The Real Reagan Economy

1.

Mr. Reagan’s Council of Economic Advisers asserts that the administration’s economic program “has become a blueprint” for worldwide growth. Recent US economic growth, they write in their 1988 Annual Report, “was shaped by government policies explicitly directed toward fostering the inherent dynamism of the private sector.” “Our proven market-oriented policies”—the words here are Mr. Reagan’s in the accompanying Economic Report of the President—“are being adopted in more and more countries around the globe, as they recognize the high cost of big government and the harmful effects of stifling the entrepreneurial spirit.”

The Council of Economic Advisers’ claim that “market-oriented policies” have been shown to cause (or to “shape”) economic recovery has momentous implications. There were about 30 million people unemployed in OECD economies in 1987, as there have been every year since 1982.¹ While the United States is not the only country in which employment has boomed during this period, it is the largest and the most conspicuous. It is also conspicuous for the consequences of its public policies, such as in the number of people who are homeless; in the rate of infant mortality (a little higher, in parts of New York City, than in Malaysia, or a little lower than in Guyana); in the rate of deprivation (12.3 million children living in poverty, and 31.3 million people without any health insurance); and in the level of underdevelopment (28,000 people without running water in parts of El Paso, and 53,000 without sewers).²

The US economic record has been used to justify right-wing policies around the world. There are international conferences about the “American model,” and about growth through the “structural reform” (or repression) of the public sector. In some countries, such as the UK and other high-unemployment economies of the EEC, Reagan-inspired policies have attracted popular support. In others, such policies have been imposed by international institutions, including the International Monetary Fund; in Mexico, for example, public investment in schools and health clinics has been reduced in response to international pressures, and Sri Lanka has deregulated its food subsidies.³ “From continent to continent,” Mr. Reagan writes in his introduction to the report, “the benefits of privatization and deregulation are becoming appreciated.”

Mr. Bush has proposed more of the same policies for the United States. His campaign statements say that he “strongly supported the 1981 tax cut, which has been the primary engine for…the tremendous economic recovery we have had in our Administration.” He wants further tax cuts, notably in the “tremendous burden” of the capital gains tax (from 28 to 15 percent). There should be “more deregulation,” of transport, energy, health care, and environmental protection. The “first priority,” still, “is to control spending.”⁴

Even Mr. Bush’s opponents accept much of the Republican blueprint. Mr. Dukakis and Mr. Jackson object, convincingly, to the costs of the Reagan policies: for the poor, and for US “competitiveness,” and for the people who will be obliged in the 1990s and 2000s to repay the debts of the last seven years. But they do not, in general, question that these policies have also been responsible for much of the economic recovery.

It is urgent, under these circumstances, to take the argument of the Reagan economists seriously: to see how the US economy has changed since 1981, and to discover what, if anything, that change has to do with the Reagan administration’s policies for “fostering” the private sector. The 1988 economic documents of the federal government—the eight-page Economic Report of the President and the 359-page Annual Report of the Council of Economic Advisers, the Budget of the United States Government, and the National Income and Product Accounts (NIPA) published by the Department of Commerce—provide a fair opportunity to do so. They are the last complete reports of the Reagan period⁵ : the funeral oration of the right-wing economic blueprint. They are also, as it turns out, its confutation.

The US economy described in these documents is virtually the opposite of the idyll described by the Republicans. The policies which Mr. Reagan proposed in 1980—for cutting public spending and reducing public interference—have not been fulfilled, or have not had the expected effects. The policies that have succeeded are those rejected in 1980 by the Republicans: fiscal policies that have been consistently in deficit and monetary policies that have been expansive for much of the time since 1983; international borrowing; and increased public spending for health, social security, and the welfare of private services.

Mr. Reagan proposed in 1981 to cut taxes, eliminate the budget deficit, reduce government spending, cut transfer payments (payments made to individuals for welfare and social security), stimulate personal saving, and encourage profits. Personal taxes have instead increased as a share of personal income; profit taxes are now a sharply higher share of profits; the budget deficit has tripled; transfer payments are a higher share of personal income; the savings rate has fallen to its lowest level since 1947; the share of profits in national income has fallen by one third; and the level of profits has suffered its longest slump since the 1930s.

The US economy, after seven years of Republican big government, is even more dependent on social expenditures than it was in 1980. It has become a welfare society for the well-to-do; a conglomeration of semiprivate pension and insurance and medical schemes, clustered at the edges of the public sector and dependent for its survival on public regulation (of schools, insurance, and nursing homes, for example), as well as on public investment, public tax subsidies, and public payments (such as Medicare and Social Security). Government employment, private services such as employment agencies, schools, and health services, and retail trade, together provided 93 percent of all new jobs in the US economy between 1981 and 1986. These are the same low-productivity industries that provided 58 percent of new jobs between 1977 and 1980. More than 32 million Americans work directly for the government, or in the private health, education, and social services.⁶

But the US is a welfare society for only part of the population. There has been a momentous redistribution of income and well-being since the late 1970s: from the poor to the rich, and also from young people and children to the elderly. Some people are inside the little semi-private welfare states, and other people are far outside. The US has become more snug, in a sense, for the nonpoor, especially for the elderly and for women with good jobs. For the poor and for children, it is something like an underdeveloped country.

