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L. Gordon Crovitz in the WSJ on how competition, not regulation, is what’s really need to improve US broadband:
When it comes to broadband competition, government is the big problem. The most significant new competitor in broadband is Google Fiber, which launched in 2011 but has permission to build its fast service in fewer than two dozen communities across the country. Google Chairman Eric Schmidt, a longtime supporter of “net neutrality,” tried to lobby the White House against the radical step of applying Title II to the Internet, which adds new barriers to competition such as requiring universal service.
Google Fiber’s Milo Medin offered this assessment of Obamanet at the Comptel industry conference this month: “No consumers are seeing higher speeds than before the order was passed; no consumers are paying less for their Internet services than what they were paying for; no consumers are seeing higher volume caps than they had before; and no consumers have additional choice of providers than they had before.”
He added: “Some would argue that regulation is the answer, but I have never seen a company deliver better service because a federal rule existed.” Instead, “what we do need to do is build new networks and deliver better and faster services while offering consumers new choice that replaces bandwidth scarcity with bandwidth abundance.”
Google Fiber needs federal and local governments to deregulate by granting it and other new competitors more rights of way to lay fiber along existing highways, bridges, telephone poles and sewers. Mr. Medin called on the Transportation Department and Environmental Protection Agency to allow more open access. Local governments block new competitors by requiring large fees and favors for officials such as free government Web access.
The government’s monopoly control over broadband infrastructure limits which companies can offer broadband services. That—not mergers in the declining cable industry—is what leaves consumers limited choice in how to gain access to the Internet.
And here is Andy Kessler in the WSJ earlier this year:
To get gigabit speeds, we need fiber running all over the place. Fortunately, fiber optics is glass, basically melted down sand. Plenty of that to go around. Instead of arguing about broadband speeds or invented problems like “net neutrality,” we ought to be focused on the regulations and cronyism that impede running fiber on our poles and under our roads and lawns.
It is time to adopt a Quick Dig doctrine. This is the Google Fiber approach: Google only agrees to lay fiber in cities that agree to easy access to infrastructure and a quick permitting process. Though Google has agreed to expand in 34 cities in nine metro areas, it looks like only Atlanta, Charlotte, Nashville and Raleigh-Durham will see fiber installed. Google is still haggling with the other locales over details. But Google can’t do it alone.
The FCC can encourage the rollout by mandating that municipalities open up their infrastructure to all who wish to install fiber—instead of using access to extort money from would-be providers. New companies would show up to lay fiber. Wall Street would funnel capital to those with the best prospects.
During the stimulus spending of the American Recovery and Reinvestment Act of 2009, we were all inconvenienced as roads were ripped to shreds under the auspices of Transportation Income Generating Economic Recovery, or so-called Tiger grants. There are still potholes. Instead, let’s get a real bang for our buck. I propose the DUMB Act: Dig Under My Block. Legions of workers will be hired to dig. The results—extremely fast, reliable Internet—will be worth the inconvenience.
Some may ask: Do we really want the federal government changing local laws? It is a scary thought, but it is necessary: Web traffic crosses state lines. The FCC should stop quibbling over “neutralizing” our slow Internet and encourage a real high-speed build out. Dig, baby, dig.
And here are a few posts from me from along the same lines:
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Wikipedia tells me that “Generation K” refers to “the collective nickname given to a trio of young starting pitchers in the New York Mets organization in 1995.” Of course, “K” is baseball shorthand for a strikeout. But the next time you hear about “Generation K,” it will almost assuredly be pop-culture shorthand for “Generation Katniss,” the catchy demographic title given to girls ages 13 to 20 — devised by British economist Noreena Hertz — assumed to be fans of “Hunger Games” heroine Katniss Everdeen.
