Real War (33 page)

The free nations have demonstrated their superiority in achieving and exporting economic progress. The danger now is that we have not proved as effective in protecting freedom as the Soviets have in advancing tyranny. When the leaders of frail countries around the world see that we are determined to hold the ring against the Soviets militarily, then the economic attraction of our system will have the conditions it needs to work its magic.

A major strategic goal of the Soviets in World War III is to weaken and destroy our economy. Conversely, if we are to prevail in World War III, one of our first priorities must be to keep the American economy strong, sound, productive, and free.

Short of actual war America's economic power cannot be destroyed by the Soviet Union. But we can destroy it ourselves. The primary danger in this regard is not from recession. However painful, recessions are ills from which the patient recovers.
Rather, the major danger is from the creeping anemia of taxation, regulation, nationalization, socialization; of governmentitis; of what in recent years has come to be called “the English disease.”

Before World War II British intellectuals nurtured the doctrines of democratic socialism; they were enormously influential in spreading those doctrines around the world. After World War II British politicians increasingly put those doctrines into practice. The result should be a warning to the world, and especially to the United States.

Labour Party leader Aneurin Bevan once said of Britain, “This island is almost made of coal and surrounded by fish. Only an organizing genius could produce a shortage of coal and fish in Great Britain at the same time.” After years of socialist economic management there were shortages of both. By 1976 the government was spending $63 out of every $100 circulating in Great Britain. Nationalized British industries were turning belly-up in world markets everywhere. Until recently personal incomes were taxed at rates up to 83 percent, up to 98 percent for “unearned” income. As a result, incentives were eroded and many of Britain's most productive people left—65,000 professionals in 1975 alone—creating a “brain drain” that further debilitated the economy. Britain's nationalized health service is a disaster. At the end of 1974 over half a million people were on waiting lists for “noncritical” surgery. In 1979, with the economy tumbling toward chaos, Conservative Party leader Margaret Thatcher pledged to turn away from smothering statism and return Britain to the era of individual incentives. Britons voted for the change she promised, and Prime Minister Thatcher has an enormously difficult but urgently important challenge to restore Britain's economic vitality.

Unless we too reverse the trend, the United States is headed toward socialism in everything but name.

When the communist world is turning to the West to save it from its economic follies, it is absurd for the West to be lurching in the other direction. Yet the United States has been doing just that. The promise of statist remedies for every real or imagined social ill holds an irresistible appeal for both populists
and demagogues. Demands that government “do something” may bring relief in the short run. But the cumulative impact of all these government interventions will be to destroy the base on which all else is built.

Even John Maynard Keynes, the architect of liberal economics, warned that a level of public spending over 25 percent of GNP would have dire consequences. The budgets of our state, local, and federal governments now amount to 32 percent of the gross national product, up from 21 percent as recently as 1950. The federal budget alone for 1980 is bigger than the gross national product of all but three of the world's 159 other nations. The 1980 budget for the Department of Health, Education and Welfare—nearly $200 billion—was more than that of any other organization on earth except for the governments of the United States and the Soviet Union. The big growth has not been in defense, but in social programs and income transfers. In real, constant-dollar terms, despite the enormous increase in the Soviet threat, the government is spending less on defense in 1980 than it did in 1960. In the twenty-five years from 1950 to 1975, by contrast, federal expenditure on social-welfare programs rose, in 1975 dollars, from the equivalent of $32 billion to $169 billion; from 26 percent of the federal budget to 54 percent.

The government now consumes more goods, spends more money, employs more people, and is more heavily in debt than any other segment of our society.

As government grows, bureaucracy grows, and the strangling web of government rules tightens around everyone else. The United States today is overlawyered, overlitigated and overregulated, and every year it gets worse.

It now costs the federal government $6 billion a year just to operate its regulatory agencies, a seven-fold increase since 1970. Former Treasury Department official Murray L. Weidenbaum estimates the cost to the public of complying with federal regulations at $121 billion a year—more than $500 for every man, woman, and child in America.

There are crippling hidden costs as well: in ideas not pursued, businesses not started, inventions left undeveloped because the government has been suffocating the entrepreneur
under an avalanche of paper. Innovation is the spark that fires economic growth; productivity is the engine that drives prosperity. Overregulation kills both.

American productivity—that is, actual output per worker-hour—is still among the highest in the world, but its rate of increase has shown alarming declines. For the years 1947-1965, productivity rose at an average annual rate of 3.2 percent a year. By the mid-1970s, this had dropped to 1 percent a year; in 1979 output per worker-hour was actually falling. Productivity is the cushion between prices and wages; it determines how fast the standard of living can rise. Without a rising level of productivity, we will be doomed to standing in line in a standstill economy.

We need to take the regulatory shackles off the entrepreneur, spur innovation, and provide incentives for people to save so that business will have the huge sums it needs to invest in order to rebuild the nation's industrial plant and restore our competitive position in the world economy.

Erecting tariff and trade barriers to keep lower-priced foreign goods out of the U.S. market will provide short-term relief for American producers and long-term disaster for the American economy and consumer. The only sound approach is to give American companies a chance to become competitive again by removing the shackles of excessive government regulation, and by providing incentives for U.S. industry to modernize and replace obsolete equipment. Our present tax system is a major culprit in the decline of productivity in the American economy. Any proposed tax relief for corporations is immediately attacked by political demagogues as helping the rich at the expense of the poor. This is economic hogwash. What all people, poor as well as rich, need first of all is a job, and if our tax system continues to discourage incentive and reward indolence, jobs will become increasingly hard to find as American industry inevitably becomes noncompetitive at home and abroad.

