Seven years ago, in his 1981 state-of-the-economy address, President Reagan told the American people, "We're in the worst economic mess since the Great Depression." The federal budget, he said, was out of control and America faced runaway deficits.
It was an ironic prediction. The highest federal deficit since World War II had been 4.5% of gross national product in the 1975 recession during the Ford Administration. Reagan surpassed that in his first supply-side budget; so that in last Monday's State of the Union message he was pleased to point out that during the past year "the deficit itself has moved from 6.3% of the GNP to only 3.4%." Otherwise, the message was the same in 1988 as in 1981: Government is too big and spends too much money.
Good rhetoric. Bad economics. In 1981 the President lamented that between 1960 and 1980 the national debt had increased from $284 billion to $934 billion; what he failed to say was that during the same period GNP went from $515 billion to $2.732 trillion--the debt had declined from 55% to 34% of the GNP. Despite the inception of such major programs as Medicare, federal spending had increased only from 17.1% to 19.25% of GNP. During the 1970s, while government and private sectors were simultaneously expanding in Germany and Japan, the private sector was growing at twice the rate of government in the United States.
Japan is the only competitive nation where the central government taxes less than the United States (when state and local taxes are factored in, the aggregate is virtually the same), and many European governments impose taxes twice as high, or higher, than the federal government. In 1985, for example, the French government revenues were 42.2% of GNP, the British 37.9%, the German 29.2% and the United States 19.8%.
Furthermore, before 1981 the U.S. government was running lower deficits than the Japanese, Germans and almost every other industrial nation. Economists generally regarded America as fiscally conservative, with the Democrats even more prudent than the Republicans. Harry S. Truman averaged an annual surplus of 1.5% of GNP; Dwight D. Eisenhower's deficit averaged 0.15%; John F. Kennedy and Lyndon B. Johnson's 0.34%; Richard M. Nixon-Gerald R. Ford's 2%, and Jimmy Carter's 1.6%.
"The worst economic mess" was not so much a mess as a ferment, part of the rapid global evolution for which the United States had been the principal catalyst since 1950.
Except in the early 1900s, when the United States, Great Britain and Germany were on a rough parity, there had always been a world industrial leader. Yet before the 1950s, there was only one nation with a highly sophisticated consumer economy: the United States. Now, however, not only are Japan and Germany hard in competition, but a host of other nations are participants in an increasingly fractured industrial world. The oil shock of 1973 ended the halcyon days of the U.S. economy and steady improvement in the U.S. standard of living. The creation of the Organization of Petroleum Exporting Countries was to a large extent a reflection of the oil-producing nations' reaction to the erosion of the dollar--the currency of world oil trade--and, consequently, their earnings, as well as the transition from a world economy dominated by American companies to one of multinationals and transnational organizations.
Domestically, it marked the beginning of "stagflation." Between 1961 and 1973, total disposable income in real (not inflated) terms had increased 71.6%, average weekly earnings (in 1972 dollars) rose from $167 to $198 and annual disposable income per capita for Americans in the labor force (including the unemployed) went from $6,961 to $9,481. This, despite an increase in the combined tax burden (federal, state, local and Social Security) from 14.8% to 18.2% of personal income.
In contrast, from 1973 to 1982--as the tax burden continued rising to 19.9%--total disposable personal income increased only 22.4%, average weekly earnings slipped back to the 1961 level and per capita labor force disposable income declined slightly.
Concurrently, the baby boom enlarged the labor force by 20.7 million (a faster pace than from 1961 to 1973, when it had grown 18.8 million). While the burgeoning labor force depressed wages in lesser-skilled, less-unionized jobs, the demand created by the baby-boomers generated surging land and housing prices, adding to commodity inflation. Consumers compensated by forming more two-earner households, in effect increasing their spending power and placing additional pressure on prices and, particularly, interest rates. Although interest rates reached historic highs, their rise was outpaced by inflation, so that the rates were in reality moderate and in some periods even negative. So with money losing value and everything else gaining, the entire economic orientation was toward buying now and paying later with deflated dollars.