Laffer, Stockman, Reich, and Greenspan
Art Madsen, M.Ed.
[A]We were especially fortunate in having an Assistant Managing Editor of the Washington Post, William Greider, as author of our class reading selection on David Stockman, Ronald Reagan’s Director of the Office of Management and Budget, a crucial federal agency that has been in existence since the 1920s. Stockman’s naivete, arrogance, and inexperience soon outraged such large segments of the U.S. population that a detailed analysis of his misdeeds, committed in the name of supply-side economics, is an important addition to the economic literature of our time. In this selection, Grieder explains the relatively humble origins of Stockman in small-town Michigan and lays the groundwork for Stockman’s embrace of Reaganomics, based largely on ultra-conservative supply side thinking.
What is supply side economics, one is forced to ask? Supply-side economists essentially believe in lowering taxes for the following reasons:
It is, in fact, a school of economic thought based on the belief that major economic expansion will result from lower tax rates. The theory contends that a reduction in taxes will increase supply by encouraging production, providing greater human energy to work, and stimulating the savings rates needed to support new business growth. A greater supply of expendable money would also mean a slowdown in inflation, although opponents of the theory, such as Keynes and Galbraith to some degree, argue that this is fundamentally incorrect logic. The anti-inflationist thinking used by supporters of supply side approaches (principally Arthur Laffer who influenced Stockman’s decision-making) is basically that tax cuts will spur economic growth and contain wage/price-spiraling. The problems the supply-siders wanted to resolve dealt mainly with the tax burden placed on corporations and private individuals. Supply-side theorists approved of income tax reduction because this usually increases private investment in corporations, facilities and equipment. But the strategy didn’t work, as will be seen.
In fact, many vocal critics argue, and argued at the time, that Reagan’s supply-side program caused massive federal deficits, penalized the impoverished classes and even the middle-class, and fueled excessive speculation that ultimately damaged the U.S. economy. After reading our selection from The Education of David Stockman, there is good reason to believe that this is exactly what happened!
By 1992, it is generally known, after 12 years of Reagan and Bush in the White House, the nation's debt had literally quadrupled, from $914 billion to $4 trillion! Annual deficits had increased five-fold from $59 billion to more than $300 billion, according to Robert Reich! To cope with this near-emergency situation, the Federal Reserve had increased interest rates and had suffocated the economy. In the years to follow, almost as if to disprove supply-side thinking, Clinton and Gore undid the damage. Perhaps amazingly, Gore often called for larger cuts than the president wanted to make, and was instrumental in helping undo the supply-side disaster of the eighties and early nineties.
[B]Robert Reich, a Harvard Professor, was also a classmate of Bill Clinton, and served as his Secretary of Labor from 1993 to 1997. His theory, therefore, takes heavily into account the dynamics of social class in America. He compares, for example, the working-class town of Chelsea, Massachusetts to nearby upper-crust Belmont, and makes a number of often humorous but perhaps accurate assumptions. He supported a much-praised Minimum Wage Law that increased the income of the poor and made at least a (feeble) attempt to narrow the gap between the lower and middle classes in this country. Indeed, spending in the lower and middle classes (80% of the population) has not increased at all, he states (footnote 13).
The analysis of Reich’s thinking provided in our class reading selection demonstrates the amount of detail that went into his conclusions concerning production and employment figures. Reich speaks of routine production services, in-person services, and symbolic-analytic services. These constitute the three main types of work performed in America and help to underpin his overall theory. He turns to a discussion of the rich-poor gap and wants to resolve it, although he is astute enough to realize that it is occurring worldwide. He states that the first two job-types are virtually "sinking boats", in the US and abroad. Only the symbolic analysts are surviving. They are doing so in the United States and overseas, where a demand for them is considerable.
Reich wants to improve profits for corporations (thus spurring the economy), and pass these benefits on to workers who, hopefully, will have been re-trained to cope with the symbolic-analytical tasks required of them. The reader gets the distinct impression that there is substance to Reich’s theory, as opposed to the knee-jerk philosophies of the supply-siders who failed to scratch the surface of the real problems confronting modern economies. There is a definite humanitarian overlay to Reich’s position because he wants to train the world’s "pool" of unskilled workers and move the planet forward, out of impoverishment. But he places America in a high priority position, of course.
It appears in the latter portion of our reading selection that Reich’s solution to the widening social class gap problem would be to increase funding for public investment, with an emphasis on education. This would go hand in hand with his desire to retrain vast segments of the population so that they may adapt to the symbolic-analytical tasks ahead. He concludes his "Three Jobs of the Future" selection with thoughts about leadership in this country and acknowledges that, as political leaders and symbolic-analysts, they have a responsibility to look after the less fortunate segments of the citizenry. Economic decisions, affecting the United States, must be made with a view toward other nations, he stresses. He rejects the idea that taxes on the rich must be lowered, and that public spending must be cut. This flies in the face of traditional supply-side thinking. In fact, he argues, these concepts are flawed and are based on "mistaken notions" tied to merely national funds – when it is so important to look beyond the borders of the US for opportunities and growth.
