EWSEWS INKINK THE BEACON HILL INSTITUTE NN LL AT SUFFOLK UNIVERSITY

Vol. 3, No. 3 IDEAS AND UPDATES ON PUBLIC POLICY Spring 1999 BHI's MBTA study: Derail budget buster

fter decades of signing a mal. Fares were last raised in 1991. Years later usage, the legislature is simply substituting blank check for the Massa- when the Weld Administration’s blueprint for one flawed budget practice for another. A chusetts Bay Transportation privatization proved to be politically unpopu- Authority, the Common- lar, the MBTA’s financing problems left the An efficient and fare solution wealth is planning to change the way tax- collective radar screen. Consider the following: payers are charged for public transporta- And so the T chugs along on a bud- tion. But will these changes be enough? A get that now approaches $1 billion per year, • The MBTA could save $58.87 million in new BHI study, Financing the MBTA: An of which only about 17% is derived from fares. FY 2000 operating costs by increasing effi- Efficient and Fare Solution, raises doubts that Now, however, even supporters of ciency to levels achieved by comparable they will. public transportation have, in effect, declared, transit authorities and without sacrificing For years, the “This is no way to run service. MBTA has simply billed the a railroad.” That’s be- state for rapid transit, bus cause the state faces a • Massachusetts taxpayers pay on aver- and commuter line services debt ceiling imposed age $203 per year each to subsidize the it has provided to commut- by expenditures and MBTA, whether they use the system or not. ers in 78 communities. And, commitments to the The total state subsidy is $608 million. each year the legislature has Central Artery/Tunnel That comes to about 8% of the average paid the bill, asking few project and other brick taxpayer’s tax bill. questions about cost con- and mortar efforts. continued on page 5 tainment, efficiencies and While bridge and toll user fees. road drivers and taxpayers are called upon The method, called “backward to sacrifice to alleviate this crisis, the MBTA funding,” is one reason why the MBTA is and its users continue to enjoy an almost free Single-trip base-fare (1999) known as a perennial “budget buster.” With ride. Metropolitan Motor Subway Commuter backward funding, MBTA management has Shouldering the MBTA’s burden Area Bus Rail* little incentive to bring costs into line. isn’t good for the state’s bond rating. By Wall National Average $1.00 $1.36 $2.34 Attempts to bridge the gap between Street’s account, the more the T borrows, the revenues and expenditures have been mini- less the state can borrow for other projects Boston $0.60 $0.85 $0.85

without impairing its bond rating. Peer Average $1.33 $1.38 $2.60 N HIS SSUE I T I Is forward funding the answer? New York $1.50 $1.56 $3.25 From the Executive Director The new phrase on Beacon Hill is New Jersey $1.00 $1.00 $1.20 The right kind of tax cuts...... 2 “forward funding,” which means that the T will no longer have the luxury of billing the Chicago $1.60 $1.60 $3.15

Analysis Commonwealth for services provided for the Detroit $1.25 NA NA Suffolk economists find no link prior 18 months. In addition, the legislature between school spending and wants to raise fares, dedicate 20% of the state’s Philadelphia $1.60 $1.60 $2.50 performance...... 4 sales tax to the MBTA and assess charges upon Baltimore $1.35 $1.35 $3.25 another 97 communities that indirectly ben- News efit from the transit agency. Washington, D.C. $1.10 $1.10 $3.60

Gallant joins BHI staff...... 5 Forward funding is a move in the Pittsburgh $1.25 $1.50 $1.25 right direction. However, forward funding Bookmark doesn’t address the real issue: the MBTA needs *Source: American Public Transit Association Lawrence Lindsey's new book to be put on a budget. By guaranteeing a rev- reviewed...... 7 enue stream that bears no relation to costs or BEACON HILL INSTITUTE From the Executive Director

