Understanding Reaganomics

It is a popular cry that President Ronald Reagan’s tenure as president of the United States in the 1980s created the halcyon days of job creation and tax cuts. The terms “Reaganomics,” “supply side” and “trickle down” economics all stood for the underlying concept of reducing the burden of taxation and regulation on the rich which would cause them to loose cash and create lots of great new jobs for those below. These economic concepts have been replaced in current campaigning by those wanting to put “I’m like Ronald Reagan” on their resumes as “enabling the job creators.” Same theories and obviously, if implemented, we can expect similar results.

So the April 10^th Washington Post, reacting to one announced candidate’s claims (Rand Paul), engaged in some serious fact-checking to see, looking carefully at writings by Paul’s unofficial advisor, Stephen Moore of The Heritage Foundation, who claimed that Reagan created tens of millions of new jobs and that governmental revenues actually rose as a result of the Reagan tax cuts. The Post: “When Ronald Reagan became president in 1981, individual tax rates were as high as 70 percent. His first tax cut, the Economic Recovery Tax Act of 1981, slashed the top rate to 50 percent—and then a 1986 tax overhaul brought the top rate down to 28 percent. Those were certainly dramatic changes, though as we shall see, Reagan also raised taxes repeatedly…

“First of all, revenues as a percentage of gross domestic product (GDP), which is the best way to compare across years, dropped from 19.1 percent in 1981 to a low of 16.9 percent in 1984, before rebounding slightly to 17.8 percent in 1989. One reason the deficit soared during Reagan’s term is because spending went up as a share of the economy and revenues went down.

“We can get even more specific about the impact of the 1981 cut in rates. A Treasury Department study on the impact of tax bills since 1940, first released in 2006 and later updated, found that the 1981 tax cut reduced revenues by $208 billion in its first four years. (These figures are rendered in constant 2012 dollars.) The tax reform act of 1986, which was designed to be revenue neutral, reduced revenues by less than $1 billion four years after enactment.

“But Reagan’s tax increases in 1982, 1983, 1984 and 1987 boosted revenue by $137 billion. Overall, that’s a revenue loss from Reagan’s various tax bills, but it also shows that Moore is crediting to Reagan’s tax cuts revenues generated by Reagan’s tax increases.” Interesting. And don’t forget that there was a recession over 1981-82. In fairness, as cycles go, Reagan also presided over some good economic times later.

But what about claims about job creation under President Reagan, and how does that compare with the results during other presidents who did not believe in that trickle-down effect? We know that jobs usually follow overall population growth (see the chart above for the natural growth patterns), and we also know that politicians like to take credit for natural job growth as a result. Yet the actual numbers are interesting. “There were 90.9 million jobs at the start of Reagan’s presidency — and 106.9 million at the end, according to the Labor Department. That’s a gain of 16 million jobs, or 2 million per year in office. Bill Clinton can maybe claim ‘tens of millions’ with the 23.1 million jobs created during his time in office, but not Reagan.

“Under Clinton, 2.9 million jobs a year were created. Ironically, Reagan actually trails Jimmy Carter on the presidential list of most jobs created per year, even though he defeated Carter on charges of mishandling the economy. About 2.6 million jobs a year were created in Carter’s single term.” The Post.

The really good news for candidates claiming they are following in Reagan’s path to create jobs by the millions and economic growth unparalleled: virtually none of those who will wind up voting for such candidates will ever look behind the promises and the slogans to the hard numbers and the established objective facts. While it’s time for American voters to start living in the real world when they make their political choices, political trends suggest quite the opposite. I guess more people should read these blogs!

In the end, “it’s always the economy, stupid,” and here is the big story for the 2016 elections: insecurity generated from too many new low-paying jobs, worries about losing a job or losing opportunities for growth and advancement. The contracting middle class, movin’ on down the economic ladder. “‘There is a very big difference between the psychological self-definition of class and anything approaching a useful economic definition of class,’ said Richard Reeves, a senior fellow in economic studies at the Brookings Institution. ‘Policy in the end will hinge quite importantly on what you mean when you’re talking about the middle class and who you mean.’

“And that’s the political challenge for Democrats and Republicans looking to inspire voters with policies to address what President Obama calls ‘middle-class economics.’ Any appeals have to involve both cents and sensibility… Middle-class anxiety has been driven by several factors: increasing instability in incomes, a sense among many Americans that they are failing to keep up with the gains of previous generations, and an increasing gap between themselves and the very rich.” New York Times, April 10^th. Indeed, and lot of the future of job-growth in this country will depend on whether people believe the repackaged and relabled failed economic policies of the past or understand that there really does need to be a new approach.

I’m Peter Dekom, keeping it real and looking at the facts behind the claims.