[C]This essay question rests on certain assumptions that may not be entirely borne out by the dichotomous thinking of Laffer/Reagan/Stockman and, on the other hand, Robert Reich. However, a combined Reagan supply-side approach with a Reichian overlay might work.
These ‘differences and advantages/disadvantages’ pertaining to Laffer’s and Reich’s theories -- both incorporating certain supply-side characteristics – could, if properly implemented, achieve the original results intended by Stockman in the opening months of his OMB Directorship. Of course, since this didn’t occur, and such a combination of theoretical approaches has not been enacted, it is difficult to predict what would really occur under such a scenario.
I still contend, in closing this segment of the essay, that Laffer supply-side superficiality cannot be equated with, or used in conjunction with, the far deeper model attributed to Professor Reich.
[D]Alan Greenspan, a Republican, first took over as chairman of the Federal Reserve on Aug. 11, 1987, when he was appointed by President Reagan to replace Paul Volcker. Volcker had been responsible for pushing interest rates to levels not seen since the 19th Century in a successful effort to fight inflation rates that had soared to double-digit levels by the petroleum problems of the 1970s. Fortunately, Greenspan has not had to face similar inflation threats during his time at the Federal Reserve. But he has won compliments for managing to keep prices under control while allowing the economy to grow at a strong pace with the result that unemployment has been at its lowest levels in three decades.
Under Greenspan’s deficit reduction program, leading to economic expansion, the U.S. economy is enjoying its best performance in more than a generation. So, what is the underlying rationale advanced by Greenspan for keeping the budget deficit under control, as has been done by the Clinton Administration in tandem with the Fed?
Greenspan initiated a major drop in long-term borrowing rates, helping businesses and families to cope with their large loans (e.g. mortgages, business debt). Both Greenspan and Clinton (amazingly since they are of opposite political parties) agreed that long-term rates had to come down. They also both agreed, of course, that the Fed must remain de-politicized in the overall interest of the nation. With inflation under control due to a stabilized economy (related to the Greenspan-implemented lower long-term rates) and with income tax rates remaining steady – hence government revenue being predictable and reliable – it would be, and was, possible to reduce the federal deficit.
This philosophy is opposed to a public investment approach (like FDR’s) because it does not rely on the government spending vast amounts of money to fuel federal programs to increase employment artificially. Rather, it relies on private productivity contributing to the tax-base, under low long-term interest conditions, so that the government can reduce or eliminate its deficit. This was literally accomplished, to a credible degree, under Clinton/Greenspan.
Since Alan Greenspan is ideologically a Republican, he opposes ‘big-spending’ governments; hence, his approach of controlling short-term, but primarily long-term interest rates is far more palatable to him than an FDR or LBJ bail-out spending spree. Deficits can be controlled without artificial economic manipulation – through good fiscal and macro-economic policy, he feels. He intrinsically distrusts subjective use of government power and relies on sound economic theory and empirical evidence.
[E] Alan Greenspan is certainly not an Arthur Laffer or a David Stockman. His views are far broader and considerably less partisan. Yet, there are some similarities between the original supply side theorists and the thinking of Greenspan. Surely, they share a basic distrust of government power and a desire to reduce the economic burdens placed on taxpayers. By spurring the growth of business and industry, Greenspan is embracing one of the goals of supply side economists. And, in so doing, he is creating capital for workers and producers, not taking it from them. This, too, is in keeping with supply side thinking. By expanding the monetary mass, through enhancement of industry prodded on by low-interest loans, Greenspan is accomplishing another important goal of the supply-siders: boosting of incentive to work and produce. When people feel secure in their homes and jobs, they also save a higher percentage of their wages, and, even if they don’t, they spend this money. These realities are among the principal goals of the supply-side economists. Greenspan historically opposed high taxation (in the 70s), but has modified his stance on this issue somewhat in recent years. Thus, recently at least, he is not entirely in line with supply-side thinking, although he is by no means overtly in favor of heavy tax burdens on either rich or poor.
President Clinton’s campaign promises reflected Reichian thinking in that employment and education were extremely high priorities. Federal expenditures on training programs and university education were certainly not rejected by Clinton during either of his campaigns. Reich’s thoughts, emanating essentially from Harvard, were based on expansion and adaptation of the labor force and on modernizing of our brain-power to cope with the new symbolic world in which we are forced to live. Clinton originally embraced Reich’s thinking, but bent more toward Greenspan’s pragmatic economics as his two terms wore on. Indeed, it can be said that Clinton’s "White House Economy Team" interacted quite impressively with Greenspan’s Federal Reserve Staff. As they grew to know each other better, their philosophies merged. Fortunately, even as early as 1992, Clinton saw the wisdom of Greenspan’s non-partisan and largely empirical approach to his all-important job at the Fed.