They are concerned about existential threats. Sadly, their anxieties stretch way beyond the typical teenage anxieties. Seventy-five per cent of teenage girls I surveyed are worried about terrorism; 66 per cent worry about climate change; 50 per cent worry about Iran. They also worry inordinately about their own futures. Eighty-six per cent are worried about getting a job; 77 per cent about getting into debt. … Only 4 per cent of Generation K girls trust big corporations to do the right thing (as opposed to 60 per cent of adults). Only one in 10 trusts the government to do the right thing — half the percentage of older millennials. …
Their distrust of traditional institutions bleeds into a more generalised distrust of traditional social mores. As many as 30 per cent of teenage girls are either unsure about marriage or don’t want to get married. Even more strikingly, 35 per cent are unsure if they want to have children or definitely don’t. This is a seismic difference compared with older millennials. … And this generation is definitely career-minded — 90 per cent consider it important to be successful in a high-paying profession. … Time and time again the girls told me how disturbed they were by gender pay gaps, sexist comments, the attitude that “women cannot be engineers”. They shared their frustration that “men are able to do anything but women still can’t”, along with concerns about economic, racial and social inequality. … Eighty per cent of them support equal rights for transgender people. Indeed, I was fascinated by the extent to which Generation K celebrates difference. When I asked the girls to describe themselves in one word, “unique” was the one they most commonly chose. Unique — and proud to be so.
So a group born post 9-11 and that came of age during the Great Recession and Not-So-Great Recovery has anxiety about economic and national security and distrust of Big Business and Big Government? Hardly seems like a stretch. And how might center-right politicians appeal to Generation K? Here are some wise words from my boss, Arthur Brooks:
If Republicans and conservatives double down on the promotion of economic growth, job creation and traditional values, Americans might turn away from softheaded concerns about “caring.” Right? Wrong. As New York University social psychologist Jonathan Haidt has shown in his research on 132,000 Americans, care for the vulnerable is a universal moral concern in the U.S. In his best-selling 2012 book “The Righteous Mind: Why Good People Are Divided by Politics and Religion,” Mr. Haidt demonstrated that citizens across the political spectrum place a great importance on taking care of those in need and avoiding harm to the weak. By contrast, moral values such as sexual purity and respect for authority—to which conservative politicians often give greater emphasis—resonate deeply with only a minority of the population. Raw money arguments, e.g., about the dire effects of the country’s growing entitlement spending, don’t register morally at all.
Conservatives are fighting a losing battle of moral arithmetic. They hand an argument with virtually 100% public support—care for the vulnerable—to progressives, and focus instead on materialistic concerns and minority moral viewpoints.
Some say the solution for conservatives is either to redouble the attacks on big government per se, or give up and try to build a better welfare state. Neither path is correct. Raging against government debt and tax rates that most Americans don’t pay gets conservatives nowhere, and it will always be an exercise in futility to compete with liberals on government spending and transfers.
Instead, the answer is to make improving the lives of vulnerable people the primary focus of authentically conservative policies. For example, the core problem with out-of-control entitlements is not that they are costly—it is that the impending insolvency of Social Security and Medicare imperils the social safety net for the neediest citizens. Education innovation and school choice are not needed to fight rapacious unions and bureaucrats—too often the most prominent focus of conservative education concerns—but because poor children and their parents deserve better schools.
Defending a healthy culture of family, community and work does not mean imposing an alien “bourgeois” morality on others. It is to recognize what people need to be happy and successful—and what is most missing today in the lives of too many poor people.
By making the vulnerable a primary focus, conservatives will be better able to confront some common blind spots. Corporate cronyism should be decried as every bit as noxious as statism, because it unfairly rewards the powerful and well-connected at the expense of ordinary citizens. Entrepreneurship should not to be extolled as a path to accumulating wealth but as a celebration of everyday men and women who want to build their own lives, whether they start a business and make a lot of money or not. And conservatives should instinctively welcome the immigrants who want to earn their success in America.
‘Once you begin to see humans as the interchangeable members of a class, you begin to dehumanize them’
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“Mrs. Clinton pointed at the top category and said the economy required a ‘toppling’ of the wealthiest 1 percent …” – reporter Amy Chozick, New York Times.
In all the talk about US income inequality and the 1% or 0.1% or 00.1% vs. everybody else, some politicians seem to be forgetting we are more than our income percentile rank. It’s important to remember that even as we use these handy short-hand descriptions when discussing various groups. Here is a bit from a recent EconTalk podcast where host Russ Robert chats with James Otteson of Wake Forest University about his new book, “The End of Socialism.”
ROBERTS: So why don’t you close us out and talk about the socialist impulse to think about classes versus the capitalist focus on the individual and why that’s such an important–why do you make that distinction as one of the important ones between the two?
