I have written several articles on our Presidents and Vice-Presidents. A list of the links have been provided at the bottom of this article for your convenience. This article will, however address additional Presidents and their places in history.
The four pillars of Reagan’s economic policy were to reduce the growth of government spending, reduce the federal income tax and capital gains tax, reduce government regulation, and tighten the money supply in order to reduce inflation. The results of Reaganomics are still debated. I discussed these concepts in a previous article on President Reagan, entitled, “Was Reagan A Failure as President? In this article I am going to discuss how his policies affected the Stock Market.
In order to discuss the effects of Reaganomics had on the stock market, I will have to rehash Reaganomics some.
Background of Reaganomics
Ronald Reagan’s economic policies are based on supply-side economics, which is a macroeconomic theory that states economic growth can be created by reduced taxes and lower regulation. Reagan believed a tax cut would ultimately generate more revenue for the government.
The idea is that consumers will benefit from cheaper goods and services and unemployment will decrease. Tax cuts will put more money in the consumer’s wallet, which they spend, and this will stimulate business growth and lead to more hiring. The end result is a larger tax base, and thus more revenue for the government.
The policy is also called trickle-down economics as lower taxes on businesses and the wealthy will increase investments in the short term, and the benefits will trickle down to society as a whole.
Reagan’s policies were a drastic change from his predecessors such as Presidents Johnson and Nixon, who both looked to increase the government’s role in the economy. On the other hand, President Reagan promised to reduce the government’s role and adopt a more laissez-faire approach.
Implementation of Reaganomics
1. Reduced government spending
Government spending still grew but at a slower pace. Instead of funding domestic initiatives, Reaganomics focused on national defense, as Reagan believed the US was exposed to a “Window of Vulnerability” to the Soviet Union and their nuclear weapons.
2. Reduced taxes
The bulk of tax cuts were aimed at the top income earners. Reagan cut top bracket income taxes from 70% to 28%, and he indexed each tax bracket for inflation. However, the tax cuts were offset elsewhere by increases in social security payroll taxes and excise taxes. Reagan also cut corporate taxes from 48% to 34%.
3. Reduced regulation
Reagan eliminated the price controls on US oil and gas prices implemented by President Nixon. He also deregulated cable, long-distance telephone service, interstate bus service, and ocean shipping.
4. Slow down money growth to control inflation
A contractionary monetary policy was used to control inflation. In a contractionary policy, the central bank raises interest rates to make lending more expensive.
Results of Reaganomics
Economists still argue the results of Reaganomics until this day. Naysayers call it “voodoo economics” and supporters call it “free-market economics.” However, from the early ‘80s to the late ‘90s, the Dow Jones Industrial Average (DJIA) rose fourteen times, and forty million jobs were added to the economy.
Reaganomics did ignite one of the longest and strongest periods of economic growth in the US. The result of tax cuts depended on how fast the economy was growing at the time and how high taxes were before they were cut. Cutting taxes only increases government revenue up to a certain point. Once taxes get low enough, cutting taxes will decrease revenue instead.
Tax cuts were effective during President Reagan’s time because the highest tax rate was 70%. The effect would’ve been much weaker if the tax rate was less than 50% like it is in the present time.
The increase in interest rates initially pushed the economy into a recession as high interest rates caused demand for the US dollar to increase, thus increasing the value of the US currency. As the price of USD increased, exported goods became more expensive and imports increased. However, the economy did eventually become less volatile, and the economy entered into a period of strong growth.
WHAT RONALD REAGAN HAS DONE FOR INVESTORS
In 1980 Ronald Reagan was elected President and the stock market marched off to hit new peaks a few weeks later. Then last month, the Democrats failed, despite a 10-percent-plus unemployment rate, to break decisively Mr. Reagan’s hold on Congress. The very next day, more market records were shattered.
It thus appears that there is something about Mr. Reagan’s Administration that investors like. Between these surges, of course, was another grim episode for the long-suffering American investor. The stock market tumbled more than 20 percent as the economy suffered its worst recession since the 1930’s and for much of the time it seemed that everything else was going down, too – bonds, commodities, collectibles and even houses.
The only refuge seemed to be money market mutual funds, the yields on which, while they can disappear faster than a bucket-shop telephone jockey, reached a hefty 17 percent at one point.
But nowadays investors in long-despised stocks and bonds are smiling again and talking about the possibility of sustained good times. This is in spite of continued economic stagnation – for more than two-thirds of his Presidency, Mr. Reagan has presided over recession – the likelihood of more months of recession, more years of 12-digit budget deficits and a Federal Reserve policy that, while now more flexible than it had been, apparently remains leery of risking revived inflation by fully turning on the credit tap.
The market optimism appears based on what analysts regard as fundamental improvements in the way Washington approaches economic policymaking. Much of this is the result of Reagan initiatives, although there has been a growing acknowledgement in recent years among Democrats, too, of the importance of such things as capital formation and less burdensome regulation for business.
Specifically, the changes involve one of investing’s oldest truths – that markets thrive on a sense that there is basic predictability upon which business executives and others who risk their money can fasten.
”There is now a persistence of purpose in Government, whether one agrees with the programs or not,” Charles L. Booth, executive vice president and chief investment officer of the Bank of New York, observes. ”The most important thing,” says Mr. Booth, whose bank manages some $7 billion of pension, endowment and other assets, ”is to have a frame of reference that lets corporations and individuals plan for the future.”
There are numerous elements to this increased predictability, including such ”atmospherics” as further deregulation of business and some financial markets and a less severe policy of antitrust enforcement. But one, reduced inflation, towers above the rest. The stunning success that the United States has enjoyed in curbing inflation – prices are now rising considerably less than half as fast as when Mr. Reagan took office – is almost undeniably the biggest factor in reducing the uncertainty that plagued investors throughout the 1970’s, a time also of oil shocks, political scandal and rapidly expanding government.
”The greatest plus in this Administration is that for the first time a Presidential candidate said he would do something about inflation – and clearly meant it,” says David Silver, president of the Investment Company Institute, the principal trade association for the nation’s $300 billion mutual fund industry, which has been thriving in the Reagan years.
It is perhaps not widely appreciated how close the United States had come in the late 1970’s to hyperinflation, a phenonemon in which prices rise exponentially and cause gross misallocation of national resources. Taxes, for example, were already being levied on nonexistent profits – even losses – and corporate balance sheets were increasingly less accurate reflections of economic reality.
No wonder investors had grown disenchanted with financial assets and were putting more of their money into houses and precious metals and less into what are considered the wealth-creating enterprises that make the economy grow.
But the receding inflation tide has now restored much of the confidence that had been lost. ”A diminution in inflation is always good for investors,” Mel Colchamiro, senior economist at the New York Stock Exchange, notes.
Lower inflation, in turn, has cut interest rates sharply and at the same time allowed the Administration’s income tax cuts to do their work to raise incentives for saving and investment. The magnitude of the rate drop can be gauged by the prime rate, the basic lending rate to large corporations, which has tumbled almost without interruption from 21.5 percent in December of 1980 to under 12 percent.
Investors are one of the main beneficiaries of Mr. Reagan’s tax cuts. The maximum rate on capital gains, applying to securities held for at least a year, dropped last year to 20 percent from 28 percent. This compares with 49 percent as recently as 1978. Various efforts, moreover, were made to cut the capital gains holding period back to six months – where it stood from 1942 to 1976 – and these will no doubt be revived in the new Congress if not in the current ”lame duck” session.
According to James B. Cloonan, founder of the American Association of Individual Investors, a private nonprofit educational group, lower taxes are most helpful in luring the disenchanted, particularly long-term investors, back into the stock market. ”There are now more people who can see a return that’s worth the risk,” Mr. Cloonan says. He reports a 25 percent increase in the last six months in the response rate to the membership appeals of his three-and-a-half year old organization.
Clearly, the trend these days is toward market, rather than Government, solutions to economic problems, a shift that greatly encourages investors to risk their money.
Although Mr. Reagan is the first President since John F. Kennedy to reduce the so-called ”misery index” – the inflation rate plus the unemployment rate – in his first two years, Republicans did lose 26 House seats in the midterm elections. Nonetheless, the prospect is for more political compromise rather than less. And the markets have responded well this year each time there have been signs of bipartisanship in Washington. One very likely result is slower growth in the defense budget, which Mr. Reagan has sought to raise by more than 8 percent a year after inflation. The defense kingpins, the aerospace companies, saw their stocks leap early in Mr. Reagan’s term but then underperformed the market for nearly a year before resuming their rally last spring.
Even if defense spending is scaled back, however, says Phillip R. Brannon, an analyst at Merrill Lynch, Pierce, Fenner & Smith, the outlook for the companies, particularly those suppliers of less glamorous military items, remains bright. The Reagan Administration, Mr. Brannan asserts, ”greatly raised” both the relative and absolute level of defense spending and ”the party isn’t over yet.”
The effect of deregulation – a term applied to a vast range of initiatives ranging from less harassment of business by the Occupational Safety and Health Administration to ”shelf” registrations for securities issuers and market rates of interest for ordinary savers – is hard to calculate. But it is clear that these measures, some of which have their origins in earlier Administrations, have helped improve the investment climate.
”Washington,” says Donald H. Straszheim, a vice president of Wharton Econometrics, a prominent forecasting firm, ”has clearly begun to realize there are costs as well as benefits” in regulating business.
Many economists and others believe that despite the remaining budget and other problems – a newly created one, the 10 percent witholding tax on interest and dividends starting July 1, 1983, is considered minor – investors have good reason to be optimistic. ”The equity markets have a lot further to go,” says Mr. Straszheim, who likes bank, savings and loan, housing, automobile and appliance shares as well as the defense contractors.
Adds the Bank of New York’s Mr. Booth: ”We continue to have an extraordinary opportunity” for more gains. He declines to make a specific forecast about the Dow Jones industrial average but notes that ”a fair value of stocks is the replacement cost of their assets.” He said this could mean that within the next year or two the Dow, now around the 1,000 level, could reach 1,600 to 1,700.
January 17, 1983 I REAGANOMICS: MAKING GAINS INTRODUCTION Stay the course, urges Ronald Reagan. But so did the captain of the Titanic, retort critics of the White House. Are the implicit fears of such critics justified? Is Reagan steering the American economic ship of state to safe harbor or smack into icebergs? Navigators would have a hard time reading the economic currents. On the one hand, a dramatic economic upturn might be signaled by the spectacular advance of the stock market, the decline in interest rates, and the dampening inflation. On the other hand, unemployment remains high and the economy bobbles along in a trough statistics some key signs are unmistakable. During the first two years of Reagan’s term of office fundamental changes have taken place in the economy, which may have laid the foundations for a long period of growth and prosperity rate, for instance, is up nearly 30 percent from its 1981 low The stock market is at a ten-year high industry has hit record heights. All this occurred in a year marked by a severe business recession. The surge of new capital has spawned a near record crop of new business incorporations especially in “high tech” firms, and a healthy number of new public stock offerings. Inflation is at a ten-year low and interest rates have been cut by one-third since Reagan took office. Such achievements profoundly affect consumers, businesses, and government. Reduction in unemployment has always lagged behind economic recovery–especially when the economy is also undergoing profound changes. In addition , comparisons of today’s rate with that of earlier periods are dangerous. In the first place, unemployment insurance, welfare payments, and other factors have increased the “basic unemployment rate but, reduced the plight of the unemployed. According to one Department of Labor survey, the average unemployed family can still count on an annual income of approximately $19,000. Moreover, we should remember that the unemployment rate is the proportion of the active labor force which is seeking work without success. It is not an indicator of the percentage of the adult population not working. So we can have periods where the unemployment rate is high while the percentage of the adult population at work is also high. Today, when more than 56 percent of the adult population is employed (the “employment ratio is economy was booming and the unemployment rate was 3.5 percent and actually higher than in 1953, when unemployment was at its lowest since World War 11. It means that a very high proportion of families s till have at least one breadwinner. In 1933, by comparison, the employment ratio was only 44 percent.
This does not mean, of course, that the laid-off auto worker in Detroit should feel cheerful. But it does mean that such a period. This is about the same as in 1969, when the Congress should not misunderstand the unemployment problem and stampede into action that will undermine the key structural changes that are under way.
Lower taxes and lower inflation mean that once again economic conditions favor the saver over the debtor. Americans now have the incentive to cut their expenditures and work off their debts.
Indeed, consumer installment debt has declined- steadily throughout the recession from a high of 14.8 times personal income in early 1980 to 12.85 in September 1982. This means that consumers are coming out of this recession with a lightened debt burden offers hope for a sustained recovery in past recessions, consumers usually have plunged deeper into debt. Now, as Forbes magazine reports, we “have come through the 1982 recession with credit accounts in the best shape since early 1974. If Consumer credit defaults among New York banks are the lowest since the pre-1975 recession month of June 1974. Forbes notes that if Consumers have had the capacity to buy throughout the 1982 recession; they are simply showing restraint. This restraint is replenishing the capital coffers needed to finance investment and modernization. Thanks to fading inflation, households and businesses are shifting their resources from the popular inflation hedges.
