U.S. economic policy currently operates in a house of media mirrors--a gallery of distorting myths and statistical gargoyles--that panic the policy-makers themselves into blind fits of self-defeating behavior. They raise taxes to fight recession, raid our scarce savings to stimulate the housing industry of the world's most overhoused nation, and ululate over fake data that miss all the dynamics of economic life.
Politicians and editorial writers still talk of "huge tax cuts" on personal income, when in fact, even after the October reductions, 1981 brought an effective 10 percent increase in tax rates for most citizens, as inflation pushed wage earners into higher tax brackets and Social Security hikes continued. The oft-repeated estimate of a $750 billion Reagan tax cut is based on Carter administration fantasies of a revenue boom from a 46 percent increase in tax rates, brought by four more years of bracket creep. But a 46 percent rise in rates would bring a depression, not a boom in Treasury receipts.
These phantom revenues, however, have proven to be President Carter's most valuable legacy to his party. For it is this totally mythological money that is now alleged to have been "given" to the rich through the Reagan tax cuts. But in fact it is only the relatively poor who will pay less taxes in coming years.
Wealthy earners of "unearned" income, who have confronted rates well over 100 percent adjusted for inflation, will see their marginal rates substantially reduced. But the long history of tax cuts demonstrates that the decline in the top rate from 70 percent to 50 percent will actually bring a surge of new tax payments from the rich, as they pay more to the government and less to tax lawyers and accountants. On very conservative assumptions, Michael Evans of Evans Economics, Inc., estimates a net revenue increase of $3 billion from this source alone in 1982.
The media mythology becomes especially bizarre on the subject of interest rates. A generation of Keynesian economists constructed an imposing edifice of spurious capital theory on the assumption that interest rates were low during the Great Depression, when, in fact, adjusted for deflation, they were prohibitively high. Now another generation is misleading policy-makers by speaking of today's real interest rates as at a "historic high" when, in fact, adjusted for inflation and taxes, they have long been close to zero for the dominant savers and borrowers.
With an inflation rate of 5 percent, for example, the saver must receive an interest rate of over 14 percent to receive a 2 percent real return after taxes in the 50 percent bracket where most savings occur. Conversely, individuals and corporations borrowing at high tax levels pay relatively low interest rates after inflation and taxes. Thus we punish the supply of funds (personal savings) with exorbitant taxes on false interest; and we reward the demand for this money with an array of subsidies for favored borrowers and with the deductibility of interest costs. The predictable result is a twisted money and bond market that imposes exorbitant rates on all unfavored borrowers in low tax brackets, chiefly unprofitable companies, start-ups and low-income mortgage seekers.
Nor can tax increases in any way relieve our interest rate problem. Increased income tax rates, effected through bracket creep and deferral of the "cuts," will reduce savings virtually dollar for dollar and also repress activity and tax revenues. Tax hikes retard savings four ways: by taxing most heavily the high incomes from which all net personal savings come; by deterring acquisition of further income still more likely to be saved; by taxing interest income at confiscatory rates; and by lowering incomes and savings in the conventional way explained by Keynes.
Thus President Johnson's infamous surtax of 1968- 69 destroyed savings, increased inflation and interest rates and brought economic collapse in 1970. President Carter followed the hidden tax hike policy throughout his administration and reduced the federal deficit from almost 4 percent of GNP to under 1 percent by 1979. The result of this triumph over the deficit was a complete collapse of personal savings (to 3.6 percent), soaring inflation, doubled interest rates and a deficit that leaped to $60 billion in 1980. Incredibly enough, the Reagan administration followed this path again in 1981, allowing effective income tax rates to rise in an effort to reduce the deficit produced by Carter's tax hike policies. The result is our current predicament: higher deficits and lower growth.
As this decade of experience shows, tax hikes cause deficits by retarding taxable activity, and then exacerbate their effects on interest rates by extinguishing savings. The resultant recession triggers new welfare and other transfer payments that expand the size of government as a share of GNP, while requiring continual cutbacks in popular government spending programs, all in a politically and economically suicidal austerity package that pleases no one but Pete Domenici and other budget-blinded politicians and economists.
While President Reagan has so far failed to achieve substantial tax cuts, he has prevented the catastrophic bracket creep increases projected by the Carter administration and still sought by his opponents. Thus he has allowed the economy to maintain the highest level of employment in the West (58 percent of the adult population) while accepting more immigrants than any other country and opening the way for dramatic economic gains in coming years.
Beyond the hall of media mirrors--distorting and exaggerating the econometric gloom--U.S. industry is moving, at astonishing speed, toward a new era of high productivity and growth. While the television cameras circle like vultures around the decaying carcass of Detroit, and financial journalists recite false figures of capital formation and productivity that totally miss the productive breakthroughs in energy and electronics, the nation's economy has made a dramatic transition into the long-heralded computer age.
Over the next three years, the U.S. computer industry--led by companies like Apple and Osborne, which scarcely existed three years ago--will probably sell more personal computers than the Big Three auto companies will sell cars. Together with only slightly more modest surges in other revolutionary products, such as Computer Aided Design and Manufacture, and in energy production and conservation, this entrepreneurial achievement is well on the way to solving the world's energy and productivity problems and launching the boom of the 1980s. The current dismay about our economic prospects reflects a morbid preoccupation with nearly meaningless statistics, an obsession with the declining industrial structure of the past, and a blindness to the entrepreneurial future.