It's Reaganomics, Stupid!

factory 1Let's face it, Americans are living in an economic golden age. For the first time in our history, 15 years have passed with only a mild recession. Also, the Gross Domestic Product has risen by an average annual rate of 3%. And, the unemployment and inflation figures are at healthy averages respectively.

So, who gets the credit for this golden age?

factory 2First and foremost, the land, labor, and capital of individual Americans. Their factor inputs have financed the lifeblood of any capitalist country--business.

But what about the government? What has the beltway in Washington done to stimulate and organize the private activities of firms and their roles? More importantly, which administration is to be held in high degree for this?

Ronald ReaganThe answer couldn't be clearer. Today's golden age was started under President Ronald Reagan, and policies set during his administration have sustained this economic stability in the current economic state. On the other hand, George Bush and Bill Clinton deserve credit primarily for not tampering (excessively) with the changes Reagan sought. And then, there's the Republican Congress. If it wasn't for the expulsion of liberal Democrats from the House and Senate to make way for conservative Republicans in 1994, Clinton almost certainly would have terminated the golden age prematurely.

The direct causes responsible for the growth mentioned above aren't perfectly clear. However, the barriers are no mystery. According the U.S. Chamber of Commerce, high tax rates are a major hindrance to economic expansion, in which this expansion allows our children to live better lives than ourselves. Reagan's goal at the start of his administration in 1981 was to reduce this latter burden. And why not? Ronald Reagan knew and understood that ridiculously high rates put heavy burdens on businesses and prospective entrepreneurs. In fact, excessive taxes deter experimentation and risk-taking, which is the wellspring of growth.

This is not a difficult concept. Before Reagan took office, the top rate of so-called "unearned" income was a whopping 70%; the top rate on income was a Swedish-like 50%; on capital gains, 35%. All these rates fell to 28% in the 1980s. Ask yourself, "Would I embark on capital experimentation if I knew Washington would benefit more than me in the end?" Economic incentives are imperative for risk takers and imperative for a country's long-term welfare.

So, the key was constructing an ideal tax system which would make Washington less obtrusive and that would encourage growth. That policy worked, without a doubt. The proof is in the tax revenues that were generated. In 1980, the last year of the disastrous Carter years, the Treasury took in $517 billion; in 1989, it rose to $991 billion. That's a 92% increase during a period when the CPI rose 46%.

Yet, as every commoner knows, these tax cuts caused the deficit and the debt to sky-rocket toward infinity and beyond. Right...? I think not. The Reagan deficits have been widely misunderstood and socially manipulated. They were created not by a shortfall of revenues, but by a surfeit of spending. However, half of this spending increase came from defense. That was money well spent. It not only rebuilt a weakening defensive infrastructure, it also led to the disintegration of the Soviet "Evil Empire."

Yet, revisionists have attacked Reagan mainly on the revenue side. From the Statistical Abstract, it is obvious Reagan and his supporters didn't cut tax revenues in 1981 and 1986. They cut tax rates.

By cutting marginal rates in this way, Reagan and his advisors believed they could boost economic growth, and they were quite correct. Between 1981 and 1989, GDP advanced at 3.1%. In fact, Robert Bartley, editorial page editor of The Wall Street Journal, wrote that the 1980s became "the great heyday of the venture capital industry."

factory 3The Reagan boom continues today. In July of 1997, Investor's Business Daily commissioned a survey of 200 CEOs from the nation's largest corporations. They were asked, "What has triggered recent economic growth?" "Reagan policies" were credited by 26% of the executives. Farther down the list, at 14%, were "Bush policies," and nearly at the bottom, at 8%, "Clinton policies."

The lower tax rates introduced in 1981, are still far below those semi-socialist rates of pre-1981. In today's society, in fact, some of those rates are lower. Thanks to the Republican Congress, capital gains taxes are at 20%. Ronald Reagan's economic plan was simple, revolutionary, and tremendously beneficial. A certain faith was required to achieve this, and Ronald Reagan had it, brilliantly declining the relevance of government in our lives.

Eric Seymour

Robert Schiener