For the real estate industry, the major inflation hedge of the middle class, 1982 was the hardest year since the 1969-1970 housing slump. Some of real estate’s luster will undoubtedly be restored in the recovery. But the boom days of 10 to 20 percent growth may be gone as resources flow into non-housing production. During the inflationary seventies, it made sense to put money into housing. The median home price soared from $23,000 in 1970 to 62,200 in 1980, a 170 percent increase. The Dow Jones Industrial Average, ‘in comparison, increased by only 18 percent over the same period, not enough to keep pace with the 112 percent surge in the consumer price index.
According to the National Association of Realtors, home prices, after adjusting for inflation and concessionary financing actually fell at least 10 percent in the past year. Home Loan Bank Board Chairman Richard Pratt predicts that fewer Americans will buy houses in the 1980s than in the 1970s, primarily because they may not need “the hedge against inflation.’ Viewed in this way, softness in the housing market is a positive, not negative sign. Housing industry sluggishness is evidence of the success against inflation.
Other inflation hedges and tax dodges have taken similar nose dives under Reagan. Diamonds, antiques and leisure goods are all in the doldrums. Sotheby Park Bernet, the nation’s largest antique auction house, last year suffered its first loss since World War II. The diamond market is near collapse. A one carat D-flawless white gem, a benchmark jewel, reached a peak of 64,000 in 1979-1980, but had plunged to $21,000 by the beginning of December 1982.
Bad news for inflation hedges, however, heralds.good news for the financial markets. In a recent study, Claremont economist John Rutledge finds that reductions in inflation have in past periods powerfully stimulated new capital formation. Extrapolating historical trends, Rutledge estimates that “each percentage point drop in the inflation rate should send $100 billion of the tangible assets that people hold back into the financial market as increased capital supplies I7 With inflation expected to stabilize at about 6 percent, the country soon should be awash with new risk capital.
Dr. Jack Carlson, chief economist and executive vice-president of the National Association of Realtors NEWS, National Association of Realtors September 27, 1982 Bob Fick, “Need for House as Hedge Against Inflation Foreseen Declining Washington Post, September 25, 1982.
John Rutledge Why Interest Rates Will Fall in 1982. This will mean even lower interest rates and expanded savings and investment, just what the supply siders promised all along. In short, Reaganomics works. In the thirteen months since it was redirected, the nation’s rudder has been set firmly in place. The policies are paying off in a new crop of business enterprises, expanded savings, and reduced inflation. But the economy, like an ocean liner, changes course only in degrees.
Economic turnarounds are measured in years, not months. The important progress made so far, however, vindicates the supply side approach and should encourage the Administration to stay a course of lower money growth, tax reduction, and a freer market place. THE ATTACK ON INFLATION Reaganomics is not a scheme to redistribute wealth from one group to another, but one to benefit all Americans, particularly the poor, by inducing rapid and sustained economic growth. A rising economy, Reagan often points out, pulls everyone up with it. Inflation and high taxes, however, tilt economic incentives in favor of consumption, debt, and leisure, thereby undermining the nation’s productive capacity designed to restore capital-producing incentives so that the economy once again generates the jobs and wealth necessary to raise the standard of living of all Americans. The President was convinced that a glut of newly printed money had stoked the inflationary fires that blazed in the seventies. He urged the Federal Reserve, the independent body charged with regulating the nation’s money supply, to slowly but steadily reduce the money supply so that inflation could be dampened.
Accordingly, from a high of 8.3 percent money growth in 1978 the Fed nearly cut off the money spigot in the first seven months of 1982. The inflation rate correspondingly fell from 13.3 percent in 1979, a postwar high, to below 5 percent by the end of 1982. But the Fed also has allowed the money supply to fluctuate erratically. From November 1981 to January 13,’1982, the money supply increased at the dangerous annual rate of 25 percent. Then from January to August, the Fed apparently grew alarmed that it might reignite inflation, slammed on the monetary brakes, and reversed direction annual rate.
In the last thirteen weeks, the Fed has been reversing course again and the money supply appears to be surging ahead at a 16.7 percent annual rate annual money supply growth this year to 8 percent, far above the Fed’s target of 2.5 to 5.5 percent The money supply grew by only a 2 percent. The recent increase pushes up If not corrected, it threatens to set off inflation, destabilizing economic activity, exacerbating unemployment and sapping the Fed’s credibility. Lower money growth brings with it the short-term side effects of lower output and employment. According to some studies, it may take eighteen months for these side effects to be overtaken by reduced inflation. Sound economic growth administrations have reacted to the upswing in unemployment by stoking the fire of inflation through easy money and government programs. There have been four bouts with inflation in the last fifteen years; each was lost because political and economic leaders did not have the courage to see the anti-inflation fight through to the finish. After each failure, unemployment rose above previous peaks, economic growth often fell below previous Goughs, and inflation bounced off a higher plateau. In the past each monetary fix has been but a temporary palliative. Ever larger doses are required to pack the same stimulative wallop bringing with it higher inflation and eventually higher unemployment. Historical and international evidence clearly shows that there is no long-term trade-off between inflation and unemployment. The question is: Can the President withstand the political pressure to do something” about unemployment? Can he resist the loose money seduction and persevere until recovery begins? In the last fifteen years, no president has had enough courage and confidence to resist these pressures.
Reagan has vowed, that he will continue to attack high unemployment by getting at its root, high inflation, and riding out the inevitable withdrawal symptoms. Cutting inflation and keeping it down is still the key to breaking the inflation recession cycle. The current withdrawal symptoms are the price paid for the many mistakes of the past. If the course against inflation is maintained, the U . S. will soon enjoy for the first time in fifteen years a recovery untarnished by a new burst of inflation. CLEAR SIGNS OF SUCCESS. The underlying benefits of this course and the confidence it engenders are becoming clear. There are convincing signs of a dramatic expansion of the capital pool, an increase in risk taking, and a surge of investment in productive ventures. The Stock Market Surge The fortunes of the stock market ebb and flow each day. A soaring stock market is traditionally a precursor of economic recovery. And for good reasons. Rising stock prices open a rich source of business capital, increase household wealth, and generate profits for pension plans, insurance funds, and other institutions that include substantial holdings of stock in the portfolios. At present, the stock market has surged to its highest level in ten years. The Dow Jones Industrial Average at the end of 6 1982 stood around 1,000, almost 25 percent higher than the average in June. The rise in prices has added perhaps 120 billion to the wealth of American households. A study released by the Congress’s Joint Economic Committee (JEC), estimates that if the Dow Jones Industrial Average reaches 1,150, the increase in per capita wealth will be $875. Sixty percent of this is in the form of direct increases in household wealth, with 40 percent indirect, through the holdings of private and public pension funds. Committee Vice-Chairman Roger Jepse, explains that 46 percent of that wealth increase is going to families with incomes of less than $25,000 per year. A rough rule of thumb, according to the report is that “every 10 percent rise in stock prices over their August 1982 low, adds $175 to per capita wealth holdings.
The recent stock market rally is especially good news to public and private pension Eunds with substantial stock holdings. Private pension-funds have 40 percent of their assets in stocks. The recent 30 percent rise in the price of corporate equities reported Dr. Lowell Gallaway. It translates, roughly, into a twelve percent increase in the assets of private pension progruns. Public pension plans hold less stock, but the recent stock rally also significantly enhances their assets. Thus, the recent ‘bull market’ may have provided a six percent increase in the value of assets supporting public retirement systems adds Gallaway. In all those dependent on public and private pension systems have had their wealth increased by perhaps an additional $85 billion nearly $400 per capita due to the recent stock rally.
By exerting such a powerful effect on household wealth stock market rallies usually play a significant role in fueling economic expansion. The Joint Economic Committee study discovered that stock price increases encourage households to shift the composition of their wealth away from tangible assets to more liquid financial assets. Both factors, the study concludes, will stimulate consumption and saving simultaneously. But will the bull market continue? And what is the reason for the upsurge in stock and bond prices? Many economists argue that success in the fight against inflation has buoyed business prospects and made it easier for investors to ‘estimate future business profits. Stanford University economist John Shoven, for example, argues in Business Week that “The market has been held.
How high can the stock market go? If stocks were only valued at replacement cost of assets the stock market could still shoot up by another 600 points in the DOW. The equity markets have recently bloomed with new financing for smaller, more risky firms and businesses making their first public offerings. In light of the lingering recession, the new issues market in 1982 is surprisingly buoyant. New public offerings for 1982 are estimated at $1.2 billion, using the Initial Public Offering Reporter figures for the first eleven months of 1982. This would make the 1982 total about the same as 1980, and far above most years in the capital starved seventies. Many experts think that after ten years of stagnation, the stock market is becoming a fertile source of new business risk capital. New public offerings in 1981 reached a record high of 3.2 billion, a total of 448 new initial public stock sales.
That was a whopping 130 percent increase over the robust 1980 dollar figure and more than 60 times larger than the depressed 1974 total. This comeback stems from two major public policy changes: the capital gains tax cuts of 1978 aid 1981 and lower monetary growth.
Experts blame the 1976 capital gains tax hike for choking new public stock. The more favorable tax treatment for new stock issues since the 1978 capital gains tax cut, however, has caused the number and dollar amount of initial offerings to come roaring back.
This spectacular performance refutes the contention that savings does not respond to tax incentives. Indeed, the evidence clearly suggests that the keystone of the supply-side philosophy that savings and investment have been repressed by the tax structure is substantially correct. The American public saved less than the Japanese or Germans not because we were less thrifty or virtuous, but because the U.S. tax and business climate was more hostile to savings than in these more prosperous countries. The U.S. public has responded to lower tax rates exactly as supply siders promised by reducing expenditures and stashing more into savings accounts. The success in taming inflation is also paying off in a dramatic reduction in interest rates. Over the past year, rates have dropped substantially relaxing their choking grip on businessmen, investors, and consumers and setting the stage for economic recovery. The prime interest rate, for example, fell from 20 1/2 percent in August 1981 to the December 1982 figure of 11 1/ 2 a 40 percent improvement since Reagan assumed office.
Corporate bond rates also have decreased from-16.97 percent in September 1981 to around 12.5 percent at the end of 1982. As a result, the heavy interest burden on businesses will be substanially lightened.
Small and marginal firms without access to the long-term debt markets were particularly vulnerable and many were squeezed into bankruptcy as interest rates soared. The average nonfinancial corporation in 1981 paid 40 cents in interest charges for every dollar of income, up sharply from 20 cents for every dollar of income in 1978. Businesses that have held on, however, are taking advantage of the improved interest rates to refinance their short-term debt. Larger businesses that can float their own bonds are rushing to, beef up balance sheets by refinancing their high-cost, short-term debt with the now lower-cost, long term debt As a result, corporate America looks stronger today than even six months ago. Balance sheets are blacker, cash flows are healthier, and income reports are brighter Lower interest rates are a boon to the government as well.
Treasury must refinance over one trillion dollars of national debt as well as pay for burgeoning future deficits. The Treasury bill rate has dropped from a high of 16.3 percent in May to around 8 percent at the end of 1982, sharply cutting the Treasury’s cost of servicing the debt. Every one percent drop in the T-bill rate, reports the Congressional Budget Office, will cut the budget deficit over the next 3 years by over $15 billion.
Consumers, too, benefit from interest rate reductions. Everything consumers buy on credit, from cars to houses to house hold appliances, becomes substantially cheaper when interest rates decline. Mortgage rates, for one, have dropped from a high of 18 1/2 percent in September 1981 to around 13 percent in December 1982. This reduces average homebuyer’s mortgage costs by several thousand dollars.
The Administration’s success in containing inflation and cutting tax rates has begun to pay rich economic dividends that soon could propel the economy to long-term growth and prosperity.
One of the most promising trends is the recent surge of new capital. Personal savings, which provides most small businesses with initial seed capital, is at a five-year high. Venture capital, the source of new risk capital for high-growth and technologically advanced companies, is expected to reach a record this year. The stock market, a major source of capital for medium-and-larger-sized businesses, is at a ten-year high.
Initial public stock offerings are at a surprisingly healthy level ‘for a recessionary period. Other hints of a stronger economy are interest rates down by one-third and the inflation rate cut in half since Ronald Reagan took office. The U.S dollar soared against major European and Japanese currencies signaling the confidence abroad in the U.S. economy. The G.N.P too, has had positive, if timid, increases over the second and third quarters of 1982. These successes lead to a number of important implications a) The supply siders are essentially correct– marginal tax cuts stimulate savings rather than excess demand. Contrary to much critical speculation, as the tax rates were cut 15 percent over the last two years, inflation fell by half.
