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TIMES BOARD OF ECONOMISTS / David M. Gordon

Political Rhetoric Curses Symptom, Ignores Cause of Ailing Economy

January 03, 1988|DAVID M. GORDON | DAVID M. GORDON is professor of economics at the New School for Social Research in New York and is a member of the Institute for Advanced Study in Princeton, N.J

The new year has begun. Since 1988 is divisible by four, we know that we've officially entered a presidential election year. And since most of us have witnessed this spectacle before, we know from experience that media discussion of economic policy will be more and more insistently dominated by the logic and rhetoric of presidential politics.

Unfortunately, however, the reverse is also true: Presidential politics itself comes to be dominated by media definitions of the boundaries of acceptable policy discourse. A recent wrap-up in the New York Times provided early indications of just how narrow, single-minded and distorting these prevailing litmus tests have become.

The newspaper report reviewed the range of preliminary economic proposals by the Democratic presidential candidates. The story revolved entirely around a single issue: the unbearable burden of the mammoth federal deficit. The reporter repeatedly cited a faceless, nameless chorus chanting skepticism about the candidates' solutions. "Economists generally agree," the story concluded, "that the alternatives most of the Democrats have put forward cannot stand serious scrutiny."

I carry no brief for the clarity or coherence of the Democratic candidates' economic policy proposals. To this point, as far as I can tell, none of them has yet presented an internally consistent and carefully constructed set of program recommendations, although at least Jesse Jackson, Paul Simon and Bruce Babbitt have made some significant and interesting suggestions.

The problem, rather, is the standards by which their discussions are being judged. We are being told from nearly every quarter that nothing else can happen on the economic front until and unless the federal budget deficit is dramatically reduced, if not completely eliminated.

Today the deficit, tomorrow the world. The government must first "get its house in order," former Carter Administration policy adviser Stuart E. Eizenstat was quoted as saying. "Once we get some light at the end of the tunnel, we can afford exciting new things."

But the huge federal deficit is a symptom, not a cause, of our economic problems. Arguing that we should eliminate it before assaying any other government economic initiatives is like insisting that we should reduce a raging fever before we diagnose and treat its underlying causes.

Where should we look for those underlying causes? It is possible to argue, without too crude a simplification, that the surge in the federal deficit in 1983-85, beyond what would be expected at that stage of the business cycle, stemmed from four main sources:

- The economy has continued to stagnate on the supply side. Despite massive stimulus from the federal deficit and from record consumer borrowing, real output grew over the recent business cycle (from 1979 to 1986) at only 2% a year, nearly a quarter more slowly than in the last business cycle of the stagnant 1970s (from 1973 to 1979). This meant that personal income growth also stagnated and, therefore, that the growth of the personal income tax base was more and more tepid.

- Encouraged by vivid promises of a supply-side, trickle-down miracle, the Reagan Administration and Congress tried to revive the economy by throwing tax money at corporations and the wealthy. They promised supply-side magic. We got more stagnation. Real investment growth, the growth in investment after discounting the effect of inflation, declined by nearly one-fifth from 1973-79 to 1979-86. And the tax base was further eviscerated. While real personal income grew at 2.5% a year during the most recent business cycle, real federal personal taxes grew at only 0.6% a year.

- Trying otherwise to tighten the screws on inflation and tight labor markets, the Federal Reserve Board, beginning in 1979, doused the economy in a cold bath of the highest real interest rates of the postwar period.

Higher Interest Payments

While helping plunge the economy into the recession of 1980-82, the Fed also soaked the federal government with massively higher interest payment obligations. While real total government expenditures were increasing in 1979-85 at only 3.5% a year, net government interest payments, after discounting the effects of inflation, rose at an average annual rate of 18.5%.

- Inflamed by a powerful potion made from one part global anti-Communism and one part resurgent neo-imperialism, the hawks danced to the tune of remilitarization. The right was displaying an awakened recognition, as neo-conservative guru Irving Kristol wrote in 1979, that "today it is military rearmament that is the first priority, economic as well as political."

While real spending on federal social programs declined during the 1980s at an average of 0.8% a year, real government defense spending increased by 7% a year.

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