THE MYTHS OF GOVERNMENT
Free-market capitalism has triumphed around the world, but most liberals seem to have learned nothing from the experience. They are enamored of many of the principles the victims of communism and socialism have experienced and repudiated. Still, “economic freedom” is a slippery term. During our heated private conversations in 1959, Khrushchev repeated the argument communists always made to me in my travels around the world, about why their system was better than ours. Whenever I mentioned free nations, free peoples, or free ideas, he would respond that the communists provided their people free education, free housing, and free health care. We stood for higher freedoms, I replied—freedom of the press, freedom of expression, freedom of religion, free elections, and political freedom. He rejoined that capitalism meant the freedom to be unemployed, to starve, to be homeless.
We both had a point. The freedoms he stood for were material. The freedoms I stood for were nonmaterial. In between these two concepts of freedom is the economic freedom of free markets. Khrushchev and other doctrinaire communists never accepted that principle. At this great turning point in history we must prove that democratic free-market capitalism can not only outproduce communist capitalism and provide for those in need but also provide the higher, nonmaterialist freedoms the communists denied.
This challenge requires that government finally master a delicate balancing act between opportunity and security—between growth and fairness. To grow, a democratic capitalist economy requires strong economic incentives for investment, including low taxes and minimum regulation. To be fair, it must provide some goods and services to those who cannot provide for themselves, which will inevitably take resources away from growth. Enacting too much social spending is a cruel policy, not a humane one, because it weakens the system’s capacity to serve everyone. Further along this continuum is communism, which, by promising to fulfill every need, ultimately deprives an economy of the ability to fulfill any. Khrushchev was wrong when he told me housing, education, and health care were free in the Soviet Union. The price the Soviet people were paying for them was astronomical.
It is fashionable to say that communism and socialism have been discredited. But they will not be completely discredited until government overcomes its tendency to ignore the simple fact that too much social spending saps an economy’s ability to produce the funds necessary to finance the social programs. Too many of the present administration’s policies are rooted in the reflexive conventional wisdom of traditional liberalism: higher taxes; suffocating regulation; a vast expansion in the size, cost, and scope of government; more entitlements; managed trade; and deep cuts in military spending. We need to lay aside some of the more persistent myths that for years have confused rather than clarified public debate.
In the late 1980s, Professor Paul Kennedy of Yale popularized the thesis that excessive military spending and imperial overstretch had caused the decline of all the great powers since 1500, and would do the same to America. Mounting trade and budget deficits, combined with the growing power of allies such as Germany and Japan, gave Kennedy’s argument a resonance it did not deserve. He and other critics missed the essential point that the proportion of GNP consumed by America’s defense spending in 1953 was twice the share of GNP spent at the height of the Reagan military buildup.
Nor is America’s decline as irrevocable or precipitous as Kennedy portrayed it. The late 1940s and 1950s represent an artificial measure of America’s relative might, because World War II had devastated much of the world. Using the 1920s rather than the 1940s as a benchmark, America’s share of world manufacturing and GNP has remained remarkably constant. America’s share of world manufacturing actually increased during the 1980s as the Reagan recovery created 18.4 million new jobs, compared with a net gain of zero for Western Europe during the same period. Our total GNP still exceeds that of Japan, our nearest rival, by a factor of two. In industrial productivity, technological innovation, and per capita productivity we still lead the world. Our economy attracts more foreign investment than that of any other major industrial power. With a GNP close to $6 trillion, we have ample resources to play our indispensable role as a global leader. We also have the resources to build a stunning new prosperity at home, if government will become less grasping.
Liberals have vastly overstated the harmful effects of defense spending on the American economy and understated its positive impact internationally. The level of spending called for in the Bush administration’s defense plan was approximately equal proportionately to what the United States spent in 1940, the year before Pearl Harbor, when we were vulnerable to aggression. This is hardly too much of a burden for the wealthiest nation of the world, especially when we consider the alternatives.
The most prevalent myth foisted on the public is that the eighties were, as some critics have gleefully labeled them, the “Decadent Decade.” By trashing the 1980s, they try to justify their own agenda of a vast expansion in government’s role at the expense of the private sector, a substantial redistribution of America’s wealth, the socialization of America’s health care system, a relentless push for equality of result, and managed rather than competitive trade. The liberal lament is familiar. President Reagan, they chant, simultaneously doubled the defense budget, reduced taxes, and cruelly cut essential social programs, so that the rich got richer, the poor got poorer, and the country amassed an enormous debt that put the U.S. economy at a significant competitive disadvantage in the world economy.
