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    Clearing the Ditch of Debris

    BY James Miller III
    03/24/2001

    Responding to President Bush's message to Congress, Senate Majority Leader Tom Daschle warned that it was "strikingly similar" to the one President Reagan delivered 20 years ago.

    Pronouncing the Reagan "experiment" a "huge mistake," Mr. Daschle quoted Treasury Secretary Paul O'Neill as saying the Reagan plan put us "in a ditch that was horrendous." According to Mr. Daschle, "Deficits skyrocketed. The national debt quadrupled. High interest rates choked American industries. Unemployment soared. Working families struggled to meet their mortgages, pay for health care, and save for college. . . . It took 18 years, four acts of Congress and a lot of hard work by the American people to get out of that ditch. "

    With so many errors in such a few sentences, one wonders who they get to write this stuff.

    First, errors of facts. Mr. O'Neill's remark was taken out of context. Mr. O'Neill said Congress put the country in a "ditch" because it refused to deal with "the spending side." The prime rate of interest increased each year starting in 1977 and peaked in 1981. This was before President Reagan's tax cuts went to effect (1982-1984). Unemployment peaked in 1983 and fell each year throughout the rest of Mr. Reagan's two terms, as did rates on new mortgages. Some working families did struggle - they always do - but inflation-adjusted median family income (for all families as well as for married-couple families) rose steadily after the tax cuts were enacted.

    Second, errors of logic. Mr. Daschle would have people believe the deficit and the national debt increased because of the Reagan "experiment." Tax cuts did have something to do with the deficit. In the short run, reducing tax rates lowers federal receipts, as noted by administration officials at the time. But over the long term, they expand the tax base by a greater percentage and thus increase the total tax take. Also, since Congress demanded the tax cuts be delayed and phased in over time, people took every opportunity to postpone income-producing activities; this hit federal receipts up front and even prolonged the recession. (That's why President Bush is insisting that his tax cuts be made retroactive.)

    But the real reasons the deficit ballooned and the debt increased had little to do with the tax cuts. The major cause was the recession created by the policy mistakes of the previous administration. If the economy contracts, so do federal revenues - by an even greater proportion. Also, the inflation rate fell rapidly during the early 1980s. Since Congress bases spending plans at least in part on expected receipts, a faster drop in the inflation rate meant that tax receipts fell below expectations. The reverse held in the case of outlays, as Congress appropriated more purchasing power than was intended.

    As inflation fell to reasonable levels and the recession came to a close in 1982, the deficit continued to climb. But this time the cause was Congress' insatiable appetite for spending, not a lack of tax revenue. Congress wanted to invest more in domestic programs, while the president wanted to invest more in national defense. The first investment realized little or no return; the second led to the end of the Soviet menace and the liberation of hundreds of millions of people in Eastern Europe and in the Americas. From 1980 to 1989, inflation-adjusted federal receipts increased 27 percent, while spending increased by 28 percent.

    Third, errors of political judgment. Get this: Mr. Daschle is trying to defeat the Bush tax plan by tying it to President Reagan. President Bush must be thanking his lucky stars. Last month two national polls found Americans believe the greatest president in history was . . . Ronald Reagan. "So," says Mr. Bush, "throw me in that briar patch."

    The Reagan "experiment" restored America's economy and launched two decades of unparalleled good times - for rich and poor, black and white, male and female. Like Mr. Reagan, Mr. Bush faces an economy that is weak because of mistakes in economic policy. Like Mr. Reagan, Mr. Bush faces an increase in external risks. Like Mr. Reagan, Mr. Bush faces a federal government that is growing too fast. Like Mr. Reagan, Mr. Bush has a program that can secure the future. It is clear the opponents don't understand the problem or how to deal with it. Their world is virtual, not real.

    by James Miller III on 3/24/01.