Reagan's Economic Legacy
Why even his supporters are worried about the future
You'd think people would be pleased with Ronald Reagan's economic record. In the early years of his Administration, he saw the United States through a painful recession. That wrung inflation out of the economy and left us with a decade of relatively stable prices. Ever since, business has been on a roll. Real gross national product has increased 22% since 1982, one of the longest peacetime expansions in history. Employment has risen more than 15 million -- "two and one-half times as many new jobs as Japan and the major industrial countries of Europe combined," this year's Economic Report of the President points out.
Despite this record, a series of new books evaluating the President's economic policies are anything but laudatory (see "What Reagan Wrought," next page). Some, to be sure, come from economists sympathetic to the other side of the political spectrum. With an election upon us, it's not surprising they've chosen this moment to attack the Administration's policies. But even the books from Republican economists offer Reagan supporters scant comfort. The titles alone show the common ground: Harvard professor Benjamin M. Friedman, a liberal, calls his book Day of Reckoning, while former Reagan economic adviser Murray Weidenbaum calls his Rendezvous with Reality. The books resemble each other in another way as well. They have more to say about where Reagan went wrong than about how the next President can set things right.
What concerns these economists most is the growing federal deficit -- "the major adverse legacy of the Reagan economic program," as William A. Niskanen, another of the President's former economic advisers, describes it. Handwringing over deficits, of course, is nothing new, although conservatives once did more of it than liberals. But this time the story is much scarier, and not just because of the near-unanimity across political persuasions. In three respects the Reagan deficits differ from their historical forebears:
* Size. Economists measure government deficits not in absolute terms but in relation to the GNP. That's only common sense: as GNP expands we can afford more debt, and if the debt is growing slower than the economy as a whole, we're in good shape. Under Reagan, however, the federal deficit expanded from 2.6% of GNP to 5.3% in 1986 (before falling somewhat in 1987), adding more than $1 trillion in red ink to our national accounts. Worse, this growth took place not during wartime or depression but in a period of peace and prosperity. That's when the national debt is supposed to shrink.
* Persistence. Reagan came to Washington promising to cut taxes and federal spending. He cut taxes. But spending rose both in absolute terms and as a share of GNP. Was it Congress's fault? Nope, says Friedman: total government outlays between 1982 and 1987 averaged only $15 billion a year more than what Reagan requested. That accounts for only 8% of the accumulated deficits.
* Effects. In the past, the government financed its deficits mostly by selling bonds to American investors. This time it has borrowed from the rest of the world. The result: by the end of 1987 the United States had completed a fast transition from the world's largest creditor to the world's largest debtor, owing foreign investors roughly $400 billion. What made the borrowing possible was high interest rates, which themselves may have been caused by the big deficits (see "On Deficits and Interest Rates," page 3). With foreigners happy to snap up high-yielding American assets, the dollar remained high, making imports cheap and damaging the competitive position of U.S. manufacturers. We therefore ran up huge trade deficits and provided overseas investors with ever-increasing quantities of dollars to lend us.
As the new Administration will soon discover, things can't go on like this. In the short run, each year's budget deficit ratchets up the next year's by adding new interest costs. ("The deficit itself has become one of the major sources of the growth of federal spending," observes Niskanen dryly.) In the longer term, simple arithmetic tells us that the deficit can't keep growing faster than GNP. Even at current levels, our dependence on foreign lenders is unsettling. "Because of the need to service that debt," writes Friedman, "we will need to live on less than what we produce and earn.'
Wouldn't it be nice, in this context, if the economists who analyze our problems so thoroughly -- and with so much agreement -- found themselves in similar consensus over what is to be done? Alas, no such luck. When it comes to recommendations, Niskanen essentially throws up his hands, devoting only one page to possible spending cuts, then bowing -- in one sentence -- to the need to raise taxes. Friedman catalogs some possible reductions on the spending side, but decides on the basis of the past eight years that voters don't want to cut federal outlays. His conclusion is short but not sweet: "America needs a tax increase." Only Weidenbaum devotes much space to policy recommendations, often spelling them out in considerable (and thought-provoking) detail. But he can't bring himself to propose new taxes, and his proposals for spending cuts probably would not be adopted.
All these books, in fact, lack political sophistication commensurate with their level of economic sophistication. That may sound surprising, given the authors' résumés. But to these economists, all America seems to need is a President who will take a principled stand in favor of whatever they happen to believe in.
In the real world, politicians hardly ever make such "hard choices." Rather, successful ones get things done by articulating a vision, then by making the trade-offs necessary to realize it. No American President, for example, can take a meat-ax to the Pentagon's budget, bloated though it might be. He has to offer a positive image -- of a leaner, better-trained military, say -- and spend money on items that further that goal. The same holds true for the ever-swelling and politically sensitive entitlement programs, such as Social Security and Medicare. No President can cut the Medicare budget unless he can couple the cuts with new measures designed to improve, not jeopardize, health care for the elderly. It's that goal, not spending cuts, that will motivate Congress.
