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THE PRICE OF COMFORT : The Reagan-Bush faith in laissez-faire and in the wisdom of the market has cracked America's economic foundations.

January 06, 1991|John Kenneth Galbraith | John Kenneth Galbraith is Paul M. Warburg Professor of Economics Emeritus at Harvard University

CAMBRIDGE, MASS. — For 10 years in the United States, economic and political life has been identified with the politics and economics of Ronald Reagan. George Bush has, until these last months, lived much in Reagan's shadow; Reagan economics and Reagan politics, as though by their own momentum, continued. But no longer.

Reagan was an intellectually dim but nonetheless a politically faithful reflection of his constituency--of the voters who gave him position and authority. This is a matter of the utmost importance, for it largely relieves him of responsibility for the misfortunes and disasters that are his legacy and are now in the making.

The basic fact is that Reagan in his eight years and Bush until last year presided over an electorate with an intensely satisfied voting majority, comfortable with its personal situation. This was something new in the history of democratic government. In the past, such government has had to contend with, and has needed to placate, a large number of people, verging often on a majority, who, with good reason, were far from content with their economic and social position. They were people to whom government had to promise some relief from discontent, some promise of a better life.

Such people are now a minority of those who vote. Many have given up voting, for, since they are a minority, it is not in the interest of political parties or their candidates to appeal to them. It is the vote of the comfortable majority that is sought.

The politics and economics of contentment have both a short-run and a long-run dimension. The first is immediately appealing; the second can ultimately be disastrous. The politics of contentment seeks not to be disturbed in its present mood. Longer-run considerations invariably involve an enhanced role for the state. Such planning is at some public cost; it could mean higher taxes. This invades the mood of contentment; that mood, accordingly, requires that such longer-run concerns be set aside, and this has especially been true in the United States.

Throughout the 1980s, the government ran large deficits in two critical national accounts--in the federal budget and, related to and extensively caused by this, in the balance of payments. In the short run, the results were quite pleasant--high and growing personal income; reduced and, by the standards of the other industrial countries, low taxes, and a rewarding supply of relatively inexpensive foreign consumers' goods--automobiles, TV sets, other electronic goods, textiles, much else--paid for by an accumulating foreign debt.

Those who raised their voices against this course of action or inaction were not quite ignored. They pointed to the growing share of the budget devoted to interest charges and the support of a largely functionless rentier class. It was evident that, as the government so financed its activities, the money became available for stock-market and real-estate speculation, even on a small scale for art-- and to feed a reckless fever of mergers, acquisitions and leveraged buyouts in the world of corporate finance. There were also the now celebrated junk bonds.

Inflation, meanwhile, was being held in check by the Federal Reserve, through high and historically unparalleled interest rates, and these acted to restrain expenditure for productive investment and housing. These high interest rates also favored the rentier class--generally speaking, the most affluent members.

All the above was said and even accorded quite respectful attention. But having been heard, it led to no perceptible action; that would have invaded the comfortable attitudes of the time.

These attitudes were nurtured and supported by a line of thought essentially theological in character. It held that government intervention in, or regulation of, the economy were not only economically perverse but also morally suspect. God, speaking through the works of Adam Smith, David Ricardo and Herbert Spencer, was essentially a benign and solicitous Republican. Leave matters to him and the market and all would be well.

From the commitment to laissez-faire and the market came a strong support for deregulation and nearly total opposition to any new government regulation. Thus, the speculation in the securities markets, the mergers, acquisitions and leveraged buyouts all went not only untouched but with, in effect, public sanction. So also the real-estate speculation and the villainous looting of savings and loans.

Laissez-faire and the market were not the only justifying faith of the Reagan and early Bush years. There was also the comprehensive commitment to pecuniary incentives. The rich or the would-be rich, were they to be stirred to maximum economic effort, needed the reward of even more money. To this end, they must not be burdened with repressive and discouraging taxes.

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