Business: Ideas from the Innovators

Abolish the corporate income tax. Force regulators to stick to a budget. Drive up gasoline prices to $3 per gal. Replace the personal income tax with a tax on only “expenditures.” The new generation of innovative economists has a bold diversity of ideas—and ideologies. Some of them still applaud Keynes, at least with one hand, but others turn thumbs down. All agree, however, that Government often compounds the economic dilemma and that the nation needs more individual incentives. A sampling:

MICHAEL BOSKIN, 33. When he was an undergraduate at Berkeley in the 1960s, Boskin remembers, the young were radicals and the older people conservatives. In his profession now, he finds the alignments almost exactly reversed—because of the disillusionment of the students of yesterday. Says he: “The older generation held out too much promise for being able to fine-tune the economy and eliminate all its problems by Government intervention.”

In articles and testimony, Boskin, a Stanford professor, advocates a concise plan. Among his ideas: 1) reduce the size of federal spending as a proportion of the Gross National Product; 2) balance the budget over the length of the business cycle, accumulating surpluses in good years that can be used for tax cuts in hard times; 3) require the Federal Reserve Board to announce a “moderate and predictable” rate of monetary expansion—about 5% to 6%—and stick to it; 4) eliminate the personal income tax.

Under his startling scheme, Americans no longer would pay taxes on their total income, which includes savings that are now actually subjected to double taxation (first when the money is earned and later when it draws interest or dividends). Instead, they would pay taxes on only the money they spent, thus creating a powerful incentive for saving. Impossible? Not at all, says Boskin, who adds that since interest and dividend payments also would be tax exempt, U.S. capital accumulation would rise to new highs, thus revitalizing the private sector of the economy.

LESTER THUROW, 41. A liberal who remains a moderate Keynesian, Thurow favors tax reductions to fight economic slump. To combat inflation, he opposes inducing a recession or putting on wage and price controls, both of which he considers unfair. Instead, Thurow, who is an M.I.T. professor, advocates removing Government price props, such as subsidies and tariffs.

Protectionism is the heart of the productivity problem, he believes, because resources are blocked from moving from sluggish industries to more productive ones. He favors pulling investments out of “sunset” industries and allowing them to go under, while providing generous aid and retraining programs to laid-off workers. Says Thurow: “If we cannot learn to disinvest, we cannot compete in the modern growth race.”

Thurow has a radical idea for inducing Americans to invest in efficient industries: eliminate federal taxes on corporations. Freed from taxes, the return on invested capital would immediately double, and as a consequence, corporations would have greater incentive to invest—and more profits with which to do so. To offset the loss of revenue to Washington, the shareholders would pay a tax on their share of the company’s retained earnings as well as on their dividends. Even so, they would probably earn more on their shares since corporate profits would soar. At the same time, Thurow wants to establish a new tax system that would be more equitable than the present one. All forms of personal income, whether from wages, real capital gains, dividends or interest, would be taxed at the same rate. Special provisions that enable the rich to avoid taxes would be eliminated. Thurow’s goal is for people with the same real spending power to pay the same proportion of their income in taxes.

All that, Thurow argues, would raise enough money to wipe out the federal budget deficit, thus eliminating the need for heavy Government borrowing to finance it. That would free up many billions in capital for private investment. The Government then would have enough funds to put more into research and development and give incentives to emerging and necessary industries. Simultaneously, Thurow would deregulate energy prices and put a stiff” tax on gasoline, raising it to as much as $3 per gal.

WILLIAM NORDHAUS, 38. After two years as a member of the President’s Council of Economic Advisers, Nordhaus has returned to his professorship at Yale with some definite ideas about what Government should and should not do in the nation’s economic life. Says he: “It is critical that Government play a central role in influencing the general level of inflation, employment, investment, interest rates and the value of the dollar. But when Government begins to involve itself in the millions of details beneath the surface, it is going beyond its expertise.”