Firm monetary policy is essential to reducing inflation b) Reducing inflation is the key to economic health–to savings, low interest rates, and an expansion in employment c) Reductions in unemployment always lag behind economic recovery. There is no long-term trade-off, however, between inflation and unemployment d) Cutting inflation is rarely painless. Weaning an economy from an inflationary binge is like drying out an alcoholic. The 20 withdrawal symptoms can be severe, but they are the unavoidable price of recovery e) Deficits are not a major factor in causing high interest rates or inflation. Today’s projected budget deficits are more forecast, yet interest rates have been cut by more than one-third and inflation by half enhanced by the shift of household wealth out of tangible assets such as housing into financial assets such as stocks and bonds. than eight times higher than in the Administration’s March 1981 f) The chances for an inflation free recovery have been These signal important directions for the new Congress. The third year of the tax rate reduction scheduled for July 1983, together with the indexation of tax brackets for inflation, is essential to preserving and strengthening the incentives for saving and capital formation. Congress should accelerate both indexing and the percent rate cut to January 1983. Economic recovery must not be sabotaged by further tax hikes. No matter which euphemism is used revenue enhancements, loophole closings. If compliance measures I) or “user fees any measure that generates additional revenue to the government reduces available capital for business investment. The Federal Reserve Board must regain control of the money supply. The current acceleration in money growth, if continued, will rekindle inflation, possibly throwing the economy back into recession and sabotaging the entire Reagan economic program. Congress should consider monetary reforms to ensure that the Fed pursues a policy of low and stable money growth. Congress should reduce taxes further on savings, dividends and capital gains to create jobs through greater capital investment rather than through make-work job’s bills. A good start would be to index capital gains for inflation and eliminate penalties for early withdrawal of money from IRA and Keogh accounts. These actions would move the tax system to a consumption based tax that encourages savings and investment. The President should support additional marginal income tax rate reductions, perhaps to a top rate of 20 percent. There is need for further budget cuts and reforms to reduce the expanding public sector, which consumed a record 24 percent of the nation’s GNP in 1982. Reduced government spending would free additional. resources for business investment,. entrepreneurship, and ultimately more jobs. Congress must formulate a long-term solution for social security’s underlying financial and structural problems. Social security’s unfunded liabilities are now larger than the national debt and continue to grow, hanging like a dark cloud over the economy. The prospect of huge new social security taxes to finance the deficit demoralizes the younger generation and threatens to undermine economic growth by coopting new capital sources.
This agenda builds on the Administration’s first year strategy. In the second year, the legislative debates were monopolized by the economic philosophy that prosperity is induced by taxing more and spending more past 50 years and it never will . At the beginning of its third and perhaps its most important legislative year, the Reagan Administration should return to the bold colors of its first year’s program. It is clear from the changes taking place in the American economy that Reaganomics is working.
President Ronald Reagan’s first four years in the White House weren’t particularly lucrative for Wall Street.
Crushed by Federal Reserve Chairman Paul Volcker’s war on inflation, the economy stumbled into a brief recession in July 1981. Unemployment spiked to nearly 11%.
But Volcker’s rate hikes and Reagan’s corporate tax cuts eventually broke the back of inflation, setting the stage for rapid economic growth. Under Reagan, America drastically ramped up defense spending in a successful bid to bring down the Soviet Union.
Despite the strong economy, Wall Street suffered its worst day ever under Reagan. The Dow plunged an astonishing 22.6% on Black Monday — equaling about 5,500 points today.
Nonetheless, the S&P 500 posted five separate years of double-digit growth on the Gipper’s watch, including a 26% spike in 1985.
Policymakers during the 1960s and 1970s had focused on macroeconomic adjustments in
their attempts to stimulate growth. The new Administration realized that the key to growth lay
in microeconomic incentives rather than macroeconomic manipulations. The Reagan
Administration’s “supply-side” thinking focused on creating a hospitable environment for
entrepreneurs, investors, and families by cutting high tax rates, reducing needless regulations,
and providing stability in the monetary environment.
At Reagan’s urging, Congress passed the Economic Recovery Tax Act of 1981, which
reduced tax rates from their former range of 14 to 70 percent to a new range of 11 to 50
percent. To eliminate bracket creep, the act also provided inflation indexing for tax brackets,
the standard deduction, and personal exemptions. The indexing rules became effective in 1985.
To encourage businesses to invest, the act provided large increases in depreciation
allowances and introduced an investment tax credit. It also provided a generous Individual
Retirement Account (IRA) option to allow every family to save more for retirement. The
capital gains tax rate was cut from 28 percent to 20 percent.
In 1985, the Reagan Administration proposed a further major tax overhaul that became
the basis of the Tax Reform Act of 1986. This act cut marginal tax rates further and reduced
the number of federal income tax brackets to only two: 15 and 28 percent. The act relieved
millions of people from having to pay any income tax at all by increasing the standard
deduction. The act also broadened the tax base and attempted to more fairly measure
individual and business income. Its main thrust was to create a more neutral tax code,
allowing the private sector to make efficient decisions without manipulation from
Reagan’s tax cuts were preceded by a capital gains tax cut in 1978 advocated by the
House Ways and Means Committee and unsuccessfully resisted by the Carter
Administration. The capital gains rate for individuals was cut from 49 percent to 28 percent
in 1978, and then cut to 20 percent under Reagan in 1981. These cuts helped spur the growth
in the U.S. venture capital industry. Aided by 1978 regulatory changes that allowed pension
funds to place funds in higher-risk investments, venture capital investments soared from under
$1 billion per year in the late 1970s to over $4 billion a year by 1983. Venture capitalists
invested in many early high-tech dynamos that have changed the shape of the U.S. economy,
such as Apple Computer, Intel, and Genentech.
The tax cuts of the Reagan era increased incentives to work and save, thereby stimulating
economic growth. While some tax rates have since been raised, rates are still substantially
lower than they were before Reagan. For example, the top rate today on federal income taxes
is 39.6 percent, versus 70 percent before Reagan. In addition, the Reagan tax cuts have been
emulated around the world as other countries realized that high marginal rates dampen
economic growth, discourage entrepreneurial activities, and reduce productive business
President Reagan also made progress in bringing growth in the federal bureaucracy under
control. Upon coming into office, he ordered an immediate freeze on federal hiring. In two
years, his administration trimmed nondefense federal employment by more than 100,000
persons. Despite some upward drift after 1986, nondefense federal employment was 6 percent
lower at the end of Reagan’s presidency than at the start.
One budget legacy of the Reagan Administration is the rise and subsequent fall in defense
expenditures. While the defense build-up of the 1980s was a burden on the American
taxpayer, the policy achieved its goal when the Soviet Union crumbled and the Cold War was
won. When the Reagan Administration took office, the tide of Communism was at its highwater mark. Soviet troops were occupying Afghanistan, and Soviet-supported regimes in
Eastern Europe, Nicaragua, Angola, Mozambique, and elsewhere were a constant threat to
Higher defense spending in the 1980s proved to be an excellent investment. Americans
are now enjoying the peace dividend from Reagan’s defense build-up as defense spending has
fallen in the 1990s with reductions in U.S. military forces. Defense spending fell from 6.2
percent of GDP in fiscal 1986 to 3.1 percent of GDP in 1998. More than 2 million jobs shifted
out of defense-related industries between 1989 and 1993. In the short run, this caused a
contraction of an important economic sector. By the mid 1990s, however, the economy had
adjusted, and the talents of former defense workers in computers, engineering, and other
fields were contributing to its strength.
Before the 1980s, a common theme in economic policymaking was the application of
interventionist “solutions” to economic problems. On the macroeconomic front, the
stagflation of the 1970s had been exacerbated by policymakers trying to fine-tune the
economy. Wage and price controls did not solve the underlying problem of excessive money
supply growth, and they created new problems such as shortages of controlled products.
On the microeconomic front, heavy-handed regulation of major industries was supposed
to help consumers, but usually ended up doing the opposite because it restrained competition
and prevented new firms from challenging entrenched companies. Economists and
policymakers began to reassess the costs of excessive regulations, and a movement towards
deregulation that began in the late 1970s gained steam under President Reagan.
By the end of the 1980s, substantial deregulation had occurred in airlines, trucking,
intercity buses, natural gas, oil, telecommunications, financial services, and shipping.
Deregulation had important impacts that continue to this day. The break-up of AT&T in 1984,
for example, led ultimately to the Internet explosion of the 1990s as it created a multiplicity of
telecom firms, each pursuing unique innovations that Ma Bell would never have stumbled
upon. Companies such as Federal Express and MCI would not have been able to revolutionize
the economy as they did if the old command and control regulations were still in place.
In transportation, deregulation begun in the 1970s continued under the Reagan
Administration. The 4-R Act of 1976 and Staggers Act of 1980 removed regulations that were
paralyzing the ability of railroads to compete against other forms of transportation. The
Airline Deregulation Act of 1978 allowed airlines to change routes and gave them greater
flexibility in setting fares, creating the conditions for discount fares, frequent flyer programs,
and other innovations. The Motor Carrier Act of 1980 deregulated the trucking industry. The
Bus Regulatory Reform Act of 1982, signed into law by President Reagan, allowed intercity
bus companies to change routes and fares without government intervention. The Shipping Act
of 1984 allowed individual shipping companies to lower prices and provide better service than
so-called shipping conferences, which acted like cartels.
In energy, the Reagan Administration moved quickly to deregulate an industry that had
been heavily regulated in the 1970s. Federal controls had covered nearly all aspects of oil
production, refining, and distribution. Presidents had had discretion to set wages and prices, to
allocate crude oil and petroleum products, and to eliminate “windfall” profits. Within a month
of coming to office in January 1981, President Reagan removed all and price controls and
allocation restrictions on oil. With one stroke, he eliminated a large government bureaucracy
supervising an inefficient system that hurt both producers and consumers. In 1982 Reagan
vetoed a bill that would have given the President the power to set oil prices and allocate
supplies in a shortage, thus short-circuiting an attempt to re-regulate the oil industry.
Natural gas was another heavily regulated industry, whose output was also subject to
federal price controls. The Reagan Administration removed price controls on natural gas other
than caps on the “field” price, and in 1986 it increased the price ceiling on the remaining
“old” gas above the market-clearing price. This created de facto deregulation and prompted
Congress to pass legislation ending price controls on natural gas.
Two decades of experience with industry deregulation have conclusively shown that open
competition has been a great boon to the American economy and consumers. Exhibit 6 shows
calculations of the benefits of deregulating major industries.17 In all cases, prices have
plummeted, saving consumers billions of dollars every year.
A recent study by the Organization for Economic Cooperation and Development looking
back on the U.S. deregulation experience concluded:
[T]he removal of most restrictions on pricing, entry and exit in network
industries led directly to increased productivity and lower costs….More
vigorous competition stimulated industry restructuring and innovation and
benefited consumers through better service and lower prices….An
extraordinary surge in innovation and faster introduction of new technologies,
services, and business practices multiplied benefits for consumers and
produced new high growth industries….These effects allowed the US economy
to adapt more quickly to changes in technology and to external shocks,
improved the trade-offs between inflation, growth, and unemployment, and
boosted the US lead in technology.
In addition to deregulation of particular industries, the Reagan Administration worked to
reduce the rapid and never-ending accumulation of regulatory decrees issued by every agency
in Washington. Professor Murray Weidenbaum, a member of Reagan’s economic team,
remembers what the incoming president was up against: “The 1970s will be remembered for
an outpouring of federal rules and expansion of regulatory agencies that resulted in greater
intervention in the private economy.” While deregulation of some industries had begun in the
late 1970s, many regulatory agencies were still growing. Weidenbaum estimates that the
number of federal regulators grew from fewer than 70,000 in 1970 to about 122,000 by
Freedom to trade within nations is taken for granted. In the United States, provisions of
the Constitution ensure open trade between the fifty states. Unlike the case at the domestic
level, at the international level the rationale for free trade needs to be restated frequently. The
Reagan Administration pursued freer trade in a number of areas, and fought protectionist
pressures that plagued the policy environment of the 1980s.
In 1982, President Reagan proposed the Caribbean Basin Initiative, which Congress
approved the following year. The initiative unilaterally reduced or eliminated U.S. tariffs on
many imports from 24 countries in and around the Caribbean. By strengthening the
economies of the region, the United States has benefited both economically and strategically,
by promoting security and democracy close to home.
The United States signed bilateral free trade agreements with a number of countries. The
first was with Israel, in 1985. Then the Reagan Administration moved on to negotiate an
agreement with Canada, by far our nation’s largest trading partner. The agreement was
ratified in 1989. Trade between the United States and Canada remains the largest between any
two countries in the world, and has accelerated since the agreement took effect.
The Great Expansion, 1983-2000
A. Low Inflation, High Growth, and Rising Employment
Today, the United States continues to enjoy the Great Expansion, a period of economic
growth since 1983 that was interrupted by only two quarters of mild recession in the early
1990s. During this period, real GDP has expanded an average of 3.6 percent a year, employers
have created more than 35 million new jobs, and the Dow Jones Industrial Average has grown
an average of 15 percent a year. Strong economic growth has raised incomes for Americans in
every income and demographic group. Growth has balanced the federal budget and may
generate large surpluses for years to come.
