The Seven Fat Years: And How To Do It Again
The Bankrupting of America: How the Federal Budget Is Impoverishing the Nation
Today the ability of the American economy to provide rising incomes and expanding job opportunities is in greater doubt, and at greater genuine risk, than at any other time in recent memory. Even during the record-length business expansion that began in 1983 and ended in 1990, growth in US productivity was sluggish and the average American worker’s wage failed to keep pace with inflation. The 1990-1991 recession may have been mild in the aggregate—the increase of unemployment to 7.8 percent of the labor force in June does not approach the 10.8 percent unemployment rate in 1982—but it has affected companies and social groups that used to be thought immune from ordinary business downturns. Worse yet, there is little confidence that even after the recession is well behind us our economy will be able to provide a rising standard of living for most of the nation’s families. If it cannot, then in the years to come that economic failure will surely threaten the general character of American society, and it will sharply circumscribe the role that this country plays in world affairs.
Among the disparate forces that have combined to bring about these doubtful prospects, the one that can be most directly confronted is the now chronic drain on the nation’s saving caused by the federal government’s borrowing. Put in the simplest possible terms, the problem is that what we pay in federal taxes now amounts to 19 percent of American incomes, while what the government spends adds up to 24 percent. Closing this imbalance, if we are to close it, means either raising tax revenues or cutting government spending, or both in some combination. But a coalition of those who fear higher taxes and those who dislike much of what modern governments do anyway (often the same people) has firmly blocked the first solution, while those who are committed to (or rely on) what the government does have just as firmly blocked the second.
While this political deadlock persists, so too does the government’s budget imbalance and, consequently, the crippling drain on our saving. On average during the last ten years, the entire net saving of both American families and businesses amounted to 6.2 percent of our national income. The federal government’s deficit absorbed 3.7 percent of national income. We therefore go on, year after year, investing less than we should in just about all of the makings of a strong economy—factories and machinery, most obviously, but also research, worker training, bridges, airports, and the like—and both incomes and job opportunities have stagnated for a large majority of our citizens.
The initial enthusiasm for Ross Perot’s abortive presidential candidacy, notwithstanding his lack of details about the “waste” he would eliminate, or for a balanced-budget constitutional amendment, notwithstanding fears that in practice such a measure would not work anyway—might seem to have suggested that Americans have finally started to wake up to what has happened to their economy. If so, the mechanism at work is not any shrill alarm but the slowly growing awareness of concern on the part of many people for their economic well-being and that of their children. After the euphoric stupor into which so many Americans lapsed during the Reagan years, their critical faculties dulled by the President’s unique combination of inspiring bluster and empty yet soothing promises, the current signs of dissatisfaction may foretell positive action. As this year’s election campaign stumbles forward, the increasingly visible uneasiness of the country’s political establishment, including both major parties, suggests that some of the nation’s leaders may at last be shocked out of their customary complacency.
At the same time, fear for oneself and for one’s children is often not the best inspiration to cool-headed assessment of economic problems. Thus far in the election campaign popular discontent has concentrated largely on the recent business downturn, which still continues in some industries and some parts of the country. The real problem, however, is something more fundamental than just a business recession. The all too familiar newspaper reports that this year’s graduates face the worst job prospects in fifty years clearly reflect more than just the increase of about two percentage points in unemployment since the recession began.
The real problem is that, even apart from the recession, the American economy has stagnated. Overall economic growth during the three years since President Bush took office has averaged 0.6 percent per year above inflation, not even enough to keep up with a population that is increasing by 1 percent a year. This pace of growth is below that of any other three-year period in America since World War II except 1980–1982, when the Federal Reserve system, with the support of presidents Carter and Reagan, raised interest rates to record levels in order to brake accelerating inflation, and in the process pushed unemployment to nearly 11 percent. By contrast, the economy’s sluggishness today is not the tangible cost of any significant further progress in slowing inflation. It is simply the stagnation caused by our decade-long failure to invest in the ingredients of economic growth.
For a while, earlier this year, it appeared that a misdirected concentration on the recession might lead to some foolish, even counterproductive, new policy. President Bush’s publicity trip to the shopping mall was harmless enough, but potentially dangerous proposals were also made in Congress and the press for fiscal stimulus measures such as general-purpose public works programs or restored tax shelters for commercial real estate. Unless they were promptly canceled once full employment was achieved, such programs would only have detracted further from the economy’s ability to produce growing numbers of well-paying jobs. Greater amounts of consumer spending, or credits for the construction of still more empty office buildings, are not the answer.
