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Friday, April 27, 2012

Reaganomics: A Report Card

Tax Analysts H. Nelson Yu (J.D. 2012, Oregon), Reaganomics: A Report Card, 134 Tax Notes 1649 (Mar. 26, 2012):

This report analyzes the economic effects of the significant changes in tax and regulatory policy that have occurred since the election of Ronald Reagan in 1980. Reagan's conservative policies, which have mostly been followed since, contrasted sharply with those that were in place for nearly five decades following the election of Franklin Roosevelt in 1932. The report looks at empirical results to see which party's political philosophy may be best for America. The economic results demonstrate that Reaganomics works poorly as an economic or regulatory philosophy if the country's goal is general and sustainable economic prosperity.

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Comments

Clearly, the author knew what radical result he wanted before he started, as he selected his own economic goal and carelessly analyzed data to "prove" his point. It flies in the face of history. This is such a left-wing article, I'm surprised that he didn't attempt to have it published in "Mother Jones."

One difference between Reagan and the "prosperity" President that we have today is that Reagan inherited a much worse economy, had turned it around at this same point, and didn't whine about his predecessor for years.

Posted by: Woody | Apr 27, 2012 8:31:37 PM

Information that could benefit Mr. Yu:

Top 4 Reasons Keynesian Economics Fails

First, here’s a layman’s introduction to both John Maynard Keynes’ General Theory of Unemployment, Interest, and Money and the rivaling Austrian perspective promoted by F. A. Hayek in The Road to Serfdom. Represented in this brilliant video by EconStories.tv, these two economic perspectives are pitted against each other in a clever rap battle. I encourage you to sit back, relax, and enjoy this video before we get on to criticisms of Lord Keynes’ economic theory.

Reaganomics Vs. Obamanomics: Fallacies Offered By The Left

...if we are ever to restore traditional American prosperity, we must get beyond those fallacies and errors. Most fundamentally, many insist that they do not understand how tax rate cuts promote economic growth. ....

When President Reagan came to Washington in 1981, the top 1% of income earners paid 17.6% of all income taxes. By 2007, after a quarter century of tax rate cuts under Reaganomics, the top 1% paid 40.4% of all income taxes, close to twice their share of income.

In part, that was because at the lower tax rates the higher income earners took so much more of their incomes in more flexible taxable income rather than in tax exempt forms. That has been erroneously disparaged as the rich getting richer under Reaganomics, when it was just the same income in different forms. At the lower rates, upper income earners did invest and otherwise work to earn more, which of course is exactly the desired effect of the rate cuts, and so paid higher taxes on the resulting incomes. This is why Jack Kemp always used to say if you want to soak the rich, cut their tax rates.


Posted by: Woody | Apr 28, 2012 10:24:08 AM

Woody, thanks for your comments.

Actually, the point of the article was to analyze Reaganomics under its own metrics, not ones chosen by me. And on Reaganomics' own metrics, the economic data are telling.

In your criticism, you ignore the diminishing percentage of federal revenues coming from income tax, and the increased burden on working Americans coming from payroll tax. Commentators talk about 10-year deficit reduction programs today, and conservatives today are not even willing to accept a $1 trillion contribution ($100 billion year, over 10 years) from income taxes (about what Bowles-Simpson does). At the same time, the annual increased burden coming from payroll taxes since Reagan was elected would be over $250 billion, or $2.5 trillion using the 10-year number, and this estimate is probably low. Why have conservatives so easily embraced this increased tax on working Americans, while fighting for every percentage point on the top 1%? I don't know, but there aren't economic growth numbers to back up the conservatives' argument.

To suggest that the economy was worse when Reagan took over in 1980, compared to the economy in January 2009, is silly. The structural mechanisms for a dramatic recovery were already in place in 1980. Short term interest rates were 20% and headed down. Stock prices had been in a bear market since 1966, and valuations were compressed. The personal computer revolution, the most important industrial development since cars or electricity, was just being born. Debt to GDP was less than 33%. The savings rate was 10%. All that was dry kindling for an enormous economic recovery.

The people that should be most unhappy with our current tax structure are not poor people, and I think I made that point in the article, maybe too subtly. The people who should be really upset with the current tax structure are the two-income households, both earning about $100,000. Those people are getting hammered by both income tax rates and payroll taxes, and now conservatives want to "reform" the Tax Code by taking away tax expenditures such as the home mortgage deduction. The home mortgage deduction is not the problem in the Tax Code, and it is not a big benny for rich people. The big benny for the rich is section 1(h) of the Tax Code, the 15% rate on capital gains and dividends, and also the fact that investment income isn't subject to payroll tax.

