published in Inquiry, 25 May 1981.
a sucker born every minute,' he observed. But even the old master
of the con game would be impressed with the Reagan boys, who have
somehow tricked both the liberals and conservatives into thinking
they've cut the budget.
on the Budget Committee were feeling testy – or exultant,
depending on their party preference – after three days of
grappling with President Reagan's budget. Said a depressed Daniel
Moynihan: "We have undone thirty years of social legislation
too, were impressed with the enormity of the endeavor. "Extraordinary
times demand extraordinary efforts," said Pete Domenici of
New Mexico. Added Robert Kasten of Wisconsin: "We simply
must break from the policies of the past." All around
the country the newspapers said the same thing. Whether you were
for it or against it, the editorial pages agreed, the Reagan budget
was revolutionary, the most sweeping change in American policy
since the New Deal.
But if we
look closely at the Reagan budget, what we can see is that it's
really the most sweeping success in American public relations
since William McKinley persuaded the country that the Holy Bible
ordained American control of the Philippines.
two aspects of this supposed revolution: deep and startling budget
cuts, which reverse the seemingly inexorable trend of the last
several decades toward bigger government; and a deep cut in taxes
for business and upper-income groups, as prescribed by supply-side
economics. These tax cuts are supposed to rapidly stimulate substantial
increases in saving, investment, and business productivity.
the budget cuts seem to have met with surprisingly little disapproval
from Democrats and other critics of the Reagan administration,
except of course from the bureaucrats directly affected. "It's
a phenomenal thing for Ronald Reagan," crows White House
aide Michael Deaver, "for the New York Times, the
Washington Post, Time magazine
to say, u2018Maybe it's time to reassess, maybe we don't need so much
government.' The public mood is there."
tax cuts, in contrast, have drawn heavy criticism for being unsound
and "inflationary." In early April the Senate Budget
Committee voted twelve to eight to reject Reagan's tax and spending
package – a "stunning" blow dealt by Democrats
and "balanced budget" Republicans who tremble at the
thought of the deficits that Kemp-Roth tax cuts will bring in
their wake. In reply, the supply-siders in and out of the Reagan
administration maintain that tax cuts will so stimulate production
that government revenue will increase.
both Democratic and Republican, are implicitly saying that inflation
is caused by too much spending, private and public. If spending
increases, prices will rise. Net government spending can be gauged
by the deficits; if the government takes in, say, $600 billion,
and spends $700 billion, that will add $100 billion to the inflationary
sternly oppose tax cuts in an inflationary economy because they
will encourage inflation, by increasing government deficits and
private spending. For these critics of supply-side theory, government
spending must be cut first, and at least proportionately to any
tax cuts. In fact, they would prefer to cut spending and leave
taxes alone until a balanced budget is achieved.
To the charge
of fueling inflation, supply-siders, despite their claim to new
and revolutionary doctrine, tend to reply within the same framework.
While conceding that the money saved by tax cuts that goes into
consumer spending would be inflationary, the supply-siders want
to skew the tax cuts so that the money will be channeled largely
into saving and investment. Then, they maintain, the increased
investment and productivity will generate a larger supply of goods
and services, which will tend to combat inflation. Furthermore,
the increased work, thrift, and investment stimulated by the tax
cuts should eventually increase government revenue. In the extreme
version popularized by Arthur Laffer, large tax cuts will instantaneously
increase government revenue. In this scenario, government
spending can remain the same and we can enjoy massive tax cuts
and still balance the budget as tax revenues increase. We can
enjoy at the same time three seemingly inconsistent sets of goodies
that the public is supposed to want: keeping up the level of government
"services," cutting taxes, and balancing the budget.
Thanks to Laffer there
is such a thing as a free lunch.
supply-side economics are right, though not always for the right
reasons, when they attack the Laffer curve as "voodoo economics."
There are many grave fallacies in the Laffer theory. First, production
can never increase instantaneously, and any Laffer effect would
take years to develop. Second, there is no reason to suspect that
the Laffer effect would be enough to balance the budget or counteract
the inflationary effect of turning on the money taps. Third, there
would probably be no Laffer effect at all; that is, a deep tax
cut would probably lead to a deep revenue cut, though perhaps
not equally deep. I wait in trepidation for some liberal critic
of the Laffer curve to throw down the gauntlet as follows: "Okay,
let's test the Laffer curve. Let's raise income taxes by
30 percent and see if total revenue drops." I'd bet my bottom
dollar that total revenue would rise.
so great about increasing tax revenue anyway? Why must we try
to arrange things so that the government will extract the maximum
possible amount from the poor taxpayer? I should think that alleged
free market economists would be opting not only for cuts in crippling
tax rates-but also for cuts in total revenues, which indicate
the total resources extracted from private citizens to support
the bloated aid unproductive government sector. Surely we should
try for drastic cuts in both tax rates and revenues.
