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<font size="2"><font face="Verdana" color="#002864" size="5"><strong>The Myths of Reaganomics</strong></font>
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<p class="MsoBodyText"><font face="Verdana" size="4">by Murray N. Rothbard</font>
<p class="MsoBodyText" dir="ltr" align="left"><font face="Verdana" size="2">[Posted
June 9, 2004]</font>
<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">
<p class="MsoBodyText" align="left"><font face="Verdana" size="2"><em>This
memo to Mises Institute members was written in late 1987, and published in
"The Free Market Reader," LH Rockwell, Jr., ed., 1988, pp.
3342-362 and is posted on Mises.org in an edited edition.</em></font>
[/i]
<p class="MsoBodyText" align="left"><font face="Verdana" size="2"><img alt src="http://www.mises.org/images3/nail.gif" align="right" border="0" width="250" height="187">I
come to bury Reaganomics, not to praise it.</font>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2">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."</font>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2">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 freeÂdom 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.</font>
<p class="MsoBodyText"><font face="Verdana" size="2">The gold standard was the
easiest pledge to dispose of. President Reagan appointed an allegedly
impartial gold comÂmission to study the problem—a commission overwhelmÂingly
packed with lifelong opponents of gold. The commisÂsion presented its
predictable report, and gold was quickly inÂterred.</font>
<p class="MsoBodyText"><font face="Verdana" size="2">Let's run down the other
important areas:</font>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2"><strong>Government
Spending</strong>. 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 fedÂeral 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.</font>
<p class="MsoBodyText"><font face="Verdana" size="2">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 direcÂtion, 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 generÂating
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.</font>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2">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.</font>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2"><strong>Deficits</strong>. 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 comÂfortably to about $200
billion, a level that seems to be permaÂnent, despite desperate attempts to
cook the figures in one-shot reductions.</font>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2">This is by
far the largest budget deficit in American hisÂtory. 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 curÂrent federal
deficits now seem to be a recent, but still permaÂnent part of the American
heritage.</font>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2">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 adÂministration, the conservative Republicans in the House of
Representatives, convinced that deficits would disappear imÂmediately,
received a terrific shock when they were asked by the Reagan administration to
vote for the usual annual inÂcrease 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 RepubÂlicans never saw fit to cry again. Instead, they
found themÂselves 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.</font>
<p class="MsoBodyText" align="left">
<div>
<table style="HEIGHT: 74px" borderColor="#ffffff" cellSpacing="2" cellPadding="9" width="360" align="right" bgColor="#efefef" border="0">
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<tr>
<td><font size="4" face="Verdana">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.</font></td>
</tr>
</tbody>
</table>
</div>
<div>
<font size="2" face="Verdana">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 EcoÂnomic Advisors, came up with perhaps the most
ingenious discovery: that there is no reason to worry about governÂment
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 govÂernment assets. Moreover, the size of government
assets is really beside the point. It would only be of interest if the fedÂeral
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 fiÂnancial
hole.</font>
</div>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2">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 balÂanced, 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 posiÂtion, 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 waitÂing
for some supply-sider to adopt this famous 1930s phrase of Abba Lerner without,
of course, bothering about attribution.</font>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2">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 balÂanced
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.</font>
<p class="MsoBodyText"><font face="Verdana" size="2">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
amendÂment 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 reveÂnues 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 reÂquirement for an
estimated balanced budget: What is going to happen to the legislators? Is the
Supreme Court going to sumÂmon 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.</font>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2"><strong>Tax
Cuts</strong>. 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?</font>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2">The answer,
unfortunately, is no. In the first place, the faÂmous"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 biÂpartisan
commission. The"saving," of course, meant still higher Social
Security taxes then and forevermore.</font>
<p class="MsoBodyText" align="left"><font face="Verdana" size="2">Since the
tax cut of 1981 that was not really a cut, furÂthermore, 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 inÂcreases. Instead, ingenious labels were attached to them; raisÂing 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 presÂident had held the line against tax increases.</font>
<p class="MsoBodyText" align="left">
<div>
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<tr>
<td><font face="Verdana" size="4">Reagan's foreign economic
policy has been the exact opposite of its proclaimed devotion to
free trade and free markets.</font></td>
</tr>
</tbody>
</table>
</div>
<div>
<font face="Verdana">The highly ballyhooed Tax"Reform" Act of
1986 was supposed to be economically healthy as well as"fair";
supÂposedly"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.</font>
</div>
<p class="MsoBodyText" align="left"><font face="Verdana">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 reducÂtions 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.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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 retroacÂtive 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 acÂtions retroactively
criminal for a time period when they were perfectly legal. A friend of mine,
for example, sold his busiÂness about eight years ago; to avoid capital gains
taxes, he inÂcorporated 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!</font>
<p class="MsoBodyText" align="left"><font face="Verdana">But the bottom line
on the tax question: is what hapÂpened 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 percentÂage
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 absoÂlute increase in taxes, coupled with keeping taxes as a
perÂcentage 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.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">In recent months,
moreover; the Reagan administration has been more receptive to loophole
