Economy/Focus on Growth

...These empirical and analytical facts are critically important for sound economic policy, but they have been lost in the general hysteria over the budget deficit...

...Those who are willing to fight are rarely even backed up by their friends...

...labor can compete in markets only if U.S...

...The President will be advised, as he was in 1982, that the failure of the government to meet these expectations will result in financial panic and a rise in interest rates...

...A free society respects property rights and does not give power to government without accountability...

...The effect of discretionary behavior on interest rates is greater than the effect of budget deficits...

...The Federal Reserve needs to be made accountable on the basis of principle and well-defined law, and the tax system needs to be reformed in a way that reduces its adverse impact on economic growth...

...The deficit hysteria provides a convenient cover for Republicans who are determined to defeat the supply-side policy in order to boost their chances for the 1988 Republican presidential nomination...

...For example, secrecy could be reduced by requiring the Fed to announce all policy decisions when they are made...

...If economic weakness persists due to Federal Reserve policy and the Treasury's anti-capital investment tax reform proposal, any gains from budget-cutting would be offset by the rise in the deficit due to economic weakness...

...It would be a mistake to expect that any one President or administration can deliver this goal all neatly wrapped up in a pretty package...

...Congress is not anxious to cut spending programs and will be even less anxious if spending cuts, make no impact on the deficit projection (however much they might reduce the so-called structural component of the deficit...

...Jack Kemp, an obvious and attractive candidate for the nomination...

...The future of the Western alliance depends on the free-trade posture that allows Europe and Japan access to U.S...

...Supply-side economics is based on the incentives inherent in private property...

...Most of the troops who were willing to bleed for his policies in the Washington trenches have either bled to death or given up in disgust at their commander-in-chief's appointment of traitorous generals...

...It means that Republicans are prepared to discredit the supply-side economic policy that reinvigorated their party and restored it to political competition in order to knock Jack Kemp out of the box...

...Republicans have opposed deficits for so long that they have forgotten that the problem is spending, and many are prepared to "fight deficits" by raising taxes...

...There is an endless supply of people who desire presidential appointments for career reasons, but only a tiny number who are willing to put themselves on the line when they get the job...

...Large areas of policy have already reverted to the hands of the permanent government...

...Since discretionary behavior is not predictable, uncertainty has grown in the financial markets...

...It would be a mistake to expect too much from a second Reagan term and an even bigger mistake to supply it with no people of character and principle...

...The combination of these factors leaves President Reagan in a weakened and isolated position...

...Ronald Reagan won election and re-election despite his aides...

...The basic reason for tax reform is to restore the competitiveness of U.S...

...This view is more political than economic and is based on many political campaigns against deficit spending...

...The charge itself has the advantage of attracting powerful allies to the anti-Kemp political camp...

...Neutral tax treatment of saving would reduce poverty far more effectively than government poverty programs...

...The main effect of the assault on spending, then, might simply be headlines that budget director David Stockman and others can claim created expectations of deficit reduction in the financial markets...

...Taxes were cut in a supply-side manner despite the Administration's infighting and imperfect understanding of its own policy...

...Without spokesmen and out-maneuvered by career-oriented Washington regulars who, in the words of Washington Post editorial page editor Meg Greenfield, "will sell or sell out almost anything, including their own self-respect, if any, and the well-being of thousands of others" in pursuit of their personal ambitions, Reagan has little chance of leaving a permanent mark...

...If, however, the policy can be presented as a failure that had to be reversed, Kemp's opponents can paint him as a purveyor of "crackpot theories," David Stockman's own charge with which William Greider ended the infamous article in the Atlantic...

...A slower rate of investment means slower growth in the capital-labor ratio and labor productivity...

...A reasonable measure of political accountability could be obtained by restoring the Secretary of the Treasury to membership on the Federal Open Market Committee and by making the Fed chairman's term of office concurrent with that of the President...

...Several important factors work against a return of his pro-economic growth program of 1981...

...Even if Reagan were prepared to take charge of his government and conduct a major house-cleaning, it is not clear where he would find the human resources for a renewed assault...

...More importantly, the Fed's ability to behave as it sees fit means that elected officials risk having their policies crowded out by those of unelected officials...

...The intention might be laudatory, but the strategy and tactics of budget-cutting are more complicated than many realize and the outcome could be disastrous...

...The tax system needs to be reformed in a way that makes it more neutral in regard to the taxation of saving...

...With this approach many things can be accomplished...

...However, when the dynamic effects are considered, it is obvious that it is no help to a worker to reduce his taxes in a way that hurts the growth of his living standard...

...For example, it pulls the Federal Reserve Board into the camp by obscuring the Fed's responsibility for the deficits due to its recessionary monetary policy...

...The charge that the 1981 tax cuts are the source of dangerously large budget deficits is central to this strategy...

...If Reagan's supply-side policy is perceived as a success, much of the credit will accrue to Kemp, and he will be well positioned in the contest for the 1988 nomination...

...We are further ahead than we were...

...The evidence shows that deficits do not principally determine interest rates and that interest rates are not the main factor in the cost of capital...

...If the economy is weak at the time, this argument will be particularly effective...

...In other words, a tax system that is not neutral with respect to saving retards the growth in real living standards...