OTTESON: Well, I think that’s really one of the central parts of the moral argument against socialism and in favor of this decentralized notion of capitalism. Once you start thinking about human beings as members of classes–so, even if it’s classes that sound initially plausible or neutral, like the rich and the poor, immediately what you begin to do is to see human beings within those classes as being more or less interchangeable. They’re like marbles or poker chips and one is just as good as another.
But the danger that has actually issued real and horrible consequences in human history–once you begin to see people as being interchangeable, at least among classes, this religion, this nationality, this ethnicity, then you begin to dehumanize them. They don’t seem to you like individual centers of human dignity. And I think, looking at a lot of the horrible episodes of human history, that’s what you see. You see one group of people looking at another group of people as mere members of a group, mere members of a class. But by contrast, when you see instead human beings as being individuals–which, by the way, I think is the correct way to view this, individual centers of human agency, individual centers of human dignity–that completely transforms our relationship to one another. So, I no longer view you as interchangeable, as fungible, as a poker chip. I view you as an irreplaceable and precious asset, precious commodity, precious human being. Someone who brings something to the world that nobody else ever has or nobody in the future ever will. That completely transforms our relationship to one another.
And I think that’s captured by the individualism that you see in capitalism: that what we do is we see people, all people, any person as being unique, having dignity, and being uniquely precious in exactly this way. And when we see it that way–and this is what I call this triumph of human moral agency–that’s really a transformation in how we view other people. That is what will debar us from labeling a whole population of people as a certain kind of group and then devaluing them because they are in the wrong kind of group. We can’t do that. Because each member of that group is unique; each member is different from all of the others; and each one of them is irreplaceable.
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A much-needed (possible) corrective to a key economic stat underlying the multi-decade, middle-class stagnation thesis (via the Wall Street Journal):
So how bad- or well-off are workers? Last week, we posted a series of charts showinginflation-adjusted wages for most workers topped out in 1972. The data, an official Labor Department measure released each month, appeared to underscore soft wage gains during this recovery.
But some economists objected, saying the Labor Department is overstating true inflation when it uses the Consumer Price Index to make its calculation on real wages. “When you use a different inflation factor, you get very different results,” Aaron McNay, an economist for the state of Montana, commented here on Real Time Economics. “For example, using the Personal Consumption Expenditure index (PCE), you see that hourly wages for non-supervisory workers have never been higher than they are now.” Rather than peaking more than four decades ago, PCE shows wages bottoming out in 1990 and rising more or less steadily since. … And indeed, if you recalculate wage figures using PCE then it looks like average wages for most workers hit a new high this year.
The PCE tries to account for changing consumer behavior and is the preferred measure of the Fed. The piece concludes with another good point:
Mr. McNay offers an important caveat. “What I think we’re seeing is this divergence, with a lot of growth in high wage jobs, and lot of growth in low wage jobs, and not a lot of growth in median wage jobs,” he said in an interview.
Labor Department data has consistently shown some of the fastest wage and job growth in leisure and hospitality, a segment that includes restaurant workers and has the lowest hourly wages among major employment categories. Professional and business services–a broad category that ranges from lawyers and architects to temporary workers and security guards–also has posted steady wage and employment gains. Construction, manufacturing and other blue-collar jobs that have traditionally paid a solid middle-class wage are growing, though they have been slower to emerge from the recession. Neither sector has recovered all the jobs lost during the downturn.
That last bit is what you call job polarization.
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One way to bring down healthcare costs is by letting non-doctors provide the healthcare they’re qualified to deliver but aren’t currently allowed to. For instance, the study “Relaxing Occupational Licensing Requirements: Analyzing Wages and Prices for a Medical Service” finds “more restrictive state licensing practices are associated with changes in wages and employment patterns, and also increase the costs of routine medical care, but do not seem to influence health care quality.”
And as I have written before, “US healthcare needs innovative new delivery models to create disruptive innovation of the sort that makes healthcare goods and services less expensive and more accessible. And nurses and other nonphysician providers have a potentially massive role to play in all this as medical technology improves. One example: retail clinics employing nurse practitioners charging fixed fees for simple procedures such as strep throat diagnosis and treatment.”
