OPINION
Page 4
Amagic show
-Saturday, April 11, 1981.
The Michigan Daily
of Reagan
economics
Do you believe in magic? If so then you are
probably enchanted with President Reagan's
proposed personal income tax cut. The
president says cutting personal income taxes
$44 billion in fiscal year 1982 will lead to lower
inflation, a balanced budget, and more jobs. It
all happens because of a new magic potion:
supply-side economics.
Contrary to public perception, the magic of
supply-side stimulation is not new. In the 1960s
the Kennedy administration introduced income
tax cuts, an investment tax credit, and
liberalized depreciation deductions. The only
thing new about supply-side economics is that
its proponents are exaggerating its
capabilities.
FURTHERMORE, THERE IS nothing
mysterious about this magic trick. Aggregate
supply is the total amount of goods and services
produced by the economy. Its sidekick,
aggregate demand, is the amount of goods and
services consumers desire. Supply-siders
believe the tax cut will increase aggregate:
supply more than aggregate demand and cure
all our'economic ills.
However, not everyone believes in magic.
Critics say the tax cut will reduce investment
and inhibit economic growth. They also claim
the tax cut will do for inflation what caffeine
will do for insomnia. .
Administration officials believe the tax cut
will stimulate investment because lower tax
rates give people a greater incentive to save.
However, this effect of the tax cut will be
trivial. The recently released 1980 Economic
Report of the President noted, "the personal
savings rate responds very little to changes in
rates of return or in the tax structure."
The report calculated that a 10 percent tax
cut would increase investment a mere 0.002
percent of gross national product. Even if
President Reagan's optimistic $3.2 trillion
GNP estimate is accurate, the increased
savings will barely exceed $6 billion.
FURTHERMORE, THE TAX cut will also
reduce investment. The tax cut will add $44
billion to the deficit, which the administration
predicts will total $45 billion if Congress passes
the administration's economic program. To
finance its deficit the administration says it
will sell government bonds, rather than print
more money. This will increase the bond sup-
ply, decrease bond prices, and increase in-
terest rates. When the government borrows
money, less is available for private sector in-
vestors. Higher interest rates reflect a reduc-
tion in the amount of money available for in-
vestment and result in less investment.
The amount of investment lost depends on
the amount of the tax cut invested. If taxpayers
By Stewart Mandell
invest all of the tax cut, the tax cut would not
cause higher interest rates. If only a small per-
cent is invested, the tax cut will cost the
economy billions of investment dollars.
THE ADMINISTRATION says that two-
thirds of the tax cut will be invested. But, the
administration has no proof to support this
figure. In fact, during the past few years,
Americans saved less than 6 percent of their
income. The administration claims taxpayers
will save more than eleven times that amount.
Thus, the odds are very high that only a small
portion of the tax cut will be invested. On
balance then, the tax cut will probably cause
investment to decline.
This is shameful because the government
could easily ensure that investment significan-
tly increases by expanding the investment tax
credit, reducing corporate tax rates, and run-
ning a budget surplus. In fact, the most ef-
ficient way to stimulate investment is to run
budget surpluses. By running a surplus the
government buys bonds, increases bond prices,
and reduces interest rates. Lower interest
rates will stimulate more investment.
A RECENT STUDY by Larry Dildine, a
Deputy Director in the Treasury Department,
supports this conclusion. The study published
in last September's National Tax Journal
calculated that reducing capital taxes by 5
percent and running a $25 billion deficit
reduces investment by two percent whereas
running a $25 billion surplus and leaving taxes
unchanged increases investment over 5 per-
cent. The study demonstrates what few
economists would deny: the most efficient way
to increase investment is to run a surplus, not
to reduce taxes.
The administration also claims lower tax
rates will increase aggregate supply by in-
ducing people to work more. But economic
studies show that not everyone works more
because of higher real wages; some work less
or the same as before. Prof. Walter Heller,
former chairman of the President's Council of
Economic Advisors says, "The bulk of eviden-
ce suggests that total hours worked might rise
by 1 to 2 percent in response to a 10 percent rise
in after-tax pay."
Nor will this increased labor supply
significantly increase productivity, that is, the
output per worker. Inexperienced secondary
workers will comprise much of this increases
labor supply. Their output per worker will be
less than the national average and could per-
petuate productivity stagnation.
THE ECONOMIC REPORT of 'the President
calculated the tax cut's cumulative effect will
be to increase aggregate supply 20 percent to 60
percent of GNP, under optimisitc circumstan-
ces. Unfortunately, the report also estimated
that the tax cut will increase aggregate
demand 2 percent of GNP. These numbers are
consistent with a host of other studies which
show that personal income tax reductions raise
demand five to ten times more than they raise
supply. When demand exceeds supply, the
result is higher prices and more inflation.
