ECONOMIC SCENE

          Reagan vs. the Great Government Whale:
          Or the Triumph of Legend Over History
 

                    By J. BRADFORD DELONG

               Two decades ago Ronald Reagan campaigned for president
               promising to shrink the size of the federal government. And in
          America's political mythology Mr. Reagan's victory started the rollback
          of the social insurance state. Mr. Reagan pushed his huge supply-side tax
          cut through Congress and so starved and shrank the leviathan that was
          the government.

          This is the mythology. But it is not the economic history. In the current
          budget year -- in fiscal 2000 -- the share of the nation's economic output,
          or gross domestic product, collected by the federal government as taxes
          will amount to more than 20 percent, up from an average of 18.7 percent
          the last five pre-Reagan-administration years, 1976 through 1980. How
          did this come to pass? What happened to the supply-side line in the sand
          drawn by Mr. Reagan?

          The story of how the 1981 tax-cut shift in America's political economy
          was eroded to nothing has three parts: the 1980's deficits, the early
          1990's forecasts and the late 1990's boom.

          President Reagan's 1981 tax cut came without significant spending cuts.
          Nineteen eighty-one was the year of tax cuts. But 1982 and the years
          following were the years of deficits. Even before the ink of Mr. Reagan's
          signature was dry, his senior policy makers began loudly and angrily
          blaming each other for the deficit.

          David Stockman, the budget director, and his aides blamed the rest of
          the administration's unwillingness to think about serious budget cuts.
          Martin Anderson, who was the White House domestic policy adviser
          early in Mr. Reagan's first term, disagreed, blaming a Congress that "time
          and time again" rebuffed presidential plans to cut spending. But
          Democratic House leaders and Republican Senate leaders accurately
          pointed out that nine-tenths of the deficit would have remained had
          Congress accepted every one of Mr. Reagan's spending proposals.

          Perhaps the most interesting attribution of blame came late, in the
          mid-1990's, from Irving Kristol, the conservative intellectual, whose
          magazine, The Public Interest, had helped start the supply-side boom.
          Mr. Kristol contended the mistake was in carrying out the campaign
          promises of 1980, for supply-side doctrine was a political platform, not a
          public policy, and had a "rather cavalier attitude toward the budget deficit
          and other monetary or fiscal problems."

          The point, he added, was to create a "Republican majority -- so political
          effectiveness was the priority, not the accounting deficiencies of
          government."

          No matter whose finger-pointing you agree with -- Mr. Stockman's, Mr.
          Anderson's, the Senate Republican leader Bob Dole's or Irving Kristol's
          -- the fact of the deficits of the 1980's created slow but inexorable
          pressure to raise taxes to close the deficit. Indeed, the process of taking
          back some of the revenue given away by the government in 1981 began
          as early as 1982 with a tax bill pushed through Congress largely by Mr.
          Dole.

          The pressure to raise taxes was amplified by another consequence of the
          deficit: slower economic growth. The deficit meant reduced money for
          investment, which meant lower income growth, which meant lower
          revenue growth. As a result, the long-term forecasts of the
          administration's Office of Management and Budget and the
          Congressional Budget Office kept turning out to be substantially more
          optimistic than what actually happened. So by the early 1990's, both the
          O.M.B. and the C.B.O., anxious not to overestimate federal revenue yet
          again, began -- perhaps unconsciously -- to low-ball their forecasts. In
          the early 1990's, as the economy weakened and government revenue
          slowed as well, they produced increasingly pessimistic and horrifying
          deficit forecasts.

          All this further increased the pressure for tax increases. Both George
          Bush, a Republican, and Bill Clinton, a Democrat, proposed tax
          increases explicitly aimed at reversing the widening deficits. And by
          1994-95, federal revenues as a share of G.D.P. were as high as they had
          been in Jimmy Carter's term.

          Then came the late 1990's boom. Lowered interest rates driven in part
          by the shrinking of annual budget deficits, coupled with the flourishing of
          the information technology sector -- partly made possible by extra money
          no longer going to cover the government deficit that fueled
          high-investment expansion -- fostered a boom in asset prices.

          And as the paper wealth of rich Americans grew beyond their previous
          dreams, the well-off began to cash in some of their gains. Such increases
          in the stock of wealth from higher asset prices are not part of G.D.P.,
          which measures the flow of goods and services newly produced, and has
          no place for changes in the value of assets that already exist. But the
          Internal Revenue Service collects extra taxes when the affluent sell assets
          and realize capital gains. Thus the magnitude of the late 1990's boom in
          production and the value of wealth has pushed federal revenue relative to
          G.D.P. to their current high level.

          In retrospect the people who worked hard in the late 1970's to elect a
          president to cut federal spending and roll back the social insurance state
          saw their work go for naught. They had succeeded, or thought they did,
          with the election of Mr. Reagan. They were elated, and their social
          democratic adversaries disheartened. But today the level of federal taxes
          shows no sign of their work.

          Perhaps there is a moral here. Perhaps if you are in politics to change
          actual policy -- rather than to provide jobs for your friends -- it is
          important to make sure that those you vote and work for do not take
          political effectiveness and media splash as their sole compass.

          This column appears here every Thursday. J. Bradford DeLong is a
          professor of economics at the University of California at Berkeley
          and co-editor of The Journal of Economic Perspectives. Four
          economic analysts - Professor DeLong, Jeff Madrick, Virginia Postrel
          and Alan B. Krueger - rotate as contributors.