The Morning After

Today the ability of the American economy to provide rising incomes and expanding job opportunities is in greater doubt, and at greater genuine risk, than at any other time in recent memory. Even during the record-length business expansion that began in 1983 and ended in 1990, growth in US productivity was sluggish and the average American worker’s wage failed to keep pace with inflation. The 1990-1991 recession may have been mild in the aggregate—the increase of unemployment to 7.8 percent of the labor force in June does not approach the 10.8 percent unemployment rate in 1982—but it has affected companies and social groups that used to be thought immune from ordinary business downturns. Worse yet, there is little confidence that even after the recession is well behind us our economy will be able to provide a rising standard of living for most of the nation’s families. If it cannot, then in the years to come that economic failure will surely threaten the general character of American society, and it will sharply circumscribe the role that this country plays in world affairs.

Among the disparate forces that have combined to bring about these doubtful prospects, the one that can be most directly confronted is the now chronic drain on the nation’s saving caused by the federal government’s borrowing. Put in the simplest possible terms, the problem is that what we pay in federal taxes now amounts to 19 percent of American incomes, while what the government spends adds up to 24 percent. Closing this imbalance, if we are to close it, means either raising tax revenues or cutting government spending, or both in some combination. But a coalition of those who fear higher taxes and those who dislike much of what modern governments do anyway (often the same people) has firmly blocked the first solution, while those who are committed to (or rely on) what the government does have just as firmly blocked the second.

While this political deadlock persists, so too does the government’s budget imbalance and, consequently, the crippling drain on our saving. On average during the last ten years, the entire net saving of both American families and businesses amounted to 6.2 percent of our national income. The federal government’s deficit absorbed 3.7 percent of national income. We therefore go on, year after year, investing less than we should in just about all of the makings of a strong economy—factories and machinery, most obviously, but also research, worker training, bridges, airports, and the like—and both incomes and job opportunities have stagnated for a large majority of our citizens.

The initial enthusiasm for Ross Perot’s abortive presidential candidacy, notwithstanding his lack of details about the “waste” he would eliminate, or for a balanced-budget constitutional amendment, notwithstanding fears that in practice such a measure would not work anyway—might seem to have suggested that Americans have finally started to wake up to what has happened to their economy. If so, the mechanism at work is not any shrill alarm but the slowly growing awareness of concern on the part of many people for their economic well-being and that of their children. After the euphoric stupor into which so many Americans lapsed during the Reagan years, their critical faculties dulled by the President’s unique combination of inspiring bluster and empty yet soothing promises, the current signs of dissatisfaction may foretell positive action. As this year’s election campaign stumbles forward, the increasingly visible uneasiness of the country’s political establishment, including both major parties, suggests that some of the nation’s leaders may at last be shocked out of their customary complacency.

At the same time, fear for oneself and for one’s children is often not the best inspiration to cool-headed assessment of economic problems. Thus far in the election campaign popular discontent has concentrated largely on the recent business downturn, which still continues in some industries and some parts of the country. The real problem, however, is something more fundamental than just a business recession. The all too familiar newspaper reports that this year’s graduates face the worst job prospects in fifty years clearly reflect more than just the increase of about two percentage points in unemployment since the recession began.

The real problem is that, even apart from the recession, the American economy has stagnated. Overall economic growth during the three years since President Bush took office has averaged 0.6 percent per year above inflation, not even enough to keep up with a population that is increasing by 1 percent a year. This pace of growth is below that of any other three-year period in America since World War II except 1980–1982, when the Federal Reserve system, with the support of presidents Carter and Reagan, raised interest rates to record levels in order to brake accelerating inflation, and in the process pushed unemployment to nearly 11 percent. By contrast, the economy’s sluggishness today is not the tangible cost of any significant further progress in slowing inflation. It is simply the stagnation caused by our decade-long failure to invest in the ingredients of economic growth.