2.

“Since the longest peacetime expansion began in November 1982,” according to the Annual Report, “15 million new jobs have been created; production, as measured by real gross national product (GNP), has increased by almost 23 percent; living standards, as measured by real GNP per capita, have grown at an average annual rate of 3.2 percent; and inflation is down from double digits to a 4 percent annual rate.” Most new jobs are for full-time workers, the Annual Report continues, and in high-paying occupations; real compensation (wages and benefits) has also increased.

This is the record of the Reagan years, plus or minus a little lightness of statistical touch. The longest peacetime expansion of the economy was immediately preceded, at the beginning of the Reagan administration, by the deepest postwar contraction in employment. Reagan’s advisers do not often point out that 1.9 million jobs were lost between April 1981 and November 1982. Employment was 102.0 million, on average, for the year 1981, and 114.2 million, on average, in 1987. The record for the entire period from 1981 to 1987 would therefore show not 15 million but 12.2 million new jobs; an increase in real GNP per capita not of 3.2 percent but of 1.8 percent per year (compared to 1.9 percent per year from 1950 to 1980); and an increase in real GNP per person employed of 0.8 percent per year (compared to 1.5 percent per year in 1950–1980).⁷

Inflation had already fallen in November 1982 to an annual rate of 4.6 percent.⁸ Mr. Reagan’s report recalls the “despair” in the US “at the beginning of the 1980s,” in which “amid double-digit inflation and unemployment rates, there were calls for the Federal Government to do more and more.” But “double digit” inflation was on the way down in the last year of the Carter administration and was over by September 1981. The only “double digit” unemployment since 1941 occurred during the Reagan recession, from September 1982 to April 1983.

Mr. Bush, it should be added, has yet a different view. He says in his election material that “the economic expansion of the last four years has created about 14 million new jobs.” This is misleading even by the standards of Mr. Reagan and his advisers, whose statistical appendix shows an increase of 10.8 million jobs from December 1983 to December 1987, and of 11.7 million jobs from 1983 to 1987.⁹

The record is impressive, all the same. It should be seen as a continuation of the extraordinary employment expansion of the late 1970s, or as a Carter/Reagan boom: 2.6 million new jobs per year on average from 1977 to 1980, and 1.9 million new jobs per year from 1981 to 1987. It is impressive, too, by comparison with other countries. The US had relatively high rates of unemployment during the 1960s, ranking twenty-second out of the twenty-four OECD countries.¹⁰ By 1987, its unemployment rate was below the OECD average, and its rank had risen to tenth out of twenty-four. (The unemployment rate at the end of 1987 was 5.8 percent in the US, compared to 0.8 percent in Switzerland, for example, 1.6 percent in Sweden, and 2.7 percent in Japan.¹¹ )

The report somewhat overstates its case by comparing the US only with the other “summit countries,” Japan, Canada, and the four large EEC economies—West Germany, France, Britain, and Italy. High unemployment in developed countries is to a great extent a problem of the EEC. If the OECD countries are classified into trade groupings instead, the US advantage is more modest: in 1986, 8.3 percent unemployment for OECD as a whole, 7.0 percent for the US, 2.8 percent for Japan, 11.2 percent for EEC-Europe, and 2.6 percent for the smaller countries of the European Free Trade Association (EFTA), consisting of Austria, Finland, Iceland, Norway, Sweden, and Switzerland.¹² One of the more intriguing questions of economic recovery is indeed what it is that the “good” countries with high employment—from Iceland to Japan and the US—have in common: the elixir is not, as will be seen, the destruction of public institutions.

3.

The economic indictment of government was set out in the first report of Mr. Reagan’s first Council of Economic Advisers, early in 1982. The deterioration of the US economy was said to be the consequence, to a great extent, of federal policies. High taxes were supposed to have reduced incentives to work and save; transfer payments had reduced employment; and government regulation had increased production costs and reduced productivity.¹³ Nothing in the seventh report of Mr. Reagan’s counter-revolution supports these views, or suggests that reductions in government’s role in the economy have led to economic regeneration.

