Democratic Unity Doesn’t Extend to Economic Policy

In 1982, some young Democrats seized upon what they thought was a promising new idea in the desperate search for an answer to Reaganomics: a so-called industrial policy that would get the government more involved in the economy. A few months later, their idea took a crippling attack--from one of the Democratic Party’s leading economists, Charles L. Schultze.

Philosophical disagreements do not often just disappear, especially when they are between economists. Yesterday’s rift among Democratic economic thinkers has proved to be a forebear of today’s deeper one. Where you think a newly elected administration should concentrate its energies depends critically on what you think is the country’s major economic problem; and on that question today’s Democrats are increasingly staring at each other from across a conceptual canyon, as will become apparent if Michael S. Dukakis wins the presidency.

On this issue the Democrats are trailing some innovative Republican thinking. Ten years ago, a rift opened within GOP ranks between traditionalists, like Sen. Bob Dole of Kansas, and supply-siders, like Representative Jack Kemp of New York. The traditionalists said that what Republican economic management is all about is fiscal responsibility. The supply-siders said phooey.

The popular view of the supply-siders is that they promised to balance the budget quickly by cutting taxes. The view of their economists (which was different from what Ronald Reagan implied in his campaign speeches) was a good bit more serious: that the object of economic policy is not to balance budgets but to encourage economic growth. The path to growth, they said, was through lower tax rates, which in the long run would stimulate work effort and--this is the key--would increase production and productivity. The nation would grow more prosperous. This would work over a period of years; for short-term deficit reductions, spending would need to be cut, which would certainly be a good idea. But never mind: Making the country more productive, and not balancing the budget, was the main point.

In 1988, the Democrats are having exactly the same argument--this time between Democratic traditionalists in the center and what are, in the truest sense of the term, Democratic supply-siders on the left. Two quite different views of the world have emerged. The traditionalists are people like Schultze of the Brookings Institution, who was chairman of the Council of Economic Advisers in the Carter Administration and whose views are shared by many economists--Republican and Democratic--in Washington’s centrist Establishment. To them the problem is consumption. More precisely, the country is living beyond its means, running a budget deficit to finance its overspending. The country needs to save and invest more, meaning spend less. The answer: Cut the budget deficit. True, consumption-cutting is not pleasant--but there you are.

Consider, by contrast, how the world looks to the Cuomo Commission on Trade and Competitiveness; its recently published report gives the budget deficit little ink. In his introduction, New York Gov. Mario M. Cuomo writes, “Unlike some who see austerity as the major avenue to restoring balance to our production and consumption, the commission recognizes the downward economic spiral that dramatic cuts in consumption can produce. It advocates instead growth, both here and abroad, and suggests we raise our level of production, not lower our living standards.”

There you have the emerging liberal view. Again and again, the emphasis is on production--that is, on the supply side. (Not coincidentally, Cuomo has called the commission’s approach “intelligent supply side.”) The big problem, to this faction, is not American gluttony, manifested by the budget deficit, but an underlying malaise in American industry, manifested by the trade deficit. America is falling behind in the world economy, in this view, and without reforms to strengthen key industries risks what the Cuomo report calls “a long, slow national decline.”

Reducing the budget deficit would certainly be a good idea, the argument goes, but it is beside the point; the point is to embark on government initiatives--spending on research, infrastructure and education to “rebuild” America, cooperation between public and private sectors to revitalize important industries and so on--that will raise American productivity. The nation will become more prosperous.

“The problem is clearly, for me, on the production side,” said Jeff Faux, president of the liberal Economic Policy Institute in Washington. “The problem isn’t that consumption has gone up but that production has gone down.”

Besides, this group says (taking another page from the book that Kemp and the Republican supply-siders wrote 10 years ago), the Democrats will never get anywhere as the party of austerity. For Walter F. Mondale in 1984, Faux said, that line was a disaster. Politically, economically, any way you look at it, the conclusion is the same: Austerity--what original supply-siders called “deep root-canal economics”--is not the answer.

Economic schisms are nothing new to Democrats. In 1983, Schultze was the one who shot holes in congressional Democrats’ proposals for a so-called industrial policy. But in 1988 the Democrats are much closer to power and the differences are more fundamental. The traditionalists do not regard the nation as afflicted with industrial malaise, and they see the trade deficit as a secondary problem growing largely from the fiscal imbalance; the supply-siders do not see how balancing the budget will get lagging American industries back into the contest with Japan.

Dukakis is listening to both camps but committing himself to neither. A President Dukakis, however, would have to choose a path between the budget deficit and calls for renewed government activism (inevitably meaning new spending). In any case, when the Democrats are debating whether to sing themselves a song of fiscal responsibility or one of renewed prosperity, what is at issue is the party’s central economic vision. It is a choice, as the Republicans showed a decade ago, that can matter over the long haul.