For a while, earlier this year, it appeared that a misdirected concentration on the recession might lead to some foolish, even counterproductive, new policy. President Bush’s publicity trip to the shopping mall was harmless enough, but potentially dangerous proposals were also made in Congress and the press for fiscal stimulus measures such as general-purpose public works programs or restored tax shelters for commercial real estate. Unless they were promptly canceled once full employment was achieved, such programs would only have detracted further from the economy’s ability to produce growing numbers of well-paying jobs. Greater amounts of consumer spending, or credits for the construction of still more empty office buildings, are not the answer.

What the American economy needs is more investment: in new factories, new machinery, new research, new infrastructure, and a better educated work force. President Reagan was right when he said that boosting US productivity and competitiveness would require devoting a larger share of our incomes to new investment. But Mr. Reagan’s budget policies, combining across-the-board tax cuts with a major defense buildup and protection of extremely expensive entitlement programs such as Social Security and Medicare, soaked up so much of scarce US saving that, since the early 1980s, the nation has devoted a smaller share of its income to net new investment than at any other time since World War II.

The inevitable result has been sluggish growth in productivity, stagnant real wages, and declining job opportunities—and not just for the recent college graduates whose plight makes the front page, but especially for the high-school-educated young men and women who have traditionally looked to the country’s assembly lines and construction sites as their opening to middle-class life. While the earnings of male college graduates gained 8 percent compared to inflation during the decade that preceded the recession, earnings of high-school-educated men fell 19 percent. The equivalent comparison for women showed a 19 percent gain for college graduates versus a 6 percent decline for high-school graduates.

It is no surprise, therefore, that the infectious boosterism inspired by Ronald Reagan’s reckless fiscal experiment eventually gave way to a disappointment that now seems equally infectious, and that has politicians in both parties so worried. In other times and other countries, the combination of stagnating incomes and widening inequalities has often been a recipe for wholesale disenchantment with a nation’s established political leadership. From an economic perspective, it is a combination of forces from which a candidate such as Ross Perot—or, less benignly, David Duke—is created. Disillusion over the past, discontent with the present, and, worst of all, fear for the future are increasingly evident.

Two new books assess this situation from sharply different perspectives. Robert Bartley, editor of The Wall Street Journal, follows the lead of much of the popular self-help literature by arguing that the problem is mostly in our minds. In his view, the Reagan economic program delivered on all its promises and then some. The message of his book, The Seven Fat Years, is that we’ve never had it so good. We’re just too foolish to realize it.

The dominant theme running through Mr. Bartley’s book will be familiar enough to anyone who has ever felt the frustration of inadequate recognition or unfair rejection, either real or perceived: Why doesn’t everybody admit that I make the best blueberry pie, or throw the hardest fastball, ever seen in this town? Why can’t people see the enormous contribution of my ideas to intellectual discourse?

The specific frustration voiced by Mr. Bartley is that so many Americans do not now look back on the 1980s as a stunning economic success, the best they’ve ever had. Because they fail to recognize the country’s economic transformation during the last decade for the grand achievement that it was, they likewise fail to acknowledge the fundamental contribution of the ideas behind it. And, not incidentally, they therefore fail to recognize the contribution to the republic (in some chapters, to the world) made by the small group of men—Mr. Bartley is explicit about his own efforts as one of them through the Journal’s editorial page—who conceived these ideas, popularized them, and ultimately sold them to the nation’s policy makers.

Mr. Bartley does more than just whine over the lack of public acclaim for his ideas, however. He also provides much genuinely useful—in some cases, really excellent—discussion of economic ideas. But too often, he mars otherwise valuable presentations of basic economic concepts by his need to sneer at whatever elements in the analysis might undercut his praise for the policies of the Reagan years.

