The Real Reaganomics

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These
are the final three installments of "Are We Being Beastly
to the Gipper?", which appeared in the Libertarian Forum,
XVI, 3, April 1982, pp. 6–7; XVI, 4, May 1982, p. 6; and
XVI, 6, July 1982, p.6, respectively.

PART
III

4. Macro-Reaganomics:
Money

Now
that the American people are inured to expect inflation, there
is only one way to stop our chronic and accelerating inflation:
by stopping, immediately, sharply, and once-and-for-all, the Federal
Reserve's continual creation of new money, that is, to stop its
counterfeiting. It has to be done sharply and swiftly to be credible,
and therefore to end the inflationary process. Furthermore, a
sharp, swift "slamming on of the brakes" would lead
to a sharp but short recession which would liquidate the unsound
investments of the preceding inflationary boom and pave the way
for rapid and sound recovery.

Reagan
had the opportunity to perform this quick surgery when he came
into office. Instead, he turned his economic policies over to
the Friedmanite monetarists. Reaganomics is largely monetarism.
The monetarist view is that the Fed must only very, very slowly
reduce the rate of counterfeiting, and thereby insure a gradual,
painless recession with no unemployment or sharp readjustments.
The hoax of Reaganomics was that the phony "budget cuts"
and "tax cuts" were supposed to provide the razzle-dazzle
to give gradualist Friedmanism the time, or the "breathing
space," to work its magic.

Instead,
gradualism has led to the present shambles of Reaganomics. The
rate of counterfeiting declined, enough to bring about our current
recession, but not nearly enough to end inflation. Since
November, in fact, the Fed, stung by the deep recession and by
political urgings to expand the money supply, has increased Ml
by a startlingly high annual rate of 13.7%. Panicky, the Administration
is fighting amongst itself. Secretary Regan blames the Fed for
looming re-inflation and higher interest rates since November;
Fed Chairman Volcker lashes back by blaming Reagan and Regan'
s enormous deficits for the fear of Wall Street and higher interest.
Both, of course, are right.

There
were two fundamental reforms the Reagan Administration could have
proposed to end our Age of Inflation. First, either the abolition
or the brutal checking of the Fed. Nothing was done, since monetarism
wishes to give all power to the Fed and then navely urges the
Fed to use that power wisely and with self-restraint. Second,
the Administration could have followed Reagan's campaign pledge
and reinstituted the gold standard. But the Friedmanite monetarists
hate gold with a purple passion and wish all power to government
fiat money.

When
the Reagan program lay in shambles by the end of 1981, the Reagan
Administration briefly flirted with the supply-side notion of
instituting some form of phony gold standard, where the dollar
would not really be convertible into gold but would cloak its
decaying corpus in gold's well-earned prestige. For a while, it
looked as if a phony gold standard would be the Reaganite diversion
from the realities of grinding recession, zero economic growth,
high interest rates, almost double-digit inflation, and huge $100
billion deficits. But this was not to be, and Reagan has clearly
given the green light to the packed Friedmanite majority and staff
on the U.S. Gold Commission to reject the gold standard out of
hand and to continue the monetary status quo.

Instead,
Ronald Reagan has found another diversionary tactic, another razzle-dazzle
hoax with which to bemuse the media and the electorate: the "New
Federalism" (see Part IV of this article).

Not
only the gold standard, but all fundamental reform has been rebuffed
by the Reagan Administration. The National Taxpayers Union's balanced
budget amendment – as namby-pamby as it is – has been spurned by the
Reagan Administration, as has the Friedmanite Tax Limitation Amendment,
even though that would only freeze the status quo.

All
of this raises the dread spectre of Thatcherism, of going down
the disastrous route blazed by Mrs. Thatcher. More and more it
looks as if the Reagan Administration, despite the warning signals
sent up by the Thatcher experiment for the past several years,
is going down the Thatcher trail. That is, to ignominy and disastrous
defeat, and more important, to the discrediting of the free-market,
hard-money cause by employing its rhetoric while thoroughly betraying
it in practice.

5.
Macro/Reaganomics: The Spectre of Mrs. Thatcher

Mrs.
Margaret Thatcher came in roaring to the Prime Ministry of Great
Britain in May 1979 with the promise of free markets, denationalization,
and an end to deficits and monetary inflation. The denationalization
has been virtually nil. Deficits continue very heavy; money and
price inflation continue at double-digit levels. The only result
of Thatcherism has been to stifle economic growth and to bring
about a seemingly permanent recession with very high unemployment.
In short, Thatcherism has brought about the worst of all macro-economic
worlds. Inflation continues high and rampant, along with very
high unemployment levels and chronic stagnation. Moreover, the
slight fall in income tax rates was immediately more-than compensated
by an even greater increase in the VAT (essentially sales) tax.
In this way, slight gains for upper income groups were more than
offset by increased burdens on the poor and the middle class.
If leftists were asked to describe a right-wing Bogey Man, they
couldn't have done better, and with more disastrous results for
the cause of economic freedom.

