The economic program of the Reagan administration, like that of the Thatcher government in Britain, manifests a conservative counterrevolution in the theory, ideology, and practice of economic policy. The aim of the counter-revolution is to shrink the economic influence of government, especially central government, relative to that of private enterprise and free markets. Three kinds of policies are at stake, concerning respectively (1) macroeconomic stabilization—the use of fiscal, monetary, and other policies affecting national production, employment, prices, and other variables of economy-wide significance; (2) economic inequality—the use of the public fisc to redistribute income and wealth; (3) resource allocation—national priorities among various public and private goods; (4) regulation of economic activities and markets. I shall speak principally about the first two categories.
I have referred to a counterrevolution, so I should remind you of the revolution to which it is the counter. That took place some thirty-five to forty-five years ago, just before and after the Second World War, in this country and in other Western capitalist democracies. Radical changes occurred in the practice of economic policy and in the theory of political economy. Live memory of the Great Depression created a broad consensus that the state must assume responsibility for maintaining prosperity, as well as for protecting individual citizens against the inevitable insecurities of life in a market economy. The New Deal in the United States and social democratic movements in Europe were the agencies of these changes. They also expanded government investment in schools, housing, transportation, and other public goods, and augmented the market power of workers, trade unions, and farmers vis-à-vis business. Over three postwar decades these changes were largely accepted by all mainstream political parties and extended by governments of various political colors. Though rumblings of discontent have been heard in increasing volume over the past fifteen years, only recently have the counterrevolutionaries gained political power.
I shall confine myself mainly to the United States and the first two issues on the agenda of the revolution and counterrevolution—macroeconomic stabilization, and redistribution of income and wealth. Two acts of Congress symbolize the revolution. The Employment Act of 1946 dedicated federal power to the achievement of “maximum employment, production, and purchasing power.” Ten years earlier, under the Social Security Act, the federal government recognized an obligation to protect individual citizens from personal economic misfortunes—workers without jobs, aged without funds, children without fathers. The New Deal had already put the federal government in the business of welfare and work relief, insurance of bank deposits and mortgages, and other “safety nets.” By 1947, then, the federal government had assumed responsibilities both to maintain general prosperity and to insure and indemnify the worst individual casualties of depression and economic change.
These really were new responsibilities. Fiscal and monetary policies were not significantly dedicated to macroeconomic stabilization before the late 1930s. In 1929-1934 both Hoover and Roosevelt raised taxes and sought vainly to balance the federal budget; they were worried about the Depression’s effect on the …