The price of Reaganomics

IN WASHINGTON, the deficit-reduc tion package is history and President Clinton has turned to his next Herculean task, reforming the healthcare system. But in New York, where the stock market soars to new highs and interest rates fall to historic lows every day, the finger-pointing over who caused those huge 1980s deficits - and more to the point who, morally at least, should repay them - is only just getting started.

Two weeks ago, Time magazine published a picture of Ronald Reagan on its cover upside down, over the title 'Overturning The Reagan Era'. And for all its compromises, the budget plan the US adopted this month is the first real rejection of Reaganomics, the curiously irresponsible combination of tax cuts and spending rises that very nearly left the US Treasury issuing junk bonds of its own by the end of the 1980s.

After a decade of 'voodoo economics', wasteful military spending and the savings and loan bail-out, it has fallen to the next generation of taxpayers to restore the 'full faith and credit' of the US, and to Mr Clinton to distribute the pain.

Past policy, as Mr Reagan's one- time chief economic adviser, Murray Weidenbaum, recently admitted, is crushing present possibilities. By a twist of fiscal fate, Mr Clinton has become 'a reluctant apostle of austerity', dispensing the sort of fiscal orthodoxy that 'puts bondholders first', as the economist David Hale puts it. This has not, however, endeared him to those bondholders who, like the rest of America's wealthy, are being asked to shoulder the lion's share of the new taxes the country faces. Despite the unprecedented activity in US capital markets, investment advisers and economists are warning that the rich are simply going to stop spending their money.

The real macroeconomic risk of taxes on the wealthy is that they make those who fall just below that category 'think twice before working hard enough to earn dollars 115,000 a year', argues James Grant, publisher of Grant's Interest Rate Observer in New York. 'The history of American growth is the history of personal dissatisfaction with the creature comforts associated with the equivalent of dollars 114,000 a year, before taxes.'

America's wealthy, and those aspiring to that status, may well find ways to avoid paying the new taxes. But this will not alter the fact that they were the chief, and probably only, beneficiaries of Mr Reagan's 1981 personal and corporate income tax cuts, and of other government largesse throughout the decade.

Some respectable economists, most notably David Stockman, the architect of Reaganomics, argue that the now-legendary excesses of the 1980s - the junk-financed leveraged buyouts, the property and savings- bank booms, the whole 'casino society' in Wall Street, Beverly Hills, Dallas and Boca Raton - were essentially financed with taxpayer- backed dollars, many of which disappeared in the ensuing bankruptcy crises and scandals. Others argue the resulting dollars 4,400bn national debt is entirely their responsibility.

'No one imagined how bad the outcome would be,' Mr Stockman said in a recent interview in the New Yorker. 'It was really an unnecessary chapter. It got away from us.'

Mr Stockman, now an investment banker with the Blackstone Group on Wall Street, explained how 'tax-cutting soon became a movable feast for special interests'; how the spending cuts meant to match the tax cuts never materialised; how Mr Reagan skirted responsibility for the fiscal doomsday machine he had created.

When a secret deal was cut with key Democrats to deal with the burgeoning budget shortfall in 1982, Mr Reagan vetoed it, suggesting 'the deficit would 'serve a good purpose',' concurs Mr Weidenbaum. ' 'They keep the liberals from new spending programmes',' he quotes the former president as saying.

Wall Street may not have played an active part in this irresponsible deception, but its complicity in voodoo economics is unquestionable. The famous Laffer Curve - which pretended to show that the new investment created by a tax cut would alone generate enough revenues to balance the federal budget - was the object of jokes among economists who were themselves beneficiaries. Talented financiers like Michael Milken, Charles Keating and Lewis Ranieri almost instantly saw opportunity in this new moral climate, putting taxpayer-backed deposits and tax-free pension money to work as junk bonds, savings-bank loans and mortgage-backed securities.

Taxpayers should 'understand how money was really made in this country in the last dozen years, and their interesting, indirect but lucre- bestowing role in that process,' says Michael Thomas, the Wall Street veteran who writes a weekly column for the New York Observer. 'The people who brought us the 80s tended to make out best in the 80s and they ought to pay for the 80s.'

He proposes an additional 10 per cent 'deficit-reduction' surcharge on the wealthy, and the partial 'publicisation' of the profits of ventures that have benefited from implicit taxpayer guarantees, such as federally guaranteed mortgage bonds.

If Mr Clinton is unpopular now on Wall Street, one can only imagine the reactions to such measures. But doing the right thing is proving as thankless a job on Wall Street as doing the opposite was wildly popular.

Most investment strategists believe that the economic stagnation that has accompanied austerity will soon force him away from deficit reduction. If he defies their expectations and maintains his fiscally responsible policies through to 1996, says David Shulman, chief equity strategist with Salomon Brothers in New York, 'Wall Street would build a statue in honour of Bill Clinton. But he still would not get its vote, nor Main Street's for that matter.'