Taxes are the heart of darkness of the Reagan philosophy. They were cut during the Republican years, and tax rates have indeed fallen—for all except the very poor—and most sharply for the very rich. ¹⁴ But personal taxes actually accounted for exactly the same share of overall personal income—15.08 percent—in 1987 as in 1980. The average share was 14.82 percent in the Reagan years from 1981 to 1987, and 14.67 percent in the Carter years from 1977 to 1980.¹⁵ There was a more pronounced increase in corporate taxes. Liability for taxes on profits increased as a share of before-tax profits from 35.8 percent in 1980 to 50.1 percent in 1987; the average share was 41.1 between 1981 and 1987, up from 35.5 percent between 1977 and 1980.¹⁶

It is difficult, in these conditions, to think of a fair test of the effects of tax cuts on economic recovery. The Reagan economic philosophers would no doubt argue that it is tax rates that are the principal culprit in inhibiting economic activity, particularly taxes on the rich. As they explain in their 1984 report, “Some taxes are more harmful than others…. Taxes do more harm when levied on individuals or activities that are more responsive to tax rules.”¹⁷ The reduction in rich (and thereby “responsive”) people’s taxes might thus be responsible for fostering markets.

The specific effects that were anticipated in the 1982 report are hardly helpful, all the same. Tax cuts were then expected to increase incentives for people to join the labor force, and to work extra hours. But the labor force, and the labor force participation rate, instead grew more slowly between 1981 and 1987 than between 1970 and 1980.¹⁸ Hours worked per employee have also declined since 1981. ¹⁹ There are many demographic and other factors to explain these tendencies, for which the Reagan administration’s tax theory could in principle be adjusted. But the theory is beginning to look distinctly thin: a noncut in taxes has produced a nonincrease in effort.

The effects of tax reform on savings are especially unconvincing. The Reagan economists’ principal argument for tax reductions was that they would increase personal savings. “I cannot emphasize strongly enough,” said the first chairman of the Reagan administration economic Advisers of the first Reagan tax cut, “that this is not a consumption-oriented tax cut…. This is a tax cut which deliberately seeks to encourage productive saving” (and thus, presumably, investment).²⁰

In fact, savings have instead fallen vertiginously, to their lowest level since 1947. The period of productive tax cuts has brought much the most serious crash in personal savings of modern (or post-Depression) times. Personal savings amounted to 7.9 percent of disposable personal income, on average, in the decade between 1970 and 1980, and to only 5.5 percent between 1981 and 1987; the record in the past four years has been, successively, 6.1 percent, 4.5 percent, 4.3 percent, and 3.8 percent.²¹

The Reagan economists make an attempt, under these circumstances, to find more convincing evidence for the benefits of their tax program. The personal saving rate, they write, “has been relatively low since 1982, but the rate of business saving has been relatively high.” But 87 percent of what is described as “business saving” consists of capital consumption allowances—the allowances that businesses make each year for using up fixed capital (as reported, mostly, on Federal tax returns). When these are excluded, statistics show that business saving has also declined during the period of “market-fostering.” ²² Net national saving—the sum of personal, business, and government saving—amounted between 1981 and 1987 to only 3.2 percent of net national product; its average level between 1950 and 1980 was 8.1 percent.²³

The authors of the report also suggest that there are “nonconventional” kinds of saving. They allude to “narrow measures” of savings, to “the standard measure” of investment, and to the savings rate “as officially measured.” They would like to see “broader” measures of savings and investment, incorporating different sorts of expenditure. This is a good idea, I think. It is especially welcome, coming as it does from an administration that has done so much to consecrate savings (in the narrow sense) as a flow “of paramount importance” for economic growth. Low levels of savings need no longer be seen as the source of decline in the bad old times of big government, or high levels of savings as the source of resurrection in the tax cut idyll to come.

The new ways of measuring savings are not particularly encouraging, however, to the conservative position. A modest “nonconventional” measure would add private and public expenditure on education and research to private and public savings.²⁴ These expenditures would presumably be considered as net savings and net investment at one and the same time. The economic advisers suggest that expenditures on education are long-term investments in “human capital” that will eventually produce more national income. The new measure would increase the 1986 net national savings rate from 2 percent of net national product to 11 percent. But it would still not show a surge in savings over the Reagan period, since the extended savings rate would itself have fallen—despite a small increase in nonconventional savings—from 15 percent of net national product in 1981.²⁵

The question of “nonconventional” saving is important and interesting. It would be useful, in fact, if the Reagan economists added a new statistical section on education, training, and research in the appendix to their 1989 Report: a last gesture of respect to the theory of “human capital.”²⁶ But it is unlikely to provide any support at all for the “market-recovery” view of taxes, savings, and economic growth.

4.