The main reason that economic policy issues often embody questions that are difficult to answer is that two or more forces are at work simultaneously, tugging the relevant aspects of economic behavior—how much people will save, or how hard they will work, or whether firms will raise or lower prices—in different directions. Knowing just how the economy will respond to any specific policy therefore requires a quantitative judgment of which of these opposing forces will outweigh the others. That, in turn, requires some base of empirical evidence. But often Mr. Bartley, after offering the reader an account of opposing influences on behavior that appears to reflect genuine understanding, instead resolves the question of which one dominates the other by ridiculing one half of what he has just written. He also applies this technique of argument by mockery to issues that are not just empirical but logical.

For example, when it suits his purpose to do so, Mr. Bartley expounds enthusiastically the idea that taxpayers do not care whether the government raises funds by taxing them or by borrowing in the market, on the ground that people are sufficiently farsighted to anticipate the future taxes that will be needed to service the government’s debt obligations, and so they adjust their spending accordingly. He writes:

Indeed, a perfectly rational public sector [i.e., the tax-paying public] would recognize that in the future it would be taxed to repay the bonds it now receives [i.e. the bonds that are issued on the public’s behalf], and would set aside some savings for that purpose. That is, government saving would decrease through the deficit, public savings would increase, total national savings would be unaffected; so nothing would change because the government chose to tax later instead of sooner.

Mr. Bartley then goes on to dismiss as “esoterica” the objection that taxpayers may indeed care because some cannot borrow as cheaply as the government and others cannot borrow at all. One suspects that the typical taxpayer might instead see his limited ability to borrow as hard reality and regard as esoteric Mr. Bartley’s argument about the “perfectly rational” response he should make now to anticipate the government’s payments on its debt years in the future.

Parts of Mr. Bartley’s discussion of economic questions also exhibit strange inconsistencies. On one page he writes that dollar exchange rates cannot determine the extent of US foreign trade, but two pages later he argues that movements in exchange rate can “open and close factories, destroy and create jobs,” presumably because whether people buy American-made goods or those produced abroad depends, at least in part, on their comparing costs in equivalent currencies. He also writes “growth, not recession, is the best anti-inflation medicine”; yet just before, and just after, saying this, Mr. Bartley makes it clear that Paul Volcker’s tight monetary policy in 1981–1982 successfully slowed inflation by putting the economy through a severe recession.

After questioning the importance of government deficits on the grounds that “a perfectly rational public sector” will adjust its behavior in anticipation of the government’s future debt service burdens, Mr. Bartley devotes a lengthy discussion to the adverse impact of our accumulating Social Security obligations, apparently without realizing that the same argument about why ordinary budget deficits do not affect aggregate saving would, if true, apply to Social Security as well.

Not surprisingly, the aspect of Mr. Bartley’s review of the last decade that is least satisfactory is his treatment of the Reagan deficit. The heart of the problem, I believe, is his failure to distinguish the consequences of government deficits in an economy with a large amount of unused productive resources from the quite different effects of deficits at approximately full employment. At least in this respect, Mr. Bartley has plenty of company. But that does not make the resulting analysis correct.

Mr. Bartley is right in arguing that the government’s deficit during 1982 and 1983, and perhaps even during part of 1984, stimulated business activity in general and investment along with it. With millions of workers unemployed and hundreds of factories idle as a result of the Federal Reserve’s efforts to slow inflation, the combination of additional government military spending and the additional private spending made possible by tax cuts stimulated sales in many industries and helped put people back to work. Widely publicized fears that the growing deficit would somehow “abort” the economic recovery lost sight of the simple proposition that a fiscal policy that both lowered taxes and increased public spending was bound to expand economic activity when there was ample room to expand it.

Although Mr. Bartley greatly exaggerates when he labels opposition to government deficits even in an under-employed economy as “conventional wisdom,” such criticisms of the deficit certainly were made and they were wrong. (In these parts of his book, Mr. Bartley appears to be trying to settle an old score with David Stockman, who, both in a widely publicized interview in The Atlantic Monthly and especially in the book that he wrote after leaving the Reagan administration,¹ stated not only that the Reagan fiscal policy was based on faulty economic analysis but that the arguments used to defend it publicly were disingenuous.)

