The New American Economy: The Failure of Reaganomics and a New Way Forward
In January 1981, Bruce Bartlett and I took over direction of the staff of the Joint Economic Committee – he on the Republican and I on the Democratic side. Our situation was unique: a bicameral committee, evenly divided between Democrats and Republicans, no majority either way. This, at the start of the Reagan revolution, which he favored and I opposed.
Bruce was a resolute supply-sider, having drafted the Kemp-Roth tax cuts. I was a resolute Keynesian, who had helped draft the Humphrey-Hawkins Full Employment Act. His specialty was taxation, mine was monetary policy. We were both twenty-nine years old.
Stalemate would have been possible but we took a different path, creating flexible subcommittees and turning the JEC into an open forum on every economic issue. The result was an exceptionally productive two years, and an enduring friendship – though we agreed on nothing then and not all that much even now.
Bruce’s views are, in my view, romantic: he is (or was, until this book) a small-government conservative and a fiscal hawk. But he thinks deeply and writes honestly – something that is not easy to do without tenure. For his apostasy in the matter of George W. Bush, some years back, Bruce paid with his job.
It would appear however that apostasy is an acquired taste. In The New American Economy Bruce ladles it out with gusto, and with a message that should cause an entire generation of the American Right true heartburn. The message? That John Maynard Keynes was really one of their own.
John Maynard Keynes? The John Maynard Keynes? How can this possibly be?
Bruce’s dark secret, here exposed, is that he is primarily a historian. He has a keen interest in the musty words of thinkers from a past day, and he actually goes off to read them. A good part of The New American Economy concerns itself with the old American economy–the economy that collapsed in the Depression and that was revived-or, more accurately, rebuilt-in the New Deal.
Though English, Keynes was central to the ferment of New Deal ideas. Bruce here admirably introduces him as, among other things, the greatest enemy communism had in those years. Why? Because Keynes understood that if capitalism were not saved, revolution would result — and because he felt that revolution would be worse. Drastic measures were therefore justified, whatever the business leaders of the day thought. As Bruce notes, this assessment agrees with one made decades back by my father, who characterized FDR’s motives in similar terms.
Bruce takes up JKG on another point, his 1965 testimony to the Joint Economic Committee on the tax cut bill of the previous year, which my father had opposed. “There was a danger,” he said, “that conservatives, once introduced to the delights of tax reduction, would like it too much. Tax reduction would then become a substitute for increased outlays on urgent social needs. We would then have a new and reactionary form of Keynesianism with which to contend.”
And so it happened. The Reagan period takes up much of this book. It is interesting in large part because of the wars that broke out between conservatives once the postwar American Keynesian liberals had been swept out of the way. Much of this is highly arcane, and to understand it, it helps to have been there, as monetarists, supply-siders, fiscal conservatives, free-marketeers and pro-business corporatists battled it out.
Bruce is a first-hand witness, and quite a good one – though not disinterested. In particular he makes a persuasive case (to me) that the leading supply-siders were not charlatans. They were, rather, for the most part idealists, who took their cues from what was then reputable thought in mainstream economics. (This, of course, raises a question as to whether the mainstream economists were charlatans, but let’s leave that one alone here.)
Still, there was an interesting practical convergence between supply-side and Keynesian perspectives. In public the supply-siders reviled the “discredited Keynesians,” and insisted that their tax cuts were all about “incentives to work save and invest.” But in private even Reagan’s own top economic adviser, Murray Weidenbaum, admitted in 1981 that the tax cuts would provide a powerful economic stimulus, Keynes-style, once the recession was past and the president was gearing up for re-election.
Given that the (Galbraithian) alternative of public investment and a stronger welfare state was not a political possibility, the choice then was between a tax cut-fueled boom and prolonged stagnation. One can argue — I do argue — that by reconciling Keynes with the interests of the rich, the supply-siders made the country more prosperous than it would otherwise have been. They also kept the Republican Party in business. It is true therefore that Reagan’s tax cuts replicated Kennedy’s success in 1964.
When Bruce turns his eye to the present crisis, he confronts a Republican Party in a near-vegetative state, able at best to blink and mutter “tax cut” in the face of any and all problems. He suggests, sensibly, that the lesson of the debacle of Bush’s Social Security privatization scheme be accepted: the welfare state is here to stay. He argues (again as my father once did) in favor of a Value-Added Tax to provide a stable, admittedly regressive, pro-saving funding source. Thus Bruce Bartlett becomes an advocate of the European-style tax-and-welfare state!
Here, we again part company on the merits. For Bruce, our key economic problem going forward is an insufficiency of saving and the supposed burden of public debt. For me, it’s a lack of investment, and of jobs, brought on by the debacle of private debt and a disastrously deregulated and corrupted financial sector. I’m not a fan of the European solution — among other things it leaves savings idle, unemployment high and education (in particular) underfunded. I like the progressive income tax and even more the estate tax, which spur philanthropy and fuel our vast non-profit sector. I think Social Security is the best part of the American welfare state – and one of the most successful public pension programs in the world.
Back to the trenches, Bruce?