The argument that cuts in payments to individuals for welfare and social security—transfer payments—could lead to economic recovery is even weaker, and for much the same reasons. In fact, transfer payments have not declined in the Reagan period. Social Security recipients have not surged into the labor force as they lose their benefits. The poor have not started to save. Transfer payments provided 13.8 percent of personal income, on average, between 1977 and 1980, and 14.9 percent between 1981 and 1987.²⁷ People aged sixty-five and over were discouraged from working, in the view of the 1982 Annual Report. They are now even less likely to work. In 1987 10.8 percent were employed, compared to 12.2 percent in 1980. Of people who live in what the US government calls “poverty areas”—where more than 20 percent of people are “classified as poor”—50.2 percent were employed in 1987, compared to 50.5 percent in 1980. ²⁸

There has been an important change, however, in the composition of transfer payments. Payments to older and richer people have increased, in general, and payments to younger and poorer people have been reduced. Hospital and supplementary medical insurance has become much more important, and so have payments to retired government employees; aid to families with dependent childen (AFDC) has fallen to only 3 percent of transfer payments in 1986.²⁹

The change in transfer payments is consistent with—and to some extent responsible for—an important redistribution of economic well-being in the United States. The distribution of family income became sharply more unequal in the US between 1979 and 1984. The share going to the rich increased, and the share going to the poor fell.³⁰ But the rise in inequality was much less pronounced for the “elderly,” i.e., for people aged sixty-five or over. For people under sixty-five, the real mean income of the poorest families (those in the first “income decile”) fell by 4.7 percent per year from 1979 to 1984; the income of the richest families (in the tenth decile) increased by 2.4 percent per year. For people over sixty-five, real income increased for each income group, from the poorest to the richest.

The poor got poorer, and the young got poorer. Women with children did worse than women without children, and children did worst of all: the median real income of young “family units” (families headed by people under twenty-five, or individuals) fell by 4.1 percent a year from 1979 to 1984; the income of family units headed by an elderly person increased by 3.4 percent a year. The ratio of young families’ income to the income of elderly families thus fell from 112 percent in 1979 to 77 percent in 1984. Women without families got richer, and women who were heads of families got poorer; families headed by young women had incomes in 1984 that were only 29 percent of the median for elderly families.

The redistribution of income had little to do with reductions in transfer payments. The elderly get 36 percent of their income from social security transfers. Increases in these payments actually accounted for much of the improvement in their position between 1979 and 1984 (although benefits paid to the richest old people increased much more than benefits to the poorest). Young families, by contrast, get 89 percent of their income from earnings, and less than 1 percent from social security. Their earnings fell sharply from 1979 to 1984, and this was enough to account for the entire reduction in their income.

The increase in social security payments does not mean, of course, that life has improved for poor people in America. The deterioration of their situation during the 1980s is in fact far worse than can be explained by changes in the composition of transfer payments, or even by changes in the distribution of income. “Long term economic progress is assessed not only by output and productivity,” the Reagan advisers write at one point in their report, “but also in terms of the means and choices that allow people to enjoy full, healthy and satisfying lives.” One “indicator” of “well-being,” they suggest, is the long decline in US infant mortality rates. But the effect of their policies, by these standards, has been to reduce the freedom of tens of millions of people.

The conditions of economic life, according to the economist Amartya Sen, can be measured by “the freedom enjoyed by members of the nation,…e.g., freedom from hunger and under-nutrition, freedom from escapable morbidity, freedom to read and write and communicate.” ³¹ These sorts of measurements are usually proposed for underdeveloped countries. They are appropriate, therefore, to the circumstances of underdevelopment in the United States. (They may also suggest a generally better theory of economic well-being, but this is a different matter.)

The freedom to survive is a beginning. About 40,000 infants under a year old die each year in the US, or 17,000 more than would die if the US had the same rate of infant mortality as Finland. In 1985 250,000 were born at a low birth weight (under 2500 grams). The rate of low-weight births, which decreased steadily from the mid 1960s to 1980, has leveled off and even started to increase. The decline in infant mortality rates has also leveled off, and is increasing in places like central Harlem: “In these dilapidated buildings,” according to the New York City health commissioner, “infants who survived the first weeks of life are dying of pneumonia, freezing to death, falling from windows.”³²

The rate of immunization against childhood diseases has declined in the US throughout the 1980s. By 1985, only 40 percent of nonwhite children under five were fully immunized against polio. Almost half a million children are malnourished, according to the Children’s Defense Fund. In New York State alone, there are 97,000 children under sixteen who are “heavy drug abusers”—and fewer than 150 spaces for them in publicly financed residential drug treatment programs.³³

The conditions of life and death for children are not generally determined by transfer payments, or even by income and its distribution. There are eighteen countries with lower per capita income than the US, and lower rates of infant mortality. But the freedom to live and make choices is influenced, in all countries, by the public provision of essential services. UNICEF promotes (public) “vaccination days,” even in Lebanon and El Salvador, and the World Bank supports the construction of public sewage systems. In the US, these services have been reduced as a matter of government policy.

State and local governments, according to the current budget documents, “have the major role in providing domestic public services.”³⁴ Federal grants-in-aid—for elementary and secondary education, health and hospitals, community development and urban renewal, water and sewage, and training—may thus be considered as the main Federal contribution to public services affecting children. They amounted to $19.1 billion in 1986. This is a very small sum by the standards of the US government: only 1.3 percent of total Federal expenditures, or equivalent to a little over half of what is spent each year on military aircraft. It has fallen from $24.7 billion in 1980; the grants have been cut in real terms by 9 percent per year. ³⁵

“The quantity and quality of labor” determine economic progress, the Reagan economists write. They perceive “rationales” for government support of “human capital investment,” notably in higher education and research. But the human capital of the poor—the quantity and quality of their lives—is a matter of lesser importance, apparently, and has been given less public support.

