In advertising his challenge to fight the winner of the Leonard-Hearns bout, Marvelous Marvin Hagler, the middleweight champion, observed: "One of those guys is going to lose. And the other one is doomed." He might have been talking about the 1980 election. Only Hagler meant he would lick the winner personally, while Reagan is mostly doing it to himself.
After only a year of Reaganomics, the country senses what the economics profession knew all along: the wilder claims of "supply-side economics" are a joke. Massive tax reductions do not pay for themselves. No instant productivity miracle can be had. Personal tax cuts generate only small labor-supply increases and induce mostly routine effects on personal saving. Anyway, the availability of saving is not always the effective limit on productive investment. Plant and equipment spending responds primarily to expected sales and profitability. High interest rates can undo what faster depreciation accomplishes. Besides, the productivity- improving effects of extra capital investment are far from dramatic and take a long time coming.
It is hardly surprising that David Stockman didn't believe it. The wonder is that anyone did.
To say that much is like shooting fish in a barrel. The current recession, however, is anything but a joke. In the fourth quarter of 1980, the unemployment rate was 71/2 percent. In the fourth quarter of 1981 it was almost a whole percentage point higher. Real GNP is no bigger at the end of Reagan's first year than it was at the beginning. Another year's potential growth has been wasted.
The good news is that the rate of inflation has slowed. And that brings us to the deep truth of Hagler's remark. Some part of the reduction in the inflation rate is just dumb luck. Crops have been good and so food prices have actually fallen in the past year--just ask any farmer. And recession around the world, combined with divisions within OPEC, has kept the price of oil from rising. That helps our inflation picture but promises nothing in particular for the future. Next year's crops may be bad, and OPEC is not ultimately on our side.
The rest of the improvement in the inflation rate is a result of the recession. Car prices have been cut, the housing market is depressed and wage rates are not expected to rise much in 1982, at least not in the economy's main disaster areas. Each of our last few presidents has promised solemnly that he would never, never acquiesce when faced with a recession or create unemployment just for the purpose of slowing inflation.
Each of our last few presidents has done just that. Reagan has now joined the club. It is no encouragement when he says that he will stay the course. If we get inflation down at the cost of more years of 7, 8 or 9 percent unemployment, the victory will be hollow and maybe only temporary.
The entire experience of modern Western industrial economies suggests strongly that inflation can only be stopped by damaging recession and unemployment, so long as we are limited to the conventional tools of monetary and fiscal policy. Faster and more prolonged inflation means deeper and more prolonged periods of recession and unemployment.
Fiscal and monetary policy can produce no magical surgical strike that cuts out the inflation without first hitting the real economy of production, jobs and profits. To avoid that costly process we will have to experiment with less conventional policies. Some of these fall under the heading of "incomes policies" and some require programs to correct structural defects in such sectors as medical care, housing and transportation. Perhaps other ideas can be found.
We must admit candidly that no one can guarantee the effectiveness of a policy that has never been tried. At a time when business and labor are acutely aware of their joint need to compete internationally, presidential leadership toward a consensus on wage and price behavior might be able to speed the process of disinflation and limit the social and economic damage.
There is a certain pleasure for liberals in watching conservatives hopelessly entangle themselves in their own empty rhetoric about budget deficits. More recondite amusement is warranted in watching monetarists play hide-and-seek with whatever definition of "the money supply" they thought they were controlling or think they should be controlling. It is tempting just to poke fun, and there is some rough justice in doing so. But Marvin Hagler didn't care which of those guys lost. Liberals need new ideas, too. Reagan was not elected because the country was happy with its government.
Innovative thinking about the conduct of fiscal and monetary policy is also required. Most close students of the numbers agree that the Reagan tax and expenditure policy is pretty much of a wash with respect to its macroeconomics effect, or maybe even slightly contractionary during the first couple of years and accidentally well-timed for 1982. Policy turns expansionary only in 1983-5 as the tax reductions mount and the military buildup proceeds.
Thus the anti-inflationary burden has been carried almost entirely by monetary policy, with the explicit initial concurrence and encouragement of the administration. Only as the resulting recession has become a political liability has the administration tried to leave the Federal Reserve twisting slowly in the wind. But the recession is the price we pay for monetary-fiscal deflation. Since monetary policy is carrying the load, the big losers are the interest- sensitive sectors of the economy: housing, autos, plant and equipment and net exports -- this last because high U.S. interest rates attract foreign capital, cause the dollar to appreciate, and thus favor goods produced abroad over those produced here. A fiscally driven recovery after 1982 will collide once again with tight monetary policy before it is complete. Nothing having changed, 1981 is likely to recur on the next upswing. High real interest rates will hold the economy down, offset tax incentives for investment, hamper our own foreign trade performance, and force a slowdown on the world economy.
It would be healthy to achieve whatever deflationary pressure is desirable with a mix of easier monetary policy and tighter fiscal policy, especially if the promotion of capital investment is a goal. The United States has no good institutional way to coordinate fiscal and monetary policy decisions. Personal contacts among the leaders of the administration and the Federal Reserve work until they fail, as they have now done. Congress may not be the best arena for the conduct of monetary policy--the memory of Wright Patman is still green in the Fed.
The result is that monetary and fiscal policy work at cross purposes as often as they work together. The country could use some new ideas here: how to achieve a unified macroeconomic policy without giving up as much decentralization as we seem to like.
Finally, some of us do not wish to give up half a century's gains in social equity, care for the poor, provision for the old, education for the young, preservation of the environment, safety for the consumer and all those other bad things. Regressive redistribution of income is neither necessary nor sufficient for economic recovery and growth.
We agree that many federal programs deserved scrutiny and pruning, and many still do. It is both inequitable and inefficient, however, to concentrate on social welfare programs. There are plenty of sacred cows remaining on both sides of the budget that have escaped the ax so far. We need to examine carefully the growth of indexed entitlements, which do not all go to the poor anyway.
We have to realize that the voters saw something in 1980 that they didn't like: bureaucratic abuse, over- detailed regulation, interminable hassles, evasion of legislative intent. It should not bebeyond the wit of man to improve on past regulatory performance without giving up on desirable social goals. Some of the necessary ideas are already circulating, but they need to be transformed into practical recipies.