America dragged down - harmful economic effects of government regulation; includes related article on specific regulation cases - Cover Story

National Review, Oct 15, 1990 by Warren T. Brookes

The economy under Reagan, say the pundits, was too hot not to cool down. In fact, the economy did not run out of fuel. What happened was the arrival of the Bush brigade, armed with potent fire extinguishers.

WHEN George Bush took the oath of office in January 1989, the U.S. economy was growing at a 3.6 per cent real rate, well into the many thought might go on forever. Prudential-Bache's chief economist, Ed Yardeni, was forecasting six to 12 more years of expansion without recession.

In a matter of months that growth pattern had slumped; there has not been a quarter of growth over 2 per cent since. By 1990, MIT economist Paul Krugman was writing of "the Age of Diminished Expectations." Americans were again facing soaring oil prices and economic malaise and wondering where the Reagan Revolution had gone.

Not only had its exponents left town, they had been replaced body and soul by corporate Carterites from Treasury to Labor, from State to the SEC. The fateful budget summit and the breaking of the tax pledge were only ratifications of earlier personnel decisions, which are what ultimately determine policy.

Expansions, Ronald Reagan's chief economic advisor Beryl Sprinkel liked to say, do not die of old age. They are killed by bad economic policies. The Reagan expansion is in intensive care or already dead after more than ninety record-breaking, pundit-defying months. The Bush Administration and its friends blame its demise on Federal Reserve Governor Wayne Angell's efforts to fight the 1989-90 inflationary surge. Others see the economy as Saddamized by soaring oil prices.

History is more likely to show this expansion died long before the Iraqi invasion, and had less to do with the Fed's preoccupation with inflation than with a big change in top management. Over the last 18 months the economy simply got bushed from too much govenrment process and too little policy coherence. To paraphrase the Preacher, Were there is no vision, economic expansions inevitably perish."

This is especially true in what George Gilder likes to call the quantum economy," the information revolution which has made statist intervention in the global marketplace futile and ultimately self-destructive. In this new economic system, both wealth creation and power are being decentralized. As Gilder put it: "Rather than pushing decisions up through the hierarchy, the power of microelectronics pulls them remorselessly down to the individual.... one free mind plus a workstation can outperform any array of regimented minds."

In May 1988 Ronald Reagan told the students at Moscow State University, We're emerging from the economy of the Industrial Revolution-an economy confined to and limited by the earth's physical resources, .. into an era in which there are no bounds on human imagination, and the freedom to create is the most precious natural resource.... These entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States."

The Reagan Legacy

BUT REAGAN'S most direct legacy to the nation was his successor, an old-fashioned corporat-estate Republican whose last 26 years have been spent absorbed in big government, and almost totally preoccupied with mastering its processes. While this enables George Bush to manage the details of government policy, especially of foreign policy, better than his predecessor, it leaves his domestic policy increasingly adrift in the uncharted waters of the quantum economy.

Instead of a clear course of commitment to decentralizing economic power and increasing choice, the Bush Administration has plunged back into the Washington regulatory morass, tinkering with the levers of bureaucratic power, appeasing special interests, flirting with the no-growth environmentalists, and schmoozing with the protectors of the statist quo.

Hunkering Down

ON JULY 6, economist Larry Kudlow told his "Global Spectator" audience: "Most of all, the problem with current economic conditions is a decided lack of risk-taking and entrepreneurship. Instead of animal spirits, business and consumers seem possessed by a highly defensive belt-tightening strategy."

After expanding 7 per cent a year from 1982 to 1988, new-business formation has dropped nearly 5 per cent since early 1989. Investment in manufacturing, which rose at a 12 to 16 per cent clip through 1987, 1988, and 1989, has been falling at a 2 to 6 per cent rate in 1990. Kudlow says this is because "the threat of a federal tax increase is growing larger. So all manner of commercial and financial decisions have been put on hold." But taxes are only part of the equation: "Cost estimates for the Clean Air bill, for example, range between $20 billion and $100 billion. Cost burdens will also rise from the Disability Act . . . and implied quotas from the Civil Rights Act. In each case large established corporations are far better equipped to deal with these costs than newly formed small business. Yet it is the latter which is the backbone of a growing economy. . . ."