One-armed Economist

On the Intersection of Business and Government

Murray Weidenbaum

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351501606
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

One-Armed Economist represents a personal, if eclectic, approach to public policy. Weidenbaum avoids doctrinaire positions, be they Keynesian or monetarist or supply side or libertarian. This distillation of Weidenbaum's wide range of writings on public policy issues over the last four decades draws on his practical experience in government and business as well as his academic research over that extended period.The volume covers six major clusters of policy issues: economic policy, government programs, business decision-making, government regulation, the defense sector, and the international economy. There are chapters on how to achieve a cleaner environment, how to fundamentally overhaul the tax and health care systems, and a defense of Reaganomics. The work examines how public sector activities impact the performance of the national economy. Its coverage includes the role of government as a buyer, a seller, a provider of credit, and a source of subsidy and support. Drawing heavily on his experience as economist for a major military contractor, Weidenbaum shows that the defense industry is the most heavily regulated sector of the American economy and discusses ways to modernize the arcane and wasteful process of procuring weapon systems.He also draws on his work on the hidden costs of regulation on the consumer, showing how to improve the regulatory process so as to achieve national objectives while minimizing the burdens of compliance. The last section is devoted to the international economy, with chapters on the role of the overseas enterprises. One-Armed Economist is a lucid analysis of major public policy issues of our time. As such it will be of special interest to organizations involved in public policy, think tanks, and government policymaking groups, as well as readers interested in fresh perspectives on a broad range of policy issues.

Part 1

Innovations in Economic Policy

1

An Ambitious Agenda for Economic Growth

How can we best promote long-term economic growth? Effective policy needs to go beyond conventional monetary and fiscal policy. It requires eliminating the structural defects in the economy that depress productive capacity, productivity, and competitiveness. Tax and budget reform should focus on encouraging saving and investment rather than current consumption. This selection was the Adam Smith Address at the 1996 annual meeting of the National Association for Business Economics.

It has become fashionable to advocate faster economic growth as the elixir to cure all that ails the American society. Surely faster growth produces all sorts of good things, such as lower budget deficits, more new jobs, higher incomes, and rising living standards. Thus, who can object to the general idea of achieving larger economic output?

Economists are destined to bring the wet blanket to the party. We have to raise the question often ignored: How can we not just achieve but maintain a more rapid and more durable pace of economic expansion? The two most popular ways of attaining faster growth fall short of providing a satisfying response. The first simple growth policy is to order the Federal Reserve System (the Fed) to put its collective foot down harder on the monetary gas pedal. The second approach requires Congress just to cut taxes, providing fiscal stimulus for a sluggish economy. Both responses can be useful but they are inadequate.

In recent decades, we have learned that a rapid and sustained expansion of the money supply unaccompanied by substantial change in policy toward the real economy can generate escalating inflation. Rising inflation, later if not sooner, will cause the Fed to shift gears and to pursue a policy of slowing the growth of or even cutting the money supply. In the process, interest rates will rise. More often than not, that sequence of actions will end the economic expansion and precipitate the next recession.

The fiscal alternative, cutting tax rates, can result in a similar sequence of events. However, the process will probably be a bit more indirect. Surely, cutting income taxes alone is not going to energize the economy sufficiently to prevent a rise in the budget deficit. Those deficits can lead to a variety of negative effects. These range from a diminution of investment capital available for private business expansion to scaring the Fed into tightening the flow of money and credit.

Source: Murray Weidenbaum, “The Adam Smith Address: An Ambitious Agenda for Economic Growth,” Business Economics, January 1997.

But this is not a counsel of despair. There is a third way of responding to the poor performance of the U.S. economy. It, too, is a supply-side approach but it is more subtle—and avowedly more difficult—than just cutting taxes. It deals with the structural defects in the American economy that depress productive capacity and productivity. Many of these defects arise from the operation of government policies and programs. An example of these structural and institutional shortcomings will provide an inkling of the type of economic cure that is presented here. Although the initial example is regulatory, the full analysis will cover the gamut of government operations, especially expenditure programs and the tax system.

Dale Jorgensen of Harvard has estimated that, by the year 2005, when the new Clean Air Act is fully in effect, the compliance with that statute and other environmental laws will reduce the nation’s capital stock by over 4 percent. It will increase the cost of capital by more than 5 percent, and reduce the economy’s growth rate by more than 3 percent a year.

Nevertheless, there is no responsible pressure to dismantle environmental programs. The Manufacturing Institute, for example, suggests that reasonable regulatory and tax reforms can yield technological advances and greater capital investment that could raise the growth rate by a half percentage point. If that number seems small, please remember that compounding it over a decade generates a large cumulative increase in production, income, employment, and living standards.

To clear the air (in more than one sense), this is not a plea to swing the public policy pendulum from the present polar alternative of increasingly tough environmental regulation, regardless of the economic consequences, to the equally undesirable extreme of trying to maximize economic growth while ignoring environment, safety, and other social concerns. Rather, we need to rethink the whole gamut of government regulation of business as part of a comprehensive economic reform strategy.

