[119170] in Cypherpunks
IP: Mrs. Clinton, meet Robert Mundell
daemon@ATHENA.MIT.EDU (Robert Hettinga)
Mon Oct 18 18:52:47 1999
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Date: Mon, 18 Oct 1999 16:05:18 -0400
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From: Robert Hettinga <rah@shipwright.com>
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From: believer@telepath.com
Date: Mon, 18 Oct 1999 11:52:23 -0500
To: ignition-point@cerulean.propagation.net
Subject: IP: Mrs. Clinton, meet Robert Mundell
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Source: Washington Times
http://www.WashTimes.com/opinion/ed1.html
EDITORIAL
Mrs. Clinton, meet Robert Mundell
Typically, Hillary Rodham Clinton got it all wrong. And her timing was
especially bad. Three days after the Royal Swedish Academy of Sciences
awarded the Nobel Memorial Prize in Economic Science to Robert Mundell, the
intellectual godfather of Reaganomics in general and supply-side economics
in particular, the first lady declared, "I don't think that Reaganomics and
supply-side economics was the right direction for this country."
Recall that President Reagan inherited an economy characterized by a
13 percent annual inflation rate (two years in a row), rising unemployment,
interest rates higher than 20 percent, a top tax rate of 70 percent
applicable to so-called unearned income, annual, unlegislated,
bracket-creep-induced tax increases affecting every wage earner, a currency
under attack around the globe, a free fall in U.S. industrial
competitiveness -- all the product of a thoroughly discredited Keynesian
policy more adept at generating stagflation than non-inflationary growth.
Would Mrs. Clinton really have preferred more of the same, something a
second Carter term would have guaranteed? In fact, Reaganomics reversed the
Carter policy mix, following the prescriptions advocated by Mr. Mundell
--tight money to stop the inflation and supply-side tax cuts to spur
economic growth and increased defense spending.
Though considered economic heresy by the Keynesian establishment, the
successes of the Mundell-recommended policies are now utterly indisputable.
Contrary to Keynesian predictions, which held that inflation could not be
subdued in an environment of large tax cuts, the rate of consumer price
inflation collapsed from 13 percent in 1980 to less than 4 percent in 1982.
To be sure, the Fed's tight money policies produced a deep recession, for
which Mr. Reagan was relentlessly blamed and repeatedly mocked for his
determination to "stay the course." Who now will deny the sizable long-term
benefits the economy achieved by defeating inflation, which was less than 2
percent last year.
Moreover, despite some backsliding on the marginal-rate, tax-reduction
front in 1990 and 1993, today's maximum tax rates (39.6 percent for
wage-and-salary, interest and dividend income and 19.8 percent for capital
gains) are still substantially lower than the maximum rates Mr. Reagan
inherited (50 percent for wage-and-salary income, 70 percent for interest
and dividend income and 28 percent for capital gains). In addition, Mr.
Reagan eliminated bracket creep by indexing tax brackets each year to
account for inflation. With inflation subdued and net supply-side tax
reductions still in place, albeit at a reduced level, the long-term results
of Reaganomics are apparent to virtually everybody but the likes of Mrs.
Clinton.
Yet, apart from Mr. Mundell and other supply-side gurus, who else
predicted the prosperity that Reaganomics has produced? When Mr. Reagan
began phasing in his 25 percent tax-rate reduction in 1981, who, besides
supply-side optimists -- keenly aware of the incentive-producing effects of
marginal tax-rate reductions -- would have believed that a nearly nonstop
17-year economic expansion, which has been interrupted by one of the
shortest (eight months), most shallow recessions since World War II, would
have been possible?
A discussion of Reaganomics would, of course, not be complete without
addressing the budget deficit. So let's talk about it. In 1980, the federal
budget deficit was $74 billion. It resulted from $134 billion in defense
spending, $457 in non-defense spending and $517 billion in tax receipts.
Between 1980 and 1988, total tax revenues increased by 75 percent (from
$517 billion to $909 billion). This increase was not much different from
the 82 percent growth in nominal gross domestic product (GDP). In 1988, Mr.
Reagan's last year in office, annual defense spending had increased by $156
billion to $290 billion (compared to 1980). The 1988 deficit was $155
billion, reflecting an $81 billion increase over 1980's deficit. In other
words, Mr. Reagan managed to increase defense spending by nearly twice the
amount of the increase in the deficit. The defense buildup was, of course,
indispensable in producing the Soviet Union's utter defeat in the Cold War.
Apportioning part of this cost, in the form of debt service, to the future
generations that will benefit from the Cold War victory hardly seems unfair.
The budget deficit peaked at $290 billion in 1992, four years after
Mr. Reagan left office. How did the deficit nearly double in four years,
especially when nominal defense spending was virtually frozen
(inflation-adjusted defense spending declined by 9 percent) and tax
revenues increased by 20 percent (nominal GDP increased by 24 percent)? The
answer lies in an explosion of non-defense spending, which increased by 40
percent from 1988 to 1992, a growth rate that was 67 percent faster than
the nominal growth of the economy. Reaganomics can hardly be blamed for the
fact that Mr. Reagan's successor fed a Democratic Congress's insatiable
appetite for non-defense spending.
When Republicans gained control of Congress in the 1994 elections,
they imposed a modicum of restraint on nondefense spending, which increased
by 17 percent between 1994 and 1998, compared to an increase of 23 percent
in nominal GDP. Meanwhile, even at income-tax rates that were still
substantially below the levels Mr. Reagan inherited, total tax revenues
increased 37 percent (individual income-tax revenues increased by more than
40 percent) from 1994 to 1998, rising substantially faster than the growth
rate of the economy and producing the first budget surplus since 1969. From
here, that looks like complete vindication of Nobel laureate Mundell,
Reaganomics and its supply-side component.
Perhaps Mrs. Clinton's refusal to acknowledge the facts results from
her own experience. "If Reaganomics works at all," Mrs. Clinton wrote to
her Whitewater business partner James McDougal less than two months after
President Reagan signed the historic tax-reduction legislation in 1981,
"Whitewater could become the western hemisphere's mecca."(sic) As we have
observed before, Reaganomics was powerful enough to defeat the Soviet Union
and propel the U.S. economy upon an unprecedented path of peacetime
economic expansion. But even the will of Ronald Reagan and the intellectual
candle power of Robert Mundell were not up to the task of rescuing a
harebrained, bone-headed Ozarks real-estate deal and making Mrs. Clinton
the rich woman she so desperately wanted to become. Perhaps that's her real
complaint with Reaganomics and Mr. Mundell.
Copyright © 1999 News World Communications, Inc.
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-----------------
Robert A. Hettinga <mailto: rah@ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