5.

The third count in the Reagan administration’s initial indictment of government economic activity was that public regulation of business had led to economic decline, or at least to slow growth of productivity. This was one of the more cogent (or less incoherent) elements in the 1982 Annual Report. The Reagan economists can now suggest that the reduction in the “role of government” has “shaped” a “market-oriented” economic recovery. But the evidence in the Report turns out, once again, to be less than helpful.

One indicator of the government’s “role” in the economy is the extent of the government deficit, or the difference between what governments spend and what they receive. This old and trusted indicator stood at $10.6 billion, on average (or – 0.4 percent of GNP) between 1977 and 1980, and at $108.9 billion ( – 2.8 percent of GNP) between 1981 and 1987.³⁶ The explanation for the rise is an increase in government spending, and not a reduction in taxes. Government receipts have increased by 0.6 percent of GNP from the earlier to the later period. Defense spending, meanwhile, accounted for less than half of the increase in spending – 1.2 percent of GNP—while nondefense government spending increased by 1.8 percent of GNP.

Defense spending, after seven years of misconceived military expansion, still accounts for less than 30 percent of total federal government spending. Overall government spending increased as a share of GNP from 31.5 percent between 1977 and 1980 to 34.6 percent between 1981 and 1987; and within the Reagan-recovery period from 33 percent in 1981 to 35 percent in 1987. The increase remains when defense is excluded from total spending, and when the government’s role in the economy is defined as government “consumption” (or purchase of goods and services). The sternest measure of government spending that is held to threaten the market—the compensation of nondefense government employees as a share of GNP—increased from 7.9 percent in 1981 to 8.1 percent in 1987.³⁷

Even within the “private” sector, the Reagan years have favored the economic activities that are most dependent on government. National output may be divided into the product of three sectors, business enterprise, nonprofit institutions, and government. Business is much the largest of the three. But its relative position has decreased since 1981, while that of government has increased slightly, and that of the nonprofit sector has increased most.³⁸ Nonprofit institutions now constitute an “industry” with an output somewhat larger than that of the motor vehicles and electric and electronic equipment industries combined, and they employ about eight million people, whether in hospitals, museums, universities, or day-care centers, for example.³⁹ They mostly supply health, education, and social services: the same services in which business enterprise has flourished during the Reagan years.

The welfare society of the 1970s and 1980s has brought a flourishing growth of semi-government, semi-regulated sub-economies, clustered at the edges of the public sector. “Benefits paid by private pension and welfare funds,” for example, amounted in 1986 to $236 billion—the equivalent of 11.3 percent of wages, compared to 8.7 percent in 1981, and 5.4 percent in 1973. Together with government benefits paid out of social insurance funds, they amounted to over $600 billion, or 29 percent of wages.⁴⁰

The private welfare societies are dependent on past and present government policies: investment in health and education, regulation of insurance and pensions and health provision, and the favorable treatment of private insurance in the Federal tax system. Employer contributions for health have been excluded from taxable wages. The Reagan Council of Economic Advisers in 1985 described this practice as “the tax subsidy for health insurance.” Government also, as the council pointed out, pays for more than 40 percent of health expenditures.⁴¹

The rise of private welfare funds is not, of course, the consequence of the Reagan administration’s policies. It has continued steadily throughout the postwar period. But the rate of increase in benefits has been more than twice as great, in relation both to GNP and to wages, between 1981 and 1986 as between 1950 and 1980.⁴² The Reagan reforms have done little, once again, to interrupt the long-term socialization of the American economy; they have actually encouraged the social welfare of the well-to-do.

The growth of the semiprivate welfare state could be seen as a triumph of the entrepreneurial spirit. People might be said to have a “preference” for security, and it has been satisfied outside government. The government does not, at least, provide directly for people’s needs. The first generation of Reagan administration economists was fond of “market-like devices” (“reliance on devices which simulate market operations where intervention is the desired policy,” such as private insurance against unsafe factories, and “market judgements about the value of safety.”⁴³ ) The little welfare societies made up of private pension, medical, and welfare funds are “State-like devices”: institutions that simulate government operations, in an ideology where free enterprise is the desired policy. But they are dependent on government, and, for a great many people, their output is something other than security.

The market welfare state excludes tens of millions of Americans at the periphery of the full-employment economy. There are still some 6.8 million people who are unemployed, and therefore without the “other labor income”—employer contributions to private pension and welfare funds—that employed people receive in nonwage compensation. A further 20 million work part time. One million are employed in the “temporary help supply services” industry. Another 9.7 million are self-employed.⁴⁴ All these people are to a greater or lesser extent outside the security of private health and welfare benefits.

