The Myths of Reaganomics - Murray Rothbard

The Myths of Reaganomics

by Murray N. Rothbard

[Posted June 9, 2004]

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.

I come to bury Reaganomics, not to praise it.

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."

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 free-dom 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.

The gold standard was the easiest pledge to dispose of. President Reagan
appointed an allegedly impartial gold com-mission to study the problem-a
commission overwhelm-ingly packed with lifelong opponents of gold. The
commis-sion presented its predictable report, and gold was quickly
in-terred.

Let's run down the other important areas:

Government Spending. 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 fed-eral 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.

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 direc-tion, 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 gener-ating 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.

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.

Deficits. 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 com-fortably to about $200 billion, a level that seems to
be perma-nent, despite desperate attempts to cook the figures in
one-shot reductions.

This is by far the largest budget deficit in American his-tory. 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 cur-rent federal deficits now seem to be a recent,
but still perma-nent part of the American heritage.

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 ad-ministration, the conservative
Republicans in the House of Representatives, convinced that deficits
would disappear im-mediately, received a terrific shock when they were
asked by the Reagan administration to vote for the usual annual
in-crease 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
Repub-licans never saw fit to cry again. Instead, they found them-selves
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.

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.

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
Eco-nomic Advisors, came up with perhaps the most ingenious discovery:
that there is no reason to worry about govern-ment 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 gov-ernment assets. Moreover, the size of government assets is
really beside the point. It would only be of interest if the fed-eral
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 fi-nancial hole.

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 bal-anced, 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 posi-tion, 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 wait-ing for some
supply-sider to adopt this famous 1930s phrase of Abba Lerner without,
of course, bothering about attribution.

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 bal-anced 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.

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 amend-ment 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 reve-nues 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 re-quirement for an estimated
balanced budget: What is going to happen to the legislators? Is the
Supreme Court going to sum-mon 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.

Tax Cuts. 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?

The answer, unfortunately, is no. In the first place, the fa-mous "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 bi-partisan commission. The "saving," of course, meant still higher
Social Security taxes then and forevermore.

Since the tax cut of 1981 that was not really a cut, fur-thermore, 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 in-creases. Instead, ingenious labels were
attached to them; rais-ing 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 pres-ident had held the line against tax increases.

Reagan's foreign economic policy has been the exact opposite of its
proclaimed devotion to free trade and free markets.

The highly ballyhooed Tax "Reform" Act of 1986 was supposed to be
economically healthy as well as "fair"; sup-posedly "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.

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 reduc-tions 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.

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
retroac-tive 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 ac-tions retroactively criminal for
a time period when they were perfectly legal. A friend of mine, for
example, sold his busi-ness about eight years ago; to avoid capital
gains taxes, he in-corporated 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!

But the bottom line on the tax question: is what hap-pened 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 percent-age 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 abso-lute increase in taxes, coupled with keeping taxes
as a per-centage 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.

In recent months, moreover; the Reagan administration has been more
receptive to loophole plugging, fees, and reve-nues 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
some-thing else."

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 as-sumption, 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
employ-ers, such as restaurants, start paying the Social Security tax on
tips received by waiters and other service personnel.

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
or-ders 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.

Deregulation. 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 re-veals a very different picture. In the first
place, the most con-spicuous examples of deregulation; the ending of oil
and gaso-line 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.

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 offen-sive 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."

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 Depart-ment of Justice on the high crime
of "insider trading." Dis-tinguished 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.]

All this was part of a drive by the administration to pro-tect
inefficient corporate managers from the dread threat of takeover bids,
by which means stockholders are able to dis-pose easily of ineffective
management and turn to new man-agers. 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]?

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 clos-ing down the market on October
19, and some markets were temporarily shut down-a case, once again, of
solving prob-lems by shooting the market-the messenger of bad news.
October 20, the Reagan administration collaborated in an-nouncing 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 crow-bar 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 eco-nomic ills.

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.

Foreign Economic Policy. 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 de-nounced for the crime of selling high quality
products at low prices to the delighted American consumer.

In all matters of complex and tangled international eco-nomics, 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 qual-ity products at low prices, and so the Japanese
should be wel-comed 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 pol-icy 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.

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.

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 Treas-ury 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.

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 mar-ket, without interference by the Federal Reserve or
the Treas-ury. 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 disas-trous Baker dollar policy.]

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 spec-tre 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 pro-duce at will.

Wherever we look, then, on the budget, in the domestic economy, or in
foreign trade or international monetary rela-tions, 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.

Reaganites and Reaganomists, for obvious reasons, are trying desperately
to maintain that Reagan has indeed ful-filled his glorious promises;
while his opponents, intent on attacking the bogey of Reaganomics, are
also, and for oppo-site 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 misrep-resenting the Reagan
record; focusing, like Reagan himself, on his rhetoric instead of on the
reality.

What of the Future? Is there life after Reaganomics? To assess coming
events, we first have to realize that Reagan-omics 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 noth-ing else but prediction, the monetarists
have self-destructed by making a string of self-confident but disastrous
predic-tions 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 particul-arly interested in free markets or cutting
government.

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 gov-ernment 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 con-servative
Keynesians and supply-siders are prepared to call for an increasing
stream of goodies from government.

Both groups have also long been keen on monetary infla-tion. 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 conserva-tive Keynesians and the
supply-siders have formed a coali-tion; both groups embrace Secretary of
Treasury Baker's Keynesian program of fixed exchange rates and an
interna-tionally coordinated policy of cheap money.

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." Secre-tary of Treasury James Baker is a former Bush campaign
aide. White House Chief of Staff Howard Baker is also in the
con-servative 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 replace-ment 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
Keynes-ian camp.

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 de-voted 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.

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 govern-ment spending, and approval of
deficits, monetary inflation, and fixed exchange rates, all attest to
his supply-side devotion.

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.

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 differ-ent ideas, while the Democrats are all
muddily groping to-ward the center. To make the confusion still greater,
Klein points out that Republicans are busily talking about
"com-passion," 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.

On monetary and fiscal policy, the Democrats are the classic party of
liberal Keynesianism, in contrast to the Re-publican policy of
conservative Keynesianism. The problem is that, in the last decade or
two, it has become increasingly dif-ficult 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 differ-ent. 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 ex-pect the market to
overestimate the inflationary measure of a Democratic administration.

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."

Great article - do you have a URL for this?

-- Steve