Once we dispose
of the Laffer curve, we are still left with the dread problem
orthodox economists right, then, and mustn't we tighten our belts
and forgo tax cuts until we can cut government spending and get
inflation under control?
should be a resounding No. First there are two strategic reasons
for calling for full speed ahead on tax cuts regardless of inflation.
As Milton Friedman has long been suggesting, if taxes are cut
steeply, this will increase the pressure on Congress to cut government
spending as well. The specter of bigger deficits may well force
Congress to shrink the budget. Moreover, it is important for those
who wish to roll back big government, cut the budget, slash taxes,
and abolish regulation, never to lock themselves in to a restrictive
set of priorities of their own making. Finally, we get to the
tax cuts should be made even if inflationary, are they in fact
to the heart of the matter: What causes inflation anyway? Inflation
is not caused by total spending, but by the government – in our
case the Federal Reserve System – printing new money. The Fed has
an exclusive legal right to print dollars; anyone else who dares
to join in that activity goes to jail for a very long time, and
no one bothers about whether the unfortunate counterfeiter came
from a broken home or was deprived of playgrounds as a youth.
No one bothers because no one wants to mitigate the high seriousness
of this crime; unlike robbers, rapists, and murderers, who merely
injure individual citizens, the counterfeiter cuts into the federa1
government's monopoly on the counterfeiting business, and the
government takes that very seriously indeed.
money the government prints, the more prices will be driven up
as more money "chases" the same amount of goods – and
the government, as we said earlier, can always print money faster
than production can grow. Moreover, if the inflationary process
goes on for many years, people will begin to expect continued
high levels of inflation, and they will then spend faster before
prices go even higher. The result will be still greater inflation.
The only way to reverse inflationary expectations and end this
disastrous upward spiral is for the federal government to stop
printing money – to stop it permanently and to convince the
public that concrete action has at last replaced hot air, that
the government has ended its inflationary penchant for counterfeiting.
If the Fed's
printing press is the key, then won't federal deficits be inflationary,
and don't we have to concentrate on getting a balanced budget?
Not really. Federal deficits do not have to be financed
by creating new money; they can be financed by issuing bonds and
selling them to the public. If the deficit is $50 billion and
it is financed by selling bonds to the public, then the government's
increase in money assets of $50 billion is matched by the reduction
of $50 billion from the bank accounts of the people and institutions
who have bought the bonds. No new money has been created; there
is no inflationary impact.
On the other
hand, a balanced budget would not necessarily stop the Fed from
creating new money. Every time the Fed buys a financial asset,
in whatever form, money flows into the banks. The banks in turn
are permitted by law to loan out about seven times that much in
new money. If the Fed buys $1 billion of U .S. bonds, the banking
system will create $7 billion of newly issued money. This inflationary
effect will occur whether or not the budget is balanced.
all this emphasis on the budget is simply a smokescreen. What
is needed to end inflation is to force the Fed to shut off the
money taps; that is, to stop buying assets, to stop creating bank
reserves. Anything else is a snare and a delusion. Therefore,
cutting taxes and increasing deficits will not be inflationary
if the Fed is forced to remain on the sidelines.
deficits, even if noninflationary, do create grave problems. Deficits
siphon resources away from the productive private sector and into
unproductive government projects; the taxpayers must eventually
pay for these expenditures, plus hefty interest charges. But at
least deficits don't have to be inflationary
it or not, everyone assumes that Reagan's "supply-side budget"
offers deep tax cuts, concentrating on business and on upper-income
groups. But does it? In the first place, contrary to myth and
propaganda, taxes are not being cut at all! The piddling 10 percent
cut in income tax rates will be more than offset by two kinds
of tax increases: one is the programmed and unaltered rise
in social security taxes, and the other is "bracket creep."
The social security system, though inherently bankrupt, was picked
by Reagan as one of the "sacred cows" in his budget.
Bracket creep is an insidious process by which government delivers
all of us a one-two punch: First, the Fed pumps in new counterfeit
money, raising all incomes and prices. If your income increases
by, say, 50 percent, and prices rise proportionately, then your
"real" income in terms of purchasing power remains the
same. You are no better off, but US. income tax laws being what
they are, you are suddenly in a higher tax bracket and have to
pay considerably more than a 50 percent boost in your tax
campaign, President Reagan promised to "index" all of
our income taxes so as to eliminate bracket creep and to keep
us all in our original brackets, but that promise has been forgotten.
