that happen to be under attack. Who else would we expect to sound the alarm?

To return now to the flat tax: the seductive rhetoric invoking the “special interests” has lead most people to believe that everyone will benefit from the flat tax except a few wicked corporations or multi-millionaires. Nothing could be further from the truth. If the flat tax is enacted, millions of us will find out, too late and to our chagrin, that, to paraphrase Pogo: “We have met the special interests and they are us.” Or as Senator Robert Dole (R-KS) put it recently on the issue of the flat tax as an allegedly fair tax: “Everybody believes in fairness unless they’re involved.”

Before we go down the list of “special interests” who would be hurt by the enactment of a flat tax, I want to stress that I’m talking about the pure flat tax concept, rather than the current approach to it submitted last fall by then-Secretary of the Treasury Donald Regan or this spring by Treasury Secretary James Baker. These present as much of the flat tax as the Treasury thought it could get away with politically. But the argument for these plans are that they approach the ideal of the flat tax, and so it is that ideal that should be examined.

The flat tax, quite simply, proposes that every individual and every organization be subjected to the same, uniform proportional income tax. To achieve that uniformity, the flat-taxers propose the ruthless suppression of all credits, deductions, exemptions, and shelters, all of which are sneered at as “loopholes” in the tax system. In the flat-taxers’ pure theory, the proportional income tax would apply to everyone regardless of income. But early in the development of the flat-tax movement they decided that, politically, the poor would have to be exempt from the tax. As a result, all flat tax schemes are now “degressive”: proportional above an arbitrary minimum income floor, below which line income receivers pay no taxes. The “degressivity” leaves an important element of progressivity in what has been touted as a strictly proportional plan.

2. What Is a “Loophole”?

It is instructive to pause for a moment to examine the pejorative term “loophole.” What is a “loophole,” anyway? It is never defined, but the flat-taxers seem to make the implicit assumption that the government really owns, or should be owning, all of what everyone makes, at least up to some arbitrary percentage decided by the government. Hence, any failure of government to confiscate everyone’s property up to that amount is somehow a moral blot that needs to be rectified. But to me it is far from self-evident that the government, rather than we ourselves, should have the primary right to our own earnings.

The “closing of loopholes” under a flat tax will mean a merciless and continuing search-and-destroy mission by which the government will root out and obliterate every little hidey-hole in which many of us have been able to squirrel away a bit of our own earnings and our own property, and keep them safe from the ever-expanding maw of the federal government.

Wrapped up in the confusion over the role of “special interests” is a muddle over the concept of “subsidy.” Flat-taxers call these exemptions, deductions, and loopholes “subsidies,” and being staunchly opposed to subsidies, flat-taxers propose to eliminate them. But is it really a “subsidy” to be allowed to keep more of your own money? Only if we agree with the curious implicit assumption of the flat-taxers that the government, not us, really owns our earnings and our property, and that therefore being allowed keep some of them is an arbitrary indulgence on its part.

I submit, to the contrary, that there is a big and crucial difference between the government’s taxing Peter to pay Paul, which is a “subsidy” to Paul, and the government’s allowing Paul to keep more of his own funds. That can only be called a “subsidy” on the grotesque assumption that the government really owns all of our property to begin with.

Before examining the “special interests” who will lose, and often lose heavily, from the imposition of a flat tax, let me say that, strictly for the sake of argument, I will begin by granting, for the time being, the flat-taxers their insistent point that the shift to their tax will be strictly “revenue-neutral,” that is, that total tax revenue will remain exactly the same from the shift, and will not increase.

Let us now go down the list of heavy losers from the imposition of the flat tax:

a. Receivers of “Imputed” Income

The flat taxers are nothing if not sophisticated economic theorists, and they realize that we receive our incomes, not only in money but also in other ways, by goods or services “in kind,” or in various psychic ways. They also realize that much of the flowering of non-money incomes, to which they “impute” monetary value, has come about precisely in order to avoid some of the confiscations of the taxing system. Since income taxes are levied on money income, people tend to shift as much income as possible from monetary to nonmonetary forms.

And so, people pay and receive income in non-monetary ways: if a carpenter goes to a physician for treatment, he may meet his bill by fixing the doctor’s house rather than by money payment. Employees receive much of their income in non-monetary “fringe benefits,” which may accrue in money only in the future. Salesmen and executives take some of their salary, not in money income, but in blissfully tax-free “perks” such as expense accounts, and the much-cherished business lunch.

But the flat-taxers, in their puritanical frenzy at seeing anyone escape their allotted payment of taxes, are out to get rid of all that. It is good-bye to the tax-free fringe benefit, the expense account, the business lunch. And what will happen to the restaurant business, the hotel business? The flat-taxers, like all puritans, like all fanatics, care not; they are ready to wreak unlimited havoc in the name of attaining their ideal.

For one thing, there is the American homeowner. Every homeowner is going to get it, but good, under the flat-tax regime. The flat-taxers, for example, have figured out that homeowners benefit, in a real though non-monetary way, by not having to pay rent. And so the flat-taxers propose to tax every homeowner on the “imputed rent” they are earning by not having to pay rent to a landlord. If, for example, you own your own home, and some officials figure out that you would have been paying $1,200 a month if you had been renting the home, then you will have to pay a proportional tax on this imputed total.

Unfortunately, no one has yet figured out a way to pay “imputed” taxes. The IRS insists on cold hard cash. And so it is going to be very painful for many people to have to pay taxes in money on income which is only psychic. As we will see shortly, the flat-taxers are out to tax capital gains fully as much as if they were earned income, as indeed they are. But if they had their druthers, they would tax these gains, not when we realize them in money form, but every year, as they accrue.