Similarly, while I can restrain my inherent enthusiasm for simply cutting tax rates, simultaneously altering the fundamental structure of the government’s revenue system can contribute in highly desirable ways to strengthening the overall economy. Likewise, substantially shifting the composition of government expenditures to favor investment over consumption can help quicken the economic growth rate in a sustainable fashion.

The approach presented here will not be an easy strategy to achieve. However, accomplishments along these lines of structural reform will be far more lasting than merely tinkering with the conventional dials of macroeconomic policy.

Shifting the Composition of Government Spending

Let us begin with the opportunities for reforming government spending. Voting to approve the general idea of a balanced budget is only a start on the path of fiscal sensibility. The really tough job is to make the specific spending cuts. Few objective criteria have been developed to guide that effort. The guide suggested here is to concentrate on reducing or eliminating expenditures that hurt the economy. Inefficient public sector programs represent a loss to the economy. They produce lower benefits than if the same funds were invested in private activities that meet the test of the marketplace.

Let us assume that we have the duty of preparing guidelines to assist the Congress in this arduous assignment. The most popular formula—eliminating waste, fraud, and abuse—is not adequate to the task. Of course, there are numerous examples of fraud, waste, and abuse, however those terms are defined. The reports of prisoners who illegally receive social security checks are surely upsetting. So are the stories of companies trying to sell the government shoddy products. These situations should be dealt with severely, but that is just a small start.

Here are five fundamental guidelines for serious budget cutting:

Focus reductions on the large consumption part of the federal budget rather than the small investment component. Such a change would curb the tendency for deficit financing to be a powerful mechanism for converting private saving into public consumption. On occasion, of course, the federal government makes worthwhile investments. Some outlays for education help the recipients achieve careers in which their added incomes generate added tax payments that more than repay the government’s original investment.

Alas, such examples of effective federal investments are rare. Virtually the entire increase in federal outlays since 1980 has been in the form of consumption-type spending—aside from interest on the national debt. As a result, consumption outlays dominate the budget. In 1992, federal civilian investment outlays (education and training, research and development, and infrastructure) were only $83 billion, or 6 percent, out of a total budget of $1.4 trillion. Under these circumstances, large reductions in federal spending would be economically beneficial, because they would almost invariably fall on consumption.

By far, the dominant segment of federal consumption outlays consists of transfer payments or, to use the prevailing euphemism, entitlements. Unfortunately, in the largest such program, social security, the recipients have been led (or rather misled) to believe that they have earned the money they receive.

The typical beneficiary has contributed only a portion of the monthly check issued to him or her. A key fact overlooked by most senior citizen groups is that the total of such contributions plus matching employer payments plus interest does not begin to cover the monthly benefit payments. The balance is a gift from the working population.

There is a large but hidden welfare component in the major middle class entitlements. In the long run, privatization may be the most effective response. Meanwhile, reformers need to face the hard fact that recipients have not earned the annual cost-of-living increase (COLAs) that they now expect as a matter of right. The COLAs violate the insurance principle that, on average, you get what you pay for, and they arbitrarily tilt the federal budget even more to consumption expenditures.

If it is not possible to eliminate the annual COLA payments, a “diet COLA” could be limited to the annual inflation in excess of 2 percent. After all, the average working person is not protected completely from the effect of inflation.

Target the many subsidy programs that provide special benefits to limited parts of the population at the expense of the national taxpayer. Such subsidies inherently divert resources away from their most productive uses. Subsidies to agriculture are the largest component of this category. Nevertheless, generous subsidies are also provided to business and labor.

Here, economists can team up with an important interest group with which it is often at loggerheads—environmentalists. Many government programs are both economically wasteful and environmentally undesirable. For example, we continue mining for many metals and minerals at a time that the federal government maintains over $6 billion of these same items in a military stockpile that the Department of Defense now admits is not needed. That surplus should be sold on the open market. Those sales would reduce the need for some mining activity that, even when commercially necessary, is environmentally invasive.

Other economically wasteful activities of the federal government that are also environmentally unsound include selling governmentally produced elec-tricity—as well as water, timber, and grazing rights—at below-market prices. Eliminating these subsidies would simultaneously enhance the efficiency of the economy and reduce environmental pollution.

Avoid funding expenditure programs designed to offset problems created by regulation. A more cost-effective way of dealing with the problem is to change the original regulation that created the problem. To maintain the status quo is to ensure fiscal perpetual motion.

A major example of this shortcoming is regulation of the workplace. For years, economists have written about discouraged workers who drop out of the work force because they do not believe suitable jobs are available for them. Government has created a new category—the discouraged employer, discouraged by the host of government impediments to hiring people.