Reagan now expects tax revenues to rise by $50 billion in 1982.
the upper-income groups getting a bigger tax break to stimulate
saving and investment? No indeed. In fact, if the Reagan 10 percent
cut is passed, an individual making $200,000 a year in 1982 will
receive a decrease of only 3.4 percent, and someone making $10,000
will get a 15.3 percent reduction. Furthermore, the disastrous
70 percent maximum rate on interest and dividends (contrasted
to the current 50 percent maximum on wages and salaries) will
remain in force. No cuts here. And there are no cuts whatsoever
in other critical business taxes, including the capital gains
tax and the corporate income tax. Even the grotesque Carter
"windfall profits" tax on domestic crude oil production
at the wellhead remains in effect. This misnamed levy, actually
a graduated excise tax on crude oil, is bound to have a crippling
effect on crude oil production and on the search for new crude
oil reserves. The Reagan excuse: "We need the money."
else it is, then, the Reagan budget is not any sort of application
or test of supply-side economics. Taxes are increased, not cut,
and the cuts made fall mainly in the lower income groups.
are no tax cuts to test supply-side economics, what of the vaunted
"massive" spending cuts of the Reagan budget? Aren't
those at least a big step toward dismantling the leviathan state?
Yet here, where the propaganda, pro and con, has been the fiercest,
the fraud is the most blatant. For the budget is not being cut
Eisenhower became President, his first full year's budget, fiscal
1954, cut spending from $74.3 billion of the previous year to
$67.8 billion, a modest but not insubstantial cut of 8.7 percent.
And Eisenhower was thought at the time to have performed the function
of consolidating the New Deal – Fair Deal and preventing
any concerted action for its repeal. But this year, President
Reagan, an avowed right-wing critic of the political mainstream
for most of his career, is proposing to increase his
year's budget, from $655.2 billion in 198 1 to $695.3 billion
in fiscal 1982. This is an increase of $40.1 billion, or 6.1 percent.
The Congressional Budget Office goes further and predicts that
Reagan's budget will actually cost between $715 billion and $720
billion, and the Republican-dominated staff of the Senate Budget
Committee claims that his
cuts amount to only $42.9 billion, not $48.6 billion. Eisenhower's
first budget included a real cut, Reagan's a considerable increase.
So why is Reagan's attempt called a "historic" and "massive"
budget cut? Because Reagan has eliminated from his budget many
of Jimmy Carter's proposed and projected massive increases for
1982. In short, Reagan
is not in the slightest interested in cutting the actual budget,
only in cutting its rate of increase.
not one single agency is being abolished, not even among the handful
that are really being cut. Even the Council on Wage and Price
Stability, a totally ineffective and even counterproductive means
of fighting inflation, continues in existence, though sharply
cut back. It is dangerous to leave bureaucrats in place with the
chance to return to fight again another day.
for a moment about the uglier side of Reagan's policies: the blank
check being offered to the Pentagon, the subtle escalation in
El Salvador so chillingly reminiscent of Vietnam, the threat to
unleash the CIA, the ominous silence about registration and the
draft. Forget these, and concentrate on the domestic economic
arena, supposedly the area that
best epitomizes Reagan's "small is beautiful" philosophy
of government. Here we find that, despite the media hype, there
is no test of supply-side economics, there is no tax cut, there
is no budget cut. Taxes and government spending are going up,
not down, under the Reagan plan. There is no Reagan revolution.
The same old things are happening at the same old stand.
the massive hype? Why are both conservatives and liberals in a
sense collaborating in propounding a gigantic hoax on the
American people? Why are they helping each other to disseminate
different reasons. The Reagan administration sees fraudulent propaganda
as the key to success, and hopes that if it puts up a good pretense
of cutting taxes and cutting the budget, the public will be conned
to the point at which its inflationary expectations will be
reversed and its spending slowed down. In short, it expects to
be able to moderate our grave inflation problem by what used to
be called "jawboning" – talking big and making
grandiose claims. The hope is that in this way inflation can be
brought down without scrapping the same old policies – printing
of money, high taxes, high spending – that brought us to
our current economic morass in the first place.
Reaganites, then, are concocting the myth of their nonexistent
"revolution" in order to con the nation. The liberals
have longer-range aims: They do not want to be put in the position
of "obstructing" the President's program in Congress
and hence being blamed for its inevitable failure. Far better
from the political point of view for them to "give the President
a chance" and then, in a year or two, pick up the pieces.
The liberal strategy in going along with the hype is far shrewder
than that of the conservatives, who are bound to go toppling down
to defeat in four years' time. But the group in greatest peril,
aside from the nation as a whole, is that small but growing band
of people genuinely dedicated to free market economics and the
total rollback of big government. For when Ronald Reagan's phony
revolution turns out to be a flop, and inflation continues and
accelerates once more, the public will, understandably, blame
free markets, hard money, minimal government, and supply-side
economics. Why not, when the claim on all sides is that these
were the principles adopted by President Reagan? In this way,
economic freedom may well be discredited for decades to come,
regardless of the fact that it was never given a chance. The only
way to save the economic principles that Reagan claims to stand
for is to denounce his program for the gigantic hoax that it is.
N. Rothbard (1926–1995) was the author of Man,
Economy, and State, Conceived
in Liberty, What
Has Government Done to Our Money, For
a New Liberty, The
Case Against the Fed, and many
other books and articles. He
was also the editor – with Lew Rockwell – of The