Clintonomics and the Lessons of the 1980s
June 23, 1993
Robert L. Bartley
Introductory Remarks by David J. Theroux
Good afternoon, ladies and gentlemen. My name is David Theroux, I am the president of The Independent Institute, and I am delighted to welcome you to our Independent Policy Forum program today.
As many of you know, the Institute regularly sponsors programs featuring outstanding experts to address major social and economic issues, especially as they may relate to important new books. And, today is certainly no exception.
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Our program today could not be more timely. As you well know, we are facing record federal debt in the trillions of dollars. The national economy is sluggish at best, while California continues to decline. Is the recession of the 1990s retribution for the so-called excesses of the 1980s? Are there lessons from the 1980s that can be applied today or is the Clinton administrations pursuit of a new national industrial policy with massive tax increases, re-regulation, and government jobs programs the solution? Based on his personal involvement in the development and analysis of the economic policies since the 1970s, our speaker today will draw upon his best-selling new book, The Seven Fat Years: And How To Do It Again, to offer a deeply informed reassessment of the Reagan, Bush, and Clinton administrations economic policies. (And, I hope that each of you will not leave today before purchasing a copy of this superb book.)
Our speaker today could not be better qualified, more knowledgeable or more incisive in addressing the pressing economic questions we face. Robert Bartley is the editor of The Wall Street Journal, with a daily circulation of 2 million. In 1980, he won the Pulitzer Prize for editorial writing. The year earlier, he received the Gerald Loeb Award for his editorials on international monetary problems, and in 1977, he received the Citation for Excellence from the Overseas Press Club of America for dispatches filed from China and Tibet after the death of Mao Tse Tung.
Mr. Bartley holds a bachelors degree in political science from Iowa State University and a masters degree in political science from the University of Wisconsin. He has received honorary Doctor of Law degrees from Macalester College and Babson College.
We all know him from his excellent writings in the Journal and elsewhere, and I am very pleased to introduce him now to speak on Clintonomics and the Lessons of the 1980s, after which he will be happy to answer your questions. May I present Robert Bartley.
Thank you, especially, for officially certifying me as an expert. We have to define all of these terms. You all know what an ex is, and a spurt is a drip under pressure. Id like all of you to know that I also subscribe to the Wolcott theory of public speaking. Alexander Wolcott was one of the wits of the Algonquin Roundtable of the 1930s, and he got into outrageous statements during public speeches, as I am, and after one of these outbursts one of the members of his audience said, But, but thats only your opinion! and Wolcott said, What did you want, Madame, my hair clipping?
So with that warning that you may be in for some unsubstantiated opinions here, Id like to talk about the Clinton administration. Jay Leno said its the only thing around getting worse press than Diet Pepsi. He also said that to solve the problem of what Janet Reno does to eliminate FBI Director William Sessions, is she just arranges for CarterClintonI always do thatfor Clinton to appoint him to a higher position, and within a few weeks hell be gone.
Weve added greatly to the vocabulary of the English language in these early days of the Clinton administration. We have a new verb called Guinier. That means to pull someone out when the going gets tough. As in His family didnt like her, so he Guiniered her. Then we have another verb called Kimba. Now Kimba means to pull someone out before the going gets tough.
Were giving congratulations now to David Gergen for getting the president off the Jay Leno Show. The idea is that Gergen is getting a little more media management in here, which I think is true. Keep these stories from exploding into second day stories and third day stories and so on. And the idea is that because of this management, now everyone can concentrate on the Clinton economic program, which they seem to think everyone in the country is going to love, as opposed to his appointments process. Im not exactly sure whether the rest of the country is going to love it. The voters in the Senate Texas race didnt seem to love it very much. The whole thing was billed as referendum on Clintonomics and Mrs. Hutchinson got more than two-thirds of the vote. But theyre still in the mode of saying, Well that was an aberration, and Hutchinson was up against a weak opponent. But, on the other hand, if you look at this economic program, whats amazing about it is the lack of any coherence to it. When you keep asking, What is the economic theory behind these proposals? I mean, in what economics textbook does it say you can tax your way to prosperity? Thats certainly Keynes view. It wasnt the classical economists view. They all, by and large, viewed taxation as a drag on the economy.
