Page 5


ially the modified 10-5-3 depreciation schedule, which, along with investment tax credits, virtually eliminates taxes for many corporations and provides negative ad in the Wall Street Journal stated: “If your company plans to pay taxes . . . you obviously don’t know enough about the new tax law. Monetarism is not original to the Reagan Administration. It was actually followed by the Fed during the mid1970s and especially after 1979, but is nevertheless an important component of Reaganomics. Reaganomics is based on unrealistic assumptions, lacking credible support in economic theory or the experience of industrial economics. It is inefficient, relying on the theory that tax breaks for corporations and the wealthy will trickle down to ordinary working people and the poor. It is regressive in its impact. And it is internally inconsistent supply-side tax cuts have stimulated the economy while restricted monetary growth has limited expansion, and so far monetarism has been winning the struggle. The huge tax cut and defense spending increases caused record budget deficits. The idea that taxes could be lowered by $750 billion, defense spending raised by $1.6 trillion, and the budget could be balanced by 1984, required, in the words of A. N. Whitehead, “a temporary suspension of disbelief.” In fact, despite rhetoric about balanced budgets, the Reagan budget deficits will be greater than the combined deficits of all Democratic Presidents since Harry Truman. Budget deficits alone in the economic conditions of 1981-82 would actually be beneficial because the economy needs stimulus since it is operating at considerably less than optimal capacity. The trouble has been caused by the combination of continued prospects for large budget deficits for years into the future and restricted growth in the money supply. Investment specialists took the deficits into account because the tax cuts and military spending increases were announced for years in advance. The prospect that the government would require half of a restricted supply of loanable funds to cover its deficits caused high real rates of interest \(i.e., the difference between the consumer price index and the despite declining nominal rates. The real rate of interest was 3 % in 1980, 10 % in 1981, and 7% to 8% in 1982. The longrun rate is between 2 and 3 % and the average rates during economic recoveries is 1.5 to 2 % . The consequences of high real rates of interest and limited availability of funds, especially for small businesses, farmers, construction, durables and other interestsensitive industries, were many. They halted the recovery that was underway in 1981, causing the economy to go into a depression with unemployment over 10 % and likely to continue to rise. The comprehensive unemployment rate is about 15 % . Since the U.S. real rate of interest has been among the highest in the world, funds are attracted to the U.S. from abroad, increasing the value of the dollar. While an overvalued dollar reduces import prices and helps with inflation, it causes American products to be overpriced in world markets, reducing exports, which deepens the depression. In fact, the overvalued dollar more than offset the stimulative effect of the tax cut. High interest rates cause great difficulties for other countries, which are forced to keep their rates high, causing worldwide unemployment and destabilized product and financial markets. Instead of stimulating investment as their policies intended, the Reagan policies actually have restricted private investment. The high real interest rates create disincentives to invest in plant and equipment since it is often more profitable for businesses to keep their money in high-yielding and fairly safe short-term financial assets. Similarly, economic uncertainty aggravated by the Administration’s radical, untried, and internally inconsistent policies make firms unwilling to make job-creating investments. It is much more attractive to use loanable funds for mergers and acquisitions, which increased from $44.3 billion in 1980 to $82.6 billion in 1981. In fact, corporations tied up about $70 billion in lines of credit for merger purposes, which tended to keep interest rates high. The Administration’s tax cut did not stimulate enough producer or consumer demand to prevent the depression. Indeed, the regressive nature of the tax cut stimulated the demand for expensive houses and luxury goods, but not for medium-priced automobiles, houses, and consumer durables, all of which are very sensitive to high real interest rates. The Reaganomics experience suggests the validity of a basic Keynesian principle you will not get much investment unless there is demand for the output to be produced by those investments. It was, in addition, always unrealistic to assume that tax cuts would do much to stimulate investment. There is no credible evidence to support this belief, and there is no credible evidence to support argument that taxes had impaired the incentive to save and invest between 1965 and 1980. The Administration placed heavy emphasis on tax relief to stimulate physical investment, but its policies aggravated by the need to reduce the huge budget deficits its policies created actually have reduced human resource investments, which have been the real secret of America’s economic success: $5.1 billion was cut from education, training, employment, and social security in the 1983 budget. Despite the Administration’s assurance about preserving the safety nets for the “truly needy,” the record suggests that many low-income people will be seriously damaged by the budget cuts: 70 % of the 1982 budget cuts and 90% of those for 1983 affect the poor. With unemployment at the highest level since the Great Depression, public service jobs have been eliminated and the already underfinanced and understaffed Employment Service has been cut back. Medicare is being weakened and AFDC, food stamps for the elderly and disabled, and child nutrition programs are being cut. Only 40 % of the unemployed were receiving unemployment compensation in September, 1982, the lowest proportion in any recession since the system was adopted. Despite the cuts and rhetoric about getting government off our backs, government spending is not likely to decline relative to GNP below what it would have been without the Reagan policies; the main impact if the Administration has its way would be increased government spending, but shifting the mix away from domestic programs to defense and interest payments and from more equitable federal income taxes to more regressive state and local property and sales taxes. However, my guess is the Administration will not be able to cut domestic programs or to increase defense spending by as much as it has planned. The Reagan Administration has rejected the long-held Republican belief that social welfare should be designed to help people help themselves. While creating huge and ineffective tax incentives for high-income groups, the Administration’s welfare reform proposals put a 95 % tax on the earnings of the average welfare recipient. It places faith in workfare, instead of economic incentives for people to leave welfare rolls. There is growing concern that the Administration is encouraging a meanness of spirit, what Richard Munro, president of Time Magazine, termed “a decline in the ethic of common obligation . . . that makes our society a decent place to sustain family life, to reach our individual potential and to live at peace with each other.” The National Council of Churches, censuring an Administration for the 20 MARCH 11, 1983