So nurses have a big role to play. But what about dentists? Here is Spencer Name of the Clayton Christensen Institute on how this could be a classic case of disruptive innovation:
Most customers experience dental and basic primary care problems similarly – they’re both inconveniences to fix as quickly as possible (their “jobs” align). Therefore, it makes sense for dentists and PCPs to offer more coordinated primary care, including oral health. We foresee the creation of “one-stop shops” in an emerging retail health market where patients can receive comprehensive care in streamlined, accessible venues. This dentist-PCP partnership could pave the way for dentists to eventually do other types of non-dental triage. Integration of dentists and PCPs will require a new integrated business model that optimizes around rules-based processes and efficiency. …
PCPs will exit unprofitable, low-margin markets and are moving upmarket themselves, often by delegating to PAs or RNs. Dentists also can move into the space created by the PCP upmarket exit and burgeoning population. Although estimates vary, experts agree that the US faces a huge PCP shortage, especially in rural and urban areas. Instead of scrambling to train more doctors, we could repurpose a large dental workforce already interacting with patients. For instance, patients with diabetes have a high risk for peritonitis, or gum inflammation. Dentists can play a role in alerting patients with potential risk profiles as part of dental care.
The two main dental degrees, Doctor of Dental Surgery (DDS) and Dentariae Medicinae Doctor (DMD), involve heavy training in physiology and surgical techniques. Dentists are already trained in many of the same diagnostic tools used in primary care, like X-rays and tissue biopsies. Dentists could possibly handle imaging of simple fractures, since they already have the technical expertise and infrastructure to do the same thing for jawbones.
Dentistry is becoming commoditized by technology, opening the door for dentists to be disrupted by less skilled practitioners. Dentists spend a large volume of their time cleaning teeth, drilling for cavities and urging preventative care. But skilled dental assistants can now reliably handle much of the dentists’ work volume. This has both reduced the dentist’s value-add and saturated the low-end dental market supply. Dentists will be motivated to move upmarket into primary care because of dental commoditization.
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In the new Weekly Standard, Heritage Foundation Chief Economist Steve Moore writes a paean to the flat tax: “Remember the Flat Tax? It’s still a good idea.” Perhaps, but I don’t find anything in the piece that’s persuasive.
Moore gets off to a bad start with this initial claim: “When Reagan reduced the top marginal tax rate from 70 percent to 28 percent in the 1980s, the Laffer Curve effect was indisputable. The economy exploded, tax revenues nearly doubled over the decade.”
In other words, a low-rate flat tax — Moore says Rand Paul is considering one with a top 15% rate — would cause such explosive growth and generate such a tidal wave of tax revenue that it wouldn’t blow a hole in the deficit. In fact, one could fairly read Moore’s statement as a claim such a deep tax cut would even pay for itself. But as I have written recently, flat-tax advocates wildly overstate the growth impact of the Reagan tax cuts and ignore that they certainly did not pay for themselves or even come close. Reaganomics was a huge boon to the US economy, but let’s keep it real. As Shakespeare puts it, “To gild refined gold, to paint the lily … wasteful and ridiculous excess.” One cannot simply reason from the historical examples of the Reagan-JKF-Coolidge tax cuts that a flat tax in 2015 would usher in an age of 4-5% growth as far as the eye can see — especially given modern demographics.
Next, Moore concedes the public’s disinterest in the flat tax and disbelief in its wonder-working power. Indeed, as I recently wrote in The Week, “A YouGov poll earlier this year found that only 29 percent of Americans agree with the idea that “lower taxes on the wealthy stimulates the economy, with the end result of greater wealth for everyone.” A recent Pew survey found that just 27% of American adults say the amount they pay in taxes “bothers them a lot.” More than 60% say they are bugged by their perception that rich people and corporations “don’t pay enough.”
But Moore would try and overcome voter resistance by hitching a ride on the public’s concern that the rich aren’t paying their fair share. Moore:
The way to sell the flat tax is as the ultimate Washington versus America issue. The only people who benefit from a complicated, barnacle-encrusted 70,000-page tax code are tax attorneys, accountants, lobbyists, IRS agents, and politicians who use the tax code as a way to buy and sell favors. The belly of the beast of corruption in American politics is the IRS tax code. The left keeps saying it wants to end the corrupting influence of big money in politics. Fine. By far the best way to do that is enact a flat tax and D.C. becomes the Sahara Desert. Loopholes mostly benefit the wealthy and the politically well-connected. Well over half of the revenue lost from them comes from the top 1 percent. Want to make Warren Buffett pay his “fair share” of taxes? Get rid of the charitable deduction, which Laffer calls “by leap years the biggest tax dodge for rich people.” Laffer says Buffett and Bill Gates escape income tax on billions of dollars in earnings by diverting the money into the Gates Foundation to support dubious “charities” like the Sierra Club and Harvard. The flat tax, in short, is fair because it makes everyone play by the same rules, no matter how many lobbyists they hire in Washington.
