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Advancing Austrian Economics, Liberty, and Peace

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Making Economic Sense
by Murray Rothbard
(Contents by Publication Date)

Chapter 33
Clintonomics Revealed

After a campaign that stressed "the economy, stupid," a middle-class tax cut, and assurances by neoconservative pundits that Bill Clinton was a "moderate" and a "New Democrat," Clintonomics is at last being unveiled in the budget message of February 17 and in other intimations, such as "health care," of actions to come. And the news is that Bill & Hillary Clinton are only "moderates" in the sense that Brezhnev was more "moderate" than Stalin, or Goering than Himmler. Hold on to your seats, Mr. and Mrs. America: we're in for a very bumpy ride.

Each recent administration has had a far worse "nomics" than its predecessor. Reaganomics was no bargain; it was a melange of four clashing schools of economic thought, each professing outward loyalty to the Reagan result while trying hard to best their competitors. The four groups were the classical liberal or semi-Austrian wing, the smallest and least influential group that lasted less than a year of the first Reagan term; the Friedmanite monetarists; the supply-siders; and the conservative Keynesians. Bushonomics was solely dominated by the worst group of the four: the conservative Keynesians.

(Briefly: the classical liberals wanted drastic expenditure and tax cuts; the supply-siders wanted only tax cuts; the monetarists confined their desires to a steady rate of money growth; and the conservative Keynesians, as is their wont, pursued both expenditure and tax increases.)

But even conservative Keynesianism, though profoundly wrong, is at least a coherent and respectable school of economic thought, a foe worthy of intellectual combat. Such an accolade cannot be accorded to Clintonomics, which does not deserve the quasi-honorable label of "economics" at all. For Clintonomics is, Alice-in-Wonderland economics, schizoid economics, loony- tunes economics.

Why schizoid? Consider: Much propaganda is made about the horrors of the deficit, of the necessity of"sacrificing" for the future, for our children, in order to help close the deficit. That is the excuse for the vanishing of the middle-class tax cut, to be replaced by a whopping tax increase on the middle class. And yet, at the very same time, there is supposed to be a massive spending increase. Why? For two reasons" to "jump start the economy," which is barely out of a recession, if not still mired in one; and second, to provide "investment" for an economy that has been stagnating for 20 years, and needs more saving and investment.

The proposal is schizoid because it implicitly assumes that the economy, or the political economy, is separated into two hermetically sealed compartments, with neither influencing the other. On the one hand, tax increases help with the deficit, but have no unfortunate effects on the fragile, recession-bound economy; while on the other, the stimulating spending increases apparently have no effect in worsening the deficit!

Once we realize, however, that the economy is interconnected, and that one part influences the other, then the absurdity of Clintonomics becomes evident. For the huge increase in taxes will deliver a kick in the head to the economy: first, by crippling saving and investment by levying higher taxes on corporations and on upper income groups; and second, by imposing higher costs on business through the energy tax and other assorted "fees" that are really taxes in another guise. The higher costs on business will raise prices to consumers far beyond the moderate increases forecast in consumer utility bills. For higher energy costs will enter into every good produced by energy, and will particularly hit hard at manufacturing, such as the aluminum and chemical industries, and at transportation such as airlines. These are some of the very industries hit hardest by the recession.

Note that the effect of increasing energy taxes is not only to raise consumer prices. For cost increases, despite popular myth, are not simply "passed on" easily to consumers in the form of higher prices. They will make American firms less competitive abroad, and they will lead to lower profits, reduced production, and increased unemployment, as well as higher prices.

Furthermore, the huge increases in government spending proposed by Clinton will, of course, make the deficit worse. Apart from this, no tax increase in modern times has ever helped close the deficit. The Reagan tax increases of 1982 and after, and the infamous Bush tax increase of 1990, did not lower the deficit. The only practical way to lower the deficit is to cut government spending.

Neither will the government spending "stimulus" aid the economy, nor the government "investment" alleviate the long-term stagnation caused by puny saving and investment. The American economy has a twofold problem: short-run, where we are either still in a recession or in a very fragile and timid recovery; and long-run, where we are suffering stagnation caused by low saving and investment. The cure for the latter is more saving and investment; but, contrary to Keynesian nostrums, the cure for the former is precisely the same. 

The recession of 1990 was the inevitable result of the bank credit expansion (not the "Greed") of the 1980s, and the adjustment process of that recession can only be speeded up by two kinds of government policy: (a) not interfering in the healthy process of liquidating unsound investments by bailouts or by Keynesian "stimuli"; and (b) drastically cutting the government's own budget as well as its taxation.

The supply-siders are right that tax cuts rather than tax increases are best for both for getting out of recessions and for long-run growth; but they overlook the important point that government spending also cripples the economy, both in the short and long-run, for government spending is wasteful and parasitic upon productive private enterprise. The greater the burden on the private economy, the lower the genuine saving and investment for recovery and long-term growth.

The Clinton regime tries to get around this problem by semantic trickery: by renaming government spending as "investment," just as it dares to relabel taxation as "contributions." But regardless of such deception, government spending is wasteful spending for the benefit of the unproductive "consumers" in politics and the bureaucracy.

But what of the deficit? The Clintonians claim that the deficit is the biggest problem because government borrowing channels private savings out of productive investments. And yet the same Clintonians wish to lower interest payments by shifting from long-term to short-term debt, which will crowd out private investment far more frequently from the capital markets. In fact, the unproductive crowding out of saving comes not just from deficits but from all government spending; after all, taxes crowd out and even destroy private savings far more ruthlessly than mere borrowing. The problem is government taxation-and-spending.

Thus, Clintonomics is really Orwellian economics. It is self-contradictory Orwellian "doublethink"; to the classic Orwellian "Freedom is Slavery" and "War is Peace," Clintonomics adds "government spending is investment" and "taxes are contributions." No school of economic thought, not even the Keynesian, advocates a big tax increase while the economy has not yet recovered from a recession; and yet Clintonomics does. 

But though Clintonomics be madness, "yet there is method in it." For shining through all the lies and contradictions and evasions, there is one red thread: government power increases at the expenses of the private marketplace. In short, Clintonomics is, in essence, a Great Leap Forward, American style, not toward Maoist communism but toward Democratic Socialism, toward Marxism without the Leninism.

So far, the American public, snowed by the propaganda of Clinton's Permanent Campaign, seems to be willing to accept the "sacrifices" involved, cozy in the assurance that the rich guy down the block will be forced to sacrifice even more. In the long run, however, Americans will find soaking-the-rich to be cool comfort, indeed.

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