Dukakis’ ‘Miracle’ Only a Mirage

Gov. Michael S. Dukakis of Massachusetts, the Democratic presidential nominee, stated his vision of an America free of any problems, with “everything affordable for all,” but he has refused to say how he would raise the hundreds of billions of dollars necessary to pay for it. He is “avoiding the Mondale mistake,” by refusing to mention the “T” word--that he will have to raise taxes substantially to support these programs. Dukakis’ themes are “good jobs at good wages” and “fiscal responsibility.” But actions speak louder than words, even unspoken ones. His Massachusetts record on jobs, taxes and debt is horrendous--closer to a mess than a miracle.

Dukakis first became governor of Massachusetts in 1975. In 1974-75, the national recession following the Arab oil embargo of 1973-74 brought Massachusetts unemployment to its highest level since the Great Depression. I am not blaming Dukakis for this unemployment. The economic performance of any state is primarily determined by national and international economic conditions, not by events indigenous to that state. (Nobody blames the governors of the Oil Patch states for the depressed oil market and their concomitant economic problems).

Although Dukakis had pledged during his campaign not to raise taxes, when he became governor in 1975, his first significant move was to break that promise. He raised virtually every form of tax imposed by Massachusetts.

The sales tax was increased to 5% from 3%, a 7.5% surtax was applied to personal income and a 10% surtax placed on corporate income taxes, the gasoline and cigarette taxes were increased substantially, and taxes were raised on beer, wine and other alcoholic beverages. The adverse business climate in Massachusetts, which existed before Dukakis became governor, combined with the national economic downturn and the widespread tax increases he instituted in his first term became the nails in the state economy’s coffin. Notwithstanding a well-educated populace and other natural advantages, Massachusetts became known as “Taxachusetts.” Its taxes rose from 29% more than the average state to 44% more.

Dukakis was unseated in the Democratic gubernatorial primary in 1978 by Edward J. King, who ran on a platform of lowering taxes and restoring a favorable business climate in Massachusetts. This was virtually unprecedented for Massachusetts, given its long tradition of support for liberal Democratic politicians and initiatives. The Democratic state government under Gov. King (1979-83) was openly favorable to economic growth.

Over the active opposition of then-former Gov. Dukakis, Massachusetts also passed Proposition 2 1/2, limiting state and local taxes--their version of California’s Proposition 13. The tax burden relative to other states fell from 44% higher to only 12% higher. State and local government employment, which had peaked at 372,000 bureaucrats in Dukakis’ last year (1978-79), fell to 319,000 by 1981, freeing additional workers and other resources for productive use in the private economy of Massachusetts.

While King deserves most of the credit for the turnaround in the state’s economy, he had the misfortune of facing reelection in 1982, when the national economy was in a serious recession. The recession was a result of the Federal Reserve’s disinflation policy, a byproduct of the acceleration of inflation during President Jimmy Carter’s years in the White House.

Dukakis defeated King in the Democratic primary of 1982 and went on to beat the Republican nominee. Then, as now, he carefully avoided any discussion of taxes and promised to be more attentive to the needs of the business community. He returned to office in 1983 at a time the national economic recovery--his opposition to the Reagan-Bush Administration recovery program is well-documented--benefited every governor elected in 1982. Dukakis has served as governor during the record peacetime recovery in the national economy and has been quick on the draw to take credit for the resurgence of the Massachusetts economy.

But what about jobs there, especially good jobs and good wages? From June, 1984, to January, 1988, Massachusetts lost 91,400 manufacturing jobs--a 13.4% loss. With only 3% of the national job base, Massachusetts accounted for 30% of all U.S. industrial job losses, 10 times worse than average.

Worse, in the past year, when we have had a 30% rise in exports, rejuvenating U.S. industry, Massachusetts has continued to lose jobs. From January, 1987, to January, 1988, while the nation created 446,000 new manufacturing jobs, Massachusetts lost an additional 12,000 and has fewer manufacturing jobs than at the depths of the 1975 recession. Massachusetts’ share of U.S. manufacturing jobs has fallen by 14% during Dukakis’ second administration.

Is this a result of his government-business partnerships, a sort of boutique central planning, trading tax breaks and government subsidies for government planning in which workers and firms are bogged down in an endless morass of red tape and bargaining with bureaucrats while their markets slip away?

With such problems, why is there an alleged “Massachusetts Miracle”? When Dukakis first took office in January, 1975, amid a recession, Massachusetts’ unemployment rate was 9.7%, 1.6 percentage points below the national average. Today it is 3.7%, which is 1.7 percentage points below the national average.

Thus, in the intervening 13 years, Massachusetts gained 3.3 percentage points on the nation. But it turns out that most of the improvement in the Bay State’s unemployment rate did not occur while Dukakis was in office. Of the 3.3-percentage-point improvement relative to the nation, 3.1 points of it occurred between January, 1979, and January, 1983, when King, not Dukakis, was governor and the nation as whole was mired in a recession.

In other words, more than 90% of the improvement relative to the national average occurred in the four years that Dukakis was out of office, while less than 10% occurred in the nine years that he has been governor. Further, this low unemployment is brought about partly by the exceedingly low rate of population growth, reflecting low birth rates and emigration from the state. With the state’s labor force growing so slowly, it is much easier to have low unemployment than it is in a state like California with a high population growth rate and immigration swelling the labor force.

What about the rate of job creation? I have already alluded to the loss of manufacturing jobs. In total employment growth, Massachusetts ranks 40th among the 50 states. If the man who wants to do for the nation what he did for Massachusetts had been doing so for the past five years, there would be 2 million fewer working Americans!

Dukakis claims credit for signing his 10th straight balanced budget (covering his two terms). What he does not say is that Massachusetts law requires the Legislature to submit a balanced budget, a requirement that Congress does not see fit to impose upon itself. Thus, it would have been illegal for the Massachusetts Legislature not to submit a balanced budget during Dukakis’ tenure or anyone else’s.

The substantial tax increases that occurred during Dukakis’ administration were the largest in Massachusetts’ history. His most recent budget-balancing act consisted of 60% in tax increases, and the other 40% includes borrowing from reserve funds and some minor spending cuts.

Thus, much of this 40% is just deferring taxes until after January, 1989, in the hope that the next governor will take the heat after Dukakis is in the White House. This includes borrowing from various state reserve funds that will have to be replenished subsequently.

Were Dukakis’ 60/40 plan instituted at the federal level (where he could not get away with the 40% borrowing of reserve funds, since we do not have them available, or they are protected, e.g., civil service retirement funds), this would amount to about a $90-billion tax increase, about 20% of which we collect in personal income taxes, and would rob the typical American family of its real income gains in the 1980s.

But Dukakis did not stop there. He also borrowed like mad outside the operating budget, doubling the Massachusetts debt, adding more debt than all Massachusetts governors combined since John Winthrop in 1630. Dukakis’ personal frugality is well known, but he does not seem to pursue the same frugality with the taxpayers’ money.

To run as a fiscally responsible candidate on this record is a bit like the late Egyptian President Nasser losing the 1956 war with Israel and then crossing back across the Suez Canal to hold a victory parade in Cairo. Dukakis’ administration in Massachusetts has been something of a mess, and the alleged Massachusetts miracle merely a mirage.