It is going to be very difficult for many people to pay through the nose on capital gains from increases in the value of their stocks or their homes, gains which they can only reap when they come to sell their asset. In the regime of the flat-taxers, there will be a great deal of painful forced-selling of homes and other assets. And to think, all this in the sacred name of the twin watchwords of the flat-taxers: “Simplicity” and “Fairness!”

It’s a good thing that the flat-taxers haven’t yet figured out how to tax us on our leisure, although as good puritans I’m sure they’re working on it.

b. Payers of Interest

Interest payments are expenses that the government allows us to deduct from taxable income. They will be brought under the heel by the flat-taxers. But if interest payments are no longer deductible, this means that one of the great economic advantages of owning a home, being able to deduct mortgage interest payments from taxes, will disappear. Notice that all of America’s homeowners will be clobbered four ways by the ruthless ideologues of the flat-tax movement. One, as we have seen, homeowners will lose by being forced to pay taxes on their “imputed rent”; two, they will no longer be able to deduct interest payments on mortgages; and three and four, the value of their homes, on which they count when they wish to move, will be forced down because the after-tax return on the house will decline from the two increased tax levies.

I fail to follow the logic on this one: I can see why those who earn interest have to pay taxes on this income; but I fail to see why those who pay interest have to shell out more as well. In fact, this looks to me like double taxation on the same income, and if the flat-taxers were not self-proclaimed experts on “fairness,” I would even go so far as to say that double taxes on the same income are unfair.

c. Receivers of Capital Gains

The flat-taxers are also astute enough to realize that capital gains constitute income. But on the other hand, profits add to capital gains, and since they propose to tax profits too, they are, once again, double-taxing the same income. At the very least then, profits should no longer be taxed if capital gains are as well. Relentless in pursuing any bit of untaxed income, the flat-taxers note that capital gains have been taxed much less in recent years than other income, and so they propose to pile on higher taxes so as to bring about the desired uniformity.

But higher capital gains taxation will strike hardest and foremost at the new, young, venture capitalists going into high-risk, progressive industries. Heavy capital gains taxation will strike a deadly blow precisely at new, high-risk venture capital. Do we really want to cripple these firms and ventures?

We have already pointed to the extra difficulties if flat-taxers pursue their prey to the last ounce and insist on taxation of accrued, and not just realized, capital gains.

It is common knowledge that Great Britain’s economy since World War II has suffered grievously from very high levels of income tax. One of the reasons that Britain has not gone completely down the drain is that, fortunately, its government has levied no tax on capital gains, thus allowing many capital ventures to flourish. Our implacable flat-tax Jacobins would make sure to close that loophole.

d. Accelerated Depredators and Investors

But let it not be thought that our flat-taxers are only out to make life difficult for new venture capitalists. The old-line smokestack industries, already in decline, will get theirs too. One of the great problems of the older, heavily capitalized industries is that their profits have not been high enough to permit them to maintain and modernize their capital to allow them to compete with newer firms at home and abroad.

Two highly beneficial tax reforms of the first year of the Reagan Administration were (1) allowing investment credit on corporate and personal income tax for investing in capital; and (2) permitting business firms to accelerate the depreciation of their capital at virtually any speed. The investment credit has allowed heavily capitalized firms to keep more of their profits, and invest them in maintaining and expanding their capital.

Now, under the thrall of the flat-tax ideologues, the Administration proposes to get rid of its own salutary reforms. Both of them are now derided as “subsidies.” But, once again, the investment credit allows people to keep more of their money if used for investment. Neither can one call accelerated depreciation a subsidy. There is no reason why a business should not be able to depreciate its capital at any pace it wants. Its total, long-run tax bill does not even decline; what a business is permitted to do is, instead of extending a depreciation allowance over, say, the ten-year life of a machine, to choose instead to take the entire allowance off now, so as to be able to buy a new machine and pay the same total tax bill out of the returns of the new machine over the next nine years. Accelerated depreciation simply allows firms to arrange the time-schedule of their payments in the most convenient and efficient ways.

e. Owners of Natural Resources

Let it not be thought that owners of natural resources, such as oil, natural gas, and metallic mines, will get off scot free. On the contrary, they will be among the worst losers from the tyranny of the flat-taxers. Economists in general, let alone flat-taxers, have long denounced depletion allowances of natural resource owners as an outrageous subsidy. Since oil and natural gas companies, in the public’s folk mythology, are considered especially wicked, this part of the flat-tax creed enjoys wide popularity. Yet, in actuality, apart from the fact that the right to keep one’s own money can hardly be called a subsidy, there is another important fallacy in calling depletion allowances a subsidy.

An income tax, by its very name, is designed as a tax on annual income, not on accumulated wealth. A tax on wealth directly confiscates property and brings about a decline in the structure of capital and hence of everyone’s standard of living. But then we must realize that if we make the grave mistake of treating a using-up of capital as a firm’s income, and tax it accordingly, we will precipitate a decline in its capital structure and impose severe losses upon the firm.

Suppose, for example, that a crude oil company produces and sells oil, and makes a net income from the sale of $100 million. But the oil in its reserves has now been diminished; if we can determine, say, that the value of its underground oil has gone down by $70 million, then the net income of the company has only been $30 million. To tax it as if its income has been $100 million will unwittingly impose crippling losses upon the company. And yet, our flat-taxers, true to form, propose to do precisely that. And the value of stock investments in oil and mineral resource companies will, of course, decline as well.

f. Corporations

Lest we think that only the new venture firms and the older smokestack industries will get the axe from our flat-taxers, we should know that all corporations will suffer, for the corporate income tax will increase substantially, to make the tax on a par and uniform with the tax on the income of individuals. Everything, again, looks neat and “fair,” with all individuals and organizations paying a uniform rate.

