This exchange between conservative economist Arthur Burns and liberal economist Walter Heller is excerpted from the forthcoming issue of Public Opinion magazine. The discussion, moderated by author Ben Wattenberg, took place in late June at the American Enterprise Institute.
BEN WATTENBERG: Since the passage of Proposition 13 in California in early June, the country has been awash in explanations of the legislation and its impact across the country. All the tax revolt hoopla seems has happened. Dr. Heller, is all this really new? Or is it an old drama played out on a new stage?
WALTER HELLER: Ever since the 1930s when I was a graduate student in public finance, and as long as I can remember, people have rebelled against high taxes. There have been movements, if you will, that have reflected that rebellion, most notably in the 1950s when Colin Clark, in a sense, sparked one by saying that any nation whose taxes went above 25 percent of its national income was bound to, go into unrelenting inflation.
Then, too, there was a constitutional amendment movement in the 1950s to likit federal income and estate taxes to a top rate of 25 percent. They tried the route of memorializing Congress to call a constitutional convention, and some 30 states took action. Some of my colleagues cite that experience as kind of a precedent for today's revolt and say that this, too, is going to fall of its own weight. I disagree.
I believe there are sharp differences between those more or less sporadic movements of the past and this taxpayer revolt of the present. Today we see a strong reaction to what people regard as excessive government, as inefficient spending, and as inroads of inflation that are unfair in terms of their property and income taxes, in Particular.
WATTENBERG: Do you agree with that, Dr. Burns?
ARTHUR BURNS: I have been hoping for a good many years that we might have a taxpayer revolt. I don't remember the revolt of the 1950s that Walter speaks of. It made very little impression on me.
I think we are closer to having a tax revolt in this country at present than at any time in the past that I can recall, but I am not yet convinced that the American public has spoken clearly on the subject. This may be a passing mood; I hope not. But if it is a tax revolt, I am delighted and I hope it prospers.
WATTENBERG: Dr. Burns, assuming that there is a tax revolt, why have you long awaited it? Why is it good? What is it telling us about the people in this country?
BURNS: I think people have been watching our government grow at the federal, state, and local levels, year in and year out, pretty much. People have come to feel that while taxes have been going up and governmental spending has been going up, they were not getting their money's worth in the way of governmental services.
They see a huge bureaucracy all around them. They see the government becoming ever bolder as a redistributor of income. People in the middle class - which is the more creative and the more productive part of our economic society - feel that they have been neglected. And to a large degree, they are right.
To be sure, we have had cuts in income taxes at the federal level, but these reductions have applied to people in the lower income brackets. Taxes for the middle and upper income groups have been rising. And people at all income levels have been suffering from inflation.
More and more people are therefore saying to themselves: "We see our government doing more, spending more, taxing more, but our problems - economic and social - are not going away; they are not being solved." So there is a great deal of unhappiness and frustration in our country, particularly on the part of the middle class.
WATTENBERG: And you are suggesting that if that tax revolt succeeds, it will be beneficial to the society as a whole?
BURNS: I have little doubt about that. Our federal government is fundamentally responsible for the inflation that we have been having. Our government is largely responsible for the decline in business and consumer confidence. The huge increase in spending has not solved our urban problems. If anything, it has added to them.
Our economy is not functioning as it should. Business capital investment is lagging. To restore confidence in our nation's economic future, we ought to cut back on governmental spending, cut back on taxes, cut back on regulation. And I think that this is what people feel to an increasing degree.
One thing that surprises me and why I am uncertain about the genuineness of a tax revolt is that, as yet, I don't see anything significant in the Congress in the way of reaction to the Jarvis-Gann Proposition in California.
The Congress seems to be going on its old-fashioned way. Yes, we have had a few cuts here and there, but they don't amount to much.
HELLER: I take quite a different view of this.
First of all, yes, of course, there is a lot of unrest about taxes, and the middle class is particularly restive. But the idea that they have been taking the major beating from tax increases as against the lower income groups is open to considerable question.
The fastest growing tax in the United States has been the payroll tax. And that certainly is about as regressive a tax as one could find. While we have been cutting income taxes, with recent emphasis on the lower income groups, the pay-roll tax has been growing very sharply and rapidly as a percentage of the total tax take.
