The Achilles' Heel of the Reagan Program


Reaganomics: Supply-Side Economics in Action, by Bruce Bartlett, foreword by Jack Kemp, Westport, Conn.: Arlington House, 1981, 256 pp., $14.95.

Economics is a behavioral science. When opinion leaders and policymakers have forgotten this fact, nations have declined. Adam Smith told us as much 200 some years ago.

This book appears at a moment in history when most of the economics profession and all of the economic journalists in the United States are trying to figure out what the new administration is doing to our national priorities. Bruce Bartlett is a historian of economic ideas and economic development, currently serving as the deputy director of the Joint Economic Committee of Congress. In this compact book, he has assembled as much proof as any skeptic should need to vote in favor of tax and spending cuts and deregulation.

Here it is, the president's program:

What American business desperately needs is not more government intervention in the economy to compensate for prior intervention, but a radical reduction in the overall burden of government.…

Index the tax code.…

Cut tax rates across the board.…

Cap government spending.…

Reduce regulations and government credit activities.…

If these things were done, there would be no need for a reindustrialization policy. Our economy would take off on its own. This is the essence of supply-side economics.

Most of the debate over the administration's economic program, however, has been smoke, not fire. It is, first of all, true that the Reagan administration's budget is just as large or perhaps even larger than Carter's genuine FY 81-82 budget would have been. The news media have focused on the reductions in Carter's postelection "wish list"—which Reagan and Stockman refer to as Carter's "budget." The president has even said with satisfaction that he has not cut the budget in absolute terms but has merely reduced its rate of growth.

Bruce Bartlett comments on the risk attendant upon the new supply-side policies:

The greatest challenge of the 1980s will be to prevent supply-side economics from being perverted into an industrial policy, which would substitute government subsidies and tariffs for tax reduction or regulatory reform and put the United States on the road to centralized economic planning.

What is there about supply-side economics that fertilizes the seeds of this problem? Principally, it is not free from the clutches of the policymakers.

A few years ago, Jack Kemp and Arthur Laffer popularized the idea of tax cuts to stimulate the economy: get the government's heavy feet off the oxygen-hoses of businessmen so they can create jobs and income for everyone. Their sales campaign tended to stress the fact that a growing economy would generate increased revenue for the US Treasury. This sales device came to be seen as the central point of the Kemp-Roth plan.

It is this view of the supply-side model—as a tool to achieve particular macroeconomic goals—that is the Achilles' heel of the Reagan program. A free-market economy will tend to grow at a rapid pace, and individuals within that society will tend to work harder to improve their lives, but any macroeconomic goals that are achieved will come about only secondarily. The free-market economy is nobody's trained dog.

Bruce Bartlett has assembled a compact, heavily documented narrative that shows the deep roots of supply-side economics in pre-Keynesian theory and in experience—different regions in the United States under different policies, the United States as a whole at different periods of time, and different regions of the world. On his evidence, it is clear that government policy does one thing very well—it stifles savings and investment, restricts growth, and causes inflation. Logically, he advocates supply-side economics, "Reaganomics," as the solution to stagflation and other economic ills.

Yet it is not clear whether the policymakers who are buying it have subscribed to the free-market school of economics because it is the swifter steed on a fast-track to political power or because—as we would hope—they somehow recognize the principle that people have a right to keep the wealth that each, individually, creates and the right to pursue individual goals free from policy considerations.

Half of the book is given over to an analysis of the history of tax-cut policies in the past 50 years. As we should guess, reducing the size and scope of government tends to stimulate the economy and bring in more tax revenue. This is a timely discussion as President Reagan worries about the federal deficit, inflation, and high interest rates. It is clear that the process of the economic system is dynamic, and therefore any analysis of the impact of policy should be dynamic and look for second-order effects; but the real issue is not, or should not be, public revenue.

There is an underlying process in the free market system—Adam Smith called it the "invisible hand"; F.A. Hayek has called it "spontaneous order" and "the rules of just conduct." To the extent that supply-side economics is successful, it is due to its congruence with this underlying process: individuals seeking goals, observing one another's property rights, will create and build what we commonly call "civilization"—although a more apt term might be "capitalization," since savings and investment are an essential part of the process.

If Ronald Reagan is able to point the United States government in the direction of individual human achievement, with sufficient momentum that it will endure well beyond his administration, then "Reaganomics" will be a splendid chapter in human history. If, however, as Bartlett warns, the supply-side promoters come to see their tax-cut policies merely as a way of wringing from the private sector the most defense spending or the most new money for social engineering, then the program will fail and the free market will be discredited in the popular mind for decades to come.

Bruce Bartlett's book is an excellent place to start one's study of the fundamentals of "capitalization," with case studies from American history and vignettes from around the world. But the verdict is still far from in on the policies of the new administration.

Joe Cobb is director of economic analysis for the Council for a Competitive Economy.