hat makes for good tax politics Targeted cuts in Texas doesn’t necessarily make for On behalf of the Texas Public Policy good tax policy. Foundation, we recently built a Texas STAMP Good tax policy W In early May, the Massa- model to analyze several tax-cut proposals in chusetts House of Representa- the Lone Star state. Among the most conten- improves a state’s tives voted to drop the personal income tax tious was a plan to establish a research-and-de- comparative advan- rate from 5.95% to 5.75%. Though modest, velopment credit in the state. Texas STAMP the proposed new rate is at least headed in showed that the credit would do little to create tage and benefits the right direction. Then by a vote of 153-0, jobs for Texans. The Federal Reserve Bank of the lives of everyone the House passed a series of targeted tax cuts Texas agreed, issuing its own report that effec- geared toward “working families.” The mea- tively concurred with Texas STAMP. living there. sure is headed to the Senate. The House package includes an ex- Ending the “T”Party panded child-care deduction. It also includes When Aniko Laszlo, a senior lecturer dependent deductions, to be phased in over in economics, presented her analysis of the Mas- three years, which would be expanded to in- sachusetts Bay Transportation Authority, we clude elderly and disabled dependents. were as stunned as anyone by what she found: The cost to the state for both the a budget-busting agency that pays “Delivery 5.75% income tax cut and the sundry targeted Persons” $40,000 a year before benefits; that fails tax cuts is $430 million. to meet efficiency standards achieved by com- In order to pay for the targeted tax parable authorities in and out of the state; that NewsLink is published quarterly cuts, the House would effectively raise taxes costs the average state taxpayer $200 a year; and by the Beacon Hill Institute for Pub- by scaling back a capi- that has become a lic Policy Research at Suffolk Uni- tal gains tax cut estab- virtual free ride for versity. The Beacon Hill Institute fo- lished in 1994. (The leg- its users. We’ve of- cuses on federal, state and local eco- islature revised the tax fered our solution nomic policies as they affect citizens liability for holding an to the situation; and businesses, particularly in Mas- asset for six years. Un- there are others. sachusetts. The institute uses state- der current law the tax The legislature is of-the-art statistical, mathematical rate for such an asset is now deciding how and econometric methods to pro- zero.) the MBTA will be vide timely and readable analyses There is a reformed. What’s that help voters, policy makers and problem here. Tax clear to us is that opinion leaders understand today’s policy should be evalu- the good time leading public policy issues. ated in terms of job cre- should end. The ation, expanded pay- only ones currently PUBLISHER rolls and shored up not invited to this DAVID G. TUERCK capital stock. In short, party are the tax- EXECUTIVE DIRECTOR good tax policy im- payers. proves a state’s com- PRODUCTION parative advantage and benefits the lives of ELLEN F. F OLEY everyone living there. Former Mass. HHS Chief joins BHI DIRECTOR OF COMMUNICATIONS Tax policy that is engineered to In March, Joseph Gallant, former some desired social end, without regard to Massachusetts Secretary of the Executive Of- EDITOR the economic consequences to the state or fice of Health and Human Services, joined BHI FRANK CONTE all its residents, is quite simply bad tax as Director of Social Policy Studies. Gallant’s PUBLICATIONS EDITOR policy. Designing tax policy according to lifelong experience in the human service de- (ISSN 1094-0707) what feels good may be political expedient, livery system is playing a key role in what we but it is at best economically naive and at call “the next step of welfare reform.” We’re ©1999 Beacon Hill Institute for worst reckless. glad to have Secretary Gallant on board! Public Policy Research, Suffolk An across-the-board tax cut to 5%, University, 8 Ashburton Place, such as the one proposed by Governor David G. Tuerck Boston, MA 02108-2770. Voice, Cellucci, is the superior method of stimu- (617) 573-8750; fax, (617) 720-4272; lating and sustaining economic growth. e-mail, [email protected]; web site, http://www.beaconhill.org.