plugging, fees, and reveÂnues 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 someÂthing else."</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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 asÂsumption, 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 employÂers, such as restaurants, start paying the
Social Security tax on tips received by waiters and other service personnel.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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 orÂders 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.</font>
<p class="MsoBodyText"><font face="Verdana"><strong>Deregulation</strong>. 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 reÂveals a very
different picture. In the first place, the most conÂspicuous examples of
deregulation; the ending of oil and gasoÂline 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.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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 offenÂsive 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."</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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 DepartÂment of
Justice on the high crime of"insider trading." DisÂtinguished
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 was sentenced to three
years in prison.]</font>
<p class="MsoBodyText"><font face="Verdana">All this was part of a drive by
the administration to proÂtect inefficient corporate managers from the dread
threat of takeover bids, by which means stockholders are able to disÂpose
easily of ineffective management and turn to new manÂagers. Can we really say
that this frenzied assault on Wall Street by the Reagan administration had no
impact on the stock market crash [October 1987]?</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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 closÂing
down the market on October 19, and some markets were temporarily shut down—a
case, once again, of solving probÂlems by shooting the market—the messenger
of bad news. October 20, the Reagan administration collaborated in anÂnouncing
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 crowÂbar 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 ecoÂnomic ills.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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.</font>
<p class="MsoBodyText" align="left"><font face="Verdana"><strong>Foreign
Economic Policy</strong>. 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 deÂnounced
for the crime of selling high quality products at low prices to the delighted
American consumer.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">In all matters of
complex and tangled international ecoÂnomics, 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 qualÂity products
at low prices, and so the Japanese should be welÂcomed 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 polÂicy 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.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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 TreasÂury 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.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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 marÂket, without
interference by the Federal Reserve or the TreasÂury. 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 was later rehabilitated, and
given Cabinet status, in return for his agreement to take part in the disasÂtrous
Baker dollar policy.]</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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 specÂtre
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 proÂduce at will.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">Wherever we look,
then, on the budget, in the domestic economy, or in foreign trade or
international monetary relaÂtions, 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.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">Reaganites and
Reaganomists, for obvious reasons, are trying desperately to maintain that
Reagan has indeed fulÂfilled his glorious promises; while his opponents,
intent on attacking the bogey of Reaganomics, are also, and for oppoÂsite
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 misrepÂresenting the Reagan record; focusing, like Reagan himself, on
his rhetoric instead of on the reality.</font>
<p class="MsoBodyText" align="left"><font face="Verdana"><strong>What of
the Future?</strong> Is there life after Reaganomics? To assess
coming events, we first have to realize that ReaganÂomics 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
nothÂing else but prediction, the monetarists have self-destructed by making
a string of self-confident but disastrous predicÂtions 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 particulÂarly interested in free
markets or cutting government.</font>
<p class="MsoBodyText"><font face="Verdana">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 govÂernment 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 conÂservative Keynesians
and supply-siders are prepared to call for an increasing stream of goodies
from government.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">Both groups have also
long been keen on monetary inflaÂtion. 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 conservaÂtive
Keynesians and the supply-siders have formed a coaliÂtion; both groups
embrace Secretary of Treasury Baker's Keynesian program of fixed exchange
rates and an internaÂtionally coordinated policy of cheap money.</font>
<p class="MsoBodyText"><font face="Verdana">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." SecreÂtary of Treasury
James Baker is a former Bush campaign aide. White House Chief of Staff Howard
Baker is also in the conÂservative 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 replaceÂment 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 KeynesÂian
camp.</font>
<p class="MsoBodyText"><font face="Verdana">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 deÂvoted 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.</font>
<p class="MsoBodyText"><font face="Verdana">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 governÂment
spending, and approval of deficits, monetary inflation, and fixed exchange
rates, all attest to his supply-side devotion.</font>
<p class="MsoBodyText"><font face="Verdana">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.</font>
<p class="MsoBodyText"><font face="Verdana">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 differÂent ideas, while
the Democrats are all muddily groping toÂward the center. To make the
confusion still greater, Klein points out that Republicans are busily talking
about"comÂpassion," 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.</font>
<p class="MsoBodyText"><font face="Verdana">On monetary and fiscal policy, the
Democrats are the classic party of liberal Keynesianism, in contrast to
the ReÂpublican policy of conservative Keynesianism. The problem is
that, in the last decade or two, it has become increasingly difÂficult 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 differÂent. 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
exÂpect the market to overestimate the inflationary measure of a Democratic
administration.</font>
<p class="MsoBodyText" align="left"><font face="Verdana">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."</font>
<p class="MsoBodyText" align="left"><font face="Verdana"><span class="048034413-09062004">______________________________</span></font>
<p class="MsoBodyText" dir="ltr"><font face="Verdana">See more on </font><font face="Verdana">Murray
N. Rothbard</font><font face="Verdana">, including his </font><font face="Verdana">Man,
Economy, and State with Power and Market</font><font face="Verdana">.</font>
</font>
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