As Exhibit 8 shows, the economic record of the last 18 years is remarkable. The United
States has experienced two of the longest and strongest expansions in our history back-to back. The years from 1983 are best viewed as a single expansion, with its roots in the policy
changes of the late 1970s and early 1980s.
The Great Expansion has lasted so long in part because growth in productivity has been
strong. Productivity growth is vital to long-term increases in the standard of living.
Deregulation, increased global competition, and the enormous investments that American
businesses and workers have made in new technologies are making the economy ever more
efficient. Unlike the expansions of the 1960s and 1970s, the Great Expansion is not the result
of policies stimulating short-term demand. In the 1960s and 1970s, policies to stimulate
demand often led to inflation, provoking policymakers to depress demand to bring inflation
back under control. This stop-go strategy was discarded in the 1980s. Since then, monetary
policy has focused on price stability as its top priority.
The current level of price stability is the best the United States has achieved since the
early 1960s. Lower inflation has translated into lower interest rates. Although the Federal
Reserve recently acted to nudge short-term rates higher, long-term rates are generally lower
than they have been during the last three decades. Lower inflation and interest rates have
fostered economic growth. As discussed, this strategy has been very successful, not just in
terms of creating low inflation but also in allowing the private sector to maximize growth.
Alan Greenspan noted in 1999 that, “If nothing else, the experience of the last decade has
reinforced earlier evidence that a necessary condition for maximum sustainable economic
growth is price stability.”
From a historical perspective, the stability of the economy has been unprecedented during
the Great Expansion. While individual industries have been very dynamic and rapidly
changing, Exhibit 9 shows that the amount of time the U.S. economy has spent in recession
has declined from 44 percent during the period 1855-1909 to only 4 percent since 1982. The
U.S. economy has spent less time in recession since December 1982 than in any comparable
period in history.
The international economy is improving, with most major economies now achieving
sustained growth. Most of our trading partners have better prospects for growth today than
they have had for years. One cloud in the sky is the big jump in the price of oil, which
threatens to reduce economic growth worldwide. However, because of the greater strength
and flexibility of the U.S. economy today, we are in a better position to weather any adverse
consequences than we were in the 1970s.
B. The Growing Strength and Dynamism of U.S. Business
This report has discussed how the failure of interventionism in the 1970s paved the way
for a new set of economic policies under the Reagan Administration. At the same time that the
government’s ability to fine-tune the economy was being questioned, American business
stability was upset in industry after industry. Scores of upstart entrepreneurs were challenging
seemingly unassailable giants such as AT&T and IBM. The rapid birth of new entrepreneurial
businesses and continuous restructuring by America’s largest corporations has remade the
American business landscape in the past two decades. Many once-stable industries such as
steel, retailing, and financial services have seen enormous change as increased competition
has forced companies to produce better products at lower costs.
With the United States in the lead, industrial countries are undergoing a fundamental shift
away from a managerial economy towards an entrepreneurial economy. Economic activity
has moved away from large corporations towards small and medium-size firms since the
1970s. The share of total U.S. employment represented by Fortune 500 firms has fallen
substantially since 1970. The cornerstones of the managed economy—stability,
homogeneity, and economies of scale—are being replaced by greater turbulence,
heterogeneity, and flexibility. These qualities of the new entrepreneurial economy can be seen
in high-tech fields such as electronics, biotechnology, and the Internet.
Young entrepreneurial companies have been aided in their competitive challenges by
technological advances and by revolutions in U.S. financial markets. Cheaper and faster
computers, sophisticated software, and the Internet have allowed smaller ventures to gain the
information advantages once held only by large firms. Innovations in financial markets have
ensured that large pools of capital are available to risk-taking entrepreneurs. Markets for
venture capital, high-yield bonds (misleadingly termed “junk bonds”), and initial public
offerings (IPOs) have funneled billions of dollars to new ventures allowing them to test new
ideas and challenge entrenched firms. Efficient financial markets have allowed the United
States to excel at growing small firms into the new giants of leading-edge industries.
The impetus for change in the American business landscape came both from policy
changes in Washington, and from the new dynamism in the world economy. U.S. companies
faced many new competitive threats from foreign companies in the 1980s. While there were
many calls to build a Fortress America and protect U.S. producers from Japanese and German
competition, the Reagan, Bush, and Clinton Administrations have generally resisted these
calls. As a consequence, U.S. business is more competitive and efficient than ever, with the
result that incomes are higher and real prices of goods are lower than ever for the average
U.S. corporations have spent two decades restructuring and learning valuable lessons from
foreign producers, and adopting techniques such as just-in-time manufacturing systems to
improve quality. Openness to foreign investment has been greatly beneficial. Hundreds of
Japanese and European firms have built U.S. factories and provided high-wage, high-skill
jobs to American workers. U.S. business managers and engineers have been able to take
lessons learned in foreign-owned plants and implement them in U.S. companies.
Private-sector restructuring and expansion have also been greatly aided by innovations in
America’s dynamic capital markets. Any growing economy must have a way of shifting
capital away from old industries towards new and higher-valued ones. U.S. capital markets
have played this role, efficiently funneling billions of dollars to entrepreneurs in high-growth
industries. In a recent study, the Organization for Economic Co-operation and Development
found that the flexible legal framework of U.S. capital markets has helped spur strong
entrepreneurial economic growth. The diversity of financing sources available to American
entrepreneurs have meant that good ideas do not need the blessing of a government agency or
corporate bureaucracy to reach the market.
In the 1980s, innovations in the market for high-yield bonds played a key role in remaking
America’s big corporations into more entrepreneurial firms. High-yield bonds provided a key
source of financing for rapidly growing firms in telecommunications and other high technology fields. High-yield bonds were also instrumental in financing buyouts and
corporate restructuring efforts to make American corporate management more accountable.
Managers in every corporation were forced to improve performance to avoid becoming a
takeover target. Forbes magazine noted of the 1980s: “Attitudes in American business across
the board had been changed by 2,385 leveraged buyouts worth a total of $245 billion….These
deals helped revolutionize corporate finance, create new incentives for efficient management,
and inspire risk-taking on a grand scale.”
In the 1990s, a second front of entrepreneurial financing blossomed with the explosion of
the venture capital industry in California’s Silicon Valley. Deregulation and capital gains tax
cuts helped the venture capital market take off in the early 1980s. This industry fed $48
billion of equity risk capital to young technology companies in 1999, up from just $2 billion
in 1990. Since the 1970s, many of the dynamos of the U.S. high-tech industry have been
nourished with venture capital, including Apple, Lotus, Compaq, Intel, Yahoo, Sun,
Genentech, Cisco, Amazon, and McAfee.
In fact, the high-technology sector has played a starring role in the dynamic economic
climate of the 1980s and 1990s. High-tech industries now account for more than 8 percent of
U.S. GDP, up from 4.5 percent in 1980. U.S. software, semiconductor, biotechnology,
pharmaceutical, and Internet-related companies dominate world markets. In addition to
plentiful venture capital financing, U.S. high-tech firms have benefited from easy access to
equity financing through the NASDAQ stock exchange. The NASDAQ now hosts hundreds
of initial public offerings each year. The value of initial public offerings has risen from $2
billion in 1990 to $50 billion in 1999. NASDAQ has been a powerful competitive asset to
U.S. entrepreneurs, who have excellent access to capital compared to rivals in more regulated
foreign financial markets.
Ronald Reagan rarely catches any blame these days for the present economic mess that is destabilizing markets in the United States and around the world. In fact, Americans often praise the former president for taking the country in bold new directions during his years in the White House. Politicians contribute to this love-fest by naming schools and roads after the iconic president
These admirers rarely acknowledge how central Reagan’s ideas are to the market difficulties troubling us today. As the country’s greatest modern champion of deregulation, perhaps Ronald Reagan contributed more to today’s unstable business climate than any other American. His long-standing campaign against the role of government in American life, a crusade he often stretched to extremes, produced conditions that ultimately proved bad for business.
Ronald Reagan promised to take government off the backs of enterprising Americans. He told voters that government was not the solution to the nation’s problems; it was the problem. “The nine most terrifying words in the English language,” said Reagan, are, “ ‘I’m from the government and I’m here to help.’ ” His speeches contained numerous warnings about the chilling effects of bureaucratic regulation. Government leaders think, he said, “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Ronald Reagan was not the only major champion of deregulation. Economist Milton Friedman served as the idea’s principal philosopher, and Newt Gingrich was a leading advocate in Congress. But Reagan was the most influential figure to make the term “government” sound like a naughty word.
The main problem with Reagan’s outlook was a failure to recognize that government regulation can serve business interests quite effectively. Many of the regulatory programs started by Franklin D. Roosevelt’s New Deal in the 1930s aimed to promote fairness in economic competition. That legislation required greater transparency so that investors could more intelligently judge the value of securities in the stock market. The reforms mandated a separation of commercial and investment bank activities, since speculative investments by commercial banks had been one of the principal causes of the financial crash. Roosevelt’s New Deal also created a bank insurance program, the FDIC, which brought stability to a finance industry that had been on the verge of collapse.
These and other improvements of the 1930s worked splendidly. For the next half century American markets operated with impressive stability. There were periods of boom and recession, but the country’s financial system did not suffer from the kinds of shocks that have upset the American economy in recent years.
The turn away from rules that promote fair business practices fostered dangerous risk-taking. An early sign of the troubles occurred on Reagan’s watch. When the requirements for managing savings and loan institutions became lax in the 1980s, leaders of those organizations invested money recklessly. Many institutions failed or came close to failure, and the cleanup cost more than $150 billion. Yet blame for that crisis did not stick to the Teflon President.
Recent troubles in the American economy can be attributed to a weakening of business regulation in the public interest, which is, in large part, a consequence of Reagan’s anti-government preaching. In the absence of oversight, lending became a wildcat enterprise. Mortgage brokers easily deceived home buyers by promoting sub-prime loans, and then they passed on bundled documents to unwary investors. Executives at Fannie Mae packaged both conventional and sub-prime loans, and they too, operated almost free of serious oversight. Fannie’s leaders spent lavishly to hire sixty Washington lobbyists who showered congressmen with campaign funds. Executives at Fannie were generous to the politicians because they wanted to ward off regulation.
Meanwhile, on Wall Street, brokerage firms became deeply committed to risky mortgage investments and did not make their customers fully aware of the risks. The nation’s leading credit rating agencies, in turn, were not under much pressure to question claims about mortgage-based instruments that were marketed as Blue Chip quality. Government watchdogs were not active during those times to serve the interests of the public and the investors.
The most influential person to call for a more powerful watchdog recently is Secretary of the Treasury, Henry Paulson. After responding to the credit crisis by working with the Federal Reserve to shore up and bail out floundering business organizations, Paulson has become the leading challenger to Reagan’s outlook on government. During an August 10 interview on Meet the Press Paulson stressed over and over again that “the stability of our capital markets” requires “a strong regulator.” Our regulatory system is badly “outdated,” Paulson complained. Market discipline should be tightened by assigning a “regulator with the necessary power,” said the Treasury Secretary.
Henry Paulson never mentioned Ronald Reagan’s name during the interview, but the implications of his remarks were clear. Reagan’s views of the relationship between government and business helped to put the nation and the world into a good deal of trouble. It is time to recognize that the former president’s understanding of economics was not as sophisticated as his enthusiastic supporters often claimed.
Reagan deserves credit for serving as a vigorous defender of free markets, but he carried the idea to extremes. Ironically, the great champion of business enterprise advocated policies that have seriously hurt business here and abroad.
During the campaign of 1980, Ronald Reagan announced a recipe to fix the nation’s economic mess. He claimed an undue tax burden, excessive government regulation, and massive social spending programs hampered growth. Reagan proposed a phased 30% tax cut for the first three years of his Presidency. The bulk of the cut would be concentrated at the upper income levels. The economic theory behind the wisdom of such a plan was called SUPPLY-SIDE or TRICKLE-DOWN ECONOMICS
Tax relief for the rich would enable them to spend and invest more. This new spending would stimulate the economy and create new jobs. Reagan believed that a tax cut of this nature would ultimately generate even more revenue for the federal government. The Congress was not as sure as Reagan, but they did approve a 25% cut during Reagan’s first term.
The results of this plan were mixed. Initially, the FEDERAL RESERVE BOARD believed the tax cut would re-ignite inflation and raise interest rates. This sparked a deep recession in 1981 and 1982. The high interest rates caused the value of the dollar to rise on the international exchange market, making American goods more expensive abroad. As a result, exports decreased while imports increased. Eventually, the economy stabilized in 1983, and the remaining years of Reagan’s administration showed national growth.
