The Real Reaganomics

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.

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