Tax, Monetary Policy Consistancies Behind U.S. Upturn / but Greenspan Fed Must Be Ready to Change Course If Our Economic Climate Worsens

Article excerpt

Despite all the worries on Wall Street, the American economy has been performing remarkably well - if, for the moment, you leave aside the big trade deficit, the budget deficit, the weak dollar and the growing dependence on foreign capital.

In its new Economic Quarterly, the Morgan Guaranty Trust Co. cites three major areas of improvement:

- The low rate of inflation in the last five years.

- The second-longest expansion since World War II.

- The adding of 14 million jobs since 1979, with the U.S. unemployment rate now seven percentage points lower than the average of other industrial countries.

What have we done right? Morgan's answer is that, first of all, the United States has had a consistency of policy, especially compared with the 1970s, with its twists and turns in price and wage controls and stop-go fiscal and monetary policies.

The first decisive break with the ``quick-fix'' approach, Morgan says, came with the ``bold anti-inflation monetary policy of late 1979,'' when President Carter appointed Paul A. Volcker as chairman of the Federal Reserve Board. Despite several mid-course corrections, Morgan maintains that monetary policy has displayed a ``consistently resolute, anti-inflation approach.''

Tax policy, too, has been steadier in the 1980s, Morgan says. Though there was zigzagging on corporate income taxation, the Reagan administration stressed reduction of marginal tax rates, adding to the economy's dynamism.

The second major factor contributing to the better American performance, Morgan says, has been increased reliance on market forces, giving the economy greater flexibility. It notes that the trend toward less government interference began under President Carter, with the beginning of deregulation of the airline and trucking industries and the swing away from energy price controls, policies that were carried further by Reagan.

But has U.S. fiscal and monetary policy really been all that consistent? And are America's chronic financial and international problems the consequence of Reagan policies?

An analysis by Data Resources Inc., the economic research subsidiary of McGraw-Hill, finds that the American performance would have been much stronger in the 1980s had it not been for dramatic tax cuts and a defense buildup that were not offset by discipline in the budget. It also says the performance would have been better had monetary policy not been so conservative, ``always erring on the side of greater progress against inflation at the expense of higher unemployment.''

Using runs of its large-scale econometric model to compare what actually happened with what the model indicates would have happened if the 1976 tax code had been left intact and federal expenditures had expanded only at the same long-term pace as the economy, DRI found that interest rates would have been far lower in the last four years and the budget and trade deficits would have been smaller. …