Now, that is just a question of fact and, while I would agree that the delivery systems of government leave a great deal to be desired, that we are not getting as much as we should for our government dollar and, while I would also agree that we should be cutting taxes from time to time - I have been associated with some fairly sizable tax cuts in this country and I have been advocating a tax cut now - at the same time, I think it is terribly important to ask: What does this tax revolt accomplish?
Does it accomplish efficiency of government? Does it accomplish a cutback of what we might consider government supernumeraries, and superfluous services, and so forth, or does it just blindly hobble local government?
One of the things I have always been interested in - and this is one of the reasons I was an early advocate of nostrings revenue sharing back in 1957 - is seeing that we have strong, decentralized, pluralistic self-government at the local level. I think this is an attack on that.
Secondly, what happens to services when you have a tax revolt like this? What services are cut down eventually? In the California case, they will buffer it for a year or so, but in the last analysis, who wins? Who loses? Is it the poor? Is it the aged? Is it the ill? Is it the disadvantaged - at the expense of preserving services for the middle class? I think the jury still has to be out, and I doubt that the tax revolt is a very good way of getting an efficient solution to that problem.
Furthermore, I don't like it if it ties up government with constitutional limitations. One of the ways in which democratic representative government can be effective is by responding to changes in the economic situation, changes in preferences, changes in circumstances. I don't like to see those things embedded in the Constitution.
One has a whole array of questions that have to be answered before we can decide whether the effects of the tax revolt are going to be negative or salutary.
Furthermore, as far as the overall federal, state and local tax levels are concerned, I don't know whether this is much comfort to the American people - obviously, it isn't at the moment - but our U.S. taxes are less than 30 percent of the gross national product.
WATTENBERG: As compared to rates in European countries in the high 40s or so?
HELLER: In the 35-40, 45-50 range. The only major industrial country below us is Japan.
The questions of fairness in the distribution of tax burdens, efficiency in the delivery of services, inadvertent tax increases that arise from inflation - in other words, where inflation takes the place of the legislature, in effect, and stealthily and inadvertently increases taxes - I think those questions need to be faced. We have a big agenda there. I just don't think that this slashing and crashing about in taxes, the way Jarvis-Gann has done, is the way to go about it.
BURNS: I would have preferred a more rational approach to cutting back on governmental spending and on taxation than the Jarvis-Gann way. I still hope that might happen in the future.
I was an enthusiastic proponent of the Congressional Budget Reform Act, but I am disappointed with what has been accomplished under it. I don't see rational techniques accomplishing the result that Walter seeks and that I, too, seek. A meat-axe approach, arbitrary though it be, may perhaps be the only way, the nature of man in the political arena being what it is, to cut back on governmental spending.
Governmental spending is a larger factor in our economy than the figures you cite would suggest, Walter. According to my calculations, governmental expenditures at all levels now constitute 37 percent of the net national product. And the proper comparison is with the net national product. And the proper comparison is with the net national product; in other words, the dollar value of the nation's true production of goods and services. That proportion has been growing steadily across the decades.
I have asked myself the question, "What would I have done if I were a Californian?" I would have been somewhat unhappy voting for the Jarvis-Gann proposition, but I still would have voted for it in order to force economies on our governments.
HELLER: I read it a little differently than you do, Arthur. I think there is a considerably new mood in both the White House and the Congress. We have a fiscal conservative in the White House, and there are more and more people in Congress that have gotten the fiscal message from the voters.
Take those freshman and sophomore classes in Congress: Do you recall the great fear that there was going to be an opening of the spending pores by this new wave of liberals? But in fiscal matters, they have proved to be quite conservative. The anti-spending voice of the people is being heard. And the introduction of that congressional budget procedure was one reflection of it. Now, that isn't working perfectly, but at least it didn't go down the tube the way the procedure did in 194-48 after the Hoover Commission recommended a similar reform. It has made congressional budgeting more systematic and responsible.