The distribution of social benefits is notably unequal, even for the employed. Employer contributions to private and social welfare have increased faster than wages and salaries. But the consequence has been to increase the inequality of total compensation over what it would otherwise have been. Employees in the industry with the highest “supplements to wages and salaries,” petroleum and coal products, receive extra income worth $18,300 per year. This is more than fourteen times as much as the $1,300 of extra income received by people in the “personal services” industry. The spread for wages and salaries is a more modest five-fold: $59,800 per year in security and commodity brokerages, compared to $11,400 in retail trade.⁴⁵

The security of private welfare dwindles away to very little at the bottom of the employment scale. Fifty percent of all private employees work in the “consumption services” of retail trade and services, and they receive only 25 percent of employer contributions to private welfare funds. Workers in the highest paid industry group (communications) earn 2.1 times as much per hour as workers in the lowest group (retail trade); their total compensation is 2.4 times as great; and their private benefits are 6.5 times as great.⁴⁶ The distribution of benefits is similarly skewed by occupation. Managers earn 3.6 times as much per hour as service workers; their private benefits are 5.6 times as great; and their private pension benefits are 7.3 times as great.⁴⁷

The rise of the market welfare-state institutions thus shows much the same tendencies as the rest of the Reagan economy. The administration’s reforms have not reduced the size of government, and they have not inhibited the long-term transformation of the US economy into a semiprivate welfare state. This has been good for employment, as will be seen. It has been good for people who have secure jobs, or political power, or who are represented by labor unions.⁴⁸

It has been better, as has been said, for the old than for the young. Private pension benefits have increased 300 percent since 1980. But the proportion of the population covered for hospital expenses by private health insurance has fallen from 82.5 percent in 1980 to 75.4 percent in 1985. Many of the people who have lost coverage are children; the main decline has been in “individual and family policies,” presumably among low-paid workers who can no longer afford coverage and have no group insurance. At the beginning of the Reagan administration, according to the 1982 Economic Report, twenty-three million people (or 10 percent of the population) had no public or private health insurance. In 1985, there were 31.3 million Americans (or 13 percent of the population) who were not covered by any health insurance at all, and more than half of them were children or young people. Eighteen percent of people under twenty-four had no insurance; and only 1 percent of people over sixty-five.⁴⁹

Even for the elderly, finally, the welfare boom has been far better for the rich than for the poor. Some 1.3 million elderly Americans live in nursing homes, and three quarters of the nursing homes are controlled by profit-making businesses. These nursing homes now face “severe problems,” bankruptcies, forced sales, and declining health and safety standards. The successful companies favor “private payers” and “people who can recover with therapy.”⁵⁰ Medicaid patients and people with expensive illnesses are worst off of all.

6.

The insidious role of government, according to Mr. Reagan’s first Economic Report, was “far deeper and broader than even the growing burden of spending and taxing would suggest.” The government’s “vast web of regulations” had adversely affected productivity. But the growth of Federal regulation was already slowing down, at least “as suggested by a 27 percent decline in the number of pages in the Federal Register.” This would lead, it was anticipated, to faster growth in productivity: “Regulatory reform will make its greatest impact in raising productivity and reducing costs.”⁵¹

The authors of the present report claim that there has been an “accelerated growth of productivity” since 1981 and that it is the result of “a general approach to policy that emphasizes reliance on the private sector.” Mr. Reagan himself points to the worldwide appreciation for the benefits of deregulation. But the Reagan economists provide no convincing evidence of a causal relationship between growth of productivity and deregulation. The improvement of productivity through deregulation is still—after seven years of effort by the “Task Force on Regulatory Relief” and its chairman Mr. Bush—a matter for “the years ahead.”

The Reagan economists were probably right to attribute part of the decline in growth of productivity in the 1970s to government policies, especially those having to do with safety and the environment. The policies reflected a relatively sudden change in people’s preferences, or in their “judgements about the value” of the physical environment. These judgments were embodied in increased regulation during the Seventies. But the “problem” is one of preferences more than of regulations. The mining industry, for example, produces less pollution and has fewer accidents than it did during the 1950s. Most of the administration’s “reforms” have in any case been concerned with regulations that are far older than the environmental legislation of the 1970s.