What the American economy needs is more investment: in new factories, new machinery, new research, new infrastructure, and a better educated work force. President Reagan was right when he said that boosting US productivity and competitiveness would require devoting a larger share of our incomes to new investment. But Mr. Reagan’s budget policies, combining across-the-board tax cuts with a major defense buildup and protection of extremely expensive entitlement programs such as Social Security and Medicare, soaked up so much of scarce US saving that, since the early 1980s, the nation has devoted a smaller share of its income to net new investment than at any other time since World War II.
The inevitable result has been sluggish growth in productivity, stagnant real wages, and declining job opportunities—and not just for the recent college graduates whose plight makes the front page, but especially for the high-school-educated young men and women who have traditionally looked to the country’s assembly lines and construction sites as their opening to middle-class life. While the earnings of male college graduates gained 8 percent compared to inflation during the decade that preceded the recession, earnings of high-school-educated men fell 19 percent. The equivalent comparison for women showed a 19 percent gain for college graduates versus a 6 percent decline for high-school graduates.
It is no surprise, therefore, that the infectious boosterism inspired by Ronald Reagan’s reckless fiscal experiment eventually gave way to a disappointment that now seems equally infectious, and that has politicians in both parties so worried. In other times and other countries, the combination of stagnating incomes and widening inequalities has often been a recipe for wholesale disenchantment with a nation’s established political leadership. From an economic perspective, it is a combination of forces from which a candidate such as Ross Perot—or, less benignly, David Duke—is created. Disillusion over the past, discontent with the present, and, worst of all, fear for the future are increasingly evident.
Two new books assess this situation from sharply different perspectives. Robert Bartley, editor of The Wall Street Journal, follows the lead of much of the popular self-help literature by arguing that the problem is mostly in our minds. In his view, the Reagan economic program delivered on all its promises and then some. The message of his book, The Seven Fat Years, is that we’ve never had it so good. We’re just too foolish to realize it.
The dominant theme running through Mr. Bartley’s book will be familiar enough to anyone who has ever felt the frustration of inadequate recognition or unfair rejection, either real or perceived: Why doesn’t everybody admit that I make the best blueberry pie, or throw the hardest fastball, ever seen in this town? Why can’t people see the enormous contribution of my ideas to intellectual discourse?
The specific frustration voiced by Mr. Bartley is that so many Americans do not now look back on the 1980s as a stunning economic success, the best they’ve ever had. Because they fail to recognize the country’s economic transformation during the last decade for the grand achievement that it was, they likewise fail to acknowledge the fundamental contribution of the ideas behind it. And, not incidentally, they therefore fail to recognize the contribution to the republic (in some chapters, to the world) made by the small group of men—Mr. Bartley is explicit about his own efforts as one of them through the Journal‘s editorial page—who conceived these ideas, popularized them, and ultimately sold them to the nation’s policy makers.
Mr. Bartley does more than just whine over the lack of public acclaim for his ideas, however. He also provides much genuinely useful—in some cases, really excellent—discussion of economic ideas. But too often, he mars otherwise valuable presentations of basic economic concepts by his need to sneer at whatever elements in the analysis might undercut his praise for the policies of the Reagan years.
The main reason that economic policy issues often embody questions that are difficult to answer is that two or more forces are at work simultaneously, tugging the relevant aspects of economic behavior—how much people will save, or how hard they will work, or whether firms will raise or lower prices—in different directions. Knowing just how the economy will respond to any specific policy therefore requires a quantitative judgment of which of these opposing forces will outweigh the others. That, in turn, requires some base of empirical evidence. But often Mr. Bartley, after offering the reader an account of opposing influences on behavior that appears to reflect genuine understanding, instead resolves the question of which one dominates the other by ridiculing one half of what he has just written. He also applies this technique of argument by mockery to issues that are not just empirical but logical.
For example, when it suits his purpose to do so, Mr. Bartley expounds enthusiastically the idea that taxpayers do not care whether the government raises funds by taxing them or by borrowing in the market, on the ground that people are sufficiently farsighted to anticipate the future taxes that will be needed to service the government’s debt obligations, and so they adjust their spending accordingly. He writes: