A few more thoughts on Reaganomics and the modern GOP
AEIdeas
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.
So James, we now have the present in which to reflect on the past… comparing the “recession recovery” of President Obama to that of Pres. Reagan, it is obvious that Reagan’s economic was superior. Perhaps this is more a lesson on how NOT to do it (Obama), than an ode to Prez Reagan, but clearly the decade of the 1980’s was so wildly successful for such a large swath of Americans from all socio-economic backgrounds, that minimizing Reagan’s impact gives credibility to the very Keynesians now destroying our economy, ballooning the debt, and widening the chasm between classes, does it not?!
While government tax revenues may not have kept pace with GDP, they did in fact double from 1980 – 1988, thanks again, to Reaganomics. Is that bad thing? The fact that the debt ballooned is more testament to out of control government spending than any failure in Reagan’s tax policy.
Richard is right, I am reading all articles from the same author always minimizing Reagan’s economic politics. I always see writers and economists whose want to say reagan’s economic politics are not the best but they can not say which economic politic is better than, because history have shown left economic politic and keynesianism to be worse for economy than reagan politics. There are macroeconomic indicators showing us which economic politics had been better through the history and of course the reagan’s economy was better. Also critics always are saying the economy was recovering, to minimize the politic economic had been taken in that moment.
These are from my own research and calculations:
The tax collections at the top of the income scale ($200k+) did increase dramatically, by about 28% after inflation from 1980 to 1988. The top tax rate had been dropped from 70% to 28%.
The number of people reporting in the upper income range grew from 117k to 724k, about a 5X increase. The amount of income in the upper range also increased almost sixfold.
The continued low rates, even though changed a bit in Clinton’s first year, enabled the 20-year boom, probably the greatest in American history.