Economists critical of these personal tax
cuts are not exclusively Democrats or liberals
For example, Herbert Stein, President Nixon's
chairman of the Council of Economic Advisors
has criticized the supply-side magic show. Also
the tax cut is inconsistent with the monetarist
view espoused by neo-classical economists.
Now, when spending cuts are politically
feasible, the administration has a magnificent
opportunity to increase investment. Too bad
the administration prefers costly magic shows.
The American public will be paying for this
show for years to come.
A
a
t
b
i
a
a
a
d
M
d
b
.,c
Stewart Mandell is a 3rd-year student at
the University's Law School. His criticism t
of Laffer's theory of economics will appear
on tomorrow's Opinion Page.
I ,ii
Edited and managed by students at The University of Michigan
Weasel
Vol. XCI, No. 156
420 Maynard St.
Ann Arbor, MI 48109
Editorials represent a majority'opinion of the Daily's Editorial Board
TEN Ot)T of CONTROL.
I AE1Z SHOT...
CI-Tr'STnIMF- NAND&JN THIN&
NKrtONhL F-MBARW65MENT...
BRN HAND IS r
IcESP! f 7viT 5LOW
THis Ti ME r
Another chance to rally
against the Reagan budget
PE4ATS L- Y tRt-{ CAN T.
TH$11. I-AN4P5 ON.
-'4
-r IL.Ot1ONE Wr1M A WN.
~0 ~DON} HAE Ta it- Ttt4kT
THE~P.L;LpEVICTIMT.
AND t4ANI'60NS AE Tht WORST
OFA . W-k 1r \RMRR
by Robert Lence
7t
f~iMK 9Bj
i
1-4
T HREE OBSTINATE Senate
Republicans Thursday stood firm
by their insistence on an even more
conservative economic plan, refused to
approve the federal budget 1an eador-
sed by the Reagan administration, and
in doing so may well have slit their own
conservative throats.
In a surprise move, three fiercely
conservative members of the Senate
Budget Committee sided with
Democratic senators in rejecting the
austere budget proposed by the
Reagan administration and cut further
by Congressional Republicans.
The dissenting Republicans hope to
devise a budget with even deeper cuts
in federal spending, and so joined
Committee Iiemocrats, who are
pushing for their own, more moderte
budget ,plan, in shooting down the
Reagan plan.
The Reagan administration had
hoped that the budget plan would clear
Capitol Hill hurdles before
congressmen and senators leave for
home for Easter recess next week.
Administration officials fear that the
delay will give opponents of the plan
time to regroup, lobby fiercely against
the Reagan proposal, and succeed in
forcing passage of a compromise
package such as the more moderate
Democratic plan.
So, instead of buying time for the
development of a more conservative
plan, as the three staunch Republicans
had hoped, Thursday's defeat, in Born-
mittee will probably result in a loss of
budget-slashing momentum.
Democrats can use the delay to rally
opposition to the harsh Reagan plan.
Constituent groups will have the oppor-;
tunity to meet with their represen-
tatives and senators during the recess
in attempts to persuade them to reject
the Republican plan in favor of a
Democratic package which proposes
more modest cuts in the federal
budget.
The delay also may help diffuse the
current frenzied, slash-the-budget at-
mosphere the administration has suc-
ceeded in creating on Capitol Hill.
When senators and congressmen
return from their home districts after
the recess, they will likely scrutinize
the Republican budget proposals more
carefully and approach decision-
making with more prudence.
Democrats must take advantage of
this fluke of conservative political
miscalculation and rally to push for
more modest cuts when they return af-
ter recess.
LETTERS TO THE DAILY:
More inane MSAyballot proposals
To the Daily:
Ah, the time has once again
come and gone. MSA elections.
And once again the same
questions immediately come to
mind. Maybe this year someone
can help me with the answers.
I do not deny that political
awareness is a virtue.
Heightened student involvement
in and concern about student
government would be ideal. But
this can only be accomplished
through a concerted, well
organized, and continual effort on
the part of our elected represen-
tatives.
If there are issues with
genuinely widespread im-
plications facing the University
community, we as students
should be informed of them well
in advance of any real need to
vote on a course of action. This
information can be easily
disseminated through student
publications. When there are
Clarifying the NDPC
referendums upcoming on the
ballot in a general election, the
public is literally bombarded
with summary and discussion on
the issues.