Reagan came to Washington with plenty of vision. As these books make plain, however, he was unwilling to make the trade-offs necessary to realize many of his goals. Maybe the next President will be better suited for the job.
WHAT REAGAN WROUGHT
A reader's guide to Reaganomics
Among the new books on Reagan's legacy are these three from well-known economists:
Reaganomics: An Insider's Account of the Policies and the People, by William A. Niskanen (Oxford University Press, 1988). Niskanen served on Reagan's Council of Economic Advisers (CEA) from 1981 to 1985, and his book is the quintessential inside-the-Beltway view of recent economic history. Nothing about Rust Belts here: if it didn't happen in Washington it didn't happen. That said, Niskanen provides us with a not-too-partisan conservative view of Reagan's successes (e.g., cutting inflation) and failures (e.g., imposing "more new restraints on [international] trade than any administration since Hoover'). An occasional personal shot ("Ed Meese was the most conspicuously mediocre man in American public life') enlivens the book.
Day of Reckoning: The Consequences of American Policy Under Reagan and After, by Benjamin M. Friedman (Random House, 1988). Harvard professor Friedman has collected prepublication kudos from a host of Nobel-laureate economists. And, yes, his single-minded focus on the causes and effects of swelling deficits is both powerful and unsettling. Still, there are elements of the book that are hard to swallow. One is the relentlessly preachy tone, with scriptural headnotes to each chapter; from Friedman's moral fervor you'd think we had turned into a nation of child molesters rather than a nation of spendthrifts. Then too, these Harvard professors should get out more. At one point he tells us, "We are not borrowing against the future earning power of our new industries, for there are none'; later, he says, "There is little basis for thinking of the 1980s as an especially fertile period for business startups." Where has this man been?
Rendezvous with Reality: The American Economy After Reagan, by Murray Weidenbaum (Basic Books, 1988). Weidenbaum lasted on the CEA only until 1982, when he returned to Washington University in St. Louis. His distance from the corridors of power makes for a wryer view of public policy than you'll find among denizens of the capital. Example: Weidenbaum takes us on a quick tour through the defense budget, and comes up with several serious suggestions for cuts. But who else would see fit to quote from the Pentagon's 14 pages of specifications for fruitcake? ("The fruitcake batter shall consist of equal parts by weight of cake batter specified in Table I, and fruit and nut blend specified in Table II, blended in such manner as to meet requirements of 3.5.')
BOOK OF THE MONTH
Gloom and doom from the left
The Great U-Turn: Corporate Restructuring and the Polarizing of America, by Bennett Harrison and Barry Bluestone (Basic Books, 1988). Harrison (of MIT) and Bluestone (of the University of Massachusetts, Boston) care about Reagan's deficits for only one reason. By stimulating economic growth, the authors say, deficit spending has helped mask the American economy's longer-term structural problems. Those problems: a declining manufacturing sector, declining real wages, and growing inequality.
The two authors have been generating controversy over such matters ever since the 1982 publication of their book The Deindustrialization of America. This time around they elaborate their arguments, answer their critics, and assault new ground. The American economy creates jobs? Sure, say the authors -- part-time, low-wage jobs. "Corporate restructuring, aided and abetted by permissive government policy, is producing a startling deterioration in the quality of . . . jobs and consequently in the standard of living of a growing proportion of our citizens.'
Polemicists that they are, Harrison and Bluestone have their blind spots. In their view, America's lack of competitiveness is due entirely to corporate mismanagement, not at all to union wage levels or work rules. Downsizing and outsourcing are devious corporate maneuvers aimed at "zapping labor" rather than rational managerial responses to a changing world. (At one point they actually complain that Europeans are now "succumbing to the lure of the flexible workplace," as if flexibility were something intrinsically evil.) Nevertheless, their book is a provocative antidote, both to mindless business boosterism and to the Washington-oriented mentality of Reagan's other critics. What's been happening to the economy, Harrison and Bluestone show, has roots far deeper than economic policy -- and has costs as well as benefits for the entire country.
ON DEFICITS AND INTEREST RATES
Or, how many economists does it take to screw in a light bulb?
"There was (and is) surprisingly little evidence that government borrowing has a substantial effect on interest rates."
-- William A. Niskanen
"As a result of the sharp rise in borrowing by the federal government, the real rate of interest . . . rose sharply."
-- Murray Weidenbaum
"Our new fiscal policy, generating ever larger deficits even in a fully employed economy, [has] long since replaced tight monetary policy as the reason for high real interest rates.'
-- Benjamin M. Friedman
"The large and apparently intractable budget deficits do have real and deleterious effects on the economy. But the production of high interest rates is not one of them.'
-- Bennett Harrison and Barry Bluestone
"If all economists were laid end to end, they would not reach a conclusion." -- attributed to George Bernard Shaw