Without getting into a long-winded debate about Keynesianism v. Austrian economics, I think nearly all economists would agree that the marginal propensity to consume out of each dollar earned is a higher percentage the lower one's income level. As disposable income continues to stagnate or drop for the middle class, while increasing for the top 1%, there will be less consumption and more capital investment. I think the economic data of the last 30 years verifies this idea. The thing is, the economic argument for taxing the rich less, that it will supply much needed investment capital, is also silly today. There is a plethora of investment capital in the world today, whether held by the wealthy, or the Chinese, or Arab oil sheiks. There are trillions of dollars sitting idle in money market accounts today. In short, there is no shortage of investment capital. By contrast, one could make a very reasoned argument that the middle class, and even the upper middle class, is seeing their consumption crimped, and part of that is due to the inequity in the Tax Code, and the greater burden on earned income through the payroll tax.

I think this is an important argument we're having, about how to best structure the Tax Code for long-term and widespread economic prosperity. We've had 30 years of Reaganomics (and the Tax Code has not changed since Obama took office), and I think conservatives need to confront the economic data.

Posted by: H. Nelson Yu | Apr 28, 2012 5:35:02 PM

Thanks for your response, Mr. Yu.

With all due respect, your paper's analyses of numbers are flat out wrong, naive, deal with only surface causes, and are tainted by your apparent ideological bent; therefore, avoiding discussion of, for examples:
(1) the finanacial impacts of entitlements, budget busters, and double-crosses initiated by the Democrats who, by the way, declared Reagan's balanced budgets dead-on-arrival,
(2) giving unbiased credit to the Republican Congress and the Contract With America limiting Clinton's expansion of government (you downplayed this with your assumed "why" rather than "what"),
(3) future cuts to defense budgets allowed by Reagan's foreign and military policies; i.e., the "peace dividend," and
(4) an accurate appraisal of the economies that Reagan and Obama inheritied.

I suspect that you wrote the paper to please your professor (who favors an all-women's law school, wants carbon taxes on "global warming," and lectures on queer-theory) with her views rather than to discern the realities of damage that results from a progressive government and the benefits that we realized from Pres. Reagan's policies. I'm not going to grade your paper, unless you want me to, or do in depth research to help you, but here are some selected points:

"...the point of the article was to analyze Reaganomics under its own metrics, not ones chosen by me."

Here's what Pres. Reagan said at his first inaugural address: "In the days ahead, I will propose removing the roadblocks that have slowed our economy and reduced productivity." By that measure, Reagan was extremely successful. Here's a decent summary: President Reagan's Economic Policies.

"To suggest that the economy was worse when Reagan took over in 1980, compared to the economy in January 2009, is silly."

Oh, my goodness. Perhaps, you need to reassess that statement. Economists were not predicting the extended slow-down of the economy that we've experienced over the past three years. And, by historical measures, we should have recovered by now. Rather, today, all we hear from "the progressives" is that the economy was much worse when they took over than they realized. I have to say "bull" to that. That's excuse-making to cover failed liberal policies and useless spending.

I suspect that you are too young to have lived during the Carter and Reagan eras to know first-hand the situations at that time and are relying upon questionable works of other people who have an anti-Reagan agenda. Under Carter, we suffered from double-digit inflation, unemployment, and interest rates. Obama was much luckier. A better historical background would have helped you.

Today, economic growth is being choked by a "progressive government" that you defend -- a steep increase in regulations, expansion of EPA restrictions, a flawed energy policy, an anti-business and pro-union attitude in the Administration, the failure of Obama to provide long-term tax rules for business planning, increased taxes and threats of more increases, government borrowing competing with private borrowing, the remnants of the housing bust fueled by the false liberal belief that everyone has a right to a house, increases to minimum wages leaving young people unemployed, handouts that provide disincentives to find work and take jobs, and Obamacare with its projected high costs discouraging hiring. Reagan also said this in his first inaugural address: “In this present crisis, government is not the solution to our problem; government is the problem.” That's still true today.

Without further explanation, a payroll tax which benefits the individual has nothing to do with income taxes, which fund government operations. Keep those issues separate and remember which political party started the social security Ponzi scheme.

Oh, and I don't care how they do things in Sweden, which you used as a measuring stick with ther U.S. People flock to the U.S. for opportunties rather than handouts. Do you wonder how a poll would come out by asking people if they would prefer to have Sweden's military in charge of defending the free world? It's a bad comparison.

And, if you want to know if "the progressive era" will achieve greater success than conservative policies, we don't have to wait to see what happens here; simply turn your eyes to Europe and its critical government financial crises. There's your measuring stick.

Perhaps, you need to get out of that dreary northwest atmosphere and transfer to the South, or I need to fly to Oregon to set some professors straight.

Good luck on your studies.

Posted by: Woody | Apr 29, 2012 10:28:56 AM

I'm so glad Woody has no ideological bent.

Posted by: Publius Novus | Apr 30, 2012 7:57:53 AM

You have to admit that there is something fishy about liberals continuing to write articles attacking Reagan after so many years, probably in an effort to justify their opposite policies that are failing.

Posted by: Woody | Apr 30, 2012 11:51:31 AM