...This has proved to be less and less the case...

...The supply-side argument has been cavalierly misrepresented by opponents as a claim that "deficitsdon't matter...

...labor is more productive than its foreign counterparts...

...Discretionary monetary policy has not been successful...

...Yet another is the fight within the Republican party over control of the agenda and the 1988 nomination...

...With the main thrust of Reagan's policy so easily thwarted, it is not difficult to imagine what has happened elsewhere...

...Obviously, the first step toward a sensible budget policy is an economic policy that returns the economy to its growth trend as rapidly as possible and provides incentives to capital and labor that increase the economy's growth potential...

...One is the Federal Reserve Board's belief that economic growth causes inflation, a belief that makes the Fed reluctant to support an economic growth policy...

...Indeed, despite his own supply-side rhetoric Reagan's toleration of public displays of disloyalty to his policy on the part of his budget director, Council of Economic Advisers chairman, and chief of staff has resulted in the office of the presidency being used to discredit the President's policy...

...The products of high-wage U.S...

...This is why the key to budget control is a pro-economic growth policy...

...What does all of this mean...

...Faced with this ingrained and inflexible Republican point of view, supplyside economists in the Reagan Administration have found it difficult to get a hearing for empirical evidence...

...The tax policy bureaucracy apparently thought it could strike a populist blow by reducing the average tax rate on personal income and shifting the burden to corporations by raising the marginal tax rate on new capital investment...

...labor in order that the Western alliance can be maintained...

...Again situation, however, should not cause us to lose sight of the fact that some changes did occur...

...On the surface this can be dressed up in the rhetoric of fairness and helping the little guy by making fat cats pay...

...Another is the failure of President Reagan to appoint senior officials who believe in his policy enough to fight for it...

...But the slower the economy grows, the harder it is to restrain government spending...

...It means that Paul Vblcker and the Federal Reserve Board are the main arbiters of economic policy...

...The quixotic, Carteresque tax reform devised by the Treasury bureaucracy is a good example of the speed at which the permanent government has been able to reverse the direction of tax policy taken in 1981...

...This posture is threatened by the sharp decline in U.S...

...The multiple taxation of saving in the current code reduces the investment rate below what would be the case in a neutral tax system...

...The incentive is to join the establishment, not to make an enemy of it...

...In the absence of clear rules, the Fed can substitute its own judgment...

...These reforms would leave open for debate the method by which the Fed should conduct monetary policy, but better accountability could improve policy while the debate is being conducted...

...Many liberals view tax rate reduction as an immoral attack on the scope of government and as a restoration of private property rights that permits greater income inequality...

...This is an unfortunate loss of vision, because spending should be cut even if the budget were balanced...

...As the chart on page 200 of the 1984 Economic Report of the President shows, a significant portion of the multi-year deficit projections is due to an economic forecast that holds the economy below its growth trend for a decade...

...By crowding out evidence and sound thinking, the deficit hysteria is crowding out Reagan's economic program...

...The charge also appeals to the largely liberal media and academic communities that prefer larger government...

...Part of the problem is the belief held by many Republicans that the deficit determines the level of interest rates and, therefore, the economy's performance...

...Their goal is to raise taxes as a way of discrediting the tax-cutting policies of Rep...

...The President's men have succeeded in replacing economic growth with deficit reduction as the focus of policy...

...The Reagan Administration seems to be gearing up for a massive assault on federal spending in 1985...

...Therefore, the task remains what it has been-to fight for a free society...

...Tax reform must be careful not to raise the cost of capital...

...A wider issue is at stake...

...productivity growth that occurred during the 1970s...

...The establishment's encroachments on the Reagan presidency are not likely to be rolled back, but it is now our ground that is being encroached upon...

...Prospects for controlling the growth of government depend fundamentally on the performance of the private economy...

...It is government spending that "crowds out" the private sector regardless of whether the spending is financed by taxing or borrowing...

...This rules out the simple-minded approach taken by the lawyers and accountants in the Treasury's Office of Tax Policy (over the opposition of the Office of Economic Policy...

...The impact of interest rates can be easily swamped by changes in taxation...

...The slower the economy grows, the more government spending must be cut back in order to reduce it as a percentage of GNP...

...Sometimes the few can catch the imagination of the public and prevail over the many...

...The list of people who have left the Administration is a Who's Who of Reaganauts...

...in its absence frustration and disillusionment await.tration and disillusionment await...

...fet, many Republicans believe that only borrowing crowds out the private sector and that raising taxes prevents crowding out by balancing the budget...

...It is the economics of a free society, and it will prevail if freedom prevails...

...But it is being approached in a mechanical way that stresses tax increases and spending cuts and neglects the overriding importance of the economy's performance...

...As long as Reagan is not prepared to take charge of his government, he cannot expect to achieve his goals...

...It means that the pursuit of power in Washington rather than the country's real problems absorbs the energies of policymakers...

...There is an obvious economic agenda consistent with these requirements...

...It happened in 1981, and it can happen again...

...Therefore, the main result of an assault on spending could be a tax increase to "make good on the expectations of deficit reduction that have been factored into the financial markets...

...markets...

...There is nothing wrong with deficit reduction...

...The Fed can be made more accountable without destroying its integrity...