However, once the economy had regained approximately full employment of its labor and capital resources, the effects of budget deficits changed, while the Reagan fiscal policy did not. Persistent large deficits after 1984 no longer stimulated economic expansion, but mostly drained away scarce saving that would otherwise have financed investment—either in addition to or instead of the investment financed in those years by borrowing the savings of foreigners (probably some of both). Additional new factories and machines would have helped prevent the stagnation that has caused so many Americans to sour on the Reagan administration policies that Mr. Bartley continues to admire. Using our own saving instead of foreigners’ would have avoided the accumulation of our now enormous foreign debt.

Mr. Bartley never squarely confronts what many critics regard as the central feature of the Reagan fiscal policy: chronic large government deficits and borrowing even during peacetime full employment, with the result that the share of national income invested during the 1980s fell, by some measures, to the lowest level of any decade since World War II. In part he relies on the already mentioned argument that deficits really do not reduce total saving because “perfectly rational” people react to anticipated future debt service burdens by increasing their own saving in step with the growing deficit. But he drops this idea readily enough not only when he writes about Social Security but also when he discusses the way that fiscal policy helped to stimulate the economy after the 1981–1982 recession. If people had simply increased their saving in 1982–1984 by the amount of the tax cut plus the additional military spending, the rapid growth to which he points in those years would not have taken place.

In part Mr. Bartley blames Congress for the deficit, suggesting that President Reagan’s policies, if left alone, would somehow have delivered a balanced budget after all. But here he ignores the fact that even if Congress had adopted all eight of Mr. Reagan’s budgets exactly as he submitted them, the deficit would still have averaged $159 billion per year during this period, not much below the $177 billion we actually had.

He also repeats the familiar argument that the standard calculations of the size of the deficit do not accurately represent what economists would ideally like to measure about fiscal policy. But here and elsewhere his questioning of data that cast doubt on the economic performance of the 1980s—not just the budget deficit but also other measures, such as the growing US deficit in international trade—stands in sharp contrast to his ready acceptance of the conventional data when they show the 1980s in a good light. It is too bad that he did not apply to the budget imbalance the same good sense he showed in discussing another hard-to-measure concept—the dollar exchange rate at which equivalent goods produced in different countries cost the same no matter where they are purchased: “Just because economists can’t look up the exact rate scarcely means it doesn’t exist.”

Finally, Mr. Bartley tries to deal with the fact that so many of his fellow citizens do not share his enthusiasm for their economy’s performance in the 1980s, or his admiration for the policies that delivered that performance. Here he has a difficult time being convincing, mostly because he never acknowledges the central problems of declining investment, sluggish growth in productivity, and stagnating incomes. He argues, in part, that these are times of rapid economic transformation, brought about by technological advances as well as what he sees as a renewed entrepreneurial energy; that change itself is often unsettling to many people; and that economic progress in particular inevitably involves dislocations that bring genuine, albeit temporary, hardships, as some companies and even whole industries decline and even disappear while others rise to take their place. This view merits serious consideration, although one might also want to apply it more broadly than just to the expansion during the 1980s.

In addition, however, Mr. Bartley repeatedly suggests that much of the blame for Americans’ disenchantment with the economic performance of the last decade rests on mostly unnamed “naysayers” to whom he repeatedly refers as the nation’s “elites.” As Mr. Bartley sees it, “in the midst of these achievements and opportunities, the fashionable talk in America has been of decay and decline…. In the midst of success, American elites were infatuated with failure.” Although Americans have actually enjoyed a smashing economic success, and are now poised to achieve what Mr. Bartley labels “another belle époque,” the nation’s “elites” have somehow persuaded them otherwise.