Why
such disastrous results from an allegedly free-market regime?
Because the Thatcherites are "Burkeans" rather than
"right-wing Leninists," and are therefore committed
to the glories of gradualism and moderation rather than to a hard-nosed
radical and abolitionist approach to the achievement of economic
freedom. But it is too late for gradualism. Gradually tight money
succeeded in bringing about a chronic recession, but it was not
tight enough to end inflation or turn the economy around. Hence,
the worst of both worlds, and the economic collapse.

Part
IV

6. Macro/Reaganomics:
Lies, Damned Lies and Statistics

But
there is hope, of a peculiar sort, for the hard-pressed American
people. If the Reaganauts cannot relieve inflation or unemployment,
they may moderate these twin evils by sleight-of-hand: by doctoring
the statistics which everyone has been following avidly. Despite
the pretensions of "scientific" economic forecasters,
the seemingly precise quantitative data spewed forth by the various
statistics factories are highly imperfect indicators of what is
going on in the economy. There are no even approximately "scientific"
measurements of inflation or unemployment, and there is no way
of arriving at such measurements. Every person experiences his
own "inflation rate," depending on what he customarily
buys. I, for example, buy a great number of books every year,
whereas the paradigmatic blue-collar Dayton, Ohio housewife with
2.2 kids buys no books at all. Yet, book prices have been skyrocketing
upward at an alarming rate in the last few years, though none
of this has been reflected in the orthodox Consumer Price Index
(CPI).

There
is, then, no "scientific" or unflawed measurement of
the movement of consumer prices. The only excuse for any such
index is that it be consistent, that is, whatever its flaws, it
be consistent over the years so that movements in the index can
have a substantial degree of coherent meaning. To change the nature
of such indices is to deceive, for it is to abandon consistency
and to doctor the data for political effect.

If
the Reaganites cannot bring down inflation, however, they have
decided that they can bring down the index by redefinition. This,
of course is equivalent to bringing down a patient's fever by
repainting the numbers on the thermometer. The Reaganites have
decided that rises in housing costs have been embarrassing them,
so the Bureau of Labor Statistics, which issues the CPI, has been
ordered to change the basis for its measurements: From now on,
instead of housing prices, all housing will be costed as if it
were rented. The reasoning is that one buys a house as a durable
good, but during each year one only lives in an amortized yearly
quota; hence, a purchased house will be treated in the index as
if it were rented.

The
reasoning sounds plausible, but is as phony as a three-dollar
bill. For why stop at housing? Why not similarly "imputed
rents" for all consumer durables: speedboats, hi-fi sets,
furniture, even clothing – none of which is used up during one year?
The main point is that there are good arguments either way, but
the overriding consideration is to remain consistent so as to
enable meaningful comparisons over time. Reaganite doctoring of
the CPI – which will begin in early 1983 – may help to fool the public
into thinking that inflation is getting better, and may also reduce
the upward indexing of numerous contracted wage rates.

The
latest scheme of the mendacious Reaganite statisticians is to
doctor the embarrassing unemployment data. Once again, there are
good reasons both for increasing the number of unemployed (disheartened
who have given up seeking work) or reducing them (those only recently
off the employment rolls or who are not really seeking work).
But the vital thing is to keep the measures consistent over time,
and not to doctor the data by changing the measurements. But the
unemployment figures have been embarrassing for many years, and
are getting worse. After World War II, the blissful state of "full
employment" was defined as unemployment of 3–4% of the
labor force. But since we haven't seen hide nor hair of such a
figure for decades – it's been hovering around 7% –
"full employment" has now been redefined as 5–6%.
But apparently that's still not enough, and the Reaganites are
moving toward still further mendacity.

Specifically,
Secretary of Labor Raymond Donovan has now proposed to stop including
in the unemployment figures all teenage workers still in high
school. Since teenage unemployment has been far higher than adult – largely
because of minimum wage laws – what better and more painless way
to reduce overall unemployment than by tossing teenagers out of
the statistics?

And,
indeed, why stop there? Why not drop out all teenagers whatever,
indeed everyone below 25, where unemployment is the highest? And
also drop out women workers, since their unemployment rates are
also high? And blacks too? And urban areas of the Northeast, and
of New England?