The “accelerated growth of productivity” is itself distinctly modest. Output per hour increased by 1.6 percent per year between 1981 and 1987, compared to an average of 2.7 percent per year between 1950 and 1970, and 1.2 percent per year between 1970 and 1980. The US still has among the lowest rates of growth of productivity of any OECD country.⁵² The most plausible explanation for the slight improvement in the 1980s has nothing to do with the Reagan reforms; it is a matter, rather, of the rapid increase in business investment during the expansion of the Carter period.⁵³

The only specific argument in the report about recovery and deregulation, that “deregulation substantially improved productivity and efficiency in the transportation sector,” is not at all convincing. The deregulation of transport was largely an achievement of the Carter administration—in the Airline Deregulation Act of 1978, for example, to which the report devotes several pages—and it has had various good effects, such as some reductions in the price of air tickets. These good effects do not include increases in productivity. The “product” of the transport industry—the value of the air tickets and freight services it sells, less the value of the fuel and advertisements it buys—has increased more slowly than its employment. Output per hour in transportation, according to Labor Department statistics used in the Report, increased by 2.1 percent per year from 1950 to 1970, and by 2.6 percent per year from 1970 to 1978: it fell by 0.8 percent per year from 1978 to 1986.⁵⁴

The deregulation of the financial industries was even less helpful to the Reagan economists’ view that the rise in productivity resulted from a decline of the government’s role. Employment in financial services has boomed during the recent expansion, notably in credit agencies and security brokers.⁵⁵ But the output produced per person in financial industries—the value of brokerage services sold, for example, less costs for messengers and supplies—was lower in 1986 than in 1980. It was lower, even, than in 1950.⁵⁶

There is one industry—agriculture—in which the “role of government” has increased sharply during the Reagan period. The economic advisers are admirably open about this failure of “market-oriented policies.” They show, in their chapter on trade, that effective subsidies to US agricultural producers “doubled in the four years from 1982 to 1986.” Federal government expenditure on agriculture has been almost three times higher in the Reagan than in the Carter period.⁵⁷

This is the consequence of congressional as well as executive policies. The Reagan economists mention what they call “pork barrel” amendments—such as subsidies for tobacco exports and US sugar refiners. But agriculture, meanwhile, is the undoubted star of productivity growth, as it has been throughout the postwar period of government intervention. Farm output per hour increased by 4.2 percent per year between 1950 and 1980, and by 6.4 percent per year between 1981 and 1986.⁵⁸

7.

The “benefits of privatization”—or of selling government operations to private industry—are missing, finally, from the Reagan economists’ paean to market-oriented recovery. They appear several times in President Reagan’s own statement (as an “important element” in the economic program, glowing from “continent to continent” and even into China), only to vanish virtually without trace in the contribution of the Council of Economic Advisers.

The main discussion of privatization is to be found in the 1989 Budget documents. A “Commercial Space Initiative” will “expand the free enterprise system into space,” or into a twenty-first century SDI/”CSI” empyrean, already bustling with war-fighting mirrors. US Customs Service inspection services might be sold (together, presumably, with much of the “War on Drugs”); the uranium enrichment “business” may also be up for sale.⁵⁹

Privatizing federal prisons is another prospect in the Budget initiatives.

Prison population has grown by over 84 percent during this Administration, partially in response to vigorous Federal law enforcement. As a result, Federal prisons, designed for a population of 28,000, now house over 44,000 offenders.

The Reagan administration therefore proposes pilot projects to test the private “construction, financing, operation and maintenance” of prisons. In state and local prisons, after all, “private sector firms have successfully incarcerated inmates from all security levels.” They have also adopted an ingenious, if not entirely free market arrangement: prison leasing, or the “lease/purchase agreement, in which a private investor underwrites the lease arrangement for tax advantages.”

The economic advisers’ reticence about “privatization” is to their credit. The two visions of “privatization” and “deregulation” are not, in principle, complementary.⁶⁰ Turning government operations over to the private sector can lead (like deregulation) to a new process of reregulation. The Budget documents even have some evidence that the cycle has already begun. The calculations in the Budget show a modest decline in federal civilian employment during the Reagan period (although the total increases when civilian defense employees are included). Employment is falling sharply in the Postal Service, for example, and in Health and Human Services. But it is increasing elsewhere, and notably in new jobs whose function could be described as tidying up the debris of tax cuts, or of deregulation.

At the end of the Reagan reform epoch, federal employment is increasing in the Department of the Treasury: the “dominant component of this increase is for the Internal Revenue Service.” It is also increasing in the Federal Aviation Administration: “for air traffic control, safety inspections, security, and systems maintenance.” There is a further large increase for the Securities and Exchange Commission: “increases are required as the result of rising workload due to fundamental changes in the securities markets.” Even the Federal Deposit Insurance Corporation is expanding, after seven years of market-oriented recovery: “This increase relates to heavier workload for the Corporation because of the rise in the number of troubled banks.”⁶¹

8.

There are two respects in which the statistical evidence I have described is unjust to successive groups of Reagan economists. They have been forthright, in the first place, in expressing their unhappiness with “standard” or “official” statistics. The economic role of government, they suggest, is inadequately measured in the conventional system. Some of their suggestions have been trivial (such as counting the pages in the Federal Register). Other suggestions have been awkward for free enterprise ideology: that public expenditure on education, for instance, should be included in measures of investment and savings; or that economic progress should be measured by decline in the mortality rate. But their openness to unconventional measurements is one of their principal merits.⁶² Their view of economic recovery deserves to be judged, eventually, by more inventive economic criteria.