But if, in the famous Milton Friedman formula, TANS-TAAFL (there ain’t no such thing as a free lunch), then we can also add the term TANSTAAC (there ain’t no such thing as a “corporation”). There is no existing entity called a “corporation” that feels, works, thinks, earns income, and then enjoys that income. A “corporation” is only a label for individuals who organize themselves, and hope to earn income, in certain ways. There is no income-earning thing called a “corporation” that exists and earns income above and beyond the people, that is, the stockholder-owners, who constitute that corporation. Therefore, a tax on corporate income is an unjust and “unfair” (if I may use that term) double tax on the same income, as well as a tax hitting at savings and investment. Instead of raising income tax rates on corporations, as the Treasury plan and the flat-taxers would do, we should move in the other direction, end double taxation, and cut the corporate tax to zero. Stockholders should be taxed just once, on the income they individually earn from the corporate form. Even President Reagan himself had been known to voice such sentiments.

g. State and Local Taxpayers

And now we come to a category of losers from the flat tax that I find particularly outrageous, since I live in New York City, where I and millions of other hapless citizens are mulcted into paying the highest state income tax in the nation, the highest city income tax in the country, and the highest sales tax.

After having been chastised for so many years with whips, the flat-taxers now arrive on the scene to chastise us with scorpions. It seems that being able to deduct our massive state and local taxes from our federal taxable income has only been a wicked “subsidy,” and so now even that small consolation will be snatched from us.

It goes without saying that flat-taxers are zealots in favor of taxing the interest from municipal bonds—a long-standing goal of liberals in order to aggrandize the power of the federal government as against the states. If municipal bonds are taxed, their value will of course plummet, as will the credit and the power of state and local government to float bonds. More and more spending will then be centralized in the hands of a super-powerful federal government.

Is that all we really want? I suppose there is no reason to raise the point that federal taxing of municipal bonds is clearly unconstitutional, as would be state taxation of Treasury bonds, for since when has anyone worried about the provisions of the Constitution of the United States?

h. The Charitable and the Non-Profitable

One important tax deduction to be swept away would be gifts to charities or other non-profit organizations. Since much charity is now done under the gun of the IRS, the result of the flat-tax would be a drastic crippling of private charitable and educational organizations. Why should giving to charities, the arts, and educational institutions be hobbled and penalized, in the name of “simplicity” and “fairness?” The severe losses of many of these organizations, would lead them to turn to the federal government to bail them out, in effect nationalizing private charity and expanding and aggrandizing the federal welfare state. All universities and non-profit institutions that depend on voluntary giving would be victims of the zeal of our single-minded flat-taxers.

i. Victims of Fire, Sickness, and Accident

There are even more helpless victims who will fall under the heel of the flat-taxers. Every man or woman who falls sick and whose medical payments are not insured, will, in flat-taxland, be unable to deduct these payments from his taxable income. No victim of fire, uncovered by insurance, will any longer be able to deduct his losses. And so life’s unfortunates, run over by accident or disease, will be run over a second time, this time in the name of “equality” and “fairness.”

j. Entrepreneurial Losers

Some entrepreneurs make profits; others suffer losses. That is the essence of entrepreneurship. While I don’t believe that losers should be bailed out or subsidized by the government, it seems like excessive punishment for government to kick them while they’re down. But this is precisely what our flat-taxers are planning to do. For while it is difficult to claim that losses, like profits, somehow constitute net income, this is precisely how flat-taxers regard them: as hidden income to be ferreted out and taxed. We have heard for years about those evil “tax shelters” which “they,” the wicked rich, like to indulge in. But mainly these “shelters” are losing propositions, the losses of which partially offset net income in other areas. How can we call such shelters “income”?

I, for example, in addition to being a salaried professor, am a self-employed author and lecturer. Some years, I make a net income from this business, other years I suffer losses. Who are the flat-taxers to come swooping down, and they or the IRS to try to pry into my soul, and announce either that I am a genuine but sometimes losing entrepreneur, or that in my secret heart of hearts I rejoice in my losses because it lowers my taxable income? Are the flat-taxers or the IRS truly qualified to examine everyone’s heart and soul and decide on everyone’s inner motives? And, in the last analysis, how dare they anyhow?

Let everyone, then, realize that the “they,” the “special interests” who will be hurt, and perhaps hurt badly, from the flat tax, are not just a few shadowy and malevolent millionaires.

While it is not really possible to average out pain or loss among individuals and make it disappear, there is every reason to believe that, on the average, upper-income groups will probably benefit on net from the fall in tax rates under the flat tax, whereas the middle class, as usual, will be hit and hit hard. So what else is new?

3. The Argument From Fairness

The major argument for the flat tax is not economic but moral, namely that this is the only fair way to distribute taxation. The assumption is that, given an arbitrarily determined total revenue to the government, that revenue should be distributed in a uniform, flat-tax manner.

But the flat-taxers do not really argue their point; they simply assume it as self-evident to all people of good will. Well, sorry, but I don’t see it. I don’t see why it is particularly “fair” to clobber the sick, the sufferers from accidents, or the homeowners, or why it is fair to impose monetary taxes on earners of non-monetary income.