Moore is correct a complex tax code encourages lobbying. He is also correct that federal tax breaks disproportionately help wealthier Americans. (The 10 costliest federal tax “expenditures” were worth nearly $1 trillion, or 6% of GDP, back in 2013, according to CBO and JCT. More than half of the tax benefits from those tax breaks went to households in the top 20%. And nearly a fifth of the benefits accrued to the top 1%.) But the tax break Moore focuses on, the charitable tax deduction, is not one of the biggies and would do little to offset the huge revenue losses from a flat tax.
What are the real mega-tax breaks? Well, there’s $250 billion a year for the tax exclusion for employer-provided healthcare. I suppose you could ax that tax break and use the dough to pay for flat-tax reform. Unfortunately, most center-right healthcare reform plans would use the money from limiting, capping, or eliminating the exclusion for a new healthcare tax credit. Another huge tax break is the $160 billion preferential tax rate on dividends and capital gains. I am pretty sure Moore doesn’t want to get rid of that. Some other tax breaks in the $60-70 billion range include the child tax credit, earned income tax credit, and mortgage interest deduction.
Or look at it this way: Some estimates suggest a low-rate flat tax could lose $1 trillion a year, about the same as the amount we spend on the 10 largest tax breaks. Getting rid of all those tax breaks would raise taxes on middle-class and working-class families and the poor, and worsen some of worst anti-growth aspects of the current code. If the flat tax is the answer for Republicans, what the heck is the question? (Here is how you limit tax breaks for the rich and expand them for the working class.)
Finally, Moore dismisses one flat-tax alternative:
Not every leading Republican candidate has bought into the flatter tax solution. Many GOP political operatives argue that the flat tax keeps getting rejected by voters. A new group of thought leaders called Reformacons want to ditch the supply-siders’ obsession with lowering tax rates and load up the middle class with tax credits. The usually sensible Marco Rubio has endorsed this concept; his tax plan offers an additional $2,500 credit per child. This would only reduce the top rate to 35 percent, and some tax filers without children would see tax rates go up.
“This is one of the dumbest ideas I’ve heard in a long time,” says Larry Kudlow of CNBC. “It costs $2 trillion for those credits over the next 10 years, with no growth effects whatsoever.” It also misunderstands the middle-class squeeze that is killing families’ finances. The problem isn’t so much that the middle class pays too much income tax—though they do. It is that real wages haven’t risen over the last decade. A tax giveaway isn’t going to solve that problem. By depleting the Treasury of revenues, it will boost the left’s case for raising tax rates down the line.
More problems here: First, Moore fails to mention that the Rubio plan contains sweeping corporate tax reform and eliminates investment taxes, two huge goals of supply-siders. Second, eliminating the CTC expansion only allows you to lower the top tax rate by a few percentage points. Third, expanding the CTC and EITC would directly and immediately increase worker incomes and recognizes that in the age of automation and globalization, a rising tide is not lifting all boats. Fourth, it’s strange to now be worried about revenue losses from the Rubio plan when revenue losses from a flat tax would be maybe multiples higher.
Republicans need to quit trying to find some supposedly easily explainable, quick-fix policy for what ails the US economy. Again, as I wrote in The Week, “Such imaginings will only suck up intellectual oxygen better devoted to creating a broad portfolio of pro-growth policies — deregulation, education, public investment, labor market reforms, and, yes, some tax cuts — to boost the economy’s growth potential.”
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There are two flavors of secular stagnation theory, supply and demand — and they are not mutually exclusive. In Japan and Europe, says Stanford University economist Robert Hall in a new essay, “the case for boosting demand is strong and inadequate demand is almost surely a main cause of the stagnation.” But in the US, as he sees, you have a growing economy where labor market slack is fast disappearing. But we still have long-run supply-side issues, noting more than a decade of stagnant living standards.