Quite apart from the irony of the man who rules the editorial page of America’s leading nationwide newspaper identifying those he disagrees with as “elites,” Mr. Bartley’s accusation betrays a certain shallowness of confidence in the good sense of his fellow citizens. When Ronald Reagan scored a success in the 1980 election campaign by asking voters if they were better off than they had been four years earlier. Mr. Bartley apparently thought it reflected plain good sense that so many knew they weren’t. Similarly, when the tax revolt of the early 1980s attracted many Americans who thought their government wasn’t giving either them or their society generally good value for what they paid to support it, Mr. Bartley thought those citizens were on the right track. But he now claims that the nation’s “elites” have somehow managed to bamboozle all those previously sensible citizens they now fail to recognize how much richer the Reagan program has made them. The argument doesn’t work because in fact the average citizen is not any richer.

Most Americans were right in thinking they were worse off economically in 1980 than in 1976, and many Americans were (and still are) right in thinking they don’t get full value for what they pay in taxes. They voted for Ronald Reagan not because he said he would triple the national debt, or reduce the nation’s investment rate, or keep wages stagnant, but because in each case he promised to do just the opposite.

Now Americans have soured on the 1980s, and on the economic policies of that period, because so many of them know that as a result of those policies they still are no better off—and, worse yet, face little prospect of becoming better off. During the last five years before the recent recession, what American businesses invested in new factories and machines, after allowing for depreciation, amounted to just 5.3 percent of our national income, compared to a steady 7.2 percent in the 1950s, 1960s, and 1970s. The share of national income devoted to such investment, before subtracting depreciation, has declined steadily from a postwar peak of 13.5 percent in 1981 to 10.6 percent in 1990 (and just 9.7 percent in 1991, because of the recession). If we had merely invested enough in the 1980s to keep our stock of factories and machines growing at the pace that had prevailed on average during the prior three decades, by 1990 there would have been $65,700 of capital behind the average American worker; in fact there was just $57,600. Moreover, as if our failure to invest adequately in plant and equipment were not enough of a problem, the National Science Foundation reports that spending on research and development by US industry has been declining in real dollars since 1989 and will probably decline again in 1992.²

As this year’s events have shown, many Americans who sense the poor prospects that Mr. Bartley overlooks have also soured on their country’s two-party political system. The real risk is that, in their frustration, they may ultimately sour on representative democracy itself.

David Calleo, a distinguished political scientist at Johns Hopkins University, is far more realistic than Robert Bartley about the American economy in the 1980s and the discontent it has produced. In his view, the popular disillusionment with the economic policies of the last decade does not go far enough and the public should, if anything, be more alarmed.

The chief basis for this more negative assessment is the way in which the US government’s now chronic fiscal imbalance is weakening America both domestically and in its ability to compete internationally. In his previous writings, most prominently in Beyond American Hegemony,³ published in 1987, Professor Calleo explored how changes occurring outside the United States—particularly, the emergence of competing centers of economic and political power in Europe and Japan—would force this country’s international relationships to change, even if our own economic strength did not erode. Professor Calleo argued that the need for America’s military power to protect its major allies and trading partners had declined. He now plausibly argues that this need has been diminished much further by the collapse of the Soviet empire and America’s apparent inability to help resolve the ethnic and national disputes left in its wake. Meanwhile, the narrowing gap between other countries’ incomes and ours, an influence that Professor Calleo also cited in his earlier work, has grown smaller still.

Professor Calleo now emphasizes the role of US economic policy since 1980 in undermining the economic basis of American leadership. In this process, what he calls the “fiscal incubus” is clearly central: “Fiscal habits of this kind,” he writes, referring to chronic spending in excess of normal tax revenues, “are both the symptoms and the mechanisms of a broad national decline,” a process that has worrisome international implications: “Failure and decline at home will have to be masked by more and more vigorous assertions of economic and military power abroad.” (Does this mean more interventions like the one in the Persian Gulf? Many readers will regret that Professor Calleo is not more specific about the kinds of intervention he foresees.) Professor Calleo fears that America “will end up clinging to military power because it is economically weak.”