The second injustice is more elusive. Mr. Reagan and his advisers often allude to a spiritual view of economic recovery. The “spirit” of enterprise was in 1980 “still there, ready to blaze into life.” The sources (or “vital forces”) of economic growth were essentially psychological: “creativity and ambition,” or “the motivation and incentive of our people.” The first object of the new economic policy was therefore to “rekindle the Nation’s entrepreneurial instincts.” Its instruments were political as well as economic reform, and in particular the reduction of government.⁶³

This view of recovery is evidently convenient for Republican economists. Economic growth, they suggest, can be explained by noneconomic forces. The blueprint for market-oriented resurgence is no longer dependent on such confining economic indicators as taxes, transfers, savings, and the extent of government. There is no reason, on such a view, that the Reagan policies must succeed in order to be successful. The declaration of an intention to reduce government or increase profits may improve the national spirit, even though the policies do not then succeed. The fortunes of the very rich and the very poor may rekindle the instincts of everyone:

In society the extreme parts could not be diminished beyond a certain degree without lessening that animated exertion throughout the middle parts…. If no man could hope to rise or fear to fall, in society, if industry did not bring with it its reward and idleness its punishment, the middle parts would not certainly be what they are now.

This was Malthus’s view of the invigorating psychological effects of inequality, and it has not really been out of fashion since the 1790s; it is an argument, of sorts, for spiritual recovery.⁶⁴

No effort has been made here to describe the psychological view of economic recovery. This is unjust, no doubt. But there are limits to the spiritual hypothesis. The most obvious economic role for euphoria is to explain otherwise obscure increases in investment. People are thought to be exhilarated because of increases in profits or reductions in taxes, and they therefore exert themselves to invest.

There is no need, in the 1980s, for such spiritual explanations, because there has been no increase in investment. Investment accounted for a much lower share of national product during the Reagan administration than in the preceding years. Gross private domestic investment amounted to 17.5 percent of GNP, on average, between 1977 and 1980, and 15.9 percent between 1981 and 1987. The fall in net investment (as a share of NNP) was even sharper: from 7.8 percent to 5.2 percent.⁶⁵

Even the “surge” in profits after 1981 cannot explain economic growth and entrepreneurial euphoria—because there has been no surge in profits. The share of profits in national income has instead plummeted in the Reagan period: from 12.1 percent, on average, between 1977 and 1980 to 7.5 percent on average between 1981 and 1987. These are figures for profits before tax and before adjustments for capital consumption allowances. The plunge has been even more serious for after-tax profits. Corporation taxes have increased, as already noted, and after-tax profits have fallen from 7.8 percent of national income between 1977 and 1980 to only 4.5 percent between 1981 and 1987.⁶⁶ The Reagan administration has increased government spending, increased transfer payments, increased the Federal debt, and invented unprecedented disincentives to private saving; it has also presided over the most sustained fall in profits since the 1930s.⁶⁷

9.

What is there, then, in the “market-recovery hypothesis,” that can explain the US economic success in creating employment? There is very little. Each of the propositions in the original indictment of government has turned out to be unverifiable, or irrelevant, or both. The Reagan policies for reducing the public sector have been postponed, or compromised, or revised so that they hurt only poor people, children, and people yet to be born.

The question remains why the US has done so well. Part of the explanation is to be found in policies that the Reagan economists rejected in the early 1980s. They have postponed “right-wing” policies, and adopted policies that are more or less “left-wing.” The current economic advisers now emerge as open exponents of fiscal and monetary expansion:

When appropriate, judicious easing of monetary policy and increased spending on worthwhile public investments can contribute to demand and output growth.

They have discovered national “macro-economic” policy and have embraced it with the wide-eyed admiration of the newly converted: “The Federal Government’s budget has the attractive property of providing the economy with automatic stabilizers.” They have added $1.5 trillion to the federal debt.⁶⁸ They have combined a (“left-wing”) enthusiasm for international indebtedness with the (“right-wing”) ability to get unlimited credit. The US has borrowed $530 billion from the rest of the world during their period in office. ⁶⁹

There are other, relatively simple explanations for the US success. The expansion of employment in low-productivity services has continued, uninterrupted by reductions in the government spending that supports private welfare services. In the 1980s as in the 1970s, the US employment boom has been at the expense of—or the consequence of—very slow growth in output per person employed.

The high-employment service economy of the US is still an extraordinary phenomenon, at least by the dispiriting standards of most other OECD countries. It is in some respects, and for some people, a “welfare society.” The US model of recovery has in this sense—as well as in some of its international aspects—a surprising amount in common with a “Japan/EFTA” model of growth with government interference. The new US jobs are in some respects, as the Reagan economists argue, in high quality and high-paying occupations. But the high jobs produce low output, and the improvement has been almost entirely for women rather than men. The money borrowed has been used to create jobs for truck drivers, medical managers, and financial salesman. These and other explanations for the US “economic success” will be the subject of a second article.