More specifically, I don’t see why proportional taxation is any “fairer” than many other possible patterns of distribution. Take, for example, Mr. A and Mr. B, each of whom earns a net income of, say, $50,000 a year. But Mr. A is a young man, just starting in life, with virtually zero assets. He depends on personal savings to finance a future business.

Mr. B, on the other hand, is an older man who has already built up or inherited millions of dollars in assets. Why is it manifestly fair for him to pay the same tax as Mr. A? Neither is it obvious to me that a sick person with heavy medical bills should pay the same tax as a healthy man with the same income. Note that I am not saying the opposite: I am not advocating a tax on health or on wealth. I’m simply saying that there seems to be no convincing argument for the fairness of one pattern of taxation over another.

In fact, I will go even further, and say that fairness has little or nothing to do with the matter, that, in fact, TANS-TAAFT (“there ain’t no such thing as a fair tax”). Conservative flat-taxers like to analogize to the free market, and maintain that they are trying to achieve neutrality to the market. But consider: what in the world is a “fair” price on the market?

Many medieval economists came to grief on this issue. What is the “fair price,” for example, of Wonder Bread? Who knows? For my part, as a Wonder Bread consumer, I’d love to see the price down to about a penny a loaf, and the Wonder Bread Company would undoubtedly love to be able to charge $100 a loaf. As it is, after the higgling and haggling of the market, we all settle for about one dollar a loaf. There seems to be no sense to the concept of fairness in price except what is arrived at, from day to day, as the result of voluntary transactions on the market.

But what of taxation? Unfortunately, we can’t even apply the voluntary transaction criterion here, because by its very nature, taxation is coercive, and is not arrived at by the voluntary bargaining of individuals on the market. So what then is a “fair” tax? I submit that the concept simply doesn’t apply.

All I know is that, as a taxpayer, I would like my taxes to be as low as possible. I suggest, then, that we cease the impossible quest for fairness in taxation, and try to arrive at taxes as low as possible. For whom? For everyone.

One of my favorite economists, the 19th-century Frenchman, J. B. Say, after pointing out that taxation is a coercive transfer from individuals and groups to the government, crippling their ability to produce and consume, concluded: “The best scheme of finance is to spend as little as possible; and the best tax is always the lightest.” In short, to paraphrase Jefferson, “That government is best which spends and taxes least.”

Instead of worrying about distributing taxes “fairly,” or what is supposed to amount to the same thing, allocating tax suffering equally, we should set about trying to minimize tax suffering as much as we can down the line. And if we approach the problem that way, we should find it easier to gain broad agreement. Rather than trying to figure out whether a proportional, degressive, regressive, or progressive income tax structure is “fairest,” we may find we can agree on reducing the tax burden of everyone.

Thus, let us compare two hypothetical tax systems. In system A, there is a progressive income tax, ranging from one to ten percent. In system B, everyone pays a flat, strictly proportional income tax, of 20%. I have a hunch that, in choosing between these systems, even the upper-income groups would opt for the far more progressive, but much lower tax burden. The central point is the lowness of each tax, rather than the distribution of the burden.

People are, or should be, interested in lowering their own tax burden rather than enviously trying to aggravate the burdens of other people. And here is a genuine basis for solidarity among taxpayers of all groups and sizes. The point, then, is not that “they”—whoever “they” are—are paying too little taxes and should be brought to heel. The point is that all of us are paying too much. The flat-tax movement is part of a process by which the government and its allies have been able to split and deflect the tax protest movement from trying to lower the taxes of everyone, into trying to force everyone into paying some arbitrarily defined “fair share.”

4. The Argument From Neutrality to the Market

An important argument of the flat-taxers, especially those who claim devotion to the free market, is that their plan is needed to restore the allocation of resources to what would have been the pattern on the market: in short, that the flat tax is uniquely neutral to the market.

The argument runs as follows: credits, deductions, loopholes distort resources relative to the free market because more resources go into the loopholes than would otherwise. Thus, an investment tax credit means that more resources will go into investment than would a free market.

Suppose that there are only two industries in the economy, machine tools and wheat. If machine tools receive an investment tax credit, more resources will be poured into machine tools relative to wheat than on the purely free market. Therefore, the tax credit distorts resources, and a flat tax, by eliminating that credit, will correct the distortion and restore genuine market conditions.

But this argument overlooks a crucial point: namely, that even in our simple model, much less in the real world, there is still another channel for the allocation of resources, namely government. In our example, if resources did not go into machine tools because of the special credit, they would have gone not into wheat but into government, and government is far less neutral to the market than any other allocation.

In other words, from the point of view of the free market, any allocation of economic resources in the private sector, whether machine tools, wheat, or whatever, is better, that is, closer to the free market, than those resources going into the maw of government. If neutrality to the free market is really the consideration, then free-marketeers would rejoice with the creation of one more loophole, one more nook and cranny safe from the tax-man. The key point to focus on is private resources vis-à-vis government.

It has been completely overlooked that the Reagan Administration, while submitting the Treasury flat-tax plan, has at the same time called for further tax credits: for private school tuition and for enterprise zones. Both are laudable, but both are completely opposed to the flat-tax concept.

There is another important point about neutrality to the market, one which also speaks to the fairness issue. The flat-taxers have strongly implied that, in contrast to the progressive tax, the uniform proportionate tax is neutral to the market—for the market would pay in this way for the services of government. But would it really? Where on the market is the price of anything proportionate to the income of the customer? I pay approximately one dollar a loaf for Wonder Bread; if and when David Rockefeller goes to the market to buy a loaf of Wonder Bread, is he forced to pay one million dollars a loaf—or whatever the proportion would be for our respective annual incomes? One of the great things about the market is that every good or service tends to be at one price: regardless of the race, creed, personality, or income of the customer.

