Book Review The New American Economy: The Failure of Reaganomics and a New Way Forward Bruce Bartlett

Palgrave Macmillan, 2009 There ought to be a special place in the pantheon of heroes for people who think for themselves and who, though they have convictions, allow themselves to be beholden to no fixed interest group or faction. Bruce Bartlett, an economic historian and widely published author, has long been associated with the Reagan legacy in the United States, but that association has been of the sort one would expect for an independent thinker. In the 1970s, he served on the staffs of Congressmen Jack Kemp and Ron Paul; and in the following years was a domestic policy adviser to President Reagan and then a treasury official in the administration of George H. W. Bush. It tells a lot about him, though, that in 2006 he authored what to many of his erstwhile associates would seem an heretical book, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy, and accordingly was fired by a Republican-aligned think tank. Now he challenges a long-held cornerstone of free market, limited government thinking by arguing that John Maynard Keynes was actually a conservative who sought a realistic way to combat the Great Depression and thereby to save the capitalistic system. Further, Bartlett supports a Value Added Tax (VAT) for the United States, a position that he says political leaders privately tell him is sound but that has been too politically risky for them to embrace. It is both a weakness and a strength that in this book he focuses almost entirely on monetary/fiscal policy to the exclusion of all else. The strength is that he has much valuable to say about those policies, but it would seem that todays economic conundrum goes far beyond them, so that the real economy and manifold predicaments of the society need to be considered as part of the economic condition. If the fiscal deficit is a problem, this suggests that the immense cost of foreign wars, of military undertakings throughout the world, and of overall global meliorism as supported by both neoconservatism and neoliberalism simply have to be taken into account. Further, Bartlett continues the vogue among most economic commentators of disregarding the hollowing-out of the American manufacturing system and of employment through offshoring, out-sourcing, vast imports, and immigration (both legal and illegal). Nor does he discuss the historic shift of the American economy into financialization, an emphasis on finance that brought with it the many structural pathologies that were so instrumental in producing the crisis of 2007 and beyond. All of this, and more, is part of the economic fix the United States is in today, so that a preoccupation with monetary and fiscal policy hardly covers the ground. It is incongruous that Bartlett doesnt reach out to include these things, because not doing so runs directly contrary to his basic methodology. Throughout the book, he argues effectively that economic doctrines and policies are, and ought to be, responses to particular situations. Economic theory has always evolved to deal with the particular crisis of the times. Keynes, faced with the situation in the 1930s, saw that wages were sticky and wouldnt fall precipitously to create the renewed demand for labor that

would produce full employment, as orthodox economic thinking in the 1930s thought they should; and Keynes saw that monetary policy could not produce its intended effect in a deflationary situation in which firms were unwilling to borrow. Keynes, Bartlett points out, was responding to untoward realities. When in the 1970s stagflation saw a puzzling combination of high unemployment and high inflation (puzzling because it contradicted the inverse relationship predicted by the Phillips Curve), supply-side economics offered the solution: a lowering of marginal tax rates (to provide incentives for new ventures and thus to address the unemployment problem), while a tight monetary policy put the kibosh on the inflation. Bartlett sees that this, too, was a response to specific needs. Keynesian fiscal stimulus has been called for in the present economic crisis, Bartlett argues, because the recession of 2008-2009 created deflationary conditions like those of the 1930s. He is pessimistic, though, since he says economic stimulus usually gets underway well after the economy has turned the corner; the likelihood is that the recent stimulus it will continue to be applied long past the point where it is valid. [Such a misapplication violates Bartletts commonsense prescription that policies need to be geared intelligently to the actually-existing conditions.] In fact, such a misuse has been the fate of Keynesianism over the years. Keynes ideas reached their pinnacle in the 1960s, at which time his followers increasingly forgot that his policies presupposed deflationary conditions. When inflation and unemployment ran in tandem in the 1970s, the result was to utterly discredit Keynesian economics for the next several decades. The American Left moved toward industrial policy, with government seeking to direct the economy, which Bartlett considers a quasi-socialist policy. Its not surprising that Keynesianism was equated with inflationism, even though Bartlett believes that that was not Keynes intent. Bartlett himself tells us that Keynes analysis in The General Theory of Employment, Interest and Money left the impression that he thought inflation was a cure for unemployment at all times. (This suggests that Bartlett is giving Keynes the benefit of a limited interpretation, justifying it on the ground that Keynes overall intellectual history bears it out.) Nor is it surprising that those who saw the New Deal through the prism of traditional American thinking thought of Keynes not as a friend of a market economy, as Bartlett thinks he was, but as one of those pulling toward a vastly expanded government role. The intellectual milieu of the 1930s in the United States was indeed far left. Roosevelt had started with the National Industrial Recovery Act, which sought a syndicalist-style organization of American industries, something about which the Lefts New Republic magazine was quite enthused until its editors found that businessmen, not government, were running the show. The pages of the New Republic became filled, as the decade went along, with calls for centralized economic planning. When Keynes prescribed massive federal spending programs, it seemed to fit right in as part of the overall attack on limited government. Just the same, it doesnt hurt for us to think back today and realize that capitalism must avoid extreme dysfunction if it is not to give rise to remedies that capitalisms most ardent supporters will find distasteful. Such a realization in effect throws down an intellectual gauntlet to those who cherish the ideals of limited government and a market economy, crying out to them: take it upon yourselves to find ways to address the dysfunctions.