This dire portrayal is wrong. The policy implications many liberals draw from it are even more wrongheaded. Dramatically ending a prolonged period of stagflation and slow growth, which were lingering legacies of the Great Society, Reagan’s tax cuts and deregulation stimulated an economic boom, seven years of uninterrupted growth during which the American economy grew by nearly a third—or by the size of the entire West German economy. Runaway inflation rates plummeted and remained low. American productivity increased significantly. America’s share of the world’s GNP remained constant. America’s percentage of world manufacturing increased. The increased emphasis on competition and entrepreneurship rather than subsidy and regulation forced American business to take measures that would greatly increase its competitiveness for the 1990s.
While the federal budget deficit increased substantially during the Reagan years, it is crucial to keep this in perspective. On one hand, we must avoid the temptation of exaggerating the immediacy and severity of the danger. A deficit of 5 percent of GNP will not bring the apocalypse overnight. On the other hand, contrary to the claims of doctrinaire supply-siders, deficits do matter. They distort our economy over the long run by siphoning off for short-term consumption funds that could have gone toward long-term capital investment. They confer benefits on the present generation and burdens on future generations. While sustainable in the short term, and even justifiable in recession and war, deficits act like water, eroding the foundations of a strong economy.
It is wrong, however, to blame the combination of the Reagan tax cuts and defense increases for creating the deficit problem. Although defense spending doubled from $147.2 billion in 1980 to $290.2 billion in 1989, the increase in tax revenues—due in part to cuts in tax rates—exceeded the increase in defense spending. The Reagan administration’s miscalculation lay not in its tax or defense policies, but in its and Congress’s failure to control domestic spending, which continued to increase significantly during the 1980s and now consumes four fifths of the federal budget. The defense buildup was a bargain. It helped win the Cold War and saved both blood and treasure in the long run. Unfortunately, domestic spending has increased relentlessly over the past three decades. It is this relentless increase in domestic spending that is the curse.
The present administration has added revenues from its massive tax increases to the peace dividend from the end of the Cold War—which it has magnified through excessive cuts in defense spending—but despite its overly optimistic predictions, it still faces a
n out-of-control budget deficit. Even the most deft political shell game cannot hide much longer the fact that the recurring deficits are largely the result of decades of unchecked spending on domestic programs and entitlements. Each program is tied by a titanium umbilical cord to a particular interest group or lobby, which in turn is fused at the hip to the powerful members of Congress who hold the purse strings. The genetic code of government commands it to grow and to expand its authority. Like all things that take on a life of their own, it will not cheerfully commit suicide or lop off an arm or a finger. As I found when I abolished the Office of Economic Opportunity early in my administration, any President who attempts to terminate a program or department, no matter how redundant or unnecessary, is accused of insensitivity to poor people, young people, sick people, or small animals. It becomes impossible to imagine how the nation survived before the threatened program existed.
These spasms of outrage generally come from the bureaucrats, interest groups, and other organizations that receive the taxpayer dollars the federal government dispenses. All are masters at bringing political pressure to bear on the most neuralgic spot in Congress and the media. President Reagan, one of the strongest Presidents of the post–Cold War era, learned this lesson early in his first term. While in office he created the Strategic Defense Initiative, armed the Nicaraguan contras, and deployed intermediate-range nuclear missiles in Europe, all over the shrill objections of his critics. But when the giant teachers’ unions got wind of his plan to abolish a relatively new megabureaucracy, the Department of Education, the sworn enemy of the Evil Empire had finally met his match and had to cry uncle.
The liberals’ favorite programs are the hardest to cut. There are two for which I feel a particularly acute sense of responsibility. The first is the subsidies to public television and the national arts and humanities endowments. Their budgets increased at a healthy pace during my administration, despite my reservations, and by 1973 they were receiving a total of $129 million. After twenty years, ten of which our country spent agonizing over the deficit, their budgets have quintupled, to $640 million. If all three programs were terminated tomorrow and the unspent funds were returned to the federal treasury, Americans’ quality of life would not be diminished by one iota. If enough people wanted to watch Masterpiece Theater, or performance art in which people do bizarre things to their bodies with vegetables, the marketplace, including the huge private foundations that support the arts, would find a way to make this possible. And yet in the current atmosphere, even if the President wanted to eliminate these programs, he could no more do so than he could fly to Mars, because they are the darlings of the liberal establishment.
Even harder to eliminate or even slow will be those programs where the tendencies of bureaucracies to grow and grow dovetail with the profound antiestablishment, antibusiness inclinations of the post-Vietnam generation of federal officials and special-interest lobbyists. The most obvious example is the way environmental programs have run amok since I created the Environmental Protection Agency and signed into law the Endangered Species Act.
I consider myself an environmentalist. No rational person can quarrel with Churchill’s observation “I see little glory in an empire which can rule the waves and be unable to flush its sewers.” When we established the EPA, our goal was to find a rational balance between the imperative of protecting the environment and the imperative of economic growth. Since we recognized that most well-meaning businesspeople wanted clean air and water for the sake of their children and grandchildren as urgently as did the protesters marching in the streets, we envisioned a cooperative relationship between business and the new agency, with punitive measures applied only in cases of abuse.