5. The Argument From Simplicity

Perhaps the most seductive argument of the flat-taxers is the argument from simplicity: that, in contrast to the maddening complexity of today’s tax code, a code that even the IRS itself cannot fully understand, the flat tax would be simplicity itself. Everyone, they promise, would be able to make out their income tax “on a postcard.”

But in the first place, it wouldn’t be that simple. We would still need a complex process to determine what our net, taxable income might be. Those of us who are self-employed would still have to figure out our expenses and net incomes. But let us set that aside. What the flat-taxers don’t seem to realize is that there are worse things in the world than complexity. And one of them is paying higher taxes. In short, they don’t seem to understand some of the reasons for all the tax complexity.

The reason is that many people are willing to wade through a great deal of complexity in order to lower their tax burden. So that, in a sense, given the tax system, much of the complexity that everyone denounces is voluntary. In fact, if we desire simplicity, we can achieve it right now, and without the flat tax. Two-thirds of Americans do so now by filling out the simple short form for their taxes. The one-third of us who choose the wearying long-form route do it for one reason alone: to lower our tax bills. Why in the name of simplicity, are the flat-taxers trying to take this choice away from us? Let them keep their gift of simplicity to themselves, thank you.

One variant of the simplicity argument proved so alluring to a friend of mine that he was almost persuaded by the flat-taxers: the promise that the flat tax would get rid of what are apparently one of the most disliked groups in our society: tax lawyers and accountants.

Apart from the fact that the flat tax would still require a lot of cogitating over net income, let me be one of the few Americans to put in a good word for this much vilified and beleaguered group. Denouncing tax lawyers and accountants is like blaming doctors for the existence of disease, or attacking expenditures on guards, locks, and fences for protecting oneself against crime. Our complaint should not be with tax lawyers and accountants, but with the system that makes them necessary. So long as that system exists, we must realize that they are our shield and our buckler, our defense against the depredations of the tax system.

6. Revenue-Neutral?

It is now time for us to relax the original assumption that I granted the flat-taxers: that their plan would be and remain revenue-neutral. Even if the flat tax would not raise total revenue immediately, who here is naive enough to believe that the government will sit still for long for revenue-neutrality?

The government may be willing to lull us into a false sense of security by promising no increase in total revenue. It doesn’t mind cutting tax rates a bit temporarily, for the sake of bringing more revenue sources into its clutches. It is worth a lot to bring previously sheltered hiding places into the grasp of the federal government. I can make that point most dramatically by pointing to the fact that eminent left-liberal economists like Walter Heller champion the flat-tax plan. We might almost point to a picture of Professor Heller, and ask: why is this man smiling? He is smiling because, as he has frankly written, the cut in present tax rates is worth the broadening of the tax base, that is, the bringing of previously exempt income under the grip of federal taxing power.

7. The Terrible Simplifiers and the “General Interest”

If the flat tax is neither evidently fair not genuinely simple nor neutral to the market, if it is merely a snare and a delusion for more confiscatory taxation, it is easy to understand why politicians and bureaucrats may love the idea. But why the enthusiasm of the intellectuals—the alleged spokesmen for the “public” interest? The answer is that the intellectuals may well have a “special interest” of their own.

Jacob Burckhardt, the great 19th-century Swiss historian, referred to many of the intellectuals of his day as “terrible simplifiers.” What he meant is that many intellectuals, right, left, or center, are opposed to the messy individuality, the untidy diversity of real life. It is an occupational disease of intellectuals to simplify the reality of people, of other people that is, in order to try to understand them. And so intellectuals like to pigeonhole their subjects—other people—into neat, orderly, and simple categories, and to classify and then deal with them in neat and orderly ways. From that way of thinking is an easy step to classify and then treat people as mere pawns to be pushed around.

To do so, the intellectual turns to the secular arm—that is the enforcement power of government—to do the pushing. Intellectuals, in short, are all too often terrible simplifiers, willing and eager to impose massive and painful losses upon other people for the sake of symmetry, uniformity, flatness, or some other simple and abstract ideal. The nature of the creed, the specific content of the ideal, is not nearly as important as the eagerness to override and bulldoze out of existence the diverse and rumpled reality of individual life. We have, alas, come to know in the twentieth century that totalitarianism can have many faces.

When the Regan plan toward a flat tax was announced last fall, an anonymous White House aide attacked the proposal as one “that looks like a tax system designed by a lot of academics.” And a leading New York broker charged that “those guys at Treasury are tax lawyers, assistant professors, or statisticians. They have no understanding of what makes an entrepreneur tick.”

Indeed, the main designer of the Regan plan, a former academic, proudly proclaimed his lack of realism. Admitting that the plan was written “in an ivory tower,” he declared that “one nice thing you get from the ivory tower, is that you get opinions that tend to be unbiased, that are not affected by special interests, that have the public interest in mind.” I hope that we will now begin to treat such arrogant claims with the skepticism they so richly deserve.

Is There Life After Reaganomics?

Murray N. Rothbard

Icome to bury Reaganomics, not to praise it—and there can be no more fitting epitaph for Reaganomics than the October massacre, especially Black Monday of October 19. The stock market crash brought an end to the so-called Reagan “miracle” not with a whimper but a bang. The crash showed dramatically once again that every time—as in the late 1920s—the financial and political establishment begins to talk about a new era of permanent prosperity and perpetual boom in the stock market, the time has come to head for the hills. Before Monday, the largest stock collapse had occurred in October 1929, when stock prices fell 12.8% in one day; this Monday, stock prices fell almost twice as hard, by 22.6%. That is a crash, not a “correction.”