One proposition that links US economic policy and the US international position is simply that a nation that is increasingly weak in economic growth and productivity will ultimately lack the resources to take a leading part in organizing the world economy or dealing with threats to peace, or easing the plight of refugees, or investing in the global environment. For just the same reasons that so many Americans now look back in dismay on the economic developments of the 1980s—sluggish growth in productivity, stagnating incomes, widening inequalities, loss of competitiveness in major industries—Professor Calleo argues that the policies of the last decade have weakened America’s ability to act positively in world affairs. The arguments he advances here are both familiar and persuasive, but the textbookish way in which he presents them—with lists of key points, tables of undigested statistics, repetitive end-of-chapter summaries and questions for further discussion—falls far short of the standard set either by Robert Bartley’s cogent expositions or by Professor Calleo himself in the parts of his book that deal more directly with international relations.

Indeed professor Calleo’s analysis is strongest when he discusses explicitly international questions. For example, he argues that, from a political perspective, the relative decline of American power in fact represents “the triumph of postwar American foreign policy. It was not our aim to build a new Roman Empire, but to revive the broken great powers of Europe and Asia and to coax them into a liberal and cooperative world order.” At the same time, the resulting new configuration poses major challenges for American policy:

The principal threat to the United States is the possibility that it will obstinately fail to recognize and adapt to the more plural world it has done so much to create…. Hegemonic policies merely…ensure the decline and exhaustion of the leader.

Professor Calleo also gives a useful account of the connection between defective domestic economic policies and the changing international situation. How much saving the United States drew in from abroad during the 1980s was a matter mostly determined by President Reagan’s economic policies: tax cuts and fiscal expansion maintained at least some modest level of investment in US industry, while the government’s deficit absorbed a large part of the available saving. When this imbalance drove real interest rates (that is, interest rates compared to inflation) to record high levels here, while no such increase occurred abroad, foreigners naturally sought to shift their savings into American markets. By contrast, Professor Calleo points out, during the 1990s other parts of the world will also be advancing powerful claims on the saving of the richer countries. Reunification in Germany and the rebuilding of Eastern Europe and (more doubtfully) the former Soviet republics, to name only a few such claims, are likely to make major demands on the world’s supply of saving, forcing the United States to compete for funds in a way that was unnecessary in the very recent past—if, that is, the government’s budget imbalance persists.

And will it? Professor Calleo has few suggestions for addressing the problem he forcefully identifies, and sometimes he even seems to despair of the possibility of a solution. His analysis of the deficit’s origins concentrates on government spending for the military and for health care, as well as on the relatively low levels of taxation to pay for both. For example, he points out that the common practice of discussing military spending either as a fraction of total federal spending or as a percentage of gross national product (by both of which measures it has declined sharply in recent years) obscures the actual growth in military costs. He also usefully shows how health care costs have grown enormously by any measure:

Medicare reimbursements, in constant 1982 dollars, were $22.7 billion in 1975 and $74.5 billion in 1990…. The number of people served nearly doubled; the ratio of those served to those enrolled increased by nearly one half; average real outlays per patient served grew by a half.

So far, so good. But on each subject, Professor Calleo is extremely pessimistic about prospects for significant change. He argues that “any durable cuts in military spending would depend on a more modest definition of America’s geopolitical role in the world.” No doubt he is correct. But as this spring’s defense budget debate in Congress clearly showed—and as the restoration of the Seawolf submarine program underlined even more dramatically—our changed relationship with the former USSR does not necessarily produce changes in military procurement. We must now confront the extent to which much of what is conventionally labeled “defense” spending, which in the past was justified mostly on grounds of national security, is really just a part of the modern welfare state.

