The right needs to get real on Reaganomics

Once more into the breach: It is possible to accept that (a) the Reagan tax cuts were a big long-term plus for the US economy, and (b) the Reagan tax cuts generated more tax revenue than a simple static analysis would suggest, without also accepting (c) the Reagan tax cuts were so fantastically growthy that they paid for themselves. (I accept the first two, but not the third.)

But that last part seems to trip up some people who insist Reaganomics was an impossible five-run homer. Such thinking is typically plagued by these errors. They forget about the$125 billion a year in 1980s tax increases (in today’s dollars). They forget about how the 1986 tax reform act nudged rich people to shift their income from the corporate income tax  base to the personal income tax base. And they assume the 6% growth seen in 1983-84 was completely due to the Reagan tax cuts, ignoring that V-shaped recoveries were typical of the postwar era. For instance, real GDP grew by 7.1% in 1955 after the 1953-54 recession — that, even though the top rate was left unchanged at 91%.

Also note that in the summer of 1982, “the FOMC effectively began fundamental change in the course of monetary policy in the direction of substantially greater ease.”  You can’t talk about the 1980s economy without talking about the Fed. In fact, here is a bit from a recent Brooking literature review on tax cuts and economic growth:

Martin Feldstein (1986) provides estimates indicating that all of the growth of nominal GDP between 1981 and 1985 can be explained with changes in monetary policy. Of the change in real GNP during that period, he finds that only about 2 percentage points of the 15 percentage point rise cannot be explained by monetary policy. But he also notes that the data do not strongly support either the traditional Keynesian view that the tax cuts significantly raise aggregate demand or traditional supply-side claims that they significantly increase labor supply. He finds, rather, that exchange rate changes and the induced changes in net exports account for the small part of growth not explained by monetary policy. Feldstein and Elmendorf (1989) find that the 1981 tax cuts had virtually no net impact on economic growth. They find that the strength of the recovery over the 1980s could be ascribed to monetary policy. In particular, they find no evidence that the tax cuts in 1981 stimulated labor supply.

You can disagree with the above analysis without ignoring that it is tough to tease out the impact of any one change in economic policy when there are lots of big changes happening at once. Anyway, here are my recent pieces that touch on this issue and dig a bit more into the data:

No, the flat tax isn’t still a good idea
The real lessons of Reaganomics, at least as I see them
A few more thoughts on Reaganomics and the modern GOP
2016 Republicans are invoking Ronald Reagan. They’re doing it wrong