As usual, the crisis was met by deception and soft soap. Day after day, as the crash continued, our political, economic, and financial leaders continued to assure us that nothing was wrong, that stock prices are bargains and we should all buy right now, that stocks could not drop further, that 1929 could never happen again. At first, we were told that the market crash was unimportant because trading volume was small, only to be greeted a few days later by unprecedented and enormous trading volume, setting records at over 600 million daily shares.

Leading the parade was President Reagan. Delivering a bromide eerily reminiscent of Herbert Hoover, the president assured us that the “economy is fundamentally sound.” A dubious consolation for those who lost one-half trillion dollars in wealth on Black Monday, and one trillion dollars since the stock market began its steep decline this August.

In his now traditional “press conferences” shouted over the roar of helicopter motors, President Reagan followed up his assurance by yelling that “there is nothing wrong with the economy,” and, besides, that “Congress is responsible for the deficit.” However, it was hardly reassuring for him to shout that if a recession does come, the fault will be the media’s for alarming us, a classic case of the king reacting to bad news on the front by shooting the messenger.

The crash came because several years of monetary expansion finally resulted this year in the return of price inflation, which accelerated from about one percent last year to about five percent in 1987. But during the years of the Reagan “miracle”—heavy monetary expansion, prosperity, but low price inflation—real interest rates still remained high, a sign that the public remembered the bad not-so-old days of double-digit inflation. As inflation accelerated in 1987, interest rates rose inexorably in response to the return of inflation, and in anticipation of more to come. High interest rates put a chronic damper on the stock market during the inflationary boom of the 1970s, and only the fall in nominal interest rates caused by the whopping recession of 1981-82 could generate the boom of the last few years in the stock market. Now that inflation and higher interest rates reappeared, the stage was set for the stock market crash.

The timing of the crash was insured by the Federal Reserve. After pumping in more money into the economy at the rate of over 10% a year for several years, the Fed became worried at the rising inflation and interest rates this April and stopped its policy of monetary inflation. From April on, the money supply has been flat, an admirable policy, but one that almost always triggers a recession. A recession is inevitable once a credit boom has been launched. The stock market is often an indicator of the near future of the economy, so it is very likely that this crash presages an imminent recession, one that is long overdue.

It is the view of the Austrian School of Economics that a boom in bank credit will lead inevitably to a corrective recession, and that the sooner the boom is stopped, and the recession is allowed to liquidate the unsound investments of the boom, the better. Having expanded credit and brought about a return of inflation, the Reagan administration quickly reacted to the crash by promising to protect us by virtually unlimited doses of inflation in the future. Thus, our monetary czar, Federal Reserve Chairman Alan Greenspan, assured the banks and the financial markets of enough liquidity (that is, new money) to bail everyone out. On Tuesday Greenspan declared that “the Federal Reserve . . . affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” Hence, the “cure” for what ails us—monetary inflation—is to be a lot more of the same. Consistent with this program, the Fed has already pressured the banks to lower their prime interest rates, and has already driven down the federal funds rate by pumping in more bank reserves. On the international front, Secretary of the Treasury Baker, who had been having trouble with the West Germans trying to induce them to inflate and lower their interest rates, announced success in the wake of U.S. pressure after the crash.

Unfortunately, the Fed and the administration are caught in a trap of their own making—in what the British call a “cleft stick.” As the Fed expands credit and pushes interest rates down, price inflation will accelerate, and this will inexorably raise interest rates via an inflation premium—precisely what happened in the double-digit inflation of the late 1970s. By frantically trying to stave off an inevitable recession, the administration can only make it worse—and also make it inflationary, as in the 1970s. The administration is busily working to bring about its own worst fears: the so-called “nightmare scenario” of a simultaneous inflation and recession, accompanied by a falling dollar and a collapsed stock market—all neatly in time for the presidential election year of 1988.

Let us now turn from the crash, for the moment, and assess how well Reaganomics has done over the seven years of its reign.

The first question to ask is: 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.

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.

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 has since been 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?

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 has recently been 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.”

Ronald Reagan: Protectionist

Sheldon L. Richman

Mark Shields, a columnist for the Washington Post, recently wrote of President Reagan’s “blind devotion to the doctrine of free trade.” If President Reagan has a devotion to free trade, it must be blind because he has been way off the mark. In fact, he has been the most protectionist president since Herbert Hoover.

Admittedly, his rhetoric has been confusing. In 1986 Reagan said, “Our trade policy rests firmly on the foundation of free and open markets. I recognize . . . the inescapable conclusion that all of history has taught: the freer the flow of world trade, the stronger the tides of human progress and peace among nations.”

But he advocated protectionism early in his 1980 campaign, saying to the U.S. auto industry: “Japan is part of the problem. This is where government can be legitimately involved. That is, to convince the Japanese in one way or another that, in their own interests, that deluge of cars must be slowed while our industry gets back on its feet. . . .”

When he imposed a 100% tariff on selected Japanese electronic products for allegedly “dumping” computer memory chips, he said he did it “to enforce the principles of free and fair trade.” And Treasury Secretary James A. Baker has boasted about the protectionist record: Reagan “has granted more import relief to U.S. industry than any of his predecessors in more than half a century.”

It’s true that the administration has fought with protectionists in Congress, but only over who should have the power to restrict trade. As Reagan put it, “It’s better policy to allow for presidents—me or my successors—to have options for dealing with trade problems.”

