Professor gives Reaganomics a C+, but he calls that a midterm grade
As the presidential election campaign heats up, attention is focusing on the issue of the economy. Under the circumstances, it seems appropriate to evaluate the progress made so far on President Reagan's economic program.
Inflation has come down further and faster than most people anticipated, but the unemployment rate throughout most of the Reagan term has been higher than when Ronald Reagan took office. (Unemployment in May, however, was exactly the level it was in January 1981 when Reagan was inaugurated: 7.4 percent.)
In the simplest of measurements, that would yield a batting average of .500, signifying a very heavy hitter. In a year divisible by four, there is a lot of charm in that methodology.
However, I believe that it is more appropriate to evaluate Reaganomics on its own terms. Thus, we should begin at the beginning - specifically the Feb. 18, 1981, ''white paper'' which was the initial and still most comprehensive presentation by the administration of its economic design. The ''white paper'' presented a four-point program to achieve a stronger economy by reducing the power, cost, and burden of the federal government.
Those four pillars of the program are well known: (1) cutting tax rates, (2) slowing the growth of federal spending, (3) curtailing the burden of regulation, and (4) reducing the growth of the money supply.
Well, what has occurred in the way of translating the rhetoric into reality?
Back in February 1981, the President urged the Congress to enact a 25 percent across-the-board reduction in personal income tax rates over a three-year period , plus a major incentive to investment in the form of liberalization of business depreciation allowances. That was done.
But in the course of the legislative process, a ''bidding'' war occurred, which resulted in many costly items being added to the tax bill. As a result of these tax-law changes, the Treasury's share of the national income has been declining - from 21 percent in 1981 to 19 percent in 1983. That downward shift in the federal take is in marked contrast to the 1970s, which witnessed a rise in the per capita federal tax burden.
However, these developments were viewed adversely in financial markets. There the outsize tax cuts were interpreted as meaning an extended period of deficit financing. The response in financial markets was a significant rise in interest rates, which increased interest on the national debt and hence the budget deficit. To tax policy I give a ''B.''
But what about all the spending cuts? True, important shifts in priorities were made, from welfare to defense. But the growth in military programs, farm subsidies, entitlements, and interest more than offset cuts in food stamps and other welfare items. Federal expenditures rose from 23 percent of GNP to 25 percent in 1983. Hence, government spending is a larger factor in the economy today than in January 1981.
To sum up, taxes were cut substantially more than originally planned and expenditures far less. The result contributed fundamentally to large and growing budget deficits. The inability to carry out effective budget restraint was not an inherent failing of the basic policy of Reaganomics but of its execution. The resultant large imbalance in the budget, however, remains a contradiction in Reaganomics. For the failure to cut government spending, I award a grade of ''D.''
The third pillar of Reaganomics is reducing the burden of regulation. For the first time in decades, no new major regulatory activities have been started. Many existing burdensome regulations have been modified or rescinded. A benefit/cost test has been introduced for proposed new regulations.
Simultaneously, however, many backward steps have been taken. Rising protectionist sentiment, plus foreign policy factors, has led to a variety of administration restrictions on imports and exports. On balance, we cannot say that, as a result of policy actions since January 1981, the government will be intervening less in the American economy than in the 1970s. At best, the several steps taken forward in the early days of the administration have been offset by an equal number backward. For regulatory reform, I award a grade of ''C.''
The fourth pillar of Reaganomics is monetary restraint. Initially, policy shifted from excessive ease in the second half of 1980 to significant restraint in 1981. This move succeeded in bringing down inflation but also produced a major recession. The expansion of the money supply in late 1982 and early '83 was instrumental in moving the American economy to recovery. With the President's reappointment of Paul Volcker as chairman of the Fed, the administration has implicitly endorsed the actions that he and his colleagues have taken.
The administration's major contribution to monetary policy was supporting the slowdown in the growth of the money supply needed to reduce inflation. The various attempts to provide public advice to the Fed have been counterproductive , usually upsetting financial markets. In the monetary area, I give the administration a ''B-.''
What is the overall grade for Reaganomics? According to my calculations, it is a disappointing ''C+.'' But this is in the nature of a midterm grade which, it is hoped, inspires the student to do better in the rest of the course. I am a tough grader. I flunked Jimmy Carter.