BURNS: Walter, I have no quarrel with anything except your conclusions. From where I sit, I see this country experiencing a fairly rapid expansion of economic activity. I also see the federal budget deficit - instead of diminishing or vanishing, as used to be American practice during business-cycle expansion - I see the budget deficit mounting. If you call that fiscal conservatism, I can only reply that you must mean by that, that things could be a lot worse. True, the rhetoric that we hear about the budget is conservative, but that is an old and familiar story.
HELLER: Well, let's take a different cut at it. We are agreed that it did get up to 23 percent or so of the GNP in the early seventies. We can also agree that if Carter is able to carry out his 1979 budget plan, 1 1/2 percent real growth federal spending as against 3 to 4 percent growth projected in GNP, the proportion will drop and continue the move toward Carter's target of 21 percent of GNP. And that, it seems to me, is a valid if not by any means complete answer to the charge that government is expanding like some kind of protoplasmic blob. This is a genuine effort and one on which there will be very considerable congressional cooperation.
BURNS: I like Mr. Carter. I don't question his conservative instincts. I don't question his intentions. I don't question his striving for a balanced budget eventually. All I say is that the net result so far of his efforts and congressional efforts has been to expand the federal budget deficit at a time when economic activity is increasing quite rapidly. I see a budget deficit this year, including off-budget outlays as we should, of $65 billion. I see a deficit as large as or larger than that next year. I ask myself the question: do we have responsible financial management by our government at the present time? If responsible management of fiscal affairs means that the managers take reasonable account of future contingencies, then I am bound to conclude that our federal finances are being mismanaged.
Walter, you know as well as I do that in the kind of world we live in, sooner or later a recession is likely to come along. Make the assumption quite arbitrarily that a recession will get under way this year sometime, or next year, or the year after. Now, if we run budget deficits of the magnitude that we have been having, the deficit in a year of recession could easily rise to $100 billion or $125 billion. I am very much afraid that if we ever got into a situation like that, it might take 10 or 20 years for this country to get back to anything like economic or financial stability.
HELLER: Arthur, you paint too black a picture. Our governmental budget deficits, as a whole, are a smaller proportion of GNP than in Germany and Japan, among others. And as long as state and local governments run a $30 billion surplus and foreign governments run a near-$25 billion trade surplus against us, the federal deficit mainly serves to offset those surpluses. Undersirable as the big federal deficit may be, it's not about to do us in.
WATTENBERG: In recent years the case has been made that people in this country feel that they have lost control over their own destiny. Now in a democratic society, aside from its economic impact, is this a healthy social phenomenon for people in California to be able to pick up the "2-by-4s," in Sen. Alan Cranston's words, and say, "By God, I still run this place."?
BURNS: I would say that it will tend to rejuvenate the human spirit, that it will make people feel that they can have an effective voice in what is happening in our country, that it will make people feel that they have repudiated those whom they had sent into legislative halls, and that those who are there may be disciplined as a result.
HELLER: I am afraid that I can't interpret this California vote as people grabbing control of their own destiny. It was a blind, self-interest-motivated lashing out at government. Now, whenever one makes a statement like that one has to go and say there were some genuine grievances but simply to say, "I want to lower taxes for myself," is not my idea of a national crusade for reestablishing one's own destiny. That certainly applies as well to putting a provision into the state constitution requiring a two-thirds vote of both houses of the state legislature to enact any new taxes to take the place of the old.
BURNS: That latter is the one part of the Jarvis-Gann amendment that I would certainly applaud. As a matter of fact, at the risk of shocking you, Walter, I would like to see the federal government proceed on the principle that if there is to be a budget deficit of any magnitude, that should be voted by a three-fifths or a two-thirds majority of the Congress. Now, that is a reform that I would like to see carried through.
HELLER: That is shocking. In terms of sensible, sound, responsible economic management, Arthur, I am shocked.
BURNS: I think we need to introduce some firm discipline into the management of fiscal affairs. Simple majority government has led us into the position in which we now find ourselves - with deficits persisting year in and year out, with deficits feeding inflation year in and year out, with inflation itself accelerating in this country at a time when the rate of inflation is diminishing in most other parts of the world. The legislating of deficits by simple majority rule has led to a depreciation of the dollar in foreign exchange as well as in domestic markets. It has led to great uncertainties about the future of free enterprise in our country. It has led also to a lowering of our national prestige.
