Sunday September 14, 2003
To justify their economic program, the Bush administration contends they're following in Ronald Reagan's footsteps. Insisting that Reagan "got the economy moving," the Bush administration claims that just as Reagan saved the American economy from stagnation and misery, so too will their tax-cutting, favor-the-rich, plan.
While the rhetoric is strong, a careful read of the facts shows the Bush administration has misread both Reagan's accomplishments and history.
Most observers tend to focus on the similarities between the administration's "supply side" tax cuts a discredited theory that owes its life to biased research funded by conservative family foundations and fierce political propaganda. The larger story is the Bush teams' penchant for suggesting that Reagan's policies erased both inflation and the tendency toward recession. To understand the claim we need to recall the conditions that Reagan inherited from the 1970s.
With inflation (12 percent to 13 percent) and interest rates (20 percent) reaching new heights in the post-war era, and unemployment on the rise (around 6 percent), both confidence and investment were in short supply. The result was a new term in the field of economics and a fresh challenge in American politics: stagflation (recession, low productivity, and inflation.)
Today, conservatives and ill-informed talk show hosts like to claim that a combination of tax cuts, deregulation, bureaucratic reform and assorted incentives created the environment for investment that energized the economy by the late 1990s. A review of some "cause and effect" facts suggest Reagan's policies were, at best, a supporting rather than leading factor in reversing the dismal economic environment of the 1970s.
The main reason is the primary culprit behind runaway inflation was the sudden spikes in oil prices by the Organization of Petroleum Exporting Countries (OPEC) in 1973. While other factors had a hand in rising prices the declining strength of the dollar, low productivity, deficit spending, etc. what tipped the scales were OPEC's price increases (three to four times pre-1973 levels) because effectively everything in America's tied to petroleum.
By forcing Americans to pay more to travel, transport goods, heat their homes and virtually every other activity that keeps our economy churning, general prices rose throughout the 1970s (far more than in the 1960s.) This had the effect of sapping confidence and undermining business investment in the 1970s.
According to revisionist historians, however, the Reagan administration was able to get America moving by reducing the size of government, cutting government spending, and getting "government off of our backs." The problem with this version of economic revolution is that during the Reagan revolution the size of the federal government actually grew (2.8 million employees to 3.1 million), our national debt almost tripled (from $959 billion to $2.7 trillion), and bailouts and subsidies to favored industries from 1981 to 1992 totaled almost $1 trillion.
So what created the conditions for the American economy to stabilize in the late 1980s, and take off during the 1990s? Primarily three factors: all of which undermine the Bush administrations second-coming-of-Reagan claim.
First, OPEC, an oligopoly that depends on cooperation to sustain itself, found its solidarity undermined by late 1981. With the beginning of the Iran-Iraq War which Saddam Hussein initiated in part because the ayatollahs were fomenting fanatic revolution in Iraq black markets in the oil industry grew as cheating on the part of the two combatants began. (They needed to fund their war efforts.)
To be sure, conservation efforts, alternative energy sources, new oil field finds, etc., helped to stabilize oil prices. But the reality was OPEC unity the primary force behind price hikes had unraveled because of war. As the price for oil dropped, so did inflationary pressures.
Second, recall the strategy employed to control inflation was undertook by the Federal Reserve's Paul Volcker. In spite of pressure from the Reagan administration, who initially wanted to expand the money supply, Volcker stuck to his guns and maintained a stringent monetary policy. Critical here is that Volcker was appointed by Jimmy Carter, not Ronald Reagan.
Finally, we must keep in mind the Reagan administration's deficit spending broke all previous records. In fact, his administration spent twice as much as the previous 39 presidential administrations combined, in the process using taxpayer funded debt to deposit hundreds of billions of dollars into our economy each year. This government induced "pump priming" was an artificial stimulus what economists refer to as a "Keynesian stimulus" and was hardly a vote of confidence for laissez-faire economics.
In sum, cracks in OPEC unity, tight monetary policy and a state-led stimulus to our larger economy speak more to serendipity and Keynesianism than invisible hands. This suggests that, unless there's another tech boom (good luck) or speculative bubble (more probable) on the horizon, the flood of red ink in this administration's budgets will eventually chip away at the positive gains generated by the Fed-laced refinancing boom, undermine the small spike created by tax cuts, and insure that jobs continue to disappear well into the future.
As the Bush administration petitions the world for financial help and with interest rates inching up it's hard to see relief for the American worker, let alone a parallel to the mythical version of Reagan's economy promoted by the administration. This should cause us all concern as we stare into the valley of trillion dollar deficits over the next five years.
Dr. Mark A. Martinez is an associate professor of political science at Cal State Bakersfield.