Economics as public policy.

• Author: Weidenbaum, Murray L.
• Position: Economic Observer - Column

EFFECTIVE ECONOMIC POLICY must go beyond conventional monetary and fiscal measures, important though they are. We need to eliminate the structural defects that depress productive capacity and productivity. These structural barriers interfere with maintaining a pace of economic expansion that is more rapid and durable than today's experience. Many of these defects arise from the operation of Federal government policies and programs. Let us focus initially on two major categories: the composition of government spending and the structure of taxation. Reforms in these groupings can further more fundamental economic objectives.

Five guidelines can be helpful for changing the composition of government spending: focus budget cuts on reducing the large consumption part of the budget rather than on the small investment portion; target subsidy programs that benefit limited groups; avoid spending programs that merely offset problems caused by regulation (reform regulation directly); privatize activities that are properly the responsibility of the private sector; and use economic efficiency considerations more widely.

The array of government programs that affect the economy is staggering--and a basis for serious budget cutting. Concerning privately produced goods and services, the government is a major buyer, significant seller, and potential competitor. Literally, the Feds giveth and the Feds taketh away. Government is a powerful regulator, but it also subsidizes private business in a great variety of ways--making direct expenditures, providing credit, furnishing facilities, and offering numerous tax loopholes.

Moreover, government can encourage technical programs and innovation in numerous ways. Most Federal expenditures for research and development are not motivated by the desire to promote R&D per se. Rather, they are designed to support a specific program objective, which may or may not have a high technology content--national defense, space exploration, health, agriculture, etc. All of the expenditure approaches possess a basic shortcoming: the government selects the firms to do the R&D and the specific fields to which the funds are to be devoted. In contrast, a tax incentive for business firms to finance and perform R&D represents a private sector approach to fostering innovation. Unlike direct government expenditures, the tax credit puts the major responsibility for selecting the area of R&D on the private sector, which also bears the major...