Lies,
damned lies, and statistics. Why stop there, Reaganauts? Why not
include in the CPI only computers and hand calculators?
Then, precise statistical data could "prove" that prices
have been going down rapidly. And why not include in the
labor force only adult white males in the Sun Belt? Then we could
"prove" that there is virtually no unemployment in today's
America.

The
Reagan Administration might be a macro-economic disaster, but
it has brought us "creative" language ("revenue
enhancement") and "creative" statistics. Mendacity,
mendacity. For shame, "free market" Reaganites! As Swift
once put it, "I never wonder to see men wicked, but I often
wonder to see them not ashamed."

Part
V

7.
Macro-Reaganomics: the Latest

Since
we have begun this series, the Reagan record has become so putrid
that even the right-wing of our movement has fallen into a conspicuous
silence about their erstwhile Hero. Our assaults on the Reagan
performance have lately been pushing on an open door.

Inflation
has dramatically "abated," but interest rates remain
very high, clearly because the public and the market understandably
distrust the enormous and unprecedented deficits and the fact
that the Fed has been quietly pouring in more money since last
October at the whopping annual rate of 10 per cent. All this means
an imminent reflation, high interest rates, and a big increase
in both once a boom reappears.

For
the last several months, the Reagan Administration has been desperately
attempting to deflect the attention of the public from its rotten
record. In addition to scapegoating the Democrats and the Carter
Administration, the Reaganites have thrown up a series of razzle-dazzle
gimmicks to try to gull the voters.

First,
trotted out in last-minute desperation at the 1982 State-of-the-Union
message, was the New Federalism (remember that one?). Even the
original version was so vague and so pie-in-the-sky (taking a
decade to go into effect), that it was difficult to take it seriously
or to figure out whether federal spending or each state's spending,
would go up or down as a result. But, in offering to assume all
state Medicaid costs for the federal government in exchange for
shifting welfare and food stamp costs to the states, it was at
once clear that Reagan was offering to shoulder the fastest-growing
expenditure of the three (Medicaid) by the federal government,
so that the feds would probably wind up spending more money than
ever before. In addition, Robert Carleson, White House aid in
charge of welfare, was reportedly unhappy because the proposed
swap would be setting the stage for national health insurance
from the next administration.

Now,
the Reagan Administration has caved in even more, since it is
now offering to keep food stamps for the feds, and only shift
welfare to the states. More and more, the New Federalism is looking
like the same old galloping statism under the cloak of Reaganite
rhetoric.

When
the New Federalism failed to fly, the next gimmick adopted by
Reagan was the balanced budget amendment, which has been kicking
around for a long while, and has now been introduced in the Congress.
The President must get high marks for unmitigated gall; here he
is, presiding over by far the biggest budget and the biggest deficit
in American history, and still attempting to curry favor with
opponents of Big Government by self-righteously urging a constitutional
amendment for a balanced budget! How can Reagan keep getting away
with his favorite ploy of being Head of State and yet still
sounding like a private citizen reading oppositional anecdotes
attacking Big Government from his eternal 3×5 cards?

Furthermore,
the main balanced budget amendment before Congress is so namby-pamby
and so attenuated that it would probably be better if it were
defeated right now. First, Congress is not required to balance
the actual budget, but only its estimates of future budgets, estimates
which are notoriously vague and chronically inaccurate. Second,
there is no enforcement procedure to bring Congress to heel. Deficits
are right now against the law, though not yet unconstitutional,
and yet no one pays any attention to the continuing violation,
let alone proceed to incarcerate some erring Congressmen. Third,
it is absurdly easy for Congress to override this solemn amendment,
ranging from a mere majority to a three-fifths vote. Even easier
than overriding the constantly abused statutory limit on taxes
would tie tax revenues to a percentage of the "national income."
It is truly absurd to enshrine a slippery concept such as "national
income" in to the basic law of the land. Who knows what "national
income" is? This is not a precise or scientific concept,
but whatever government statisticians say it is. For example,
every time the government hires a bureaucrat, the salary is counted
as a per se addition to the "national income."
The saints preserve us from Friedmanites (for such they are) adding
their mumbo-jumbo to an already much-abused Constitution!

Murray
N. Rothbard (1926–1995), the founder of modern libertarianism
and the dean of the Austrian School of economics, was the author
of The
Ethics of Liberty
and For
a New Liberty
and many
other books and articles
. He was also academic vice president
of the Ludwig von Mises Institute and the Center for Libertarian
Studies, and the editor – with Lew Rockwell – of The
Rothbard-Rockwell Report
.

Murray
Rothbard Archives

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