The defense industry boomed as well. Reagan insisted that the United States was open to a “WINDOW OF VULNERABILITY” to the Soviet Union regarding nuclear defense. Massive government contracts were awarded to defense firms to upgrade the nation’s military. Reagan even proposed a space-based missile defense system called the STRATEGIC DEFENSE INITIATIVE. Scientists were dubious about the feasibility of a laser-guided system that could shoot down enemy missiles. Critics labeled the plan “STAR WARS.”
Economists disagreed over the achievements of REAGANOMICS. Tax cuts plus increased military spending would cost the federal government trillions of dollars. Reagan advocated paying for these expenses by slashing government programs. In the end, the Congress approved his tax and defense plans, but refused to make any deep cuts to the welfare state. Even Reagan himself was squeamish about attacking popular programs like Social Security and MEDICARE, which consume the largest percentages of taxpayer dollars. The results were skyrocketing deficits.
The national debt tripled from one to three trillion dollars during the REAGAN YEARS. The President and conservatives in Congress cried for a balanced budget amendment, but neither branch had the discipline to propose or enact a balanced budget. The growth that Americans enjoyed during the 1980s came at a huge price for the generations to follow.
nytimes.com, “WHAT RONALD REAGAN HAS DONE FOR INVESTORS,” By Robert D. Hershey; corporatefinanceinstitute.com, “Reaganomics A set of economic policies put forward by US President Ronald Reagan during his presidency in the 1980s,” By CFI editors; investopedia.com, “Presidents and the Stock Market: Administrative policies can impact the stock market in many ways,” By Caleb Silver; cnn.com, “From Reagan to Trump: Here’s how stocks performed under each president,” By Matt Egan; jec.senate.gov, “President Reagan’s Economic Legacy: The Great Expansion;” marketwatch.com, “Reagan insider: ‘GOP destroyed U.S. economy’, By Paul B. Farrell; dailykos.com, “Reagan Ruined America,” By Camillus; heritage.org, “Reaganomics: Making Gains,” By Thomas M.; historynewsnetwork.org, “Blame Ronald Reagan For Our Current Economic Crisis,” By Robert Brent Toplin; pbs.org, “Reagan’s Economic Legacy;” nytimes.com, ” The Reagan Boom-Greatest Ever,” By Martin Anderson; politico.com, “Reagan blames soaring deficits for ‘Black Monday’ crash, Oct. 19, 1987,” BY PAUL BRANDUS; ushistory.org, “The Reagan Years;” mises.org, ” The Myths of Reaganomics,” By Murray N. Rothbard;
Presidents and the Stock Market
Administrative policies can impact the stock market in many ways
Presidents get a lot of the blame, and take a lot of the credit, for the performance of the stock market while they are in office. However, the truth is that the president’s ability to impact the economy and markets is generally indirect and marginal.
It’s Congress that sets tax rates, passes spending bills, and writes laws regulating the economy. That said, there are some ways that the president can affect the economy and the market.
How Presidents Impact the Stock Market
Because the president is responsible for implementing and enforcing laws, they have some control over business and market regulation. This control can be direct or through the president’s ability to appoint cabinet secretaries, such as the head of the Department of Commerce, as well as trade representatives.
The president also nominates the Chair of the Federal Reserve, who sets monetary policy along with the other Fed governors and members of the Federal Open Market Committee. The Fed is an independent government body with a mission to set monetary policy that ensures economic growth, low inflation, and low unemployment. Those monetary policy measures can impact the stock market, although the Fed typically does not consider the performance of the stock market as an isolated factor to influence its decisions. The extent to which the person picked as Fed Chair is hawkish or dovish on monetary policy will determine how they affect the economy.
All presidents would like to lead during times of economic expansion and a rising stock market because those usually increase their likelihood of reelection. As President Bill Clinton’s campaign manager, James Carville, once famously said, “It’s the economy, stupid.”
This chart shows the S&P 500’s price change over each four-year presidential term going back to 1953. Two of the terms have two names because President Kennedy was assassinated before the end of his term, and President Nixon resigned before the end of his second term. Their terms were finished by their vice presidents, Lyndon Johnson and Gerald Ford, respectively.
There haven’t technically been any CEOs who went on to become president. In fact, Donald Trump may be the closest contender to claim that title. He was chairman and president of The Trump Organization before becoming President of the United States, but that’s pretty close. Many have tried, and we’ll certainly see many more make the attempt in the future.
Presidents and the NYSE
It’s very rare that a sitting president will visit the New York Stock Exchange. Sure, President George Washington’s statue is right across the street at Federal Hall, but the exchange was barely established during his tenure. It’s an iconic image, though.
President Bush Visits the NYSE
On Jan. 31, 2007, President George W. Bush paid a visit to the New York Stock Exchange. He had just made a speech on the economy across the street at the aforementioned Federal Hall, where he chastised corporations for excessive executive compensation. Little did he know, the nation was about to slip into a financial crisis and the longest recession it had experienced since the Great Depression. Here is a great photo from that day, courtesy of the White House archives.
Relatively speaking, presidential salaries are pretty tame, currently $400,000 a year. Presidents make their money when they leave the office with lucrative book deals and speaking fees.
The Bottom Line
So, while the President can influence the economy through policies and economic agendas that can impact the stock market, the President probably gets too much blame and too much credit when it goes down or up.
From Reagan to Trump:
Here’s how stocks performed under each president
The stock market is certainly not the best indicator of the economy’s health, or of a president’s track record. But throughout his four years in office, it clearly was President Donald Trump’s favorite metric. He often tweeted in all caps about “ALL TIME HIGHS!!!” for stocks, even as the country grappled with surging coronavirus cases and high unemployment during the pandemic.
Now, as he wraps up his last day in the White House, where does Trump’s beloved stock market stand? As of Tuesday’s market close, the S&P 500 was up 67% since his Inauguration Day in 2017.
Here’s how that performance stacks up to stocks at the same point in other modern presidencies (1,006 trading days, to be exact): Stocks were up 83% at this point in Barack Obama’s presidency, amid the recovery from the Great Recession. They were much weaker under George W. Bush, down about 13% because of the September 11th attacks and the dot-com bust. Stocks were up 75% four years into Bill Clinton’s presidency, and 25% into Ronald Reagan’s.
Meanwhile, President George H.W. Bush, who also failed to win reelection, ended his four years with stocks up around 50%.
Unlike his predecessor, incoming President-elect Joe Biden does not put nearly as much emphasis on stocks as a gauge of the country’s strength or wellbeing.
“The idea that the stock market is booming is his only measure of what’s happening,” Biden said of Trump in the final presidential debate in October. “Where I come from in Scranton and Claymont, the people don’t live off of the stock market.”
Ronald Reagan( See Above)
he economy and stock market surged in President George H. W. Bush’s first year in office. The S&P 500 climbed 27% in 1989.
But then the savings-and-loan crisis and Gulf War struck. Oil prices more than doubled after Iraq invaded Kuwait. Growth slowed, and the American economy slipped into a mild recession in July 1990.
While the recession ended in March 1991, the recovery was choppy. Two years later, unemployment remained around 7%. The sluggish economy led to Bush’s defeat in 1992.
The roaring 1990s were very kind to Wall Street.
Stocks spiked — the S&P 500 increased 210% under President Bill Clinton — as investors celebrated the rise of the Internet and brisk economic growth. Clinton presided over two of the S&P 500’s top 10 years: 1995 and 1997.
GDP topped 4% in five of Clinton’s eight years in the White House. Inflation remained stable. Unemployment dipped below 4%. And the United States enjoyed the longest period of uninterrupted economic growth in modern history.
The era was punctuated by the dotcom boom, which amounted to the creation of an entirely new industry. The Nasdaq spiked sevenfold between 1993 and its peak in early 2000. The mania created vast amounts of wealth — much of which would disappear as the bubble inevitably popped.
Investors who bet that a businessman in the White House would translate into strong returns were badly disappointed during President George W. Bush’s presidency.
The S&P 500 declined 40% under Bush, the worst among modern administrations.
Bush inherited the dotcom bust, which spawned the 2001 recession. The downturn was deepened by the 9/11 terror attacks.
Growth gathered steam in 2004 and 2005, fueled in part by low interest rates and the housing boom. But that bubble also popped in spectacular fashion, ushering in the Great Recession and the scariest financial crisis in a generation.
In the final quarter of Bush’s tenure, GDP plummeted at an 8.4% annual rate. Unemployment began rising rapidly. The S&P 500 plummeted 38% in 2008, its worst year since the Great Depression.
The Wall Street meltdown continued during the first few months of President Barack Obama’s presidency.
The financial and auto industries teetered on the brink of collapse before government bailouts saved them both. Unemployment would peak at 10% in 2009, doubling in barely a year.
The stock market bottomed out in March 2009, but then the economy slowly healed, beginning what would eventually become the longest bull market in American history.
Digging out of the depths of the Great Recession was a long and slow process, though. Annual GDP growth never topped 3% in the Obama era.
Hoping to juice the economy, the Fed kept pumping easy money into the system. The unprecedented experiment helped send stocks soaring — the S&P 500 nearly tripled during the Obama era — but also contributed to wealth inequality and populism.
President Donald Trump’s upset victory initially fueled a breathtaking rally in the stock market as investors welcomed his pro-business agenda of tax cuts, deregulation and infrastructure spending. Early in Trump’s presidency, corporate profits spiked after his signature legislative achievement — a tax overhaul. And the unemployment rate plunged below 4%.
A trade war with China temporarily sucked some of the air out of the market’s gains in late 2018, but it wasn’t until the coronavirus pandemic hit the United States in early 2020 that the bull market officially came to an end.
The S&P 500 reached a high on February 19, 2020 and then plunged 34% over a month, as states enacted stay-at-home orders and businesses shut down to contain the virus.
Months later, stocks have bounced back even as the country is still struggling to recover. More than 24 million coronavirus cases have been identified in the US, and 400,000 Americans have died. Meanwhile, economic activity remains well below its pre-pandemic level, and millions of Americans continue to grapple with unemployment, hunger and struggle to pay their bills.
Cumulatively, the S&P 500 gained 67% from Trump’s inauguration to the market close on Tuesday, January 19, 2021 — his last full day in office.
Reagan’s Economic Legacy
In the more than 15 years since the late President Ronald Reagan left office, experts have continued to debate the merits of his policies. His economic agenda — known as Reaganomics — was characterized by tax cuts, deficit spending and lower inflation.
Now, the lasting impact of Ronald Reagan’s economic policies. From the very beginnings of his presidential campaign to the end of his second term, the former president’s economic agenda, widely called Reaganomics, drew both praise and criticism. The principles were simple, and he laid them out in a speech before Congress in April 1981. Here’s an excerpt.
High taxes and excess spending growth created our present economic mess. More of the same will not cure the hardship, anxiety, and discouragement it has imposed on the American people.
Let us cut through the fog for a moment. The answer to a government that’s too big is to stop feeding its growth. Government spending has been growing faster than the economy itself. The massive national debt which we accumulated is the result of the government’s high spending diet. Well, it’s time to change the diet, and to change it in the right way.
This week, as the public remembrance of President Reagan continues, so too does the debate over his economic legacy.
We get two views now: Robert Reich was secretary of labor during the Clinton administration. He is the author of the book, “Reason: Why Liberals Will Win the Battle for America.” And Stephen Moore is president of the Club for Growth. In 1987, he was research director for then-President Reagan’s Commission on Government Privatization.
Mr. Moore, what were the main pillars of Ronald Reagan’s economic policies?
Well, Ronald Reagan came to the White House, you’re right, with some simple ideas but they weren’t simple-minded ideas. These were ideas to cut tax rates. At that time in the United States we had a 70 percent top tax rate. That was really discouraging economic growth. The second big problem that we had in the economy was raging inflation. You know, when Reagan entered office the inflation rate was 14 percent. I think that more than anything probably cost Jimmy Carter the election. And the third thing was Reagan promised to rebuild the military to fight the evil empire and to try to bring the Cold War to an end victoriously.
I think what made Ronald Reagan such a great president, in my opinion, was that he came in with these three objectives and he was able to accomplish them all in eight years. Eight years after President Reagan had been elected the Berlin Wall had just about come down, and I think it was pushed down by Reaganomics and Reagan’s military policies. The inflation rate had come down very dramatically and taxes had.
And so Reagan was able to ask Americans twice, are you better off today than you were four years ago? And both times Americans resoundingly said, yes, we’re a lot better off.
Professor Reich, you just heard Stephen Moore lay out both the policies and his view that they worked. Did they?
Ray, look, I don’t want to be disrespectful to the memory of a beloved president. Many things that Ronald Reagan did were very important for this country, but Reaganomics had some major problems. For one thing, it created a huge deficit. In 1981 at the start of the Reagan administration the deficit was about 2.5 percent of the national economy. By the end it was about 5 percent of the national economy. Interest payments just on that debt went from $69 billion in 1981 to $169 billion at the end of the Reagan administration.
With that kind of deficit, eventually you’ve got to pay the piper. There is a day of reckoning, and the day of reckoning came with a huge recession in 1990 and 1991.