Four factors account for the stagnation of purchasing power in the US economy: 1) declining labour share; 2) depleted capital; 3) reduced productivity growth; and 4) declining labour-force participation. I will discuss indexes that capture each of these factors in turn using indices that all start at unity in 1989. An index of total purchasing power from earnings is the result of multiplying the four indexes together. …
Capital seems likely to continue to return to its historical growth path. For the three other major categories, forecasting is a challenge. There has been no sign of a reversal of the decline in labour’s share of total income and no body of research that supports the idea that it will. Productivity growth is definitely under way, at rates similar to those in the 1970s and 1980s, but well below the rates of the 1950s, 1960s, and 1990s. In particular, there is no sign that a burst of productivity growth will make up for the complete stall in productivity growth around the crisis.
Most importantly, there is no sign suggesting a departure from the decline in labour-force participation. … Participation has declined along a straight line during the period of improving conditions in the labour market, suggesting a complete disconnect between participation and the state of the labour market.
So, policies to encourage or remove barriers to work (including wage subsidies and SS reform), science research, startups, and capital ownership …
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What is America worth? Not the buildings or the stuff or the people or investments, the land. How about $23 trillion. From the WSJ:
That’s William Larson’s estimate for the value of the 1.89 billion acres of land that accounts for the 48 contiguous states and the District of Columbia. The dollar figure—equal to about 1.4 times last year’s gross domestic product–represents only the value of the land, and not buildings, roads or other improvements, and excludes bodies of water. He also determined values for every state. California is worth the most at $3.9 trillion andVermont is worth the least at a paltry $44 billion. On a per acre basis, New Jersey has the most valuable land at $196,410 an acre and Wyoming the least, $1,557 an acre.
Mr. Larson’s estimates, released this month in a paper from the Commerce Department’s Bureau of Economic Analysis, aren’t meant to be a definitive measure. Rather they attempt to provide baseline methods and estimates upon which further research can draw. His estimates reflect the land’s value in 2009. Therefore it shows a post-recession figure (he says country’s value fell 24% from 2006 to 2009) and doesn’t account for the changes in value due to the shale-gas activity in the Midwest and elsewhere.
Also, according to the WSJ and Larson: (a) The federal government owns 24% of all land, worth a collective $1.8 trillion, (b) just 5.8% of U.S. land is developed, but that land accounts for 50.7% of the total value, and (c) almost half, 47%, of U.S. land is used for agriculture.
We may have a $17 trillion national debt, but we remain a wealthy nation. A 2011 study coauthored by AEI’s Kevin Hassett found that the value of intellectual capital in the U.S. economy was between $8- 9 trillion, and the value of the intangible assets – which includes which includes patents, copyrights, and “other forms of
economic ideas” like databases and general business methods — was nearly $15 trillion. And my former AEI colleague Nick Schulz has noted, ” One estimate pegs the total stock of human capital in the United States at over $700 trillion. That dwarfs the physical capital stock of $45 trillion.” Yes, we remain a very wealthy nation.
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If you want to promote pro-market policies by citing the success of Reaganomics, don’t do it the wrong way. And the wrong way is suggesting that the Reagan tax cuts paid for themselves. They didn’t (although their deficit impact was smaller than a static analysis shows). And that’s true whether you look at (a) income tax revenue/GDP or (b) real GDP growth to real revenue in the 1970s vs. 1980s, or (c) academic research.
Nor should you suggest the Reagan tax cuts immediately ushered in a period of crazy-go-nuts hypergrowth. They didn’t. Real GDP growth in the 1980s was about the same as the 1970s. Nor was their a pickup in productivity.
But, but, but … the way to judge a huge change in public policy is over the long term. “Making changes to the tax system and regulatory policies of a mammoth economy like the U.S. is like turning the rudder slightly on a supertanker: The initial effects are small, but it leads to a big shift in course over time,” economist Michael Mandel wrote in a fantastic 2004 magazine piece on Reagan’s economic legacy. This is especially true of sweeping tax reform and how changes in tax rates affect “investment in schooling, occupational choice, and business creation and development,” as AEI’s Aparna Mathur, Sita Slavov, and Michael Strain explain in “Should the Top Marginal Income Tax Rate Be 73 Percent?”
