Dirty hands across America's economy.

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Author: Chapman, Stephen

Hands Off: Why the Government
Is a Menace to Economic Health
Susan Lee
Simon & Schuster / 252 pages / $23

On successive days in April, Bill Clinton used his presidential powers to do two surprising things. He ordered oil stocks released from the federal government's Strategic Petroleum Reserve in an attempt to reverse a sudden rise in retail gasoline prices; and he told the Department of Agriculture to buy more beef for public school cafeterias, in an effort to bolster sagging meat prices. The actions immediately revived memories of the 1960's and '70's, when presidents and their aides routinely stuck their snouts in the marketplace to overrule wages and prices that offended them. Clinton's meddling served as a reminder of how much distance we have traveled since then--and how little.

You could hardly invent a better example than energy prices to dramatize the superiority of free markets to government control. Between the beginning of the Arab oil embargo in 1973 and the end of Jimmy Carter's administration in 1981, when the prices of crude oil and gasoline were controlled by Washington, the retail cost of gasoline in the United States, adjusted for inflation, more than doubled. One of Ronald Reagan's first acts upon taking office was to scrap the controls, defying predictions that consumers would have to bear an even heavier burden. The result, in fact, was a speedy decline in prices that extended throughout the 19800's and--with a brief interruption after Iraq's invasion of Kuwait -continued until this year. Between 1981 and the end of 1995, the inflation-adjusted price of filling your tank fell by more than half, reaching the lowest level of the postwar era.

But all this was taken for granted by the American people, who had come to assume that falling fuel prices are constitutionally guaranteed. Clinton's release of federal oil supplies got little criticism from Republicans, who were too busy trying to upstage him with their demand for a reduction in the federal gasoline tax, and it was utterly uncontroversial with the public at large. The beef-market intervention, meanwhile, went virtually unnoticed.

Many Americans apparently missed some of the crucial economic lessons of the last thirty-five years, but Susan Lee was more attentive. A former editor at the New York Times op-ed page and former member of the Wall Street Journal's editorial board, Lee is also an economist raised in the orthodoxy of Keynesianism at Columbia who has abandoned the faith. She is unflinching in her apostasy: "That Keynesian economics didn't work is evident in its legacy--the problems that we are trying to solve today. That Keynesian economics could never work is obvious when its theoretical basis is examined." Her conversion to lais-sez-faire could hardly be more complete. "The plain fact is that the government cannot fix economic problems," she writes. "What government can do, to a greater or lesser degree, is to make it difficult for us to solve problems or, at best, it can create a congenial climate for us to fix things:"

In the vast majority of cases, she believes, the best thing the government can do is get the hell out of the way. "Minimum wages? Free employers to pay employees based on the value of their work, not on the political calculations of Congress. Trade protection? Let firms and industries fail if they can't cut the mustard internationally. Farm supports and other forms of economic welfare? Dismantle them."

Hands Off is not, per se, a critique of the Clinton administration, but it can profitably be read as one. Lee's mission is to dissect America's major blunders in fiscal policy since the Kennedy administration--from deliberate and premeditated deficit spending to inflationary monetary policy to high marginal tax rates to presumptuous federal regulation. And many of those errors continue to be repeated today.

The economists who advised Presidents Kennedy and Johnson, for example-particularly Walter Heller-- thought deficits were essential to stimulating growth whenever the economy was below its full output level, which is nearly always. Heller has a disciple in Clinton's national economic adviser Laura D'Andrea Tyson, who last year made the preposterous claim that if the federal budget were to be brought into balance over seven years, as Republicans were demanding, the economy would be thrown into a recession.

High tax rates have also come back into fashion. Clinton's 1993 tax package increased the top marginal income tax rate on individuals from 31 percent to 39.6 percent, mutilating one of the primary achievements of Ronald Reagan. (Republicans, to their eternal discredit, have done nothing to repeal it, despite pushing to roll back a 4.3 percent increase in gas taxes that passed at the same time.) Showing the continuing Democratic addiction to federal regulation, Clinton has lobbied to raise the minimum wage, forced businesses to provide workers with family and medical leave, demanded that employers furnish the same amount of insurance coverage for mental health problems as for other kinds, and, of course, done everything he could to convert the health care industry into a public utility.