We have these Clinton proposals. First he proposed to boost the deficit in the short run on Keynesian grounds that this will stimulate the economy. But later on, were going to reduce it, but thats also going to stimulate the economy, because thats going to all flow into local investment. You have proposals to increase the expensing provisions for small business, but all of these small businesses are run on personal tax incomes. So what you give on the expensing side you take away from small business on the increases in the marginal rates on personal taxation. Theres a big emphasis on investment, but the biggest thing theyve done about investment is to propose to tax 85% of Social Security benefits above the threshold. To be very clear about that, its not really a tax on the benefits. Thats a tax on the other income that puts you above the threshold. This is a tax on what people have saved. Yet they say they want to promote savings and investment. So its a very confusing and contradictory program to try to make some kind of sense out of, to try to figure out what the administration is really up to. And the only answer to this that seems very satisfactory is to forget economics entirely.
This is a political strategy. It actually was spelled out at some length in the American Prospect magazine in 1991 by Stanley Greenberg, the presidents pollster. Greenberg was asking the question, Well, what about the Reagan Democrats, how do the Democrats get them back? How do we get back the voters of Macomb County, Michigan? And his basic answer to that is that we can get these voters back into the Democratic coalition and put the New Deal coalition back together by stirring class resentment. Now, of course he didnt use those words, but thats the pure message of it. What theyre trying to do is persuade these Reagan Democrats that their problems arise because somebody makes more money than they do, got away with murder somehow, and this needs to be redressed, and they can get a lot of benefits by taxing these rich people. I think if you start to think about it as political strategy you come to understand a few more comments like the one the president made a few hours ago: we have to have this tax bill and Republicans opposing it are only representing the top 6% of income distribution, etc. Theres no economic content to that, particularly, but its a political drive to use these resentments to regain the Democratic voters that Reagan and the Republicans took away from them during the 1980s.
How well this is going to work as a political strategy I have my doubts about it, but Im sure on political grounds most of those people want to get into the top 6% of the income distribution, they dont want to stay where they are. It didnt seem to work very spectacularly in Texas. Most people probably have an intuitive sense that if youre increasing taxes on the rich youre going to be increasing taxes on them. The Greenbergs of the world seem to think, going on the basis of their polling data, that these people are willing to pay more taxes as long as they get some benefits out of it, therefore, you have to give them the big benefit of a national health insurance program. Paul Gigot recently in Washington was describing this to me and I started to chuckle a little bit about it, and he said, Listen, youre paying me to explain how these people think. This is the way they think, I believe, and whatever else happens economically theyre going to be pushing on these issues. How much they give in on the social issues and appointments, the soak the rich rhetoric is central to their political strategy and is therefore not likely to go away.
Now, in this American Prospect article, Stanley Greenberg was very explicit that the first thing they had to do was discredit the 1980s. That was the key to their political future, and the key to paring back these Reaganomics. And therefore we have this torrent of statistics and rhetoric about how during the 1980s all of the gains went to the rich, nothing helped the lower income, or the middle class. These are highly suspect statistics, and Ive done a little basic work on them in my book, and will be doing some more for the paperback edition coming out in January or so. But these statistics are really pretty misused in all this rhetoric, and most of these statistics are first of all starting out with the income distribution of 1978, so youre mixing Carter policies and Clinton policies. Its quite clear that the low parts of the income distribution suffer during a recession, they suffered quite a bit between 79 and 82. In my view that was the price that we paid for curing the absolutely awful economic environment of 1979 and 1980, in which we had 20% interest rates and 15% inflation and still had bad growth in the economy. We resolved that much more quickly than most economists would have predicted, in 1981 when Reagan took office. And after 1983 when we got some economic growth, the lowest income people did profit from that growth: they kept pretty much apace with the other economic classes.
Now in addition to that, these income classes are quite artificial. The Urban Institute did a very good study showing how people move from one class to another. That someone in the lowest 20% of the income distribution may be your son while hes in graduate school, for example. And these people will earn their way up the distribution. Theres an enormous amount of mobility and all that would really count much would be lifetime earning statistics. These we dont happen to have. But nonetheless, this whole statistical blizzard has created an impression, an assertion that the 1980s were somehow unfair.
It is true that throughout the world there is a trend towards greater income disparities, because in the information-driven economy that we have today there are higher returns to education, so that the better educated people have a wider advantage over the less-educated people than used to be the case. This is going on throughout the world. It also true that during the 1980s, the wealthy people, the high-income people, paid less of their income in taxes than they had previously. However, the total receipts from that class were greater than they were. In other words, they were paying a greater proportion of the federal income tax than they had previously. Either they made more money because of the growth of the economy, or they chose to subject more of their income to taxation than they had previously. One or the other, but the factstotal receiptsare quite unambiguous: the high income people paid more tax during the 1980s than they had before, as a percentage of the total federal income.