But as so often happens with government programs, the pendulum has swung too far. Measures designed to protect endangered species such as bears, wolves, and the bald eagle are now being used to force Idaho farmers off their land for the sake of the thumbnail-size Bruneau Hot Springs snail and to block massive developments in recession-ravaged southern California to protect the Pacific pocket mouse. Similarly, the public has been bombarded so relentlessly by apocalyptic warnings from EPA bureaucrats and private organizations about global warming and the depletion of the ozone layer that few people realize that many respected authorities believe these concerns lack any scientific foundation. Nonetheless, automobile companies have been ordered to make mind-bogglingly expensive modifications in automobile design on the basis of flimsy evidence.
Government, as bidden by radical environmentalists, has also mounted an assault on the nuclear power industry. Environmentalists’ opposition to nuclear power makes no sense. It is the most abundant, cheapest, and cleanest energy source. Instead of spewing toxins and soot into the environment, nuclear power plants are self-contained and self-cleaning. Technological advances have made nuclear energy efficient, safe, and environmentally sound. In the 1960s, when nuclear energy seemed to be a threat to the big oil companies, many left-wing leaders favored it. When it became part of what they sneeringly called “the establishment,” they turned against it. Government regulators became their willing accomplices in trying to hamstring an entire industry. In the 1970s and 1980s, nuclear power generating facilities were being opened at the rate of one every three months. In the 1990s, new nuclear power plants will open at the rate of one every thirty-nine months—and because of the closure of plants due to environmental and antinuclear hysteria, there will be a net gain of just one new plant by the turn of the century.
One reason for such excesses is that as new departments and offices “mature,” if that is the right word, they look for new domains to conquer, new areas into which to extend their authority. Another reason is that the inherently anticapitalist impulses of the Vietnam generation are finding a new outlet in environmentalism and throughout government. Many bureaucrats come to their positions straight from graduate school and have no experience or interest in business. Employed in government agencies from city planning offices to powerful federal departments, they have been taught that the most noble calling of government is to monitor, license, inspect, regulate, and punish the private sector. A hundred and eleven years after the death of Marx, two years after the death of communism in Russia, a depressingly large number of intellectuals, journalists, and government officials, as a result of their flirtation with the left in the 1960s, are driven by the same hostility to capital that helped spark the greatest ideological excesses of our century.
We should also think twice about the impact our environmental correctness has on the developing world. Rich nations can afford stringent environmental controls. Poor nations cannot. When I first visited Bangkok in 1953, it was one of the world’s most beautiful cities. The air was clean, but we could not drink the water. During my most recent visit in 1985, advances in technology had purified the water, but the air was contaminated by the smog of industrialization. All Thais would probably like cleaner air, and as their nation continues to prosper, most Thais, through their taxes, will pay for cleaner air. But few Thais would be willing to trade away their dramatically higher standard of living for it.
Nations that are on the brink of enormous economic growth should not be permitted to befoul the environment as devastatingly as the communists did in the former Soviet Union and Eastern Europe. But we should not impose such strict international controls that the growth that would benefit these nations’ peoples and the rest of the world is stunted for the sake of the tender sensibilities of the purists at the Sierra Club. Some of the most extreme activists would rather keep people in the developing world squeaky-clean and close to Mother Nature than permit their nations to experience the kind of dramatic advancement through industrialization that will make them healthier and more prosperous, at the cost of some temporary damage to the environment. Such thinking can make environmentalism a cruel doctrine.
In Japan, some believe government is excessively allied with business. In the United States, it is excessively hostile to it. Government slow
s economic growth both by overregulating business and by sapping its strength through the increased tax bite it applies as it grows inexorably. It is adding insult to injury, therefore, to attack the budget deficit by raising taxes without cutting the size of government. To renew America and prime it for a new era of expansion and prosperity, we must keep taxes as low as possible and ruthlessly probe every dusty corner of government at all levels and do away with programs that are not needed or that serve only to dampen growth.
We should address the deficit though domestic spending cuts, not tax increases. The American people are grossly overtaxed because their government spends too much on politically alluring domestic programs. In 1992, federal, state, and local taxes claimed almost 40 percent of the GNP, a proportion larger than at any time since World War II. The administration’s ill-advised tax increase will make this proportion even larger. And it does not include the enormous tax increases that would be required to finance the administration’s revolutionary health care plan.
Savings and investment are central to our ability to finance industrial expansion and productivity growth. Capital gains taxes are taxes on savings. Income and payroll taxes are taxes on production. All three reduce the ability of American companies to compete in world markets.
Compared with our competitors, we Americans consume too much of what we produce and save and invest too little. Experience shows that we get more of what we invest in, and less of what we tax. Sensible tax policies would therefore shift the balance toward taxing consumption more and production less. That is why a value-added tax would be preferable to income and payroll taxes.
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