Sunday, October 17, 2010

Reaganomics led to an economic turnaround

Published in The Tennessean, Sunday, October 17, 2010

Reaganomics led to an economic turnaround

By Richard J. Grant

When judging the results of successive U.S. governments, it is common to focus on the simple matter of who the president was. But this neglects the importance of Congress in all legislative matters. We cannot understand the actions or the results of an administration without examining both its intentions and the context in which it served.

That context includes not only the composition of the contemporary Congress, but also the cumulative legacy of previous governments as well as the economic and strategic conditions in the contemporary world. Strategies and ideologies manifest differently in different contexts.

It is common, for example, to note the increases in the federal budget deficit during the years of the Reagan administration. Shallow analysts look at this one statistic and dismiss “Reaganomics” as a failure. They fail to note that the national debt had been trending upward at an increasing rate during the 1970s, but peaked out during President Ronald Reagan’s first term. That began a twenty-year downtrend in the rate of growth of the national debt.

Interestingly, that downtrend began after the Reagan-initiated cuts to marginal income-tax rates that were partly responsible (along with deregulation and reduced inflation) for the strong economic growth that followed. Analysts with a static view of the world are unable to comprehend that cuts to marginal tax rates can lead ultimately, after an initial dip, to higher tax revenues. Some tax bases, such as capital gains, are more responsive than others.

Reagan recognized the Soviet Union and its contagious ideology for the existential threats that they were and accordingly requested increased defense spending. But he clearly wanted a balanced budget and pushed for spending cuts in other areas. Congress preferred to spend.

Just when we needed it most, Reagan’s policies provided both a challenge and a contrast to the Soviet myth and to the Soviet reality. When the USSR collapsed, leftist ideologues around the world were knocked back on their heels. A window of opportunity opened in many previously oppressed regions to join world markets and to engage in trade and production.

This was the world inherited by the Clinton administration. President George H. W. Bush had failed to maintain the Reagan trend, but President Bill Clinton began his first term as if he had not learned anything from Reagan. The American people checked him in 1994 by giving him a Republican congress that had learned something and would not allow his wide left turns.

As a result, government spending was lower than it would have been, nationalization of heath care was averted, and deficits continued to fall. President Clinton, recognizing the political context, signed a reduction in the capital gains tax rate and championed welfare reform. The economy boomed.

During the administration of President George W. Bush, marginal tax rates were reduced (temporarily) again and contributed to the strong growth. Tax revenues had already fallen in the wake of the 2001 recession, but government spending increased faster than it had under previous Republican congresses before slowing briefly in 2007. War spending contributed, but only a small portion of the total.

As the recent financial crisis emerged with its recession, the Congress was again controlled by Democrats who were far less inhibited about taxing, spending, and regulating. The Bush administration intervened heavily, before handing off to the Obama administration, which will be remembered differently than the Reagan administration.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean