Broadsides from the Supply Side

By Charles P. Alexander

Two provocative books examine the roots of poverty and prosperity

To hear critics tell it, supply-side economics, and thus Reaganomics, originated in a faraway jungle where voodoo is in vogue. Supply-side theory, which emphasizes the importance of tax cuts in stimulating economic growth, actually sprang forth from leading universities like Columbia, and has been refined at several respected think tanks. One of these is the Manhattan Institute for Policy Research. Two of the institute's scholars, Charles Murray and George Gilder, have written new books that are already stirring as much comment and controversy as the original supply-side ideas.

One charge often leveled at Reaganomics is that it has hurt the poor by cutting back social programs, including welfare and food stamps. In Losing Ground (Basic Books; $23.95), Murray unabashedly asserts that slashing social spending is the greatest favor the Government can bestow upon the poor. Federal welfare programs, he concludes, perpetuate poverty rather than cure it.

Conservatives have made that argument before, but no one has documented it as thoroughly as Murray does. During the 1970s, he points out, annual social welfare spending by the U.S. Government nearly doubled, after adjustment for inflation, to about $300 billion. Yet all that money had virtually no impact on poverty. In fact, the percentage of the population living below the poverty line, currently set at an income of $10,178 for a family of four, rose from 12.6% in 1970 to 13% by 1980. Murray contends that this lack of progress cannot be blamed on a sluggish economy. The annual growth of the gross national product averaged 3.2% in the 1970s, a faster pace than in the Eisenhower years, when the prevalence of poverty declined. Murray, however, does not fully address the argument that growth was sporadic during the 1970s and that wage increases were badly eroded by inflation.

Losing Ground makes the case that welfare programs hurt the poor by undermining their incentive to work and thus climb out of poverty. People will be reluctant to accept low-paying jobs, Murray maintains, if they can survive almost as well on Government handouts. "We tried to provide more for the poor," he writes, "and produced more poor instead."

Murray contends that the impact of federal largesse is especially devastating to blacks. A revealing statistic, he says, is the percentage of young adults who hold jobs or are looking for work--their so-called labor-force participation rate. For black and other minority-group males ages 20 to 24, the participation rate dropped from 83.5% in 1970 to 78.9% in 1980. In contrast, the level for white males in that age group rose from 83.3% to 87.1%. Part of the explanation for the difference, Murray argues, is that welfare payments dulled blacks' motivation to work. Others, who consider Murray's analysis simplistic, state that discrimination continued to play a big role.

Murray's book proposes that the Government dismantle all its benefit programs for working-age people, except for unemployment insurance. He thinks that the handicapped and others unable to work or find a job can be aided by private charities and state and local governments, which are in a better position than Uncle Sam to judge who is needy. Murray's prescription is politically impossible, as he admits, but his book may help stimulate new thinking on U.S. social policy.

Gilder shares Murray's disdain for the welfare state. In his 1981 bestseller Wealth and Poverty, Gilder championed supply-side tax cuts as the best way to spur the economy and help the poor. His new book, The Spirit of Enterprise (Simon & Schuster; $17.95), focuses on the role of entrepreneurs, whom Gilder calls the "heroes of economic life." Gilder points out that companies with 100 or fewer employees generated 80% of all new jobs in the U.S. during the 1970s. Thus, he argues, the creative drive of entrepreneurs can do more to ease poverty than all the social programs Washington can devise.

Gilder calls 1978 a turning point for entrepreneurs. In that year, Congress reduced the maximum tax rate on long-term capital gains from 49% to 28%. The Reagan tax cuts in 1981 cut the top rate further, to 20%. Those tax changes, Gilder contends, increased the rewards of risk taking and unleashed a whirlwind of entrepreneurial activity. New companies are springing up at a rate of about 600,000 a year, a pace six times as fast as in the 1950s.

Gilder builds his book around colorful stories of adventurous entrepreneurs who beat the odds against success. Among them: J.R. Simplot, who as a baby lived in a cabin on the Snake River in Idaho and grew up to build the largest U.S. potato-processing business; Milos Krofta, a Yugoslav immigrant who became a leading builder of water-purification systems; Tom Fatjo, an accountant who took up driving a garbage truck in Houston and created one of the world's largest solid-waste-disposal firms. Successful entrepreneurs, Gilder points out, are willing to immerse themselves in the dirty, day-to-day details of their businesses and are not afraid to test techniques that have never been tried before.

The proliferation of new ventures has made Gilder confident that the U.S. can hold its own in world competition. While steel, autos and other old-line industries have been hurt by foreign rivals, thousands of new companies have helped the U.S. keep its lead in high-technology fields. Concludes Gilder: "The crucial capital of industry is not money or machinery, but mind and spirit, and in these vital domains of enterprise America remains No. 1."

--By Charles P. Alexander