None of this endears him to Lee, who is merciless in her castigation of every president but Reagan. His administration, despite some failings, delivered what she regards as "an astonishing outburst of good sense." (She thinks Bush little better than Clinton.) Two choices win Reagan high marks. During the 1981-82 recession, he stoutly refused to propose "counter-cyclical" nostrums, knowing that they typically prove costly, tardy, and useless. Lee reports with great admiration that the 1982 Economic Report of the President, issued in the middle of the deepest contraction in decades, barely acknowledged the downturn.

Second, after the 1987 Wall Street crash, with panicked investors, oppor-tunistic political opponents, and journalists braying for White House action, Reagan again mustered the courage to do nothing. The result? The predicted recession failed to materialize, and the stock market soon resumed its upward climb.

This approach was, in Lee's telling, a welcome respite from the peripatetic fiddling of Reagan's recent predecessors, who acted on the basis of Keynesian theories that could neither control economic events nor explain them. Fiscal policy was supposed to promote full employment without inflation, but the persistent deficits of the 1960's and '70's coincided with a strange new malady-rising unemployment combined with rising prices. "Fine-tuning" (the term originated with Heller) allegedly had the power to ward off bad times indefinitely, but it too failed. "All in all," writes Lee, "there were nine major tax changes during the 1960's, and only one seemed to work as advertised-the 1964 income tax cut."

The Keynesians dismissed critics like Milton Friedman who said that inflation was always a monetary phenomenon, insisting instead that it could be prevented by wage-price guidelines backed up by the threat of federal action. In 1965 the Johnson administration threatened to release federal stockpiles of aluminum to force a price rollback. All this reflected the utter puzzle inflation was to liberal economists of the era. "It is not unfair," she writes, "to say that Keynesians felt that inflation was caused when the economy was zapped by aliens from the Planet Debbie who caused prices to rise, which caused wages to rise, thereby causing prices to rise, thereby causing wages to rise, and so on." They had to learn the hard way. Today, even Keynesians concede most of what Friedman insisted all along.

The most charming feature of this winning book is its reliance on the words of former presidential economists, mostly taken from Lee's personal interviews. Some of their admissions are far more incriminating than anything the most malevolent partisan outsider could say. Robert Nelson, a staff economist of President Kennedy's Council of Economic Advisers (CEA), recalls, "We had enormous self-confidence and a strong belief that we knew better than other people. We were full of the desire to save the world with economics." Another Kennedy economist, Barbara Bergmann, admits that the council was highly insular: "We had no real contact with businesspeople and the Council never thought to solicit it."

When Lyndon Johnson's income tax surcharge of 1968-69 didn't slow inflation as expected, it came as a shock to Arthur Okun, who chaired Johnson's CEA. Okun later admitted that "the experience was a sobering one for many economic diagnosticians, forecasters and policy planners. If I seem sensitive in reviewing the results, it is only because I am." Alan Greenspan told Lee that he preserved his integrity as Gerald Ford's CEA chief by renting a Washington apartment on a monthly lease for his entire tenure, prepared to quit and go back to New York if Ford adopted, say, wage and price controls. Charles Schultze, who had the same job in the succeeding administration, did-n't lie awake nights fretting that his boss would prove too conservative to bear: "I figured that Carter's anti-big government stuff was naive, that he wasn't serious."

Lee combines able reporting on how regulations affect ordinary people with a sure grasp of the most abstract macroeconomic theory. She makes the great issues of modern economic policy come alive in a way that is ideal for the uninitiated. Yet laymen who read the financial and op-ed pages regularly will occasionally find the book thin and facile. Sometimes Lee hurts her case with careless overstatement, as when she discusses the unintended effect of auto pollution controls. These, she says, "push up the cost of new cars so that drivers stick with their old cars longer, thereby actually increasing pollution." You can't increase pollution by slowing the replacement of older, dirtier cars with newer, cleaner ones, anymore than you can replenish your pantry by eating less. The correct point, which is damning enough, is that overly strict and expensive emissions controls may yield a smaller improvement than cheaper, less obvious methods-taxing actual emissions, for example.

A book aimed at a broad audience is bound to fall prey to occasional lapses of that sort. No matter--Hands Off is entertaining and sophisticated, and makes for a painless primer in practical economics. And it also deserves an audience among more worldly readers who want a fuller understanding of the dangers of government interference in the economy. Bill Clinton is probably not one of them.

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REVIEWED BY Stephen Chapman

STEPHEN CHAPMAN is a syndicated columnist on the staff of the Chicago Tribune

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