Economic dominoes: the seeds of Bush's defeat were sown under Reagan - but not in the way the media think; toppled by tax reform

National Review, Nov 30, 1992 by Paul Craig Roberts

Once the huge costs of the deposit-insurance bailout were in the picture, Budget Director Richard Darman used them to pursue his own agenda. The bailout was a one-time affair of acquiring and disposing of assets, unrelated to the ongoing taxing-and-spending operations of the budget, and conventional accounting practices would have kept the bailout off budget. However, by putting it on budget, Darman gained an additional $300 billion in estimated red ink with which to panic President Bush into breaking his "no new taxes" pledge. This let Darman negotiate the disastrous 1990 budget agreement, a deal in which higher taxes were the price for promised spending cuts and a promised $500billion reduction in the multi-year deficit forecast.

Predictably, Congress spent the projected revenue increase--but the taxes helped to kill the economy, and the revenues did not materialize. The Congressional Budget Office's latest estimates of federal outlays for 199093 are $226 billion higher than its estimates prior to the 1990 budget deal, and federal revenues are $363 billion lower. Consequently, the deficit widened by $589 billion over the four-year period--a swing of $1,089 trillion from the promised reduction. Ironically, interest rates fell despite the massive swelling of the deficit--a big blow to Bush's economic team, which had supported the budget deal on the grounds that the path to lower interest rates was through a lower deficit.

Thus, the failure of the Republican establishment's economic policy and theory is total and complete. It is to be hoped that we will never hear another word from the architects of Bushonomics--who delivered the country to Bill and Hillary Clinton--about how big deficits cause high interest rates. The Bush team doubled the deficit that President Reagan left, and we have the lowest interest rates in three decades, together with an economy that is dead in the water. Jobs, investment, and productivity growth did immeasurably better in Mr. Reagan's high-interest-rate economy. This doesn't prove that high interest rates are the source of economic boom, but it does show that interest rates are not the driving force that the Bush Administration assumed them to be. Michael Boskin and Nicholas Brady put all the eggs in one basket, and it wasn't the right one.

Tax, Spend, Regulate

THE FAILURE of the Bush Administration's macroeconomic policy was compounded by the explosion in regulatory costs and federal outlays. If Americans wanted a tax-spend-and-regulate President for the next four years, they could just as well have re-elected Mr. Bush. Federal regulation prospered under his Administration, gaining control over whole new areas of the economy and private life. The Clean Air Act is vastly inefficient, costing the economy two dollars for every dollar of benefits. The Americans with Disabilities Act has imposed massive costs that make no earthly sense. For example, until recently the underground garage in which I have parked for the past 11 years had one parking space reserved for the handicapped. Never in the 11 years have I observed a car parked in that space. Now, based on an arbitrary formula devised by an unaccountable regulatory bureaucrat, the garage has six permanently empty reserved spaces. At the going price, this is an annual tax on the garage of $14,400. That's just the cost to one garage of one regulation.