Economic Report of the President
It is a relief to have at last an extensive official statement of the “philosophical beliefs and economic judgments” of the Reagan administration; one that sets out to “help both the public and our fellow economists to understand the basis, the importance, and the effects” of present economic policies. The administration has presented its economic policies as politically and intellectually “historic,” and the president’s Economic Report goes a considerable way toward justifying such pretensions.
The Report—an eight-page message from President Reagan, followed by 344 pages prepared by his Council of Economic Advisers—addresses itself unhesitatingly to a question of urgent importance: what are the causes of the “fundamental deterioration” in America’s economic performance since the late 1960s, and in particular of persisting high levels of unemployment and inflation?
Such problems are common in some form to all developed capitalist economies. The Report concedes that a “full explanation of stagflation in the United States and other countries has yet to be developed.” But the authors of the Report have little patience with the “conjunctural” explanations of economic troubles that were fashionable in the centrist governments of Raymond Barre, Jimmy Carter, or James Callaghan. External factors “such as the oil price increases of the 1970s” or crop failures explain only “a small part of the decline.” The causes of the crisis are rather to be found in the underlying development of the American political economy.
By this the authors of the Report mean, above all, the increased economic activities of the federal government. The increase in federal activity “was associated with” stagflation; it “contributed to our declining economic performance”; “in short, Federal economic policies bear the major responsibility for the legacy of stagflation.”
There are three main counts to the indictment, listed at the outset of the Report. First, increased government regulation, which has increased production costs. Second, high taxes, which have reduced incentives to work and save. Third, transfer payments for welfare and social security, which have reduced “employment of the poor and of older workers.”
To these are added a further charge, that government, because it permitted rapid growth of the money supply, “bears the most direct responsibility for the increases in inflation and interest rates.” But this indictment is concerned less with the extent of government activity than with the policies of past governments (or the Federal Reserve). The authors of the Report do not, it appears, favor deregulation of the function of creating money. They in fact rely virtually exclusively on restrictive monetary policy as a means of reducing inflation. They even observe that a main virtue of fiscal policy is to strengthen the “credibility” of monetary policy. They indict previous monetary authorities for incompetence, apparently because their policies were influenced by such nefarious government objectives as reducing economic fluctuations or paying off “obligations in cheaper dollars.” But their objection is not to the public function of monetary regulation as such.
The three main themes are developed at length in the Report. Together, they constitute …