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High unemployment, of course, would complicate the Government's budget problem by retarding tax revenues and raising outlays for unemployment compensation and other social programs. The new economists would counter this by reducing spending, or at least the growth of spending, in other areas. Their targets are notably the large number of subsidies to the employed middle class and prosperous industry, handouts as varied as farm price props, generous Civil Service retirement benefits, and subsidies for shipping lines.
In the view of the incentive economists, and an increasing number of Keynesians, long-term progress against inflation can be achieved only at the cost of short-term pain. Gains will require a long period of slow but steady growth of the money supply and a shrinking of total Government spending as a share of the nation's output of goods and services. Economist Robert Lucas, for example, calls for limiting the growth of money to around 4% a year, less than half the average of the 1970s, for at least three to four uninterrupted years and preferably for as long as seven. That would purge the public of its assumption that the Government has no stomach for holding to a steady anti-inflationary course that would encourage saving instead of spending. But keeping money tight would push up interest rates and aggravate the economic slowdown that politicians instinctively fear.
Fitfully, the Government appears to be moving toward the incentive prescription. Asserts Treasury Secretary G. William Miller: "For too long we have focused on consumption and have not invested enough in productive capacity." Not only is the Federal Reserve now tightening money but federal spending as a share of gross national product has declined from 22.6% in 1976 to 21.1% currently, and President Carter aims to get it even lower in fiscal 1981.
Feldstein foresees that these developments, if they continue, would enable growth to be spurred on not by inflationary Government spending but by productive private investment. While consumer buying would slow, saving and business investment would rise. In brief, the total demand in the economy would be no lower, but the mix would be different.
Ultimately, the challenge is whether the nation has the will and the determination to take the necessary hard steps. Observes a humbled Lester Thurow, onetime economic adviser to George McGovern during his 1972 presidential campaign: "When there are economic gains to be allocated, our political process can allocate them. But when there are large economic losses to be divided up, the process is paralyzed. Unfortunately, with political paralysis comes economic paralysis."
The U.S. is by no means paralyzed, but it is at a significant turning point. From Congress to the statehouses, the tax-reforming, investment-boosting, regulation-cutting, supply-expanding recommendations of incentive economics are gaining more support every day and are being increasingly translated into policies. If those beneficial trends continue, the 1980s may yet become the beginning of the good new days.