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Media Mentions

Our study, Financing the MBTA, received cov- erage throughout Massachusetts. The Boston Herald covered the story twice (May 24 & 25). The Herald’s lead editorial of May 25 featured the study: “Tame the T beast before feeding it.” (See reprint on this page.) The Boston Globe cited the study in a May 26 editorial and covered the Tame the T beast story on May 24, “Scathing report targets MBTA.” before feeding it The Associated Press story appeared in vari- Before lawmakers hand over hikes, will guarantee the system re- ous newspapers including The Patriot Ledger 20 percent of the state’s sales tax rev- mains one of the most high-cost in the (“New study of T rips fiscal practices, urges enues to feed the beast that the MBTA nation. overhaul”) and the Worcester Telegram & Gazette has become, they ought to take a care- There is no reason - save lack (“Study claims MBTA is inefficient”). The study ful look at The Beacon Hill Institute’s of political will - that, say, a delivery per- was the feature of the Worcester Telegram & tough new analysis of the agency’s son on the T payroll should be paid Gazette’s lead editorial of May 25, “Feeding the many problems. $21.85 an hour, when the Baltimore tran- beast.” The Wakefield Daily Item’s lead editorial While much attention has fo- sit system pays someone in the same of May 26 also featured the study, “Heavy price cused on the institute’s proposal for pay grade $14.38 or that a “general for a dream.” doubling MBTA fares - a move which is helper” for the T should get $20 an hour not only politically unpalatable, but when even New York pays only $16. David Tuerck appeared on television and ra- likely self-defeating -it’s the institute’s This is fiscal lunacy. dio discussing the MBTA study: WBZ radio’s exploration of the T’s spending habits The one point on which law- “David Brudnoy Show” (May 26); WGBH-TV’s that is worth a long, hard look. makers and the institute report agree is “Greater Boston” (May 25); WRKO radio’s According to the Suffolk Uni- that the T must be put on a forward- “Howie Carr Show” (May 24); and WBZ-TV’s versity-based think tank, the T had the funded budget, just as every other state “I-Team” (May 23). highest wages and administrative costs agency. But David Tuerck, executive di- of nine urban transit systems, and could rector of the institute, also notes that it’s Radio and television stations covering the save nearly $60 million a year merely by time to consider the level of taxpayer MBTA story included Fox 25-TV, WBZ-TV, WBZ bringing its operations to the same level subsidy too. Merely diverting 20 percent radio and WLVI-TV. of efficiency as its peers. Privatizing el- of sales tax revenues (currently $600 ements of its operations, a one-time goal million a year, but growing with the David Tuerck appeared on WBZ radio’s “David of the Weld administration, would cer- strong economy), doesn’t solve the Brudnoy Show” on May 13 opposing an in- tainly help costs, according to the report. problem. What it could end up doing is creased minimum wage in Massachusetts. But what privatization efforts weren’t simply encouraging more of the same. stymied by the state auditor, were aban- Boston magazine cited BHI in an article, “For doned when Gov. Paul Cellucci signed Reprinted with permission of the Bos- whom the pike tolls,” in the May 1999 issue. a five-year give-away-the-store contract ton Herald. This editorial appeared in with the Carmen’s Union in the midst the newspaper’s May 25, 1999 edition. Our letter to the editor, “A middle road for of his gubernatorial race. That deal welfare’s least reformed,” appeared in the April alone, providing for 18 percent pay 30, 1999 edition of The Christian Science Moni- tor. fied a point made by Robert Elder, Jr. in his Feb- tal spending.” ruary 10 Wall Street Journal article, “Texas al- Richard Leonardi of the Buckeye Institute, our sister ters analysis of tax cuts to account for eco- Texas STAMP, which BHI built for the Texas organization in Ohio, cited BHI in “State’s tax sur- nomic effect.” Public Policy Foundation, factored into a plus belongs to the people,” in the March 12, 1999 February 4, 1999 San Antonio Express News edition of the Columbus Dispatch. Mass High Tech cited our findings in a Febru- article, “Group says tax cuts to bring more ary 1-7 editorial, “Income tax rollback makes jobs, spending.” Another article, “Capitol Another BHI letter to the editor, “Evaluating effects good economic sense.” Also mentioning BHI Report; In Brief” appeared in the Austin of tax credits” appeared in the Wall Street Journal was the Boston Business Journal (February 5- American-Statesman on February 4. (Texas Edition), February 24, 1999. The letter clari- 11), “Study: Tax cut will boost jobs and capi-