Whether the rule should be a two-thirds majority in order to run a deficit, or a 60 percent majority, I don't much care. But in view of the experience that we have gone through, something more than a bare majority is needed to regain responsibility in financial and economic management.
HELLER: I surely agree that we need far better economic and financial management, but that involves, for example, a much better coordinated Federal Reserve monetary policy and government fiscal policy. If you, in effect, tie one hand - the fiscal hand - behind your back, I think it will distort the management of U.S. economic policy.
BURNS: It would make it certainly more difficult to run large deficits.
HELLER: Yes, it would.
That, of course, raises the question: What is the source of our inflaltion in this country? You attribute it all to deficits. I didn't hear anything about monetary policy or the quantity of money, but I would just as soon pass on that.
BURNS: You are granting too much, Walter.
WATTENBERG: Has there been an attitudinal shift in the workplace that people no longer want to work as hard as they did; that the success goal is missing?
HELLER: Ludwig Erhard used to tell me, "The world-famous German diligence has disappeared." He told me that in the fifties, and he told me that in the sixties and now I am hearing it in the seventies.
BURNS: And it has been true each time.
HELLER: But how do you reconcile this supposedly weakening work ethic with the fact that women are rushing into the labor force and the further fact that in spite of allegations that people are so comfortable on welfare, there are throngs of applicants when companies announce new job openings in areas of high welfare incidence? Surveys show that people like to work, basically. Maybe they are not working as hard as they did.
BURNS: I think we have conflicting trends. On the one hand, more and more people are entering the labor force: that is in part a result of the pressure on family budgets caused by inflation. On the other hand, the average individual wants longer vacations, more holidays, sick leave and longer coffee breaks. People aren't working the way they used to. So you have these opposite trends.
Actually, I think that what has been happening in our society is that people, as individuals, are willing to put less and less effort into the economy, but still want to draw more and more out of the economy. They find that they are not achieving their objectives and that is frustrating.
It's become very difficult to draw more and more out of the economy. If you get an increase in wages, that is soon nullified by inflation. People generally know this but they overlook the fact that their willingness to put effort into production is diminishing. And they are only beginning to understand that government is diverting to itself an increasingly large part of the nation's production.
HELLER: But remember, Arthur, that people know from their experience in the sixties that they could put in less and less effort or at least less time and draw out more and more because productivity grew so much that in one decade, per capita income, after taxes, in real terms rose - what was it, somewhere between 25 to 30 percent? And they decided to take out a good chunk of that in leisure.
BURNS: But, you see, we had a fairly healthy environment for investment after 1962, and we do not have a healthy environment for investment at the present time. Venture capital investment is virtually dead in our country. Investment in large new projects is not proceeding at all rapidly. The spirit of innovation, of business enterprise, of capital investment is not what it was at that time. I think that persistent inflation, which has led to the deterioration of profits since the mid-1960s, has weakened the spirit to invest. That is the major difference between then and now.
WATTENBERG: And yet, the material level of well-being in this country is at an all-time high today. Can't you interpret that as progress, if you work less and get more? Isn't that also progress?
BURNS: Well, now wait. First of all, the rate of improvement in material welfare has slackened.
And when you have a slackening of the overall rate, then the number of individuals whose position has not improved materially, or who feel that it has not improved, tends to increase. I think this is what has been happening, and it is a source of spreading dissatisfaction.
HELLER: Yes. And, Arthur, I think you and I might also agree that the rapid events in the sixties built up expectations that are not being fulfilled in the seventies, partly because we have had two recessions in the first half of the seventies after none for eight years in the sixties.
BURNS: Yes. People want more and more out of the economy, and they are being frustrated; they are not getting it. CAPTION: Illustration 1, no caption, By Geoffrey Moss for The Washington Post; Illustration 2, no caption, By Tony Auth for The Philadelphis Inquirer; Illustration 3, no caption, By Taylor Jones; Copyright (c) 1977, The Charleston Gazette