Among all forms of mistake, prophecy is the most gratuitous. -- Middlemarch
It is not my instinct to offer President Reagan advice on economics or as to his economists. I am not a natural source for a Republican; my guidance belongs properly to my fellow Democrats, who, I hasten to add, have not always so favored themselves in the past. But the economic designs of the administration, recently unveiled, and the antecedent and ensuing discussion valuably illustrate one of the basic public tendencies of the economics profession. That is, when in public office, not to go back from the results that are needed to the measures that are required; rather it is to proceed from the actions that are most convenient to the results that are most benign. I would like, in a purely scientific mood, to comment on this fascinating and, some will think, formidable tendency to find the greatest future good in what meets with the greatest current applause.
The tendency has had a certain hole-in-the-corner existence in universities and research institutes in recent times. It has been a good way of attracting attention and lecture engagements. Show that with higher defense expenditures, a large deficit, free-running wage and price increases you will have a higher rate of inflation, and you will arouse no interest of any kind. But, as a certain number of scholars, not excluding, Professor Arthur Laffer of the University of Southern California, have discovered, to proceed from what the influential want to what everybody would like is to be assured of a certain mild celebrity. Show that by cutting taxas, enlarging the deficit, freeing wages and prices from any restraint and having a suitably arcane monetary policy, you will get a miraculous change in business expectations, an expanding economy, a balanced budget, stable prices and full employment, and attention is assured. Manifestly gullible reporters will seek interviews and report with wonder. Even for university colleagues, a scholar who can do that will have something of the standing of the professor who is sexually involved with his students or academically at odds with the university administration.
None of this is harmful until economists so motivated turn up in Washington. In washington, the reporters are much more numerous and, generally speaking, still quite gullible. Politicians are naturally anxious to associate pleasant result with pleasant action. So are public officials. The difference is that what previously was harmless self-enhancement is now serious public policy. Not many scholars could have been expected to recognize the change; it is normal that the scenario-builders serving the present administration have not done so. And one should not be so mean-spirited or partisan as to imagine that they are the first economists to associate needed result with present applause. As compared with the past, they are only doing this in a more imaginative way.
No one can seriously suppose that, in the past, official forecasts were designed to reflect what was going to happen. That, in the nature of the system, was unknown. Official forecasts were what the particular administration needed to have happen. That is why those forecasts, for anything more than the next six months, always foresaw less inflation, less unemployment and a more vigorously expanding economy. The six-month interval is important; by rough calculation, that is the time in which any forecast will be forgotten. Accordingly, the professional risk in adjusting future result to present need is minimal.
The newly arrived scenario-builders have, it will be seen, only carried this past practice a quantum jump further. Everything good is now foreseen from getting rid of controls, invoking the mystery of monetary policy and reducing taxes. The tax reduction is especially important, for, more than anything else, it invites the current applause.
That is because what is called public opinion in our republic, a somewhat neglected point, is strongly correlated with tax bracket. A major corporation executive, an affluent establishment lawyer and, needless to say, a well-paid author have a much better chance of getting their views before the public than the average day laborer or even a cab driver. And it is also implicit in the free enterprise system that men and women take a thoughtful view of what affects their income.
However, in this careful day and age, no one of substantial means can urge a tax reduction for its own sake; it must be tied to some superior social purpose, such as deepening incentives, adding to savings, encouraging investment or otherwise invigorating the economy. (The word "incentive" in our time is especially important here; it has become the semantic disguise for the great natural with of the affluent for after-tax money. This economist who proceeds forward from a sizable tax reduction to an unusually benign result (as distinct from the old-fashioned chap who went from the needed result back to the required taxes) is assured of an especially ecstatic cheer.
It will be supposed that, sooner or later, life will catch up with a scenario that is related not to reality but to public applause. What happens if lower taxes, a larger deficit and no restraints on wages an prices more inflation? What if the accompanying monetary policy works by depressing the economy, which is the way monetary policy works? (Not even the most accomplished scenario-builder can combine a recession with a vigorously expanding supply-side economy). If things go wrong, as they will, where does that leave the author or authors?
It leaves them far better off than might be imagined. Their first escape, a well-traveled route, is into archaeology. A continuing or worsening inflation or unemployment can always be blamed on the unexpectedly bad legacy of their predecessors. Richard Nixon's economists attributed their inflation and other failures to the fiscally retarded policies of Lyndon Johnson. He did not move rapidly enough to raise taxes during the Vietnam war. (Tax increases were then considered anti-inflationary.) Jimmy Carter's economists, in turn, told what a bad deal -- inflation combined with deep recession -- they had inherited from Gerald Ford. The legacy of the Carter economists is bad enough so that it can be used to let the new generation of tax-cutting supply-siders off the hook. "It would have worked, but things were really much worse than we expected."
This escape can be combined, in turn, with what can now be called "the no quick fix fraud." Things will, indeed, work out as promised, but no one should expect it to happen immediately. Wait for 1983 or perhaps 1985. Anyone who hears it said that there can be "no quick fix" should never be in doubt. It means "We have really screwed things up, have nothing further to offer, but do be patient. Things may get better anyway." The plea of "no quick fix" is the last resort of the barren economic mind.
Somehow it will still be thought that life will surely overtake economists who risk long-run failure for short-run approval and applause. But that too is quite wrong. Having held high public office, having had that applause from the important and affluent, they will go on to agreeable and moderately remunerative jobs in the private sector. Gerald Ford's economists have done well. Jimmy Carter's men, whose culminating scenario achievement was to combine a recession with an inflation with an election, will have a comfortable passage. It is a very good thing to have been a former high public the chap who brought it off and the one who really loused things up. It is only the principals -- i.e., the presidents (Gerald Ford defeated and at Palm Springs, Jimmy Carter defeated and down at Plains) -- who take the fall.
I think I will relent and give Ronald Reagan one word of advice: Do remember, sir, that your economists have a different career design and a different risk exposure than yours. Does that mean you shouldn't trust them? If they tell you that everything will be fine if you cut taxes, rely on the Federal Reserve, ignore the effect of wages on prices and prices on wages and count on some magically altered business expectations, it sure as hell does.