A highly one-sided and incompetent opinion piece in Monday’s Wall Street Journal by a business consultant can serve as a guide to the way many Trump supporters think about economic policy. In the piece, “What 1980 and 2016 Have in Common,” the author is determined to blame almost every economic disappointment on excessive government. The solution, he argues, is the same sort of “revolution” allegedly engineered by Ronald Reagan to rid the United States of government interference.
Let’s look at how breezily the consultant, Michael Solon, skews the facts to fit the anti-government storyline. He attributes high levels of government debt in G-7 countries after 2007 to a G-20 agreement on tax evasion, among other things. In actuality, debt soared compared to GDP in these countries, of course, because of the financial crisis and recession that followed, undermining government revenues. There is no mystery here. Solon’s contention is absurd and no doubt mentioning the consequences of the recession for tax revenues would only sully his argument.
Solon attributes the slow growth that followed the recession to this mountain of debt and “monetary excess.” Nowhere does he mention the austerity practices of Europe, eliminating fiscal stimulus as a policy response. The United States thankfully adopted a substantial stimulus in 2009, which—as Solon should take note of—enabled America to grow faster than Europe. But then the United States itself also fell into the trap of austerity with the sequester.
On goes Solon about how Obama made the world safe to “overtax, overregulate and overstimulate.” No evidence, no argument, no proof. This is not analysis, it’s Pavlovian phrase making, designed to stimulate reflexes not thinking.
His answer is a return to Reaganomics. But, in fact, the Reaganomics of deep tax cuts and deregulation failed badly, however little the Trump pack refuses to realize this.
The failures of Reaganomics were covered up by the fall in inflation and growth of GDP after the sharp recession of 1982–83. In addition, the stock market soared.
In this environment, you’d think everyone did well. Under Reagan, the era of inequality began, wages for typical workers stagnated, productivity grew weakly, private fixed investment was inconsistent, and federal deficits stayed high.
Tax cuts did indeed stimulate the economy for a while. Stock prices were buoyed, after more than a decade’s long bear market, by falling interest rates—low rates make future earnings more valuable. But over this period, most of the gains in GDP were earned by high-income Americans. Incomes of the top 20 percent soared, those of the bottom 40 percent were flat, those in the middle grew ever so slightly.
Proponents of Reagan’s policies often argue that median family income—the middle of the pack—rose handsomely after inflation in the first few years of the Reagan administration. The rise was moderate, however, ending up only slightly higher than the 1978 high.
But family incomes nearer the top soared. One way to see this is to compare the median income to the arithmetic average or mean average, which is pulled up by high incomes near the top. The ratio of the mean to the median rose rapidly in these years, its increase only slowing under Bill Clinton. No doubt, consumers were temporarily relieved by the fall of very high inflation and interest on mortgages and other consumer loans, which had aroused national anxiety. It may have taken a while for consumers to notice their incomes were growing slow.
The true measure of economic progress is productivity, the output per hour of work, which is the source of prosperity.
The true measure of economic progress is productivity, the output per hour of work, which is the source of prosperity. For all the tax cuts and deregulation, productivity grew at only 1.4 percent a year under Reagan, far slower than it had between 1950 and 1973 or than it would in the 1990s (after Clinton’s tax hike) into the early 2000s. Business investment as a percent of GDP began to fall a few years into Reagan’s first term, only to reach unusually low levels when he left office.
As for the promise of controlling the budget deficit, which he used to alarm voters about Jimmy Carter’s economic record, he did not seriously slow the rise in federal spending as he pumped up the military budget. He did cut social programs, mostly those that helped the poor, such as food stamps.
Less help to the poor was supposed to energize the economy also. But, alas, the budget deficit was almost 3 percent of GDP in Reagan’s final year, higher than it was in Carter’s final year. Meantime, poverty rates rose again.
Sources of Reagan’s failure were his successful weakening of labor unions, allowing the minimum wages to fall sharply after inflation, and as noted consumer income skewed to the rich who spend too little of it. He did not invest in education, either, cutting back on student loans. (He originally wanted to shut down the Department of Education.) His tax hikes, which were undertaken beginning already in 1982 when the deficit seemed to most observers out of hand, were generally regressive (payroll taxes, for example), also robbing buying power from the middle class.
But the great failure was that productivity growth did not revive, nor did business investment—and these are always the necessary if not sufficient conditions for more equitable wage growth. Adequate fiscal stimulus, policies that insure more wage growth for the middle and lower income workers from apprenticeships to job creation for the young, education and infrastructure investment, and child poverty programs are the nourishment for the future, not tax cuts for the rich.
And, oh, yes, Reagan was a moderate protectionist, raising tariffs. I believe free trade obsession has gone too far, but changes in trade agreements will not bring back all the jobs lost. He also carelessly deregulated finance, resulting in the crash of the nation’s savings and loan associations. That was among the first of a series of bailouts due to willy-nilly deregulation to come. It is imperative the nation’s collective memory not forget these important facts so as to back up this plea, even if futile, to our president-elect: do not use Reaganomics as your economic model, Mr. Trump.
Photo Credit: Wikimedia, Ronald Reagan televised address from the Oval Office, outlining plan for Tax Reduction Legislation July 1981.