PAGE 3 / SPRING 1999 BEACON HILL INSTITUTE

Study erases relationship between school performance and spending

n analysis of Massachusetts test higher levels of education spending do not ings may be that since residents of more scores finds there is no relation- improve student performance. The relation- affluent communities are more likely to be A ship between public school ship between student performance and per able to afford alternative means of educa- spending and student perfor- pupil student expenditures is insignificant for tion, the public schools serving those com- mance. The analysis, performed by Sanjiv all three grade levels. munities must do a better job in order to Jaggia and Alison Kelly-Hawke, both Associ- The analysis shows in particular that continue attracting students. ate Professors of Economics at Suffolk Univer- administrative expenditures appear to exert a In 1993, the Education Reform sity, appears in the current issue of Contempo- negative influence on student performance. Act established a seven-year spending rary Economic Policy, published by Western Eco- “Per pupil plan to bring all nomic Association International. administra- per pupil expen- Jaggia and Kelly-Hawke, who are tion expendi- ditures in all Mas- also Resident Scholars of the Beacon Hill In- tures are sachusetts school stitute, developed an econometric model that negatively re- districts to a they applied to Massachusetts Educational lated to stu- “foundation level Assessment Program (MEAP) test scores for dent perfor- of spending.” th th th virtually every 4 , 8 and 12 grade student mance for all This new spend- in the Commonwealth. Among their findings: grade levels,” ing aimed to im- •Increased education spending per note the au- prove student pupil does not improve student performance. thors. “For performance. th th •Student achievement is better in the 4 and 8 However, recent households in which both parents are present. grades, the test scores sug- •Family background and the stability negative relationship is very strong, with a gest otherwise. Since Fiscal Year 1993, the of a community are the main factors influenc- level of confidence of 99%. Apparently, if pub- Commonwealth has increased spending ing student performance. lic administration expenditures increase then by 34%. The projected dollars per pupil •Regardless of grade level, students student performance slips.” spent as part of the state’s foundation bud- in communities with better-educated parents The study finds no evidence that par- get for FY 2000 will be $6,463. When the (professionals and managers) perform better ents in poorer, more crime-ridden or less pro- last plan was first enacted, the spending on average. fessionally-oriented communities do not care per pupil was $5,557. •Smaller class size leads to better stu- about improving their children’s education. In March of this year, the legisla- dent performance only in the early stages of Nor does it suggest that single mothers have ture began hearing testimony on how to education (primary grades). any less desire to see their children educated continue funding public education. The results strongly suggest that well. One possible explanation for the find- Make them listen!

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PAGE 4 / SPRING 1999 NEWSLINK

MBTA Inflation adjusted real fare revenue and net cost continued from page 1 of service in excess of income MBTA (1948-1999) • In 1997, the MBTA paid 3,600 of its 600 6,000 workers on average 65% more than Fare Revenue Net Cost of Service other Massachusetts employers for work- ers in certain comparable occupations. 500

• The MBTA pays as much as 52% more 400 than other transit authorities pay the same workers. It pays a “Delivery Person” $21.85/hr, compared to $14.38/hr by the 300 Maryland Transit Authority and $15.69/ hr by the New Jersey Transit Corporation. 200 It pays a “General Helper” $19.83/hr, compared to $16.23/hr by the New York 1990 dollars (millions) Transit Authority under its contract with 100 the Transit Workers Union, Local 1056. 0 • The MBTA devotes a comparatively '48 '53 '58 '63 '68 '73 '78 '83 '88 '93 '99 large share of its budget to administrative costs (20%) and to fringe benefits (31%). and budget reforms that could save Massachu- • The MBTA charges one of the lowest setts taxpayers millions of dollars per year. fares in the nation. Subway fares are on av- Under BHI’s proposal, the Common- Gallant named Social erage 38% below those charged by compa- wealth would reduce the FY 2000 MBTA sub- Policy Director rable authorities and bus fares are 55% sidy from a projected $623.50 million to $406.26 Joseph Gallant, former Massa- lower. million. This $217.24 million saving would chusetts Secretary of Health and Hu- permit the state to finance an additional $2.66 man Services, has joined the Beacon • The state effectively subsidizes 100% of billion in new infrastructure spending. Hill Institute as Director of Social MBTA debt service, which, since 1980, has The share of MBTA operating ex- Policy Studies. In his position, Gallant increased from 11% to 35% of the MBTA’s penses subsidized out of state funds would be will assess the effectiveness of private total budget. Since the mid-1980s, the brought in line with that for a “peer group” of initiatives and of mentoring in moving MBTA’s reliance on state funds has risen eight comparable transit authorities. The share welfare recipients into work. He will from 40% to 65% of its capital expenditures. of MBTA debt service paid by state funds also examine the potential of tax incen- would be reduced by 25% to reflect the de- tives like charitable tax credits to end • Adjusted for inflation, the MBTA’s defi- crease in federal funding. dependency. Gallant will serve as a li- cit increased 1060% from 1964 to 1999 or at The MBTA would maintain existing aison between the Beacon Hill Institute an annual rate of 7.25%. service levels by raising fares and by increasing and private organizations that assist in- cost efficiency to a level comparable to that of dividuals in making the transition from • In 1997, the MBTA made 3.8 times as the peer group. Fares would rise by 124%, with welfare to work. many bus trips as all of the state’s regional bus fares rising from $.65 to $1.35 and subway Gallant served as Secretary of transit authorities combined. Yet, the state fares from $.85 to $1.90. In order to raise the rev- the Executive Office of Health and Hu- subsidy was 6.19 times higher for MBTA bus enue needed to compensate for the reduced sub- man Services from 1996 to 1997. From operations than for RTA bus operations. The sidy, the MBTA would reduce costs by $59 mil- 1991 to 1996, he was Commissioner of MBTA subsidy per trip was $1.54; the RTA lion per year. Then, the MBTA would begin to the Massachusetts Department of Tran- subsidy was $.94. operate more as a business and less as a system sitional Assistance. In that capacity, he of entitlements for its employees and users. was instrumental in both drafting and • MBTA reform would free up public Far from being draconian or mean- promoting the Commonwealth’s land- funds for other projects. The MBTA could, spirited, such reforms would simply require mark welfare reform initiative. A by increasing efficiency and making reason- the MBTA to achieve levels of efficiency and former welfare caseworker, Gallant able fare increases, save the state $217.24 self-reliance already achieved by comparable holds a bachelor’s degree in social sci- million in subsidies permitting it to fund an transit authorities in Massachusetts and other ence from Boston College and a additional $2.66 billion in capital projects. states. It would create efficiency and a fare master’s degree in social work from structure that would be, for once, fair to tax- Simmons College. BHI released its year-long study in payers. May. In it, BHI suggested MBTA efficiencies

