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The incentive economists, and even many of their older, more traditional peers urge the scrapping of outmoded and costly Government regulations and programs that amount to little more than self-inflicted wounds on the economy. Not only do they often aggravate inflation and reduce productivity, but they frequently produce results that their well-intentioned authors never envisioned. Some of the programs have been around since the New Deal and have become patent sops for special interest groups. The nation needs more food, and at lower prices, but federal price-propping subsidies last year paid farmers some $2.2 billion in supports; and almost one-third of that was payments not to plant crops at all. The nation desperately requires all the domestic oil and gas it can find, but the Government's five-year-old mishmash of domestic price controls encourages Americans to burn more oil and U.S. oil companies to do their exploring in other countries.
Some of the more recent regulations make the Government look like a neurotic nanny. Just one example: federal health rules require hospitals to use plastic liners for wastebaskets, but Government safety rules ban their use as fire hazards. Says Charles Schultze, chief White House economic adviser: "We have to regulate with more rationality and sensitivity. The major problem of Government management over the next 20 years will be management of the regulatory process."
Making economic sense out of Government's tax policies is a paramount concern of the incentive economists. One of the best known, and certainly most flamboyant, of them is the University of Southern California's Arthur Laffer, 39, creator of the "Laffer Curve," which he sketched on a napkin after dinner at the Two Continents restaurant in Washington, D.C.
The curve illustrates that after a certain level is reached, tax increases do not raise Government revenues but actually lower them. Reason: higher taxes discourage people from working or investing to earn more money since the Government simply takes it away. Conversely, lower taxes encourage people to work harder and earn more, leading to higher revenues. Thus the best way to increase Government income—as well as productivity, investment and general wealth—is to hold taxes low.
The incentive economists also urge predictability and stability in Government monetary policy. The University of Minnesota, home of Liberal Walter Heller, and the University of Chicago, where Milton Friedman did pioneering work in monetarist theory, have lately produced one money-oriented branch of the new economists, the "rational expectations" group. Their thesis: if politicians promise to cut inflation but pursue policies that just make prices rise faster, the people eventually will get the message and act on the rational assumption that inflation will keep increasing. Recognizing that savers are suckers, citizens will just spend their money as soon as they get it. Thus, in order to increase savings, the Government's wisest course would be to keep the growth of money consistently low. People then would rationally expect inflation to diminish and, acting on that belief, would save and invest.