Nordhaus favors a selective dismantling of the plethora of federal tariffs, subsidies, farm props and regulations that increase consumer prices. Says he: “We are eating high-cost domestic sugar when we should be consuming low-cost imported sugar.” While on the council, he argued for deregulation of the airlines, which Congress bought, and called for the same thing in the trucking industry. According to his estimates, the cost to private industry of meeting the myriad federal regulations is on “the same order of magnitude as the federal budget—hundreds of billions of dollars each year.” Ultimately, the bill is paid by consumers. He would restrain the regulators by requiring them to submit an annual “regulatory budget,” which would put dollar figures on proposed new measures. The Congress would have to approve the budget.

RUDIGER DORNBUSCH, 37. While the Keynesians can flaunt the master’s classic, General Theory, and the monetarists can flourish Milton Friedman’s A Monetary History of the United States, the closest that the new economists have to such a tome is a 651-page text, Macroeconomics, by Dornbusch and Stanley Fischer, 35, both professors at M.I.T. Published in 1977, it has become the largest selling advanced economics text. The authors’ central thesis reflects the new economists’ nagging uncertainty about the omnipotence of their own profession. They contend that the complex computer models used to predict the effects of specific economic policies or actions simply do not—and cannot—reflect the way the real world behaves. “What will be the magnitude of reaction to a broad tax cut?” asks Dornbusch. “Will people spend the money at once? Will they wait?” His conclusion: “We don’t know.”

In his own specialty of international monetary policy, Dornbusch opposes the efforts of the Federal Reserve and foreign central banks to prop the dollar’s value by buying up billions on the international money exchanges. His preference: let the dollar float freely until it reaches its real market value. Dornbusch takes much the same hands-off attitude toward trade: the U.S. should not protect its industries from foreign competition, and, conversely, it should insist that its trading partners reciprocate. In a free global market, Americans would be forced to face up to the fact that either the nation controls its inflation or the dollar will continue its fall.

ROBERT LUCAS, 41. The “rational expectations” economists hold that short-term policy jiggering cannot outsmart human ingenuity, or, you can’t fool all the people even some of the time. One principal in this school is Lucas of the University of Chicago. Says he: “The real amount of goods and services available cannot be manipulated effectively by short-term market interferences. Such policies are based on the premise that we, the Government, can make people work harder, invest more or perform some other desired objective. But people are skeptical, so such policies do not work any more. The public has also lost confidence in the prospect of a stable policy in the future, because monetary trends have been jumping all over the place.” Increases in the money supply, he asserts, merely produce more inflation, not expansion of output.

Lucas proposes that the Government adopt only firm, long-term policies upon which rational expectations can be based. Says he: “Ideally, we should announce a monetary expansion policy of 4% annually for the next seven years and then stick to it. People would respond, and inflation would be cured with a minimal risk of a deep recession.”

ARTHUR LAFFER, 39. Many new economists are skeptical of “laws” or “models,” but not Laffer, the irrepressibly self-confident U.S.C. professor. The originator of the Laffer Curve also has constructed the first computer model that analyzes the effects of varying rates of taxation on the economy’s “supply side.” Laffer concedes that his model is still in a rudimentary stage and may contain errors. Nonetheless, on the basis of its projections, he forecasts that a 10% cut in federal personal income taxes would raise the G.N.P. by nearly 1 %, increase tax revenues by $5.5 billion, to about $472 billion, and reduce the budget deficit by $8.9 billion, to some $20 billion. Says he: “We would collect less per person in each bracket, but there would be more people in the higher brackets because of increased economic activity.”

Laffer urges a constriction of welfare programs because “we subsidize unemployment.” According to his studies, a family of four on welfare in Los Angeles receives as much as $718 per month in cash, food stamps, rent subsidies and other benefits. If the man or woman gets a job paying $1,000 monthly, the family’s after-tax income increases by only $140. Also Laffer favors excluding teen-agers from the $2.90 hourly minimum-wage law so that they can take jobs for less and learn trades that later will enable them to find more lucrative employment.

Laffer’s flamboyant style and relatively simple solutions to complex problems put off many old and new economists alike. Liberal J. Kenneth Galbraith jokes that Laffer’s Curve resembles a wishbone in shape as well as substance. Nonetheless, Laffer has impressed many Representatives and Senators with his readily understandable theory. If a deep-cut tax bill is finally passed, he will receive much credit for it.