Well, Stephen Moore in our excerpt you heard Ronald Reagan talk about putting the beast of government on a different diet. Did he do that part and is part of the mixed legacy of Reaganomics now all these years later in part stemming from the fact that the diet didn’t change that much?
One of my favorite Reagan quotes was when he said that a government that’s big enough to give you everything you want is also a government big enough to take everything you’ve got.
And Reagan did, I think, make an effort to cut programs, mostly social programs, which had grown out of control. But on this debt issue, I think the important thing to remember is that Reagan really had two higher priorities than balancing the budget. One was to put America back to work again. I mean people forget that in the late 1970s and early 1980s we were in a mini-depression. The unemployment rate was 8 percent. I mentioned the high inflation. Most Americans really felt that there was something fundamentally wrong with America. Jimmy Carter had given a speech in August of 1980 where he said that America was in a decline and that we couldn’t get out of this problem of joblessness and high inflation.
Reagan really restored the faith in the private sector economy to grow. So I think that the price we paid for those high deficits was to win the Cold War and to rebuild our economy with 15 million new jobs that were created in the 1980s and certainly Robert Reich as labor secretary under Clinton respects that kind of job growth.
Well, do you?
Undoubtedly I respect job growth. In the 1990s when Bill Clinton became president, I was with him. We faced a huge mountain of debt. The only way we could get job growth restored in the 1990s — and by the way under the Clinton administration 22 million net new jobs were added to the economy — but the only way to actually get that going was to get out from under that mountain of debt and reduce the deficit which is what we spent most of our time doing at least in the first few years of the Clinton administration.
Let me, if I may, just make one other comment. That is that undoubtedly the economy was very bad in the late 1970s, but inflation was the major culprit. Inflation was out of control. Ronald Reagan should get some credit, but Paul Volcker heading the Federal Reserve Board actually gets most of the credit. He broke the back of inflation by increasing interest rates substantially. In fact some would say that he ended the Carter administration because we were plunged into a recession with those huge interest rate increases, but we got out from under inflation.
But, Stephen Moore, did Ronald Reagan change the terms of the debate regardless of the legacy of the policies? Is it just hard to do certain things in Washington today? Are certain proposals just hard to make because of the fact that this man was president and did what he did economically during the time he was?
I think he did shortchange the terms of the debate. A perfect example of that was when Bill Clinton, a Democrat, said in I think 1995 that the era of big government is over. I mean that’s a Reagan philosophy if there ever was one.
If you want to see other evidence of Reagan’s lasting legacy, I think what’s really interesting is you look at what’s happening around the globe today. Look at what’s happening in Russia and China where those countries which 25 years ago were our adversaries and threats to world peace now are moving very aggressively towards Reaganomics with privatization, with lower taxes, with private property rights. Russia just adopted a 13 percent flat tax so I think that’s the ultimate accolade to Reaganomics is that it’s bursting out all over the world.
And, Professor Reich, do you see the legacy, the after-effects, the shadow of Reaganomics in that same benign way?
Not quite as benign a way, Ray. Undoubtedly privatization and deregulation were the hallmarks of Reaganomics that lasted and have spread around the world.
But we also have noted that trickle-down economics — that’s what we called supply- side economics in those days — trickle down economics didn’t work very well. Very little trickled down to the poor. The gap between the rich and the poor began to widen during the Reagan administration and has continued to widen since then. We also saw that deregulation did not always work. We had a savings and loan crisis partly because of the deregulated financial markets. So, yes, privatization and deregulation are good up to a point but let’s remember that there are other objectives in our economy as well.
Robert Reich, is the jury still out on supply-side? Did it work that government revenue would increase if you cut tax revenues and cut taxes to taxpayers?
No, Ray. The jury is not out on this. It’s very clear that government revenues did not compensate for the cut in taxes. That’s why we ended the 1980s with a huge deficit. That’s why we started the ’90s with a gigantic debt.
We are seeing right now that supply-side economics tried for another time under the second Bush administration, the Bush, Jr. administration, is not working. We have a $400-some-odd billion deficit and to parody or to use the phrase of David Stockman, as far as the eye can see. We are going to have to pay the piper at some point. There is going to be a day of reckoning for that deficit particularly as baby boomers mature and have to eventually collect Social Security and Medicare.
Are you as convinced Robert Reich, Stephen Moore, that the supply side idea didn’t work that the stimulus that putting more money in people’s own pockets would eventually increase government revenue? Are you sure that it’s — it may still be with a going idea?
Just taking the 1980s, for example, I think Robert Reich is wrong on this. If you look at what happened to the federal revenues, when Reagan entered office we had $500 billion in tax revenues; by 1990, the year after he left office we had a trillion dollars in revenue so the revenue stream doubled over that period.
You know, it’s interesting because I don’t think that any even liberal Democrats today or even economists like Robert Reich who oftentimes I disagree with would want to go back to the days of those very high tax rates that we had in the 1970s when you had 80 percent tax rates when you combined federal and state taxes.
So I think the lesson we learned is that when taxes get too high they stifle private creativity and wealth creation, and I see the real evidence of this all over the world where countries really are moving towards Reaganomics by lowering their taxes and there’s no question that George W. Bush is using that model too. And the economy is doing pretty well right now with that.
Well, I was a pretty young worker then, Stephen Moore, so the idea that I would get up into those brackets and pay 70 percent taxes seemed pretty remote. Did many taxpayers pay those kinds of rates? When people talk about marginal rates that used to be yea high or yea high, were there a lot of people actually paying them?
Well what was happening in the 1970s was you had something called inflationary bracket creep. And it’s something that really destroyed the Carter presidency because you had high tax rates exacerbated by these high inflation rates. So Americans were being pushed even middle class Americans like you and me were being pushed into these higher tax brackets. That’s what caused the middle class tax revolt of the late 1970s.
Any quick final word, Robert Reich?
Only that a lot of Americans in the 1980s began paying more in payroll taxes, in Social Security taxes as a result of a very important reform that Ronald Reagan and Alan Greenspan put through, but those increases in payroll taxes have actually for most Americans more than compensated for, more than took away any tax reduction they had in income taxes, and that legacy lives on to this day.
The Reagan Boom – Greatest Ever
By Martin Anderson
Almost everyone knows that the greatest depression the U.S. ever had was in the 1930’s. It was known as the Great Depression, and its infamy merits a separate section in economics textbooks. But what was its counterpart? When did our greatest economic expansion occur?
We just had it. And it is still expanding, setting new records with each passing month.
We don’t know whether historians will call it the Great Expansion of the 1980’s or Reagan’s Great Expansion, but we do know from official economic statistics that the seven year period from 1982 to 1989 was the greatest, consistent burst of economic activity ever seen in the U.S. In fact, it was the greatest economic expansion the world has ever seen – in any country, at any time.
The two key measures that mark a depression or expansion are jobs and production. Let’s look at the records that were set. Creation of jobs. From November 1982, when President Ronald Reagan’s new economic program was beginning to take effect, to November 1989, 18.7 million new jobs were created. It was a world record: Never before had so many jobs been created during a comparable time period. The new jobs covered the entire spectrum of work, and more than half of them paid more than $20,000 a year. As total employment grew to 119.5 million, the rate of unemployment fell to slightly over 5 percent, the lowest level in 15 years. Creation of wealth.
The amount of wealth produced during this seven year period was stupendous – some $30 trillion worth of goods and services. Again, it was a world record. Never before had so much wealth been produced during a comparable period. According to a recent study, net asset values – including stocks, bonds and real estate – went up by more than $5 trillion between 1982 and 1989, an increase of roughly 50 percent.
There are other important measures. Steady economic growth. As we begin the decade of the 1990’s, we are in our 86th straight month of economic growth – a new record for peacetime, five months longer than the wartime growth of World War II and only 23 months short of the wartime record set during the Vietnam War in the 1960’s. Most experts now predict that it will last right through 1990, and perhaps beyond.
Income tax rates, interest rates and inflation.
Under President Reagan, top personal income tax rates were lowered dramatically, from 70 percent to 28 percent. This policy change was the prime force behind the record breaking economic expansion. Interest rates and inflation also fell sharply and, so far, have stayed comfortably low – a further indication of the power and pervasiveness of Mr. Reagan’s economic policies. The stock market. Perhaps the key indicator of an economy’s booms and busts is the stock market, the bottom line economic report card. And here the record has been striking. During the period from 1970 to 1982, the stock market barely moved. The Standard & Poor’s index of 500 stocks inched up about 35 percent during that entire period. But starting in late 1982, just as Reaganomics began to work, the stock market took off like a giant skyrocket. Since then, the Standard & Poor’s index has soared, reaching a record high of 360, almost triple what it was in 1982.
There were other consequences of the expansion. Annual Federal spending on public housing and welfare, and on Social Security, Medicare and health all increased by billions of dollars. The poverty rate has fallen steadily since 1983.
When you add up the record of the Reagan years, and the first year of President Bush – during which he has faithfully continued Mr. Reagan’s economic policies – the conclusion is clear, inescapable and stunning. We have just witnessed America’s Great Expansion.
The Reagan economic expansion was not perfect and we will never have one that is. The Federal budget deficits were too high and still are, too many Federal regulations lay unreformed and the trade deficit is worrisome.
In fact, the Reagan expansion may not have been the best economic expansion in history, for every economic expansion must be judged by many criteria. But if we look at the sheer size and immensity of it, at its scope and power, then it cannot be denied that it was the greatest.
The full impact of the powerful economic recovery that President Reagan launched during the 1980s is still unfolding.
Mr. Reagan’s expansion provided the financial resources to allow the U.S. to build up the combat capability of its defense forces and to begin blazing the new trail for a protective missile system. This, in turn, convinced the Soviet rulers they could never defeat the U.S., and today the Soviet Union and the U.S. are busily engaged in nuclear disarmament as peace breaks out in country after country throughout the world.
Equally important, it proved beyond doubt to all (except perhaps for a handful of left-wing faculty members in our best universities) that capitalism is superior to Socialism and Communism. Our economy is the guiding beacon for all those countries that are ripping apart the ruthless collectivist regimes that ruined the lives of their people for so long.
One thing the Marxists got right: Economics is a powerful determining factor of history. But Marxists never dreamed it would be the economics of Ronald Reagan and all those capitalists that would prevail in the end.
Reagan blames soaring deficits for ‘Black Monday’ crash, Oct. 19, 1987
On this day in 1987, President Ronald Reagan cited soaring federal deficits as having triggered the largest single-day Wall Street crash in U.S. history. The Dow Jones Industrial Average fell 508 points, or nearly 23 percent. Traders dubbed the market rout as “Black Monday.”
Reagan said he would consider raising taxes to reduce the deficit. The president had already spearheaded higher taxes on gasoline and personal income as an integral part of the Tax Reform Act of 1986. The legislation, which also raised corporate taxes and closed some loopholes, raised federal revenue by $420 billion, or the equivalent of $800 billion today.
Wall Street was hardly alone in experiencing a market rout: By the end of October, stock markets had fallen in Hong Kong (45.5 percent), Australia (41.8 percent), Spain (31 percent), Britain (26.5 percent) and Canada (22.5 percent).
The New Zealand Stock Market was hit especially hard, plummeting about 60 percent from its 1987 peak. It would take several years to rebound. High exchange rates and the Reserve Bank of New Zealand’s refusal to loosen monetary policy in response to the crisis compounded the damage — in contrast to countries such as West Germany, Japan and the United States, whose banks increased short-term liquidity to forestall a recession and experienced rapid economic growth in the ensuing two to three years.
Market insiders and economists cited different factors that might have contributed to the precipitous decline, including so-called computerized program trading, overvaluation of stocks, a lack of market liquidity and investor psychology.
Some economists theorized that the speculative boom leading up to the October crash merely reflected a return to normalcy. But program trading ended up taking most of the blame in the public eye for the crash. Among others, Rep. Ed Markey (D-Mass.), who had been warning about the possibility of a crash, said “program trading was the principal cause.” (In program trading, computers execute rapid stock trades based on external inputs, such as the price of related securities.).
After Black Monday, regulators overhauled trade-clearing protocols to bring uniformity to all prominent market products. They also developed new rules, imposing “trading curbs,” colloquially known as circuit breakers, that allowed exchanges to temporarily halt trading in instances of exceptionally large price declines in key indexes.
Following the stock market crash, a group of 33 economists from various nations met in Washington in December 1987. In a joint statement, they said: “’Unless more decisive action is taken to correct existing imbalances at their roots, the next few years could be the most troubled since the 1930’s.”
The single biggest point drop in the Dow Jones Industrial Average — 1,175 points — occurred on Feb. 5, 2018. However, point drops have translated into smaller overall percentage drops as the Dow has risen steadily over the past several decades.
The Myths of Reaganomics
By Murray N. Rothbard
I come to bury Reaganomics, not to praise it.