Looking at the economic performance in the 1980s alone may not provide the best evidence for the success of Reagan’s pro-market policies — despite their help in transitioning out of the volatile, high-inflation 1970s — especially given the role of monetary policy during that decade and natural post-recession rebound. Adopting a longer perspective brings the realization, for instance, that after 1980 only countries adopting aggressive pro-market reforms gained on America, in terms of per capita GDP. Sorry, Old Europe. But this from Mandel seems even more important:
In a way that few have realized, Reagan’s economic legacy is inextricably interwoven with the Information Revolution that the IBM PC helped kick off. His message of competitive markets, entrepreneurial vigor, and minimal regulation found a willing audience in an era of rapid technological change, where innovation was opening new opportunities seemingly every day. Reagan’s first term saw the creation of such future giants as Sun Microsystems, Compaq Computer, Dell, and Cisco Systems (CSCO) — the greatest entrepreneurial burst of new companies since the early 20th century. … Taken together, the changes Reagan championed in the tax system fostered innovation and entrepreneurialism even as they encouraged the development of venture capital and investment in human capital. And Reagan’s willingness to push for more flexible labor markets and less regulation helped companies react faster to economic changes, including new technologies. As a result, the impact of the policies Reagan set out in the 1980s, which slowly worked their way through the economy, helped lay the groundwork for the Information Revolution of the 1990s.
Mandel points out (a) the 1981 cut in top rates “made it far more attractive for people to raise their incomes by getting more education or taking the risks of starting a company; (b) the 1986 tax reform was especially beneficial to “idea-based” firms such that companies such as Oracle and Microsoft that saw big drops in their average tax rates.
That stuff aside, these stories make to me — not surprisingly — intuitive sense. I certainly want to believe them. Of course, as Mandel also points, the “Reagan helped cause the 1990s tech and productivity boom” argument isn’t universally held. And you say rising inequality and wage stagnation, I say 50 million net new jobs and a 40% rise in real incomes. As liberal economist Jason Furman once wrote before becoming an Obama economic adviser, “[People] are substantially better off than they were 30 years ago.” And in a way that few, especially on the left, would have predicted in 1980.
At the same time, you still have to pay the bills today. The US debt-GDP ratio is three times higher than when Reagan took office, and we are only now feeling the fiscal impact of all those retiring Baby Boomers. So smart tax reform should focus on boosting long-term productivity (and providing middle/working-class tax relief as Reagan did) while also making sure it doesn’t make the red ink flow even faster. Meanwhile, when presidential candidate Hillary Clinton talks about the roaring 1990s, Republicans shouldn’t be afraid to suggest the Gipper and an embrace of optimistic, entrepreneurial capitalism just may have had a key role to play in the Long Boom and America’s continuing global innovation dominance.
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In my new The Week column, I look at how Ronald Reagan’s economic legacy is frequently misused by modern Republicans. First, many still suggest the Reagan tax cuts didn’t lose tax revenue. That does not seem to be the case:
Income tax revenue fell from 9.1 percent of GDP in 1981 to 8 percent in 1989. A 2006 Bush administration study found Reagan’s 1981 tax cuts lost an average of $200 billion a year, in today’s dollars, over their first four years. A 2004 study by two Bush economists estimated that in the long run, “about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent.” Even Reagan’s economic team didn’t think their tax cuts would be revenue neutral.
Also, arguing that government took in more revenue in 1989 than in 1981 as basis for revenue neutral claims is weak. Government revenue pretty much always goes up if the economy grows. There were also income and payroll tax hikes.
Second, some GOPers use the 1980s boom to suggest that deep tax cuts today would grow the economy at superfast rates. But that didn’t happen either back then despite chopping the top rate in half:
From 1981 through 1990 — a period including both the 1981 and 1986 tax cuts and ending just before the Bush I tax hikes — real GDP grew by 3.3 percent a year, versus 3.2 percent during the previous decade. Indeed, the Reagan boom occurred in the middle of the “great stagnation” in U.S. productivity that has lasted from the early 1970s until today (other than a period from the mid-1990s through mid-2000s).
Now it’s true that from 1983 through 1989, real GDP grew by 4.4% a year. But if you are going to include 1983-84 — when the economy grew by an average of 6% — you really need to add in the 1981-82 recession. After all, postwar recessions through the 1980s were v-shaped and featured strong initial recoveries.
You can’t just credit the Reagan tax cuts and ignore the typical role of the snapback trend. Likewise, you shouldn’t ignore the role of monetary policy during the 1980s, either. I should add, of course, that I certainly think the Reagan tax cuts — both lowering rates and tax relief — were worth doing. Absolutely, as I point out in the piece. But no need to gild the lilly.