Defenders of the Reagan policies will say that he has engaged in protectionism to open foreign markets. But they cannot deny that one-quarter of all imports are today restricted, a 100% increase over 1980.

Nor are foreign markets more open. The Reagan administration talks about exporting free enterprise, but in fact it has exported economic intervention to Japan, South Korea, and other nations. When the United States imposes import quotas or pressures a foreign government to do so, a compulsory cartel must arise in the exporting country, since its government will assign the quotas among private firms and administer the system. Ronald Reagan has forced nations that export textiles, apparel, sugar, steel, and other products to cartelize these industries.

Can trade restrictions open foreign markets? The use of government power to regulate trade is more likely to produce conflict of which American consumers and exporters become the victims. It is also naive, because it ignores the political pressure to maintain existing restrictions. The United States, for example, could impose new limits on Japanese autos to force Japan to accept beef exports from Iowa. But, as syndicated columnist Stephen Chapman asks, “Does anyone believe that when Japan starts buying Iowa beef, Ford and Chrysler will stop trying to keep out Japanese cars?”

Considering our own intricate web of trade restrictions, it is sanctimonious for the U.S. government to lecture others about opening their markets. It might be in a better position to make demands if it first stripped our economy of those restrictions. But wouldn’t we be giving up bargaining chips? Yes. But the objective is not to negotiate; it is to enjoy the benefits of productivity and the international division of labor. The bonanza of unconditional free trade would be so great for the United States that it would set a good example for the rest of the world.

The value of free trade does not depend on open markets abroad. It is good for the nation that practices it, regardless of what others do. The purpose of an economic system is not to produce jobs or sell products abroad. Those are means. The end is satisfaction of our material wants. Free trade is good because our standard of living depends on how easily we can get the products and services we want.

One is led to ask: with free-traders like this, who needs protectionists? The administration has thus far:

•Forced Japan to accept restraints on auto exports;

•Tightened considerably the quotas on imported sugar;

•Negotiated to increase the restrictiveness of the Multi-fiber Arrangement governing trade in textiles and apparel;

•Required 18 countries, including Brazil, Spain, South Korea, Japan, Mexico, South Africa, Finland, Australia, and the European Community, to accept “voluntary restraint agreements” that reduce their steel imports to the United States;

•Imposed a 45% duty on Japanese motorcycles for the benefit of Harley Davidson, which admitted that superior Japanese management was the cause of its problems;

•Raised tariffs on Canadian lumber and cedar shingles;

•Forced the Japanese into an agreement to control the price of computer memory chips;

•Removed third-world countries on several occasions from the duty-free import program for developing nations;

•Pressed Japan to force its automakers to buy more American-made parts;

•Demanded that Taiwan, West Germany, Japan, and Switzerland restrain their exports of machine tools;

•Accused the Japanese of dumping roller bearings on grounds that the price did not rise to cover a fall in the value of the yen;

•Accused the Japanese of dumping forklift trucks and color picture tubes;

•Extended quotas on imported clothes pins;

•Failed to ask Congress to end the ban on the export of Alaskan oil and timber cut from federal lands;

•Redefined dumping so domestic firms can more easily charge foreign competitors with unfair trade practices;

•Beefed-up the Export-Import Bank, an institution dedicated to distorting the American economy at the expense of the American people in order to artificially promote exports of eight large corporations.

The World Bank estimates that import restrictions in 1984 had the same effect as a 66% income tax surcharge on America’s poorest citizens. Less obvious is the harm to American producers, who lose exports and pay more for capital goods because of protectionism. For example, everyone, including the beleaguered American auto industry, has to pay more for steel because of the Reagan administration’s restrictions on imports. Even the steel industry is hurt because artificially high prices stimulate the search for alternative materials.

President Reagan missed a unique opportunity to begin freeing the American economy from the shackles of trade restrictions. He need not have given the American people a technical lesson in economics. He could have said that free trade requires no more justification than domestic economic freedom; indeed, it requires no more justification than the traditional American values of a humane and open society.

The Sad Legacy of Ronald Reagan

Sheldon L. Richman

On August 2, 1988, President Ronald Reagan announced that he had changed his mind about the pro-union plant-closing bill. He had vetoed it three months earlier, but now let it become law without his signature after intense pressure from presidential nominee George Bush and former Treasury Secretary James Baker, now Bush’s campaign chairman. Reagan claimed that only this action would enable him to sign a Congressional trade bill almost unequaled in its anti-consumer protectionism.

Ronald Reagan’s faithful followers claim he has used his skills as the Great Communicator to reverse the growth of Leviathan and inaugurate a new era of liberty and free markets. Reagan himself said, “It is time to check and reverse the growth of government.”

Yet after nearly eight years of Reaganism, the clamor for more government intervention in the economy was so formidable that Reagan abandoned the free-market position and acquiesced in further crippling of the economy and our liberties. In fact, the number of free-market achievements by the administration are so few that they can be counted on one hand—with fingers left over.

Let’s look at the record:

Spending

In 1980, Jimmy Carter’s last year as president, the federal government spent a whopping 27.9% of “national income” (an obnoxious term for the private wealth produced by the American people). Reagan assaulted the free-spending Carter administration throughout his campaign in 1980. So how did the Reagan administration do? At the end of the first quarter of 1988, federal spending accounted for 28.7% of “national income.”

Even Ford and Carter did a better job at cutting government. Their combined presidential terms account for an increase of 1.4%—compared with Reagan’s 3%—in the government’s take of “national income.” And in nominal terms, there has been a 60% increase in government spending, thanks mainly to Reagan’s requested budgets, which were only marginally smaller than the spending Congress voted.