The other big rap on the 1980s is of course the federal deficit. Now we always have to talk a little bit about the federal deficit whenever we discuss this. I dont really look at the deficit in the traditional national income accounts that are usually quoted. What I look at is the total federal debt outstanding as a percentage of output, of Gross National Product, Gross Domestic Product. That number was about 110% at GDP at the end of World War II, in other words, we borrowed over 100% of GDP to prevail in World War II. Then we worked that number down to about 25.55% of GDP in 1973-1974. Since then its been on a generally upward trend. Its now at about 50%.
There are different ways you can look at that. I dont think its much of a crisis: its now back where it was in 1960 and it didnt stop us from making economic progress in 1960. Or you can look at it, Well, if we borrowed 100% of GDP to win World War II, then borrowing 50% of GDP to eliminate the Cold War is not a bad bargain. But nonetheless I agree that I would be much more comfortable if we could now get that curve down. So far we havent succeeded in doing that. I dont think were going to succeed in doing that until we address what happened in 1974, when it started to go up. And that was the 1974 Budget Act, which involved a huge transfer of power over the budget at the expense of the Executive. Nixon signed that act three weeks before he resigned. And toward the Congress, and its very difficult to make sensible budget decisions with a committee with 535 members. Thats the essential problem and I dont think were going to be able to cope with it until we address those institutional arrangements.
Now, giving more power to the Clinton administration wouldnt be my first choice, but I think that redressing that power balance is a necessary, not necessarily sufficient, condition for bringing expenditures under control and therefore getting the proportion of debt in the economy headed back down.
I dont think you can do much on the revenue side. Were now passing a bill the Senate Finance Committee claims that for every dollar of tax reduction they have a dollar of expenditure reduction. Nobody believes that. The Republicans are saying about $3 of tax reduction to every dollar of expenditure reduction. We carried an article this morning by Daniel Mitchell of Heritage saying that he figured it was $4.28. Well, I want to see the dollar expenditure reduction. Where is it? Are there any expenditure reduction? I guess theres some defense cutsbut thats all. The Senate finance billyou know, the Clinton proposals are not so bad that you cant make them worsethe Senate finance bill is, OK, we need to cut spending more. Well, what should we cut? Well, lets cut Medicaid because thats one thing thats totally out of control. The one thing they know they cant control. Theyre not doing anything to cut the benefits.
Meanwhile, they want to raise some more revenues, so they said, Well, lets increase the capital gains tax. Even the CBO doesnt think that a capital gains tax above 28% is going to raise any revenues, because people just wont realize the gain. So theyre in a kind of lets pretend world: Lets pretend that we can make these expenditure cuts. And lets pretend that these tax increases are actually going to increase revenues. And sure they know better. But I think they feel theyre in a trap now, and in a political conundrum. They dont really see a way out of it except to barrel ahead with these proposals.
Now one thing Im pretty sure of is that these tax increases theyre proposing wont deal much in the way of revenues. I told Kurt Hauser that Ive been running around the country quoting the chart that he nicely provided us in an article he wrote for us, showing that federal revenues are 19.5% of GDP, going back almost indefinitely, regardless of whether the top marginal rate is 28% or 77%. So I dont see how bringing it back higher is actually going to raise revenues if, as expected, it interferes with incentives in the economy and starts to bring the economy down. I think the revenues may actually fall on a year to year basis. So I dont see where this kind of economic program is going to lead us.
I dont see how its going to work for the economy; and I dont see how its going to work for the Clinton administration or the Democratic party because were going to end up with a very slow economy. Perhaps even slower than the one weve been experiencing. Theyre going to end up not having reduced the deficit, which is their declared goal. And I suspect theyre going to end up not having recruited the Macomb County Democrats back into their coalition. But theyre kind of in a position where they dont know what else to do. Theyre in a trap by their own rhetoric and their own positioning. I forget who it was, maybe it was Newt Gingrich in one of the conversations we had, said its kind of like Butch Cassidy and the Sundance Kid: you have to grab hands before you jump over the cliff, because you couldnt it do it yourself. I think thats more or less the situation were in. It will be very interesting to see whether Mr. Gergens media manipulation overcome these realities as we go into 1994 and 1996.