PAGE 5 / SPRING 1999 BEACON HILL INSTITUTE Tuerck speaker at Heritage Foundation

he less a state taxes its resi- rate changes affect selected economic indica- Also on the panel was Brian dents and businesses, the tors within a state. “We are able to predict how Wesbury, Vice President and Chief Economist better it positions itself to many jobs will be created or lost, how much for Griffin, Kubik, Stephens & Thompson, a T compete successfully with money will be derived for business investment Chicago investment banking firm. other states. States that enact broad-based and what the cost to the state’s coffers will be. tax reductions, such as personal income tax That helps policymakers make informed de- cuts, lay the groundwork for more powerful cisions.” boosts to their economies than states that enact targeted tax cuts. While targeted tax Unemployment insurance reforms will create cuts may be politically popular, they usu- ally do little to build a state’s economy. jobs and increase payrolls BHI Executive Director David The Cellucci-Swift proposed reform and 25% below the level that would other- Tuerck spoke to this theme at the 1999 of the unemployment insurance (UI) tax rate wise pertain in the absence of the reform. Heritage Foundation Resource Bank would result in the creation of 11,358 new jobs Under the proposal, Massachusetts busi- Meeting in Philadelphia in April. As one in 2000 for Massachusetts, with additional em- nesses will save $566 million for the next of two panelists addressing the topic, "Fun- ployment gains through the year 2003. In ad- three years. By reducing the cost of hiring damental Tax Reform," he described the im- dition there would be an increase in the state's workers the state becomes more competi- portance of measuring the effects of pro- capital stock and tax revenue, and a slight tive – attracting business and bringing posed state tax-law changes through dy- growth in the wage rate during this period. about an expansion in employment, pay- namic modeling. The Beacon Hill Institute has estimated the rolls and capital stock. “Be suspicious when you hear economic effects of these proposals by using Using an econometric model de- that a state is relying on static modeling STAMP, the Institute’s State Tax Analysis veloped specifically for the Massachusetts to analyze its tax policy,” Tuerck said. Modeling Program. economy, the Beacon Hill Institute has ex- “You need a dynamic model that consid- The UI rate reform aims to reverse amined how the proposed reforms of the ers complex but crucial factors like how UI contribution increases in the next four unemployment insurance rate will affect taxpayers will respond to any proposed years that would apply under the current law employment, wages and capital stock change.” and reduce the average cost of unemployment growth. Details will soon be available on Tuerck described BHI’s State Tax insurance from 2000 to 2003. According to the the institute's web site at Analysis Modeling Program (STAMP), Department of Employment and Training, the www.beaconhill.org. first used in Massachusetts in 1994 and reform will trim the average cost per em- since applied to Oklahoma, New Jersey, ployee to around $270 in years 2000-2002, Ohio and, in 1999, to Texas. STAMP uses which is a 15% reduction below the 1999 level state-specific data to determine how tax-