Professor Calleo is similarly pessimistic about other aspects of the budget problem. Despite the emphasis he places on health care programs in accounting for the origins of the deficit, he offers no suggestions for limiting federal health expenditures. Indeed, he argues that “overall cuts in the civil budget seem close to impossible.” Because he believes that the average American taxpayer has low regard for what he receives from the federal government—on this Mr. Bartley would agree, and so do I—he also doubts that any administration will seek serious tax increases. In sum, “the 1990s offer little prospect for any automatic or lasting fiscal improvement. The deficit seems fated to remain structural.” Instead of the new belle époque projected by Mr. Bartley, we have only “the nightmare of compounding debt.”

Is the republic’s condition really that hopeless? And if not, what can we do about it?

Vague and unenforceable constitutional amendments requiring a balanced budget, like those recently offered by Senator Paul Simon and Representative Charles Stenholm, are not an answer. Simply enshrining the general concept of budget balance in the Constitution, without any firm notion of which revenues and expenditures must be officially included in the budget, is just an invitation to fiscal sleight of hand. And what happens when even the official budget doesn’t balance? Which spending programs are cut? Which taxes go up? An amendment that spelled all this out in sufficient detail to be enforceable might do some good, but so far no one has seriously offered such a proposal—presumably because inserting such details would alter the nature of the Constitution (and, some would argue, debase it).

The problem, simple as it sounds, is that the government spends more than it takes in. And, simple as it sounds, solving the problem requires less spending, or more taxes, or both. Solving the problem therefore means deciding not only how much of the remedy is to come from reduced spending and how much from higher taxes, but what kinds of spending and which taxes. Those decisions are about more than just arithmetic, indeed about more than just economics. Do we want the government to have a large and active part in providing jobs, or research, or training, or health care? Or do we want a more limited government, confined to providing for the nation’s genuine security needs and maintaining a highly limited safety net for those citizens who are truly in distress? Even within these broad, conceptual visions lie countless practical choices over such matters as school lunches, the space program, law enforcement, highways—and, yes, which industries and which interest groups get tax breaks and which don’t. The history of the Reagan years forcefully demonstrated that emotional rhetoric could not avoid the need to make such choices. Writing platitudes into the Constitution won’t either.

With President Bush now locked by his own political ineptitude into an ossified defense of Ronald Reagan’s program of endless fiscal imbalance, what have his opponents proposed to deal with this central question? The answer, unfortunately, is not much.

Bill Clinton’s economic plan, “Putting People First: A National Economic Strategy for America,” at least shows a keen awareness that something is wrong. Indeed, the main value of his statement lies in its persistent emphasis on the need to increase what both American business and American government invest. Governor Clinton’s plan also talks of “cutting the deficit in half” over the next four years, but apart from proposing $25 billion in higher taxes on “the rich” by 1996, it contains little in the way of credible measures to reduce government expenditures in excess of income. Among $45 billion of budget savings projected by Clinton for 1996, the four largest items—comprising three fourths of the total—are $16.5 billion from defense cuts beyond the Bush program, $8.5 billion of “administrative savings,” $4.6 billion from “management reform” of the Resolution Trust Corporation (which oversees the savings and loan bailout), and $4.5 billion from eliminating 100,000 federal workers.

It may be unfair to ask Governor Clinton at this stage of the campaign to describe those administrative savings and management reforms, or say which defense programs and which civilian government workers he has in mind. But the lack of specificity should make us wonder whether he will be more successful in achieving this $45 billion projected savings than President Reagan was in finding the $44 billion that his initial 1981 budget plan identified as “additional savings to be proposed.”