Now, what should we be doing? What lessons do I draw from all of this? I think, as I said, it would be very comforting to see the debt curve head back down. That is, debt as a percent of output. Now, there are two ways you can change that fraction: you can grow the denominator, which is GDP, or you can shrink the numerator, which is debt, which means cutting the year over year deficits and get spending under some kind of control. I think we ought to do both, and on the spending side, to get this ratio headed back down you dont need a Ross Perot meat ax approach to play. Something like the Bush administrations flexible freeze would work pretty well. You have to bring some discipline to bear on the spending side. We cant do that, I think because of the procedures of the 74 Act.
On the tax side, since were going to get 19 1/2% of the total anyway, I think the logical thing to do is target taxes that grow. Which means, first of all, keeping taxes low in order to avoid imposing disincentives in the economy. Particularly, it means to pay a lot of attention to marginal rate of taxation, that is, the rate on the next dollar that you earn; paying attention to the top marginal rate, that bears on the most productive and most creative members of society. So I would resist these increases. They are particularly relevant to small business, where jobs are created. They created 18 million new jobs in the 1980s during the seven fat years that I wrote about. Even though during the 1980s and these years as well, the Fortune 500 declined a bit. The job growth comes from new entrepreneurial companies. Many of these companies are Subchapter-S corporations or partnerships taxed on personal tax returns.
I was just on the Ron Owens Show on KGO Radio, and one of the calls we got was from somebody in San Mateo who started his own firm, employing 30 people, a Subchapter-S corporation, and was angry as could be at the comments the President just made this morning because, well, hes in the top 2% of income distribution but those are in fact the profits of his company used to employ these 30 people and produce a product and provide the funds for expansion. Thats going to be one of the most deleterious effects of the kind of marginal rates that were going to have. They bear so directly on these small and creative corporations that are actually likely to produce jobs over the next few years.
So I would target growth by resisting those kind of tax increases. Even though in the political scoring they claim that they would reduce the deficit, I dont really believe that the political scoring works, because they need to have a growing economy if were going to reduce the deficit. I would cut the capital gains tax rather than increase it, because thats a very, very powerful incentive. And I would look through the tax code for places in which you might be able to cut taxes without costing much in revenues. One of my favorites would be to repeal the earnings limitations on Social Security benefits, because I think that if people went back in the work force over age 65, it would be a healthy thing and it would probably help the people; it would certainly help the economy.
Those are the kinds of things I would do on the tax side. On the expenditure side I would introduce some moderate restraint by addressing these incentives and balance of powers in the government. Now all that seems a long ways away as the Senate is now debating how much it should increase taxes, and how much it should pretend to reduce spending and all that sort of stuff.
But I dont think that we should be too terribly pessimistic. I dont see any big economic boom here in the next few years, but on the other hand I think were going through a learning experience. The economy does, I think, benefit from the enormous amount of dynamism and technology that we have.
Today I think were kind of living in the second Industrial Revolution. The invention of the transistor and the splitting of the gene, the splitting of the atom, are much more dramatic technological advances than Watts steam engine was in the first Industrial Revolution. As the steam engine transformed an agricultural economy into a manufacturing economy, were now transforming a manufacturing economy into a service and information economy thats based on the transistor, computers, and that I think will give us some thrust to the economy almost regardless of the macroeconomic mistakes of the administration, though not, of course, as much thrust as we would have with good economic policy.
There is one area that I think might be a real deal-breaker here, and thats protectionism. I think that the Smoot-Hawley Tariff and the world-wide trade war is what turned an ordinary business downturn into The Depression. I think that could happen again today if we get into a trade war. Im a little bit encouraged that the Clinton administration has really been better on this issue than I would have guessed. After Leon Panetta said NAFTA is dead, they kind of gathered around and are performing better on that issue than I would have expected. There are now kind of hopeful noises coming out of the GATT negotiations, so theres some momentum for free trade.
Now, yesterday we had this steel import decisionwere going to have countervailing duties on a bunch of steel imports. It cant be a good thing economically if these U.S. steel consumers and other manufacturers will have to pay more for steel. And its a disturbing sign politically that they may even yet carry through with some of the trade-bashing rhetoric. But on the other hand, you can see some evidence of the other direction, too, and Im encouraged by that. I think the most encouraging thought, again, is that were in kind of a learning experience, and John OSullivan, the National Review editor, was the first one to say, Well, were halfway through the Bush-Clinton era. Thats the way I look at it. And I also think that Jimmy Carter was a great president. Without him, we would never have had Ronald Reagan. And if Carter can give us Reagan, maybe Clinton can give us something even better. And that, I think, is the best hope that I can hold out for you in terms of giving you my opinions rather than my hair clippings. Thank you very much.