ROMANIAN SCHOLARS VISIT — As part of a new collaboration with the Center for Social Science Research at West University,Timisoara, Romania, Suf- folk University’s Economics Department – along with the Beacon Hill Institute – hosted two economists in April. During a seminar for students and faculty, Dr. Ali Pirzadeh (left) discussed, ”The Effects of Dollarization and Seigniorage: Evidence from Hun- gary, Bulgaria and Romania.” With Suffolk graduate student Erika Gulyas translating, Dr. Horia Cristea (right) addressed the issue of “Fiscal Reform in Roma- nia.” Meanwhile, a member of the audience, retired Northeastern University professor, Dr. Anghel Rugina (center) underscored the importance of economic re- forms in Romania.

PAGE 6 / SPRING 1999 NEWSLINK Actors on the global stage: No strings attached & Economic Puppetmasters: Lessons from the Halls of Power Lawrence B. Lindsey, 1999, 215 pages. Reviewed by Frank Conte awrence B. Lindsey, economist fice longer than anyone since Bismarck, did little Greenspan’s steering rather than and former Federal Reserve Board to reverse the excesses of the welfare state and rigid rowing of the American economy is even Governor, targets his new work, work rules. more remarkable when one looks long- L Economic Puppetmasters: Lessons term. Since the recession of 1982, the United In truth, these men from the Halls of Power, to three are constrained by global in- States has en- types of readers. They are: the investor who stabilities from acting like joyed a continu- seeks to protect himself in the market; the stu- puppeteers. At best they may In the final analysis, ous 16-year pe- dent of political economy who wants to under- manage to untangle some of it is triumphant riod of eco- stand how decision makers act in the face of the strings of a world in which nomic expan- crises; and the informed voter who may soon there is no alternative to a America that the rest sion save for one be asked to accept new institutional arrange- market economy. of the world should “relatively mild ments that govern world finance. Some (Greenspan, recession” Presumably, all three are interested in Soros) do better than others emulate. (1991-92). Since securing a competitive advantage in the global (Kohl, Sakakibara) in a game the introduction economy. And, if the growth in the stock mar- in which the rules are continu- of Reaganomics ket is an indicator, all seek to divine the mes- ally being rewritten and growing democratic (which Lindsey rightfully argues laid the sages of titans such as Federal Reserve Board movements disaggregate economic decision-mak- groundwork for the current expansion), the Chairman Alan Greenspan; Japanese vice min- ing into many hands. U.S. economy has weathered a 1987 stock ister of finance, Eisuke Sakakibara; former Ger- In the final analysis, it is triumphant market crash; a banking (S & L) crisis; the man chancellor, Helmut Kohl; and world- America that the rest of the world should emu- Mexican peso crisis; an Asian flu; corporate renowned financier, George Soros. late, says Lindsey. Americans have demon- downsizing; and record-breaking 1993 Few insiders can give a better strated “how to get the policies right.” Clinton tax increases. With this prosperity picture of the international monetary Much has to do with flexible la- prevailing, observers have perhaps forgot- system and, more specifically, the bor markets, lower taxes, technol- ten to ask how the great Greenspan would American Federal Reserve System ogy and its attendant forces of handle a real crisis. As he did during the than Lindsey. His premise is creative destruction. Needless to October 1987 stock market crash, he would clear: In spite of public percep- say, Greenspan’s faith in markets and probably play contrarian. By early May tions to the contrary, these skepticism about government action 1999, Greenspan was again warning that strong-willed are the first principles upon which he tight labor markets and rising wages with- puppetmasters “may operates. But his most incisive asset is his out continued growth in productivity never be masters of the sys- “real-time mind.” Able to digest industry- would trigger inflation. tems over which they hold sway, sector information, Greenspan is better able In highlighting the drive toward no matter how much they delude them- to overcome “decision lag.” European Union, Lindsey underscores the selves and the public into believing the op- Lindsey believes that the American benefits of American tax and fiscal policy posite.” To Lindsey, this is clearest when suc- system allows Greenspan to play the role of as well as the composition of its central cess eludes the puppetmasters. contrarian, a role first carved out by British econo- bank. Any puppetmaster would certainly Lindsey highlights Greenspan, ap- mist John Maynard Keynes. This is not an odd be wise to steer the EU into the path beaten pointed to his post by three American presi- juxtaposition. Another player, Ronald Reagan, for by the Americans. But this will be difficult. dents. The other three puppetmasters stand in whom Lindsey served as an advisor, also played That’s because the EU’s basic unit rests not his shadow but are able to convince others per- contrarian by refusing to trade away two key on Hamiltonian federalist principles of haps unintentionally that they too can part the planks of his policy: flexible labor markets and checks and balances, but on the nation-state waters. aggressive tax policy. in which each member has virtual veto Sakakibara manifests the pitfalls of a Given enough latitude, contrarians can power. rigid mandarin who fails to adopt economic rebuff politicians seeking easy money and pain- The European Central Bank mem- dynamism — the ability to use flexible labor less growth. By Lindsey’s account, “Alan bers are chosen by the nation-states, which markets and the encouragement of an entre- Greenspan is successful at his job because he found means they will reflect the political views of preneurial class. Hence, in its quest for unifor- a way of taking unpopular actions without arous- their governments. “While the Fed tends to mity, Japan has failed to produce a Bill Gates or ing sufficient wrath to cause elected officials to act like a collective CEO or corporate board of a Michael Dell or even, for that matter, a mar- curtail his power. This is a remarkable achieve- directors, the ECB is designed to work more keting icon like Michael Jordan. ment.” Add to this record, another milestone: like a legislature,” observes Lindsay. Kohl is lauded for his unification of Greenspan has never lost a vote on monetary As if being a puppetmaster were not Germany and his vision of a European mon- policy, nor, according to Lindsey, even come close bad enough without a nation-state entangling etary union. Yet Kohl, despite holding his of- to losing one. one’s strings.