If the savings Governor Clinton projects are not made, proceeding with the new spending initiatives that his plan calls for—ranging from new toxic waste recycling systems, to rebuilding bridges, to a national police force, to violence-free schools, not to mention comprehensive health insurance—will only enlarge the deficit further. These are laudable objectives, to be sure, but the question is whether Governor Clinton would finance them, as President Reagan did his military buildup, by greater government absorption of scarce private saving. (In evaluating alternative budget plans, it is important to distinguish any progress in narrowing the deficit brought about by new fiscal policies from the improvement that very probably will occur anyway as the economy returns to full employment and the government completes the bailout of the savings and loan institutions. Even if all the savings optimistically projected by Governor Clinton were made, his plan scarcely improves on the deficit reduction now forecast in standard projections based on a continuation of current policies.) To the extent that many of Governor Clinton’s new spending initiatives consist of investments, for example in infrastructure, that would genuinely enhance US productivity, their effects in crowding out other investments by absorbing private saving would pose fewer problems. But this argument does not apply to those of his proposals which seem likely to call for higher consumption, such as comprehensive health care.

Before he withdrew from the campaign, Ross Perot had even less to say about budget matters. Apart from his references to fraud and inefficiency, and his suggestions on television that Social Security benefits might be either taxed or made voluntary, and that taxes should be raised only in an “emergency,” Mr. Perot pointed to former Senator Paul Tsongas’s program, A Call to Economic Arms: Forging a New American Mandate,⁴ as an indication of a desirable economic policy. Mr. Tsongas, like Governor Clinton but unlike President Bush, recognizes the core of the problem:

America faces great economic peril as our standard of living is threatened by Europe 1992 and the Pacific Rim. Once the world’s greatest economic power, we are selling off our national patrimony as we sink ever deeper into national debt. The Reagan-Bush years have seen us become the world’s greatest debtor nation.

Mr. Tsongas’s short book goes on to describe persuasively our need for new investment of all kinds, and the role of our current fiscal policies in preventing that investment from taking place.

Instead of explicitly suggesting either spending cuts or tax increases, however, Mr. Tsongas’s book merely recommends that “Congress should pass laws which encourage savings over consumption.” If by “savings” Mr. Tsongas means government savings, then the question of how to achieve them remains unanswered. If instead he means legislation to increase saving by families and businesses, skepticism is warranted. ‘One of the strongest lessons of the 1980s was that we simply do not know how to manipulate tax policies so as to achieve significant increases in private saving. Despite record-high real interest rates, lower marginal tax rates, and specific saving incentives (like expanded access to Individual Retirement Accounts during 1981–1986), the US private saving rate certainly did not rise during the 1980s, and by most measures it fell. Why, then, should we now be confident that we can increase investment by increasing private-sector saving? Surely our first line of attack should be to reduce the government’s absorption of the private sector’s saving.

Despite his failure to make specific proposals, Mr. Tsongas showed a greater willingness to contemplate tax increases than President Bush has, and more, too, than Governor Clinton, who proposes to balance his tax increase for the rich by giving “middle class taxpayers…a choice between a children’s tax credit or a significant reduction in their income tax rate.”

What advice would the authors of the two books under review offer? Robert Bartley, despite his rosy view of the 1980s, recognizes the need for hard decisions in the 1990s. His list of the “serious issues” that should be addressed includes control over government spending, adequate investment in the nation’s deteriorating infrastructure, and the unrecognized future liabilities that the government incurs through programs like Social Security and deposit insurance. He is right to point out the importance of each of these issues, but he offers little in the way of specific suggestions to deal with them. Not surprisingly, in light of his biases, he does not consider the case for higher taxes. He favors lower taxes on capital gains, as well as tax incentives for saving and investment.

David Calleo argues that the ideal solution would be to sharply reduce military spending while dramatically improving the quality of what the government provides so that Americans will become willing to pay the higher taxes needed to sustain it. But because he is so pessimistic about the prospects for achieving any of these goals, he stops short of making detailed proposals. Indeed, he believes that no one has yet figured out how to make the new approach he favors work both economically and politically. Instead, he argues that “today’s problem is less a shortage of skillful leaders than a general deficiency of imagination.”

That may be right. But as a good many Americans evidently believe in this election year, a few courageous and skillful leaders wouldn’t hurt either.

—July 16, 1992