Liberally Applied, It’s Not Voodoo

Let us see if we can clear up some of the myths about Ronald Reagan’s economic policies and economic performance over the past eight years. A good way to begin is to imagine that Reagan lost the election of 1980 to a liberal Democrat more acceptable to the American electorate than Jimmy Carter--a Walter Mondale, say. What would have been his economic policies in a two-term presidency?

Upon assuming office, and faced with high inflation and rising unemployment, a Democratic President would have turned to his Keynesian economic advisers for guidance. None of them would have recommended a tax increase--in fact, none of them did at the time--since a tax increase would have made no economic sense. Instead, they would have split into two schools of thought, which was exactly what happened, in not dissimilar circumstances, in the Administration of John F. Kennedy.

The so-called “left-wing Keynesians” would have called for a large increase in government spending to stimulate the economy. This is what John Kenneth Galbraith urged upon Kennedy. The so-called right-wing Keynesians would have urged a tax cut to stimulate the economy, on the grounds that it would be effective more rapidly and would be more acceptable politically. This is what the late Walter Heller recommended to Kennedy, and his point of view prevailed. Both camps, in 1981, would have agreed that the Federal Reserve Board had to move toward tighter money to fight inflation. All economists--Keynesian, monetarist and “supply-side”--agreed on that.

There can be no doubt that, given the political climate then prevailing, the “right-wing” Keynesian view would once again have become official policy. There would have been a substantial tax cut. Moreover, since the Democrats in Congress voted almost unanimously for, and added significantly to, what are now called the Reagan tax cuts, it is reasonable to assume that a Democratic President’s tax cuts would not have been so different, either in magnitude or structure, as to have very different economic consequences.

Meanwhile, under the guidance of Paul Volcker, a Carter appointee, the Federal Reserve would be tightening the money supply, bringing down the rate of inflation and also (alas!) bringing about a recession. One might argue that Volcker went too far, too fast and stayed the course too long, thereby making the recession worse than it need have been. Most Keynesian economists (Lester Thurow, most notably) and all “supply-siders” thought so at the time. But Volcker would have done what he did no matter who was President.

The recession, inevitably, worsened the budget deficit dramatically. As the economy recovered in 1983, a great many economists thought it appropriate to raise taxes. The alternative, cutting government expenditures for social programs and defense, was not then acceptable to either party, and was never seriously considered in Congress. So, over the next three years, a Democratic President and a Democratic Congress would pass two tax increases, the net effect of which would be to nullify almost entirely the revenue effects of the 1981 tax cut.

This is, of course, exactly what happened under the Reagan Administration, in reluctant collaboration with a Democratic Congress. Today, the total tax burden on the American economy, as a percentage of gross national product, is only a little less (may not even be less at all, on certain calculations) than it was in 1980.

Finally, there occurs a radical, bipartisan reform of the entire tax structure, which we are now learning to live with. Left-wing Democrats would have preferred--on the grounds of egalitarian “fairness”--a larger cut in average tax rates, a much smaller cut in marginal rates. Still, it is worth noting that none of the Democratic candidates in 1988 is seizing this issue to argue for a reformation of tax reform.

As a consequence of these economic policies pursued by a hypothetical Democratic Administration--and by an actual Republican one--the economy responds very positively. Inflation stays under control, unemployment moves steadily downward as we witness the extraordinary performance of a “great job machine,” growth in GNP moves ahead steadily and the stock market enjoys its greatest boom ever. True, the budget deficit remains uncomfortably large, as does the trade deficit. But is this too high a price to pay for an economic recovery that has created jobs and opportunity for tens of millions of Americans? What compassionate liberal would say such a thing?

One suspects--no one knows-- that if our economic condition today had been the creation of a Democratic Administration, as indeed it might have been, liberals would be talking out of a different side of their mouth. The Washington Post, the New York Times and the New Republic would be urging the election of the Democratic nominee so that the “good work” could be continued. They would express cautious reservations, to be sure--that is properly an essential aspect of their role--but they would, on the whole, be feeling pretty good about the achievements of a Democratic Administration and see them as a vindication of the liberal point of view. Despite “Black Monday,” no one would be talking about “voodoo economics.”

All of which demonstrates once again that, in politics, economic realities always take second place to partisan ideologies.