PAGE 7 / SPRING 1999 In Point of Fact dollars in corporate spending and cre- Alas, the new age dawns upon Profes- overnment failure at the ating thousands of new jobs, the high- sor Solow’s computer screen! world’s center stage tech industry accounts for a growing “You can see the Computer Age ev- The world has changed its chunk of the economy. “The contribu- erywhere,” Robert Solow, a Nobel G tion of computers to GDP growth has prizewinner from MIT wrote a few mind about markets and their workings. Before, the focus was on been very, very substantial,” said Joel years ago, “but in the productivity “market failure” and the ways govern- Prakken, chairman of Macroeconomic statistics.” Yet today even renowned ments needed to fix it through national- Advisers. “Spending by businesses on skeptics on the subject of technology’s ization or regulation. Today, the focus computers has been growing at a ... 60% contribution to the economy, like has shifted to “government failure,” what to 70% annual rate over the past few Solow, are having second thoughts. goes wrong or does not work very well years.” The question, posed by economists, is when governments try to manage eco- Reuters, April 2, 1999. whether higher productivity growth, nomic affairs directly. Almost every- averaging about 2% in the last three where, there is a focus on fiscal prudence. What savings crisis? years, is the long-awaited confirma- Much of the world is now privatizing. In Concerns about the personal savings tion that the nation’s steadily rising the United States, this shift has taken the rate are largely misplaced, for they rely investment in computers and commu- form of deregulation – or at least a move on an incomplete picture of the nications is finally paying off. “My to a sort of “regulation lite,” with greater economy. The rate of personal savings, beliefs are shifting on this subject,” confidence in the ability of competition measured for national income said Solow. “I am still far from certain. to protect consumers and the public weal. purposes…excludes key sources of sav- But the story always was that it took Daniel Yergin, The New Republic, ings: business savings and the apprecia- a long time for people to use informa- April 26, 1999. tion of stock values, rising housing val- tion technology and truly become ues and even the appreciation of IRAs. more efficient. That story sounds a lot The digital economy unleashed Nor does it include personal claims on more convincing today than it did a From automated teller machines to super- private pensions and other forms of de- year or two ago.” market scanners, technology has seeped ferred compensation. Steve Lohr, New York Times, into nearly every corner of life, helping Mickey D. Levy, Wall Street Journal, April 14, 1999. propel the U.S. economy in its eight-year- February 4, 1999. old expansion. Generating millions of

BEACON HILL INSTITUTE SUFFOLK UNIVERSITY 8 ASHBURTON PLACE BOSTON, MA 02108-2770