22 June 2017

Busting the Left’s myths about Reaganomics


“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

― John Maynard Keynes

James T. Hodgkinson, the 66-year-old man who attacked the Republican baseball practice in Virginia last week, injuring a number of people, was an angry man.

His social media suggests that he admired Bernie Sanders and supported the Vermont Senator’s call for “democratic socialism” in America. A photograph of Hodgkinson that emerged soon after last week’s shooting pointed to a specific target for Hodgkinson’s anger. In the picture, the would-be assassin is pictured as holding a sign that reads, “Tax the Rich Like Congress Did for 70 Years Till Reagan’s ‘Trickle Down.’”

So, let’s talk about Reagan’s “trickle down” economics.

As George Will of the Washington Post noted, “one of the projects of the American left has been to discredit Ronald Reagan”. President Barack Obama attacked Reagan’s economic legacy endlessly. The same is true of Senate Minority Leader Chuck Schumer and the House Minority Leader Nancy Pelosi. And where would we be without Hillary Clinton piling on.

In short, the Democrats don’t think much of the Reagan presidency. So, in the interests of historical accuracy (with any luck, the CapX archives will survive the Trumpocalypse), here is what actually happened in the 1980s.

Reaganomics aimed to end inflation, cut taxes, balance the budget and deregulate the economy. During Reagan’s tenure in office, real economic growth averaged 3.2 per cent per year as opposed to 2.8 per cent during the presidencies of Gerald Ford and Jimmy Carter. It grew 2.1 per cent per year during the presidency of George H.W. Bush and the first term of Bill Clinton’s presidency.

Additionally, real mean household income increased by $4,000 in 1994 dollars. Some 17 million new jobs were created and unemployment fell from 9.7 per cent to 5.5 per cent. Inflation fell from 13.5 per cent to 6.2 per cent.

In spite of these successes, a number of falsehoods about Reagan’s economic legacy have emerged.

First, Reagan is supposed to have relied on pie-in-the-sky estimates that tax cuts would pay for themselves. In fact, Reagan never expected tax cuts to generate an equal amount of revenue feedback. The White House budget plan released in 1981, predicted that by 1986 the tax cuts would result in $700 billion of revenue loss.

Second, Reagan’s tax cuts are supposed to have caused the budget deficit to explode. True, during the 1980s, real debt doubled and federal tax revenue decreased from 20.2 per cent of the GDP in 1981 to 18 per cent in 1984. (The federal tax revenue rose to 19.2 per cent of the GDP in 1989.) But the real blame for the ballooning budget deficit rests with the massive increase in military spending and the decline in inflation.

The increase in military spending to check Soviet expansionism was greater than the increase in the budget deficit. Had military spending been held at the same rate as during the previous administration, the real deficit would have actually decreased. Moreover, the decline in inflation caused a decrease in nominal revenues. Thus, the increase in real expenditures led to a deficit increase.

Third, the Fed, not Reagan, is said to have ended high inflation. According to Reagan’s critics, inflation declined due to the efforts of the former Federal Reserve Board Chairman Paul Volcker. True, but Reagan supported Volcker’s policies and suffered the political consequences from the economic contraction (1981/1982) that the Fed’s interest rate increase brought about.

Fourth, it is claimed that economic expansion in the 1980s was a Keynesian recovery driven by deficit spending. According to Keynes himself, economic recoveries can be driven by an increase in demand. In the 1980s, however, the rate of nominal demand actually fell. Additionally, had the recovery been caused by growing demand, inflation would have risen. Instead, it fell.

Fifth, the Reagan recovery looks impressive only because the 1981/1982 recession was so deep. As explained, the Reagan economy grew faster than it did under Presidents Ford, Carter, and George H.W. Bush and Clinton’s first term in office. Additionally, the economic boom during the 1980s lasted 92 months, making it the second longest growth period since 1949.

Sixth, under Reagan, workers worked harder, bur earned less. This claim is based on the fall in wage per hour, but does not account for the monetary value of non-wage benefits. Between 1960 and 1990, the amount of compensation given to a worker in non-wage benefits rose from 9 per cent to 20 per cent of hourly wages. As such, real compensation rose from $15.00 per hour to $16.50 per hour between 1981 and 1988.

Seventh, under Reagan, the poor and minorities lost ground. In fact, Americans in the poorest quintile saw their real incomes rise by 6 per cent during the 1980s and decline by 3 per cent in the early 1990s. White Americans saw their real incomes increase by 9.8 per cent, while black Americans saw their real incomes increase by 11 per cent.

Eighth, under Reagan, the rich paid less in taxes, while others paid more. In fact, the rich not only paid more in dollars, but their share of total income tax paid increased as well. The richest 10 per cent, for example, paid $60 billion dollars more in 1988 than they did in 1980, while the remaining 90 per cent paid $5 billion less (adjusted for inflation).

Ninth, under Reagan, the rich got richer and the poor got poorer. Yes, the wealthy grew richer, but not at the expense of the poor. Between 1981 and 1989, the number of Americans earning more than $50,000 dollars a year rose by 5.9 million. The number of Americans earning less than $10,000 a year decreased by 3.4 million (adjusted for inflation). In other words, Reaganomics benefited Americans at all income levels.

According to my former colleagues William A. Niskanen and Stephen Moore, “The reason the wealthiest Americans saw their share of total income rise is that they gained income at a faster pace than did the middle class and the poor. But Reaganomics did create a rising tide that lifted nearly all boats.”

Hence the much maligned and much misunderstood term “trickle down” economics.

Marian L. Tupy is senior policy analyst at the Cato Institute's Center for Global Liberty and Prosperity