Regulatory and mandated burdens on the employment process are rarely considered in relationship to the expensive array of government programs that offset their adverse affects by trying to increase the supply of workers. Yet the record of these offsetting programs, such as job training, is not heartening. The society would be far better off with a combination of regulatory reform and expenditure reductions. Such a combined effort would reduce the gap between federal income and outlay and eliminate serious inefficiencies in the American workplace.

Privatize activities that are properly the responsibility of the private sector. We need to go beyond the useful notion of having the private sector produce items under government contract. Although an improvement over relying on government arsenals, this approach to privatization still leaves to the public sector the determination of how much of the nation’s resources should be funneled to the designated activity. Many goods and services should no longer be paid for by the taxpayer, no matter who produces them. The extent to which those items are produced should depend on the interaction of market forces.

This is not a simple recipe for cutting services to the public. For example, privatizing the air traffic controller functions of the Federal Aviation Administration would enhance the efficiency of air transportation. The airlines are willing to pay higher fees for a more efficient system than the government now provides. The resultant reductions in congestion and waiting times would more than pay for the private expansion of the air traffic control system.

Use economic efficiency considerations throughout the budget process. The key to success is to enforce this guideline. Benefit-cost analysis has often served to sanctify the pork barrel by overestimating benefits and underestimating costs. The use of basic economic efficiency tests would surely improve the overall effectiveness of government spending and likely lower its aggregate level while contributing to more efficient use of the nation’s resources. Here are two examples of what is possible:

• Charge competitive, market interest rates for all federally provided credit. That one change will quickly reduce the many demands for federally subsidized lending. Under the status quo, numerous borrowers who could obtain credit on their own are given an incentive to seek aid simply because the government charges a lower interest rate than commercial banks and other private lenders. Moreover, the current arrangement encourages the extension of credit to borrowers who do not meet the objective tests of the marketplace.
• Use the comparable market rates of interest when evaluating proposed federal investment projects. Unrealistically low interest rates result in pulling investment funds from the private sector to lower-yield public projects. By definition, such spending is inefficient and a poor use of the taxpayers’ money. Traditionally, these programs are referred to as the “pork barrel,” and are an appropriate candidate for a federal diet.

Tax Reform

After years of public debate, it is fair to say that there is no universal agreement on how to reform the tax system. Do we streamline the income tax by shifting to a flat tax? Do we adopt a saver-friendly reform known as the USA Tax? Or do we replace the income tax with a national sales tax? It will take much more discussion and analysis before a specific tax reform emerges with enough support to be enacted. Nevertheless, progress has been made toward a broad consensus on the direction of change.

The most widely held conclusion is the notion that the tax system is unfair and too complicated. And, when we step back from the mass of specific provisions, it can be seen that the Internal Revenue Code, with its heavy dependence on income taxation, depresses the economy.

There are several key arguments that economists offer for shifting the base of taxation from income to consumption. Consumption-based taxes put the fiscal burden on what people take from society—the goods and services they consume—rather than on what they contribute by working and saving, as do income taxes. Thus, under a consumption-based tax system, saving is encouraged at the expense of current consumption. So is investment. Over a period of time, the society is likely to achieve higher levels of saving and consumption, because the added investment, by generating a faster growing economy, will lead to a bigger income “pie” to be divided among the various participants in economic activity.

A constant theme voiced by tax reformers is the need for increased incentives for saving, capital formation, and economic growth. Under a consumption-based tax, the incentives would be very favorable: the basic way to cut tax payments—legally—would be for individuals and families to save more and for companies to invest more. By increasing the amount that we save and invest, a shift to consumption taxation would augment the forces that create the formation of capital and make possible a more rapidly growing economy.

Combining general tax cuts with comprehensive reform would have special charm. Any reform, no matter how carefully drafted, is bound to generate losers as well as winners, thus reducing the chances of enactment. In contrast, combining reform and rate reductions, for example, will result in more winners and fewer losers, brightening the prospects for the reform being carried out.

The various plans for tax reform are not interchangeable. Each comes with its own set of advantages and disadvantages. Nevertheless, compared to the existing tax structure, any of the three alternatives is simpler, and all of them would encourage saving and investment and result in a faster rate of economic growth. All are variants of consumption taxes, and several would provide immediate expensing of investment. Just as there may be more than one path to salvation, there is more than one approach to tax reform that can achieve the public’s expectations.

Reforming Government Regulation

Although no regulatory agency has been given the express mission to depress the economy, many regulatory actions have that undesirable effect. The popular view of regulation is wrong. It is not a contest between the “good guys” (government and the consumer) and the “bad guys” (business). The reality is that the consumer is at the receiving end of the benefits as well as the costs generated by government regulation. Business is the middleman (or wom...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Introduction
• Acknowledgements
• Part 1: Innovations in Economic Policy
• Part 2: Analyzing Government Programs
• Part 3: Applying Economics to Business
• Part 4: Understanding the Military Economy
• Part 5: Reforming Government Regulation
• Part 6: Dealing with the International Economy
• Name Index
• Subject Index