The budget for the Department of Education, which candidate Reagan promised to abolish along with the Department of Energy, has more than doubled to $22.7 billion. Social Security spending has risen from $179 billion in 1981 to $269 billion in 1986. The price of farm programs went from $21.4 billion in 1981 to $51.4 billion in 1987, a 140% increase. And this doesn’t count the recently signed $4 billion “drought-relief” measure. Medicare spending in 1981 was $43.5 billion; in 1987 it hit $80 billion. Federal entitlements cost $197.1 billion in 1981-and $477 billion in 1987.

Foreign aid has also risen, from $10 billion to $22 billion. Every year, Reagan asked for more foreign-aid money than the Congress was willing to spend. He also pushed through Congress an $8.4 billion increase in the U.S. “contribution” to the International Monetary Fund.

His budget cuts were actually cuts in projected spending, not absolute cuts in current spending levels. As Reagan put it, “We’re not attempting to cut either spending or taxing levels below that which we presently have.”

The result has been unprecedented government debt. Reagan has tripled the Gross Federal Debt, from $900 billion to $2.7 trillion. Ford and Carter in their combined terms could only double it. It took 31 years to accomplish the first postwar debt tripling, yet Reagan did it in eight.

Taxes

Before looking at taxation under Reagan, we must note that spending is the better indicator of the size of the government. If government cuts taxes, but not spending, it still gets the money from somewhere—either by borrowing or inflating. Either method robs the productive sector. Although spending is the better indicator, it is not complete, because it ignores other ways in which the government deprives producers of wealth. For instance, it conceals regulation and trade restrictions, which may require little government outlay.

If we look at government revenues as a percentage of “national income,” we find little change from the Carter days, despite heralded “tax cuts.” In 1980, revenues were 25.1% of “national income.” In the first quarter of 1988 they were 24.7%.

Reagan came into office proposing to cut personal income and business taxes. The Economic Recovery Act was supposed to reduce revenues by $749 billion over five years. But this was quickly reversed with the Tax Equity and Fiscal Responsibility Act of 1982. TEFRA—the largest tax increase in American history—was designed to raise $214.1 billion over five years, and took back many of the business tax savings enacted the year before. It also imposed withholding on interest and dividends, a provision later repealed over the president’s objection.

But this was just the beginning. In 1982 Reagan supported a five-cent-per-gallon gasoline tax and higher taxes on the trucking industry. Total increase: $5.5 billion a year. In 1983, on the recommendation of his Social Security Commission—chaired by the man he later made Fed chairman, Alan Greenspan—Reagan called for, and received, Social Security tax increases of $165 billion over seven years. A year later came Reagan’s Deficit Reduction Act to raise $50 billion.

Even the heralded Tax Reform Act of 1986 is more deception than substance. It shifted $120 billion over five years from visible personal income taxes to hidden business taxes. It lowered the rates, but it also repealed or reduced many deductions.

According to the Treasury Department, the 1981 tax cut will have reduced revenues by $1.48 trillion by the end of fiscal 1989. But tax increases since 1982 will equal $1.5 trillion by 1989. The increases include not only the formal legislation mentioned above but also bracket creep (which ended in 1985 when tax indexing took effect—a provision of the 1981 act despite Reagan’s objection), $30 billion in various tax changes, and other increases. Taxes by the end of the Reagan era will be as large a chunk of GNP as when he took office, if not larger: 19.4%, by ultra-conservative estimate of the Reagan Office of Management and Budget. The so-called historic average is 18.3%.

Regulation

For all the administration’s talk about deregulation (for example, from the know-nothing commission which George Bush headed), it has done little. Much of what has been done began under Carter, such as abolition of the Civil Aeronautics Board and deregulation of oil prices. Carter created the momentum and Reagan halted it. In fact, the economic costs of regulation have grown under Reagan.

Some deregulation has occurred for banks, intercity buses, ocean shipping, and energy. But nothing good has happened in health, safety, and environmental regulations, which cost Americans billions of dollars, ignore property rights, and are based on the spurious notion of “freedom from risk.” But the Reagan administration has supported state seat-belt and federal air-bag requirements. This concern for safety, however, was never extended to the Corporate Average Fuel Economy (CAFE) rules, which, by imposing fuel-efficiency standards, promote the production of small cars. The shift to small cars will cause an estimated 10,000 to 20,000 highway deaths over the next ten years.

Bureaucracy

By now it should not be surprising that the size of the bureaucracy has also grown. Today, there are 230,000 more civilian government workers than in 1980, bringing the total to almost three million. Reagan even promoted the creation of a new federal Department of Veterans’ Affairs to join the Departments of Education and Energy, which his administration was supposed to eliminate.

Trade

The Reagan administration has been the most protectionist since Herbert Hoover’s. The portion of imports under restriction has doubled since 1980. Quotas and so-called voluntary restraints have been imposed on a host of products, from computer chips to automobiles. Ominously, Reagan has adopted the bogus fair-trade/free-trade dichotomy, and he was eager to sign the big trade bill, which tilts the trade laws even further toward protectionism.

Results

Reagan’s fans argue that he has changed the terms of public-policy debate, that no one today dares propose big spending programs. I contend that the alleged spending-shyness of politicians is not the result of an ideological sea-change, but rather of their constituents’ fiscal fright brought about by $250 billion Reagan budget deficits. If the deficit ever shrinks, the demand for spending will resume.

This is the Reagan legacy. He was to be the man who would turn things around. But he didn’t even try. As he so dramatically illustrated when he accepted the plant-closing bill, there has been no sea-change in thinking about the role of government.