But subjecting students to the
inanity of the MSA "Ballot
Questions," with no prior ex-
planation (or warning), only ser-
ves to create frustration and con-
fusion on the parts of students
who either question the validity
or necessity of some proposals, or
wonder why their elected
representatives are not qualified
to decide such vital issues as
"Should the words 'the Board of
Directors of the Michigan Union'
be deleted from the Appointmen-
ts section of the All-Campus Con-
stitution, which deals with the
appointment of student represen-
tatives to outside bodies, because
the Board of Directors of the
Michigan Union no longer
exists?" This was the concern of
Proposal A.
I realize that constitutional
amendments must follow a
specified procedure, to ensure
that neither our interests nor
rights are violated. Can't we,
though, find an easier way of
passing at least the trivial ones?
As for the four-point Proposal
D, which poses the question of
whether or not an Oxford House
should be assigned "to each of the
relevant area studies centers at
the University of Michigan," and
how this housing should be ad-
ministered, I'd be willing to bet
that many students would be very
intertested to know just what an
Oxford House is, what a
"relevant area studies center" is,
and what the implications of the
passage of such a proposal would
be. Unreasonable?
And proposal E, which begins
by asking the student to decide
the future of United States
foreign policy - I personally
wouldn't go near this one with the
proverbial ten-foot pole.
I only hope that the incoming
MSA administration will concen-
trate on keeping students abreast
of the important issues facing
them; this communication
through the ballot certainly isn't
proving very fruitful.
Let's not turn students off to an
assembly that could be such a
valuable tool.
-Bill Kohn
April 8
4
i4
I
11
radli1
mU
14
o"
To the Daily:
In the Daily's front-page story
of April 4 about the National
Democratic Policy Committee,
the Daily made some factual
errors, a few misleading
statements, and omitted impor-
tant details.
Since Students Concerned
About a Recurrence believes it is
important that students and
faculty be given the complete
story about the organization, we
would like to set the record
straight.
The National Democratic
Policy Committee is a front-
group for the extreme right-wing
National Caucus of Labor Com-
mittees whose political arm the
U.S. Labor Party has run Lyndon
LaRouche as its presidential
candidate in 1976 and 1980. In
fact, LaRouche is the undisputed
head of all of these groups.
The Daily article stated that
SCAR "claims" ties exist bet-
ween LaRouche and the NDPC.
This fact appears in their
publications, which lists him as
chairman.
The Daily wrote that SCAR
feels that the NDPC is dangerous
because they serve as a front
group for other racist
organizations. This is not totally
correct. Though NCLC-USLP has
connections with such right-wing,
racist, and anti-Semitic groups as
the Liberty Lobby, their front
groups, (the NDPC, the Anti-
Drug Coalition, and the Fusion
legality of the signatures on their
application.
MSA is currently in possession
of signed statements from two
students stating that the NDPC
used their names without
authorization to do so.
What the Daily characterized
as a NDPC "demonstration" with
signs "held high" was actually
only two NDPC members (non-
students) with a sign propped up"
between their boxes of
publications and bumper
stickers. The Daily failed to men-
tion that a group ranging at times
from five to 15 students stood in
opposition to the NDPC represen-
tatives and told those who ap-
proached, about their bigotry and
bizarre conspiracy theories, and
not to view them solely as a pro-
nuclear group. We realized that
just as they had the right to ex-
press their opinions we had the
right to express ours.
In conclusion we would like to
emphasize an important point
which the Daily did make. This is
the linkage between NDPC's
economic and political theories
and their "moral' stand. This
linkage was well illustrated by
their sign-"More engineers, less
Queers." Students and others
must be aware that when they
support NCLC-USLP front-group
they are supporting more than
just a pro-nuclear or anti-drug
group. They are supporting an
entire political philosophy which
Ak7.
A
15
*p - na4
a
-I
Join Tax.D
To the Daily:
On April 15, Tax Day, we will
join other war tax dissidents in a
noontime protest at the Ann Ar-
bor Federal Building against
militarism and military expen-
ditures.
We have sent the Internal
Revenue Service our check for
only the non-military portion (68
percent) of the taxes we owe,
along with a letter explaining our
actions.
Political and social science
scholars agree that a nuclear
war is likely within the next
decade, and that a "limited" war
would quickly escalate to a global
nuclear exchange. Physicians
call the medical effects of such a
ayprotest
tivating a nerve gas facility in
Pine Bluff, Arkansas.
Military expenditures are a:
main cause of both inflation aftl:
unemployment. Funds spent 'in
the civilian sector on education
and health produce more than.
twice the number of jobs as the
same funds spent in the military
sector. As things are going, we
may be ruined by our military,
expenditures without even going
to war.
In its efforts to cut taxes,*"
balance the federal budget, and:
at the same time increase the*
military budget, the present ad-*
ministration is - making
disastrous cuts in human ser-
vices: public transportation
0- "-
I
/tp *w minw im