The Piper Comes for His Paycheck

William Pfaff

October 11, 1990|By William Pfaff

PARIS — Paris.---THE DOOR CLOSED last weekend on a decade of economic illusion. That illusion was popularly described as ''Reaganism'' and ''Thatcherism,'' although committed economists and editorial-writers had more formal names to apply. George Bush once called it all ''voodoo economics,'' before he became a convert -- a forced convert, perhaps, clinging to his true belief in the solitude of the night, fearing the judgment that now has come.

One might call Reaganism and Thatcherism the economics of innocence. They are a Rousseauist economics: an economics that rests on the conviction that all in nature is for the best, and the interference of man is what corrupts.

''Everything is good when it leaves the Creator's hands; everything degenerates in the hands of man.'' That was Jean-Jacques Rousseau himself, but the remark summarizes the governing economic assumptions of the United States and British governments for a decade.

It came to an end, curiously, at virtually the same moment in the two countries, on Friday last, when President Bush shut down the American government for lack of money to pay to go on, and the British government made it known that, contrary to all previous commitments, it would submit the pound sterling to the discipline of the European Exchange Rate Mechanism even though British inflation remains twice that of the other major European economies.

The American Congress and executive have since 1980 told voters that they could have what they wanted and not pay: world leadership, high military spending, space exploration, old-age entitlements, cheap gasoline and beer, junk bonds, savings-and-loan fraud, armies deployed in the Persian Gulf -- all of it was said to be available at no sacrifice to the American taxpayer.

The theoretical basis for this was the proposition that low taxes produce high government income and high taxes low income. This rests on the observation that in given circumstances of flagging growth or impending recession, reducing taxes may spur business activity enough to generate total tax returns higher than the amount lost by lowering the tax rate.

This -- a banal point, one might have thought -- was turned into a way of national life in the Reagan years, and Mr. Bush, in full and responsible knowledge of what he was doing, committed himself to it as well. Now he is sorry, but as the song says, it is too late to be sorry now. The public has become convinced that going on like this is still another American entitlement.

Thatcherism was nothing so naive. Indeed, it has been a hard doctrine of pitiless privatizations, submitting all that could be submitted to the marketplace: planes, trains, water, electricity, health, art, entertainment, education, scientific research, the nation's future itself. It turned into an operational doctrine what in Adam Smith had been an observation about the principles of the theoretical economy.

Born of the corruptions of the welfare state, the indolence of British industry and selfishness of its unions, Thatcherism did much corrective good. But it, too, rested on powerful oversimplifications: the identification of efficiency with social utility, even virtue, and a doctrinal monetarism which proved defective.

Britain's decision to enter the Exchange Rate Mechanism, linking the pound to the deutschemark and the other major European currencies, came when the British economy found itself in approximately the dismal plight it was in when Mrs. Thatcher became prime minister. Inflation is higher than it was when she took over in May 1979. Growth has all but halted. The interest rate has been at 15 percent, grossly restricting business activity and oppressively burdening home mortgage-holders (since British mortgage rates float).

Mrs. Thatcher, and her chancellors of the exchequer, had conclusively demonstrated the falsity of the proposition that high interest rates necessarily bring low inflation. Even now, the argument that membership in the ERM will restore the British economy's health seems credulous; already there is talk that the interest rate may have to go up again, or the pound be devalued.

Liberal or left-wing critics of Thatcherism and Reaganism have always attacked them for institutionalizing, as well as exploiting, selfishness. The politically active portions of both British and American electorates, which tend to be the better off, have certainly profited, in the short run at least, and the poor have grown poorer.

But the power of these doctrines, in my opinion, lies not in their appeal to selfishness but in their innocence. They are the economic counterparts to that powerful and recurrent political argument which tells us that man's natural condition is virtuous, if only the apparatus of corrupting government and education and oppressive civilization is cleared away to let him be free.

It is the conviction originally animating Shakers and Quakers, the earliest socialists, the whole utopian religio-political tradition that goes back to antiquity, and on the other hand produces Saint-Justs, Lenins and Pol Pots. One might think hardened democratic politicians, like those who have run the United States and Britain these last dozen years, would know better. But if they were not intellectual innocents themselves, they found its exploitation irresistible. Now we must pay.