In the late 1970s and on into the 80s, supply-side economics was precisely such a problem-solving insight. As we have noted, this combined tax-rate reductions with a tight monetary policy. (As to the tax cuts, the lowering of marginal rates, especially from the high rates that had existed before, was what supply-siders saw as crucial for incentives.) Bartlett says that supply-side economics was highly successful to address the twin problems of unemployment and inflation, and that its premises have become absorbed into mainstream economic thought. But, as with so much, the policies came to be applied in ways they werent meant to be. During the George W. Bush administration, Bush and other high ranking officials frequently asserted that all tax cuts raise revenue, something the original supply-siders never believed. The result was that by the end of [that] administration, supply-side economics had become a caricature of itself, largely disconnected from its original principles. It is time, Bartlett says, to drop the term altogether, allowing its thinking to exist unnamed within economic doctrine but having it no longer available as a catch-word to serve as a putative justification for an illadvised anti-tax position. Bartlett points out that the anti-tax vogue within the present-day American Right is fed, too, by an idea that was central to the policies of the Reagan administration but that has proved not to work. This was the notion that fiscal deficits were to be welcomed because they meant that government would have less to spend. The idea that tax cuts would channel concerns about budget deficits into political pressure to cut spending has come to be called starving the beast. Unfortunately, he says, in a chapter title that makes the point, Starving the Beast Didnt Work. What happened was that taxes were cut without any corresponding effort to cut spending. In fact, the Republican Congress during the George W. Bush administration added a new, unfunded prescription drug benefit to the [Medicare] program costing trillions of dollars. What is needed, Bartlett argues, is just the opposite of starve the beast. In place of the income tax, which is highly inefficient, he would seek a tax system that will provide abundant revenue to fund adequately the entitlement programs that the American people quite obviously value highly. A Value Added Tax (VAT) is such a tax. What is it? The VAT is a form of sales tax levied on producers rather than retail sales, giving each firm a credit for previous taxes paid along the production-distribution chain. Although the tax is paid by producers and distributors, who then add it to the sales price, the full burden [ultimately] falls on the final purchaser, the consumer. Advantages: as a tax on consumption, it would not fall on savings, which Bartlett sees as the engine of economic activity; it would avoid the evasions and costs of administration that are so prominent a part of the income-tax system; it would raise a lot of revenue easily; and it would allow a significant reduction in marginal tax rates. Of course, the starve the beast proponents object to such an abundant flow of revenue, to which Bartlett answers that their expectation that lower revenues produce smaller government hasnt proved true in the past probably wont in the future. There is an odd thing about Bartletts discussion of the VAT. Although he acknowledges that the tax can be rebated on exports [which is what other nations characteristically do], he says that the VAT is neutral with respect to trade. We recall, by way of contrast, that Pat Choate, whose book Saving Capitalism we reviewed in the

Spring 2010 issue of this journal,1 favored a VAT for all the reasons Bartlett does, but considered also that a major imperative for adopting one came from the protection it would provide to American industry and jobs, allowing the United States to compete on a more equal playing field. He wrote of the long-standing WTO policy of discriminating against direct taxes (such as income taxes) in favor of indirect taxes (VAT), a policy bias that puts U.S. producers and workers at a more than $355 billion annual disadvantage [in 2007] in international trade. He explains that this WTO policy allows other nations to rebate the VAT, thereby subsidizing their exports sold in the United States, while imposing a tariff-like VAT on U.S. imports into their countries. What has happened, Choate says, is that the United States has continued an inequitable system [that] has its origins in the aftermath of World War II, when the United States was trying to speed Europes economic recovery. Europe recuperated decades ago; but, perversely, the tax loophole remains. In seems apposite to notice that, along the same lines, American forces continue to stand guard in the defense of Europe and South Korea, while those who are defended spend comparatively much less on defense, decades after each of them has become fully capable of bearing its own burden. The United States seems to lack the will to abandon long-obsolete largesse given to others. It isnt surprising that Bartlett misses this point entirely. To do so is consistent with his ignoring the hollowing-out of American manufacturing and with his view that trade protection is a part of the industrial policy that he opposes as quasi-socialist.. This reviewer doubts that he is trying to sneak in a protectionist tax by dissimulation. He misses the hollowing-out in another connection, as well. When he discusses the measures taken to combat the economic collapse in 2008-2009, he focuses, as he does throughout the book, on monetary and fiscal policy. He argues that, given the collapse that occurred in the velocity-of-money and the desire to borrow, monetary policy would be impotent until a fiscal stimulus would increase aggregate spending. The economist Paul Craig Roberts, by way of contrast, points out that neither monetary nor fiscal policy is effective to overcome American unemployment and loss of manufacturing if the stimulated economic activity will just go toward more out-sourcing and importing. (See the review of Roberts book How the Economy was Lost in our Fall 2010 issue.) There is considerably more in Bartletts book than we have been able to touch upon here, especially with regard to the economics of the Great Depression. Before we conclude, however, it is worth commenting on the books subtitle, which speaks of the Failure of Reaganomics. The explanation for this iconoclastic view lies, of course, in the points we have mentioned: that he finds that the Reagan administrations hope that the size of government would be curtailed by starving the beast was not in fact realized, since the government did in fact continue to grow; and that the supply-side principles that were important in the Reagan era have been warped into a new anti-tax ideology that is one of the main pillars of the contemporary American Right. Therein lies the failure of Reaganomics. Dwight D. Murphey
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This review, and the review of Paul Craig Roberts book referred to later here, can be read not only in the particular issues of this journal in which they were published, but also in the book this reviewer has written entitled The Great Economic Debacle and Beyond, published in early 2011. They can also be read online at www.dwightmurphey-collectedwritings.info