How well has Reaganomics achieved its own goals? Perhaps the best way of discovering those goals is to recall the heady days of Ronald Reagan’s first campaign for the presidency, especially before his triumph at the Republican National Convention in 1980. In general terms, Reagan pledged to return, or advance, to a free market and to “get government off our backs.”
Specifically, Reagan called for a massive cut in government spending, an even more drastic cut in taxation (particularly the income tax), a balanced budget by 1984 (that wild-spender, Jimmy Carter you see, had raised the budget deficit to $74 billion a year, and this had to be eliminated), and a return to the gold standard, where money is supplied by the market rather than by government. In addition to a call for free markets domestically, Reagan affirmed his deep commitment to freedom of international trade. Not only did the upper echelons of the administration sport Adam Smith ties, in honor of that moderate free-trader, but Reagan himself affirmed the depth of the influence upon him of the mid-19th century laissez-faire economist, Frederic Bastiat, whose devastating and satiric attacks on protectionism have been anthologized in economics readings ever since.
The gold standard was the easiest pledge to dispose of. President Reagan appointed an allegedly impartial gold commission to study the problem—a commission overwhelmingly packed with lifelong opponents of gold. The commission presented its predictable report, and gold was quickly interred.
Let’s run down the other important areas:
Government Spending. How well did Reagan succeed in cutting government spending, surely a critical ingredient in any plan to reduce the role of government in everyone’s life? In 1980, the last year of free-spending Jimmy Carter the federal government spent $591 billion. In 1986, the last recorded year of the Reagan administration, the federal government spent $990 billion, an increase of 68%. Whatever this is, it is emphatically not reducing government expenditures.
Sophisticated economists say that these absolute numbers are an unfair comparison, that we should compare federal spending in these two years as percentage of gross national product. But this strikes me as unfair in the opposite direction, because the greater the amount of inflation generated by the federal government, the higher will be the GNP. We might then be complimenting the government on a lower percentage of spending achieved by the government’s generating inflation by creating more money. But even taking these percentages of GNP figures, we get federal spending as percent of GNP in 1980 as 21.6%, and after six years of Reagan, 24.3%. A better comparison would be percentage of federal spending to net private product, that is, production of the private sector. That percentage was 31.1% in 1980, and a shocking 34.3% in 1986. So even using percentages, the Reagan administration has brought us a substantial increase in government spending.
Also, the excuse cannot be used that Congress massively increased Reagan’s budget proposals. On the contrary, there was never much difference between Reagan’s and Congress’s budgets, and despite propaganda to the contrary, Reagan never proposed a cut in the total budget.
Deficits. The next, and admittedly the most embarrassing, failure of Reaganomic goals is the deficit. Jimmy Carter habitually ran deficits of $40-50 billion and, by the end, up to $74 billion; but by 1984, when Reagan had promised to achieve a balanced budget, the deficit had settled down comfortably to about $200 billion, a level that seems to be permanent, despite desperate attempts to cook the figures in one-shot reductions.
This is by far the largest budget deficit in American history. It is true that the $50 billion deficits in World War II were a much higher percentage of the GNP; but the point is that that was a temporary, one-shot situation, the product of war finance. But the war was over in a few years; and the current federal deficits now seem to be a recent, but still permanent part of the American heritage.
One of the most curious, and least edifying, sights in the Reagan era was to see the Reaganites completely change their tune of a lifetime. At the very beginning of the Reagan administration, the conservative Republicans in the House of Representatives, convinced that deficits would disappear immediately, received a terrific shock when they were asked by the Reagan administration to vote for the usual annual increase in the statutory debt limit. These Republicans, some literally with tears in their eyes, protested that never in their lives had they voted for an increase in the national debt limit, but they were doing it just this one time because they “trusted Ronald Reagan” to balance the budget from then on. The rest, alas, is history, and the conservative Republicans never saw fit to cry again. Instead, they found themselves adjusting rather easily to the new era of huge permanent deficits. The Gramm-Rudman law, allegedly designed to eradicate deficits in a few years, has now unsurprisingly bogged down in enduring confusion.”Reaganomics has been an uneasy and shifting coalition of several clashing schools of economic thought. In particular, the leading schools have been the conservative Keynesians, the Milton Friedman monetarists, and the supply-siders.”
Even less edifying is the spectre of Reaganomists who had inveighed against deficits—that legacy of Keynesianism—for decades. Soon Reaganite economists, especially those staffing economic posts in the executive and legislative branches, found that deficits really weren’t so bad after all. Ingenious models were devised claiming to prove that there really isn’t any deficit. Bill Niskanen, of the Reagan Council of Economic Advisors, came up with perhaps the most ingenious discovery: that there is no reason to worry about government deficits, since they are balanced by the growth in value of government assets. Well, hooray, but it is rather strange to see economists whose alleged goal is a drastic reduction in the role of government cheering for ever greater growth in government assets. Moreover, the size of government assets is really beside the point. It would only be of interest if the federal government were just another private business firm, about to go into liquidation, and whose debtors could then be satisfied by a parceling out of its hefty assets. The federal government is not about to be liquidated; there is no chance, for example, of an institution ever going into bankruptcy or liquidation that has the legal right to print whatever money it needs to get itself—and anyone else it favors—out of any financial hole.
There has also been a fervent revival of the old left-Keynesian idea that “deficits don’t matter, anyway.” Deficits are stimulating, we can “grow ourselves out of deficits,” etc. The most interesting, though predictable, twist was that of the supply-siders, who, led by Professor Arthur Laffer and his famous “curve,” had promised that if income tax rates were cut, investment and production would be so stimulated that a fall in tax rates would increase tax revenue and balance the budget. When the budget was most emphatically not balanced, and deficits instead got worse, the supply-siders threw Laffer overboard as the scapegoat, claiming that Laffer was an extremist, and the only propounder of his famous curve. The supply-siders then retreated to their current, fall-back position, which is quite frankly Keynesian; namely deficits don’t matter anyway, so let’s have cheap money and deficits; relax and enjoy them. About the only Keynesian phrase we have not heard yet from Reaganomists is that the national debt “doesn’t matter because we owe it to ourselves,” and I am waiting for some supply-sider to adopt this famous 1930s phrase of Abba Lerner without, of course, bothering about attribution.
One way in which Ronald Reagan has tried to seize the moral high road on the deficit question is to divorce his rhetoric from reality even more sharply than usual. Thus, the proposer of the biggest deficits in American history has been calling vehemently for a Constitutional amendment to require a balanced budget. In that way, Reagan can lead the way toward permanent $200 billion deficits, while basking in the virtue of proposing a balanced budget amendment, and trying to make Congress the fall guy for our deficit economy.
Even in the unlikely event that the balanced budget amendment should ever pass, it would be ludicrous in its lack of effect. In the first place, Congress can override the amendment at any time by three-fifths vote. Secondly, Congress is not required to actually balance any budget; that is, its actual expenditures in any given year are not limited to the revenues taken in. Instead, Congress is only required to prepare an estimate of a balanced budget for a future year; and of course, government estimates, even of its own income or spending, are notoriously unreliable. And third, there is no enforcement clause; suppose Congress did violate even the requirement for an estimated balanced budget: What is going to happen to the legislators? Is the Supreme Court going to summon marshals and put the entire U.S. Congress in jail? And yet, not only has Reagan been pushing for such an absurd amendment, but so too have many helpful Reaganomists.
Tax Cuts. One of the few areas where Reaganomists claim success without embarrassment is taxation. Didn’t the Reagan administration, after all, slash income taxes in 1981, and provide both tax cuts and “fairness” in its highly touted tax reform law of 1986? Hasn’t Ronald Reagan, in the teeth of opposition, heroically held the line against all tax increases?
The answer, unfortunately, is no. In the first place, the famous “tax cut” of 1981 did not cut taxes at all. It’s true that tax rates for higher-income brackets were cut; but for the average person, taxes rose, rather than declined. The reason is that, on the whole, the cut in income tax rates was more than offset by two forms of tax increase. One was “bracket creep,” a term for inflation quietly but effectively raising one into higher tax brackets, so that you pay more and proportionately higher taxes even though the tax rate schedule has officially remained the same. The second source of higher taxes was Social Security taxation, which kept increasing, and which helped taxes go up overall. Not only that, but soon thereafter; when the Social Security System was generally perceived as on the brink of bankruptcy, President Reagan brought in Alan Greenspan, a leading Reaganomist and now Chairman of the Federal Reserve, to save Social Security as head of a bipartisan commission. The “saving,” of course, meant still higher Social Security taxes then and forevermore.
Since the tax cut of 1981 that was not really a cut, furthermore, taxes have gone up every single year since, with the approval of the Reagan administration. But to save the president’s rhetorical sensibilities, they weren’t called tax increases. Instead, ingenious labels were attached to them; raising of “fees,” “plugging loopholes” (and surely everyone wants loopholes plugged), “tightening IRS enforcement,” and even revenue enhancements.” I am sure that all good Reaganomists slept soundly at night knowing that even though government revenue was being “enhanced,” the president had held the line against tax increases.”Reagan’s foreign economic policy has been the exact opposite of its proclaimed devotion to free trade and free markets.”
The highly ballyhooed Tax “Reform” Act of 1986 was supposed to be economically healthy as well as “fair”; supposedly “revenue neutral,” it was to bring us (a) simplicity, helping the public while making the lives of tax accountants and lawyers miserable; and (b) income tax cuts, especially in the higher income brackets and in everyone’s marginal tax rates (that is, income tax rates on additional money you may earn); and offset only by plugging those infamous loopholes. The reality, of course, was very different, In the first place, the administration has succeeded in making the tax laws so complicated that even the IRS admittedly doesn’t understand it, and tax accountants and lawyers will be kept puzzled and happy for years to come.
Secondly, while indeed income tax rates were cut in the higher brackets, many of the loophole plugs meant huge tax increases for people in the upper as well as middle income brackets. The point of the income tax, and particularly the marginal rate cuts, was the supply-sider objective of lowering taxes to stimulate savings and investment. But a National Bureau study by Hausman and Poterba on the Tax Reform Act shows that over 40% of the nation’s taxpayers suffered a marginal tax increase (or at best, the same rate as before) and, of the majority that did enjoy marginal tax cuts, only 11% got reductions of 10% or more. In short, most of the tax reductions were negligible. Not only that; the Tax Reform Act, these authors reckoned, would lower savings and investment overall because of the huge increases in taxes on business and on capital gains. Moreover savings were also hurt by the tax law’s removal of tax deductibility on contributions to IRAs.
Not only were taxes increased, but business costs were greatly raised by making business expense meals only 80% deductible, which means a great expenditure of business time and energy keeping and shuffling records. And not only were taxes raised by eliminating tax shelters in real estate, but the law’s claims to “fairness” were made grotesque by the retroactive nature of many of the tax increases. Thus, the abolition of tax shelter deductibility was made retroactive, imposing huge penalties after the fact. This is ex post facto legislation outlawed by the Constitution, which prohibits making actions retroactively criminal for a time period when they were perfectly legal. A friend of mine, for example, sold his business about eight years ago; to avoid capital gains taxes, he incorporated his business in the American Virgin Islands, which the federal government had made exempt from capital gains taxes in order to stimulate Virgin Islands development. Now, eight years later, this tax exemption for the Virgin Islands has been removed (a “loophole” plugged!) but the IRS now expects my friend to pay full retroactive capital gains taxes plus interest on this eight-year old sale. Let’s hear it for the “fairness” of the tax reform law!
But the bottom line on the tax question: is what happened in the Reagan era to government tax revenues overall? Did the amount of taxes extracted from the American people by the federal government go up or down during the Reagan years? The facts are that federal tax receipts were $517 billion in the last Carter year of 1980. In 1986, revenues totaled $769 billion, an increase of 49%. Whatever that is, that doesn’t look like a tax cut. But how about taxes as a percentage of the national product? There, we can concede that on a percentage criterion, overall taxes fell very slightly, remaining about even with the last year of Carter. Taxes fell from 18.9% of the GNP to 18.3%, or for a better gauge, taxes as percentage of net private product fell from 27.2% to 26.6%. A large absolute increase in taxes, coupled with keeping taxes as a percentage of national product about even, is scarcely cause for tossing one’s hat in the air about a whopping reduction in taxes during the Reagan years.
In recent months, moreover; the Reagan administration has been more receptive to loophole plugging, fees, and revenues than ever before. To quote from the Tax Watch column in the New York Times (October 13, 1987): “President Reagan has repeatedly warned Congress of his opposition to any new taxes, but some White House aides have been trying to figure out a way of endorsing a tax bill that could be called something else.”
In addition to closing loopholes, the White House is nudging Congress to expand the usual definition of a “user fee,” not a tax because it is supposed to be a fee for those who use a government service, say national parks or waterways. But apparently the Reagan administration is now expanding the definition of “user fee” to include excise taxes, on the assumption, apparently, that every time we purchase a product or service we must pay government for its permission. Thus, the Reagan administration has proposed not, of course, as a tax increase, but as an alleged “user fee,” a higher excise tax on every international airline or ship ticket, a tax on all coal producers, and a tax on gasoline and on highway charges for buses. The administration is also willing to support, as an alleged user fee rather than a tax, a requirement that employers, such as restaurants, start paying the Social Security tax on tips received by waiters and other service personnel.
