Voting on economics

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THE SUPPLY-SIDE coup in the United States and Britain has now been test-proven in at least two dozen other countries, from Bolivia to Botswana, from Singapore to Turkey, from Australia to Colombia. Socialism is now in rapid retreat, thanks to an aggressively implemented alternative of lower tax rates, deregulation, and privatization. That program has unleashed individual initiative wherever it has been tried, already lifting a billion citizens of the Asian NICs (newly industrialized countries) to a reasonable level of prosperity in a single generation. The future success or failure of economic policy in the United States, the leader of this vigorous worldwide revival of free enterprise, will have an enormous influence on the direction of both politics and economics throughout the world well into the next century.

Governor Dukakis advocates substantial government tinkering with the voluntary arrangements between employers and employees. He would impose a hidden payroll tax on employers to finance medical insurance, even though young employees might prefer to work for more cash and buy their own benefits. If mandatory charges are added to the cost of hiring inexperienced labor, either wages or employment would have to fall. But wages could not adjust, because the governor also favors a steep increase in the minimum wage, which would mean that millions of young people would simply not find jobs. All of Mr. Dukakis’s rhetoric about “good jobs at good wages” turns out to mean making it illegal to offer “bad jobs”-the sort of jobs most of us had when we first left school.

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Manufacturers are also apprehensive about the governor’s enthusiastic support for advance notification of plant closings, viewing it as a first step toward making employers as reluctant to hire as they are in Europe, because lay-offs become as difficult and costly as a divorce. Mr. Dukakis’s support for prohibiting “hostile” takeovers would add yet another rigidity, since the risk of losing their high-salaried jobs is the only thing that keeps some managers alert to new business opportunities.

The first result of all such “microeconomic” meddling is sure to be a loss of jobs. And the orthodox Democratic response to unemployment is to lean on the Federal Reserve to print money, in order to push interest rates below the inflation rate. Part of this Carteresque strategy is to collapse the dollar, in the hope of exploiting foreign and domestic bond-holders. As one of Dukakis’s advisors, Lawrence Summers, wrote in The New Republic in January, “the sooner the dollar falls, the less debt we will have to pay.” The basic idea is to cut a deal with the Fed to print more money if the government would add new taxes. As Governor Dukakis put it, “I’d like to see tighter fiscal policy in this country and more liberal monetary policy.” Yet we have tried tha”policy mix” beforein 1969, 1973, and 1979-and all we got was “stagflation.”

What kind of new taxes would a Dukakis Administration favor? The top Democratic advisors, such as Summers, James Tobin, and Felix Rohatyn, have advocated taxing stock-exchange trades, taxing shortterm capital gains at a much higher rate, and taxing interest payments to foreigners. This is, of course, a proven method of causing a crash in the market for U.S. stocks and bonds, and therefore a collapsing dollar. Allan Blinder of Princeton, another Dukakis advisor, favors a surtax on higher incomes, while Mr. Summers and others want a big value-added tax. Although such taxes would weaken the economy and thus raise little or no money, Governor Dukakis has many plans to spend more. He speaks o”seed money” for this project or that, but seeds have a way of growing into big trees.

On foreign trade and investment, as T. R. Reid of the Washington Post observes, “Dukakis has been echoing the populist, nationalistic message . . . that Gephardt used last spring.” Such thinly veiled protectionism is particularly risky now that U.S. exports are growing at a hectic pace, partly thanks to new American factories co-financed by Japanese and European investors. The push to unite Europe economically by 1992 could easily lead to protectionism visa-vis U.S. exports, with the excuse that the Europeans were merely emulating our policies, and Australian officials have likewise been citing our trade policies as a reason for creating another insular trade bloc with Asia.

A consistent theme emerges from all these particulars. Dukakis would protect union workers from competition with young people, protect established business managers from competition with those willing to offer stockholders more money, and protect high-cost producers from foreign rivals. The “seed money” he wants to use to subsidize enterprises that could not stand on their own would come from higher taxes on productive workers and investments. If it is impossible to achieve egalitarian results by raising everyone to the same level, Governor Dukakis has no qualms about trying to lower everyone to the same level.

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The obvious advantage of a Bush Administration is that it would not be a Dukakis Administration. There are other predictable advantages as well. Mr. Bush has proposed a cut in the capital-gains tax rate to 15 per cent, and defended it sturdily, on solid supply-side grounds, in his debate with Governor Dukakis. Protectionism was raised as an issue in the South Carolina primary by both Bob Dole and Pat Robertson; George Bush resisted it then, and presumably would continue to do so, in the spirit of the Reagan Administration’s Canadian trade pact.

But how much better a Bush Administration would be depends very much on which of his advisors Mr. Bush pays most heed to. Martin Feldstein-who left the Reagan Administration because he was convinced the sky was falling-has been close to Bush for years; the 71 -month-long economic recovery will, one hopes, incline Mr. Bush to listen to more sanguine advisors. The dollar started its fall during Jim Baker’s tenure at Treasury, though his G-7 initiatives toward international monetary stability were promising.

The men closest to Bush (and Bush himself) are pragmatists. This has caused them to look favorably on what has worked over the last seven years-Reaganism. So long as they continue in that course, the choice next month will be between prosperity without inflation in a Bush Administration, and inflation without jobs in a Dukakis Administration.

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