We must above all else bring inflation under control. Vermont Royster points out:

inflation is counter-productive to every other aspiration, including the needs of the poor, the black, the sick, the young.
It undermines our economic prosperity. It costs us our position in the world. It weakens our ability to defend ourselves or our interests abroad. It puts its heaviest burdens on the poor and the middle class. And—here is the tragic irony—it puts beyond reach those very social programs, such as a workable national health plan, so avidly sought by those who profess themselves “liberals.”

Inflation can only be overcome by attacking the problem at its roots: too much government, mortgaging the future by spending beyond our means, overregulation, inflationary monetary policies, tax policies that penalize initiative, disincentives for saving and investing, and low productivity. What will not work is treating the symptoms of inflation by imposing wage and price controls.

On August 15, 1971, I did something that went against my every instinct about what is good for the American economy: I imposed a ninety-day nationwide freeze on wages and prices, to be followed by a gradual return to decontrol. History told me that while controls might be politically popular, they would be economically disastrous. Imperial Rome imposed wage and price controls in
A.D
. 300. They proved unworkable and were a contributing factor to Rome's economic decline. A contemporary historian wrote that “the people brought provisions no more to markets, since they could not get a reasonable price for them and this increased the dearth. . . . ”

Over my protests, an opposition-controlled Congress had given me the power to impose controls. With inflation worsening, there was a swelling chorus of demands in Congress and the media that the power be used. The clamor grew so great that Secretary of the Treasury John Connally, who disliked the idea of controls as much as I did, bluntly told me, “If we don't propose a responsible new program, Congress will have an irresponsible one on your desk within a month.”

When controls were imposed in August 1971 the nation stirred with excitement and sighed with relief. In the first day's trading, the Dow Jones average on Wall Street rose thirty-three points. But it was a false euphoria. In the short term, controls provided relief; in the long term, they made the situation worse. Once in place, they were more difficult to get rid of in an orderly way than I had expected. The longer they stayed in
place, the more they compounded economic imbalances for which the piper would have to be paid later. The best thing they did, if the lesson has been learned, was to demonstrate dramatically that controls do not work.

Price controls can do one of two things: create surpluses or create shortages. Price floors for farm products created grain surpluses; price ceilings on oil and gasoline have created gas shortages. When the government pays more for a product than consumers are willing to, producers will come up with more of it than the consumer wants. When the government puts a ceiling on prices so that consumers are not allowed to pay as much as they would be willing to for a product, producers will not supply enough of it to satisfy the public's demands. There may be circumstances in which creating surpluses is justified; our grain surpluses, for example, helped keep the price of wheat stable for twenty years. But there is no justification for creating shortages in basic industrial materials.

Wage and price controls throughout an entire economy create thousands of separate spot shortages and surpluses. There may be more lumber than anybody wants but not enough nails; there may be more cars than people want but not enough gasoline; there may be a huge surplus of wheat in the Midwest but no railroad cars to get it to market.

The best economic advice I can give to my successors in office is to resist firmly political pressures to impose wage and price controls, however strong those pressures may become. Controls will not solve the problem of inflation. They may give short-term relief but inevitably they produce long-term disaster. The only answer to inflation is for government to spend less and for people to produce more.

•  •  •

What we do with the American economy is important not only at home but also abroad. The American economy produces over $2 trillion worth of goods and services—one-quarter of everything produced in the entire world. Seventy percent of international trade is transacted in dollars. The old adage that when the U.S. economy sneezes, the economy of Zaire gets pneumonia is still true, and today we are running a high fever.

There once was a time when “sound as a dollar” was a description, not a joke. If the dollar continues to lose value, international
trade will become a guessing game. The money markets of the world will be places where speculators will prosper and businessmen suffer.

There is no rising economic and military power that can take over the international economic burdens of the United States. We have to set things in order. We not only owe it to ourselves, we also have a responsibility to the rest of the world. The way to restore faith in the dollar abroad is to reestablish its soundness at home. Until we do so, the spectre of runaway worldwide inflation and new trade barriers will haunt businessmen everywhere and inhibit the trade that is the lifeblood of the international economic system.

As
Irving Kristol has noted, our foreign policy and economic policy are inexorably linked:

it is an inescapable fact that the American economy is a vital organ of a larger world economy. The one cannot survive, and certainly cannot prosper, without the other. The wealth of nations today is indivisible. Our economic growth will henceforth be as dependent on our foreign policy as on our economic policy. And if we fail to establish the conditions for such growth, our democracy will itself unravel, as economic pressures give rise to political polarization, at home and abroad. . . . What few seem to realize is that a prospect of economic growth is a crucial precondition for the survival of any modern democracy, the American included.

Along with inflation, energy is the most urgent problem facing the American and world economies today. Energy is basic to the world economy; all other industries depend on it.

Wood was the fuel of the preindustrial world; coal was the fuel of the first industrial revolution, which began in the eighteenth century; oil has been the fuel of the second industrial revolution, which continues to this day. Other energy sources, including nuclear and solar, will fuel the industrial advancements of the twenty-first century. Nothing is more natural than
a depletion of one energy resource, its gradual rise in price, and its replacement by a new source. In our day, however, that transition has turned into a crisis.

Three candidates are usually put forward for the role of villain in the present energy debacle: the oil companies, OPEC, and the government.