In the wake of the stock market crash, President Reagan is now willing to give us a post-crash present of: higher taxes that will openly be called higher taxes. On Tuesday morning, the White House declared: “We’re going to hold to our guns. The president has given us marching orders: no tax increase.” By Tuesday afternoon, however, the marching orders had apparently evaporated, and the president said that he was “willing to look at” tax-increase proposals. To greet a looming recession with a tax increase is a wonderful way to bring that recession into reality. Once again, President Reagan is following the path blazed by Herbert Hoover in the Great Depression of raising taxes to try to combat a deficit.
Deregulation. Another crucial aspect of freeing the market and getting government off our backs is deregulation, and the administration and its Reaganomists have been very proud of its deregulation record. However, a look at the record reveals a very different picture. In the first place, the most conspicuous examples of deregulation; the ending of oil and gasoline price controls and rationing, the deregulation of trucks and airlines, were all launched by the Carter administration, and completed just in time for the Reagan administration to claim the credit. Meanwhile, there were other promised deregulations that never took place; for example, abolition of natural gas controls and of the Department of Energy.
Overall, in fact, there has probably been not deregulation, but an increase in regulation. Thus, Christopher De Muth, head of the American Enterprise Institute and a former top official of Reagan’s Office of Management and the Budget, concludes that “the President has not mounted a broad offensive against regulation. There hasn’t been much total change since 1981. There has been more balanced administration of regulatory agencies than we had become used to in the 1970s, but many regulatory rules have been strengthened.”
In particular, there has been a fervent drive, especially in the past year; to intensify regulation of Wall Street. A savage and almost hysterical attack was launched late last year by the Securities and Exchange Commission and by the Department of Justice on the high crime of “insider trading.” Distinguished investment bankers were literally hauled out of their offices in manacles, and the most conspicuous inside trader received as a punishment (1) a fine of $100 million; (2) a lifetime ban on any further security trading, and (3) a jail term of one year, suspended for community service. And this is the light sentence, in return for allowing himself to be wired and turn informer on his insider trading colleagues. [Editor’s note: Ivan Boesky was sentenced to three years in prison.]
All this was part of a drive by the administration to protect inefficient corporate managers from the dread threat of takeover bids, by which means stockholders are able to dispose easily of ineffective management and turn to new managers. Can we really say that this frenzied assault on Wall Street by the Reagan administration had no impact on the stock market crash [October 1987]?
And yet the Reagan administration has reacted to the crash not by letting up, but by intensifying, regulation of the stock market. The head of the SEC strongly considered closing down the market on October 19, and some markets were temporarily shut down—a case, once again, of solving problems by shooting the market—the messenger of bad news. October 20, the Reagan administration collaborated in announcing early closing of the market for the next several days. The SEC has already moved, in conjunction with the New York Stock Exchange, to close down computer program trading on the market, a trade related to stock index futures. But blaming computer program trading for the crash is a Luddite reaction; trying to solve problems by taking a crowbar and wrecking machines. There were no computers, after all, in 1929. Once again, the instincts of the administration, particularly in relation to Wall Street, is to regulate. Regulate, and inflate, seem to be the Reaganite answers to our economic ills.
Agricultural policy, for its part, has been a total disaster. Instead of ending farm price supports and controls and returning to a free market in agriculture, the administration has greatly increased price supports, controls and subsidies. Furthermore, it has brought a calamitous innovation to the farm program; the PIK program [“Payments In Kind”] in which the government gets the farmers to agree to drastic cuts in acreage, in return for which the government pays back the wheat or cotton surpluses previously held off the market. The result of all this has been to push farm prices far higher than the world market, depress farm exports, and throw many farmers into bankruptcy. All the administration can offer, however, is more of the same disastrous policy.
Foreign Economic Policy. If the Reagan administration has botched the domestic economy, even in terms of its own goals, how has it done in foreign economic affairs? As we might expect, its foreign economic policy has been the exact opposite of its proclaimed devotion to free trade and free markets. In the first place, Adam Smith ties and Bastiat to the contrary notwithstanding, the Reagan administration has been the most belligerent and nationalistic since Herbert Hoover. Tariffs and import quotas have been repeatedly raised, and Japan has been treated as a leper and repeatedly denounced for the crime of selling high quality products at low prices to the delighted American consumer.
In all matters of complex and tangled international economics, the only way out of the thicket is to keep our eye on one overriding question: Is it good, or bad, for the American consumer? What the American consumer wants is good quality products at low prices, and so the Japanese should be welcomed and admired instead of condemned. As for the alleged crime of “dumping,” if the Japanese are really foolish enough to waste money and resources by dumping—that is selling goods to us below costs—then we should welcome such a policy with open arms; anytime the Japanese are willing to sell me Sony TV sets for a dollar, I am more than happy to take the sets off their hands.
Not only foreign producers are hurt by protectionism, but even more so are American consumers. Every time the administration slaps a tariff or quota on motorcycles or on textiles or semiconductors or clothespins—as it did to bail out one inefficient clothespin plant in Maine—every time it does that, it injures the American consumer.
It is no wonder, then, that even the Reaganomist Bill Niskanen recently admitted that “international trade is more regulated than it was 10 years ago.” Or, as Secretary of Treasury James Baker declared proudly last month: “President Reagan has granted more import relief to U.S. industry than any of his predecessors in more than half a century.” Pretty good for a Bastiat follower.
Another original aim of the Reagan administration, under the influence of the monetarists, or Friedmanites, was to keep the government’s hand completely off exchange rates, and to allow these rates to fluctuate freely on the market, without interference by the Federal Reserve or the Treasury. A leading monetarist, Dr. Beryl W. Sprinkel, was made Undersecretary of the Treasury for Monetary Policy in 1981 to carry out that policy. But this non-intervention is long gone, and Secretary Baker, aided by the Fed, has been busily engaged in trying to persuade other countries to intervene to help coordinate and fix exchange rates. After being removed from the Treasury after several years, Sprinkel was sent to Siberia and ordered to keep quiet, as head of the Council of Economic Advisors; and Sprinkel has recently announced that he will leave the government altogether. [Editor’s note: Sprinkel was later rehabilitated, and given Cabinet status, in return for his agreement to take part in the disastrous Baker dollar policy.]
Moreover, the policy of foreign aid and foreign lending conducted or encouraged by the government has proceeded more intensely than even under previous administrations. Reagan has bailed out the despotic government of Poland with massive loans, so that Poland could repay its Western creditors. A similar policy has been conducted in relation to many shaky or bankrupt third world governments. The spectre of bank collapse from foreign loans has been averted by bailouts and promises of bailout from the Federal Reserve, the nation’s only manufacturer of dollars, which it can produce at will.
Wherever we look, then, on the budget, in the domestic economy, or in foreign trade or international monetary relations, we see government even more on our backs than ever. The burden and the scope of government intervention under Reagan has increased, not decreased. Reagan’s rhetoric has been calling for reductions of government; his actions have been precisely the reverse. Yet both sides of the political fence have bought the rhetoric and claim that it has been put into effect.
Reaganites and Reaganomists, for obvious reasons, are trying desperately to maintain that Reagan has indeed fulfilled his glorious promises; while his opponents, intent on attacking the bogey of Reaganomics, are also, and for opposite reasons, anxious to claim that Reagan has really put his free-market program into operation. So we have the curious, and surely not healthy, situation where a mass of politically interested people are totally misinterpreting and even misrepresenting the Reagan record; focusing, like Reagan himself, on his rhetoric instead of on the reality.
What of the Future? Is there life after Reaganomics? To assess coming events, we first have to realize that Reaganomics has never been a monolith. It has had several faces; Reaganomics has been an uneasy and shifting coalition of several clashing schools of economic thought. In particular, the leading schools have been the conservative Keynesians, the Milton Friedman monetarists, and the supply-siders. The monetarists, devoted to a money rule of a fixed percentage increase of money growth engineered by the Federal Reserve, have come a cropper. Fervently believing that science is nothing else but prediction, the monetarists have self-destructed by making a string of self-confident but disastrous predictions in the last several years. Their fate illustrates the fact that he who lives by prediction shall die by it. Apart from their views on money, the monetarists generally believe in free markets, and so their demise has left Reaganomics in the hands of the other two schools, neither of whom are particularly interested in free markets or cutting government.
The conservative Keynesians—the folks who brought us the economics of the Nixon and Ford administrations—saw Keynesianism lose its dominance among economists with the inflationary recession of 1973-74, an event which Keynesians stoutly believed could never possibly happen. But while Keynesians have lost their old eclat, they remain with two preoccupations: (1) a devotion to the New Deal-Fair Deal-Great Society-Nixon-Ford-Carter-status quo, and (2) a zeal for tax increases to moderate the current deficit. As for government spending, never has the thought of actually cutting expenditures crossed their minds. The supply-siders, who are weak in academia but strong in the press and in exerting enormous political leverage per capita, have also no interest in cutting government spending. To the contrary, both conservative Keynesians and supply-siders are prepared to call for an increasing stream of goodies from government.
Both groups have also long been keen on monetary inflation. The supply-siders have pretty much given up the idea of tax cuts; their stance is now to accept the deficit and oppose any tax increase. On foreign monetary matters, the conservative Keynesians and the supply-siders have formed a coalition; both groups embrace Secretary of Treasury Baker’s Keynesian program of fixed exchange rates and an internationally coordinated policy of cheap money.
Politically, the Republican presidential candidates can be assessed on their various preferred visions of Reaganomics. Vice-President Bush is, of course, a conservative Keynesian and a veteran arch-enemy of supply-side doctrine, which he famously denounced in 1980 as “voodoo economics.” Secretary of Treasury James Baker is a former Bush campaign aide. White House Chief of Staff Howard Baker is also in the conservative Keynesian camp, as was Paul Volcker, and is Alan Greenspan. Since former White House Chief of Staff Donald Regan was a fellow-traveller of the supply-siders, his replacement by Howard Baker as a result of Iranscam was a triumph of conservative Keynesians over the supply-siders. This year, in fact, our troika of Economic Rulers, Greenspan and the two Bakers, has all been squarely in the conservative Keynesian camp.
Senator Robert Dole, the other Republican front-runner for president, is also a conservative Keynesian. In fact, Bob Dole carried on the fight for higher taxes even when it was relatively unfashionable inside the administration. So devoted to higher taxes is Bob Dole, in fact, that he is reputed to be the favorite presidential candidate of the Internal Revenue Service. So if you like the IRS, you’ll love Bob Dole.
Congressman Jack Kemp, on the other hand, has been the political champion of the supply-siders ever since supply-side was invented in the late 1970s. Kemp’s call for higher government spending, and approval of deficits, monetary inflation, and fixed exchange rates, all attest to his supply-side devotion.
Jack Kemp, however, has for some reason not struck fire among the public, so Mrs. Jeanne Kirkpatrick stands ready in the wings to take up the cause if Kemp should fail to rally. I confess I have not been able to figure out the economic views of the Reverend Pat Robertson, although I have a hunch they do not loom very large in his world outlook.
Although there are a lot of Democratic candidates out there, it is hard at this point to distinguish one from another, on economic policy or indeed on anything else. As Joe Klein recently wrote in a perceptive article in New York magazine, the Republicans are engaged in an interesting clash of different ideas, while the Democrats are all muddily groping toward the center. To make the confusion still greater, Klein points out that Republicans are busily talking about “compassion,” while the Democrats are all stressing “efficiency.” One thing is fairly clear; Congressman Gephardt is an all-out protectionist, thoroughly jettisoning the old Democratic commitment to free trade, and is the most ardent statist in agricultural policy.
On monetary and fiscal policy, the Democrats are the classic party of liberal Keynesianism, in contrast to the Republican policy of conservative Keynesianism. The problem is that, in the last decade or two, it has become increasingly difficult to tell the difference. Apart from supply-sider Kemp, we can expect the president of either party to be a middle-of-the-road liberal/conservative Keynesian. And so we can expect the next administration’s economic policies to be roughly the same as they are now. Except that the rhetoric will be different. So we can, therefore, expect diverse perceptions and responses to a similar reality by the public and by the market. Thus, if Jack Kemp becomes president, the public will wrongly consider him a champion of hard money, budget cutting, and the free market. The public will therefore underestimate the wildly inflationist reality of a Kemp administration. On the other hand, the public probably perceives the Democrats to be wilder spenders relative to the Republicans than they really are. So should the Democrats win in 1988, we can expect the market to overestimate the inflationary measure of a Democratic administration.
All of this, along with the universal misperception of Reaganomics, illustrates once more the wisdom of those incisive political philosophers, Gilbert and Sullivan: “Things are not always what they seem; skim milk masquerades as cream.”