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42 Tax Foundation's Tax Review 1 (1981)

handle is hein.tera/tafoutaxt0045 and id is 1 raw text is: Tax Review Reindustrialization of America By Paul W. McCracken Americans seem inclined to require a buzz phrase before they can get a problem into focus, and I think the term reindustrialization is a classic illustration. All at once, within the last year, we have had articles and speeches, even a full issue of Business Week, devoted to this matter of rein- dustrialization of America. I'm all for having these words encapsulate an idea-though we do run a risk. Here I want to invoke the British economist, D. H. Robertson-the only member of our profes- sion with a sense of humor. He once alluded to a grin without a cat. Now, I can assure you that you will never see anything like that in the American Economic Review today. Well, in any case, the danger, of course, that we do face is that a word becomes a substitute for thought, and we stand there preoccupied with the grin after the cat itself has disappeared. Inflation Rate Historically Low Obviously, the U.S. economy has not been per- forming well in recent years; and it is useful for us to have some kind of par for the course, as it were, by which we can judge what we are experiencing now vis-a-vis what history suggests might be more reasonable. The U.S. economy traditionally has operated with a rate of inflation of about 2 percent per year. There have, of course, been interludes of disturbed periods; but the crude, compounded rate of rise of the consumer price index beginning in 1900 and ending in 1965 is 2.1 percent. I think, however, that there are two sub-periods here which are perhaps even more significant. Those two sub-periods are from 1900, the begin- ning of the century, up to World War I, and from 1948 to 1965. That, after all, is a thirty-three year period. That's almost three and a half decades. The interesting thing is that for the first period the average rate of inflation was 1.7 percent and for the second period, 1948 to 1965, 1.8 percent. I think that's significant for two reasons. It does es- tablish the close to 2 percent per year rate as a kind of par for the course. It also suggests that at least up until the middle 1960s, there was little evi- dence that the problem was getting any worse. There was no secular tendency, in other words, as we moved through the decades of the twentieth century, for the rate of inflation to accelerate. The second point is the U.S. economy has been much more nearly a full-employment economy throughout its history than we perhaps have given it credit for. Once again, suppose we look at the period from 1900 to 1965. We would, of course, have to exclude the pathological years of the Great Depression and, of course, also World War II, when the rates were artificially low. The unemployment rate would have been 4.7 percent for the remaining forty years or so. Suppose we look at the first de- cade of the twentieth century. That decade came before macroeconomics had even been invented. This Issue In Brief In moving, toward reindustrialization, the United States needs to direct its attention toward supply-side economics, regaining its position as a high-investment economy, participating effec- tively in the world market, and fostering a liberal market-organize'd strategy for economic policy, says Dr. Paul W. McCracken. This issue of Tax Review is based on remarks presented by Dr. McCracken at the Tax Founda- tion's 32nd National Conference in New York City on December 3, 1980. The views expressed are those of the author and not necessarily those of the Tax Foundation. Copyright 1981 by Tax Foundation, Inc., 1875 Connecticut Avenue, N.W., Washington D.C. 20009, (202) 328-4500 1

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