Reagan Changed America 25 Years Ago

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Reagan Changed America 25 Years Ago
by Mallory Factor
Posted Jan 19, 2006

Twenty-five years ago today was a critical turning point in our nation’s history. On that day, Ronald Reagan was inaugurated president of the United States. He inherited an economy that was in shambles. Inflation was running rampant, penalizing work, savings, and investment. The top marginal income tax rate stood at 70 percent, punishing our most productive Americans and discouraging them from working. Our confidence as a nation was fragile.

In Reagan's first inaugural address he said: "The economic ills we suffer will go away because we, as Americans, have the capacity now, as we have had in the past, to do whatever needs to be done to preserve this last and greatest bastion of freedom."

I admired his words at the time, but I was skeptical. Politicians always make grandiose speeches, but true policy changes are difficult to accomplish. Reagan cut through all of the rhetoric and actually did something. He succeeded in restoring economic growth, prosperity, and American greatness, and he did so spectacularly.

Reagan's core policy agenda has been implemented fairly consistently for the past 25 years. With a few notable setbacks, he created a foundation for prosperity based on sound money, low marginal tax rates, and efficient, minimal regulation that has remained in place to this day.

The results have been stunning. When Reagan took office, payroll employment stood at below 90 million; it’s now over 135 million -- that’s 45 million more working Americans. Gross domestic product, the size of the U.S. economy, stood at about $5.2 trillion (in chained 2000 dollars); it has since more than doubled, after adjusting for inflation, to well over $10 trillion. The stock market in 1981 has been stagnant for decades, the Dow Jones was under 1000 and still buried on the business pages; the market has since skyrocketed, with the Dow topping 11,000 last week, as stock ownership has become an engine of prosperity for well more than 50 percent of American families.

I could go on all day trying to quantify the economic miracle of the Reagan Revolution, but it really goes beyond numbers. At its root was the restoration of the American dream, the belief that, given the economic freedom created by sound money and limited government, each of us has boundless potential to achieve based on hard work, ingenuity, and entrepreneurial risk-taking.

In 1981 I was in the process of growing my business as many Americans were. Ronald Reagan gave the business community confidence that we could grow our businesses in a prospering economy. He created the environment of lower taxes, smaller government, and less regulation in which we could excel.

We sometimes have a tendency to take our prosperity for granted. We have a sense that because we're America, any economic setback is temporary and we'll always come out on top. This optimism comes from Reagan himself, but sometimes I worry that since he's left office it may no longer be valid. It's important to remember that things could have been otherwise. We must not take the continuation of Reagan's legacy for granted.

Government is once again growing, encroaching on the private sphere and limiting economic freedom and opportunity. Our anachronistic corporate tax system combines with a thicket of regulations to drive some of our best businesses offshore. The personal income tax has grown nearly as convoluted as it was before Reagan’s landmark tax reform, and the top rate still stands 25 percent higher than his top rate. Worse yet, there is a now a series of large tax hikes scheduled to occur automatically over the next several as the temporary provisions of recent laws expire. As Reagan himself said, the American people have the capacity to meet all of the economic challenges in front of us -- I hope that our political leaders have the will to put and keep in place policies that will let them.

Ellie

[thedrifter]

Still Morning in America
Reaganomics, 25 years later.
Friday, January 20, 2006 12:01 a.m. EST

Twenty-five years ago today, Ronald Reagan was inaugurated as the 40th President of the United States promising less intrusive government, lower tax rates and victory over communism. On that same day, the American hostages in Iran were freed after 444 days of captivity. If the story of history is one long and arduous march toward freedom, this was a momentous day well worth commemorating.

All the more so because over this 25-year period prosperity has been the rule, not the exception, for America--in stark contrast to the stagflationary 1970s. Perhaps the greatest tribute to the success of Reaganomics is that, over the course of the past 276 months, the U.S. economy has been in recession for only 15. That is to say, 94% of the time the U.S. economy has been creating jobs (43 million in all) and wealth ($30 trillion). More wealth has been created in the U.S. in the last quarter-century than in the previous 200 years. The policy lessons of this supply-side prosperity need to be constantly relearned, lest we return to the errors that produced the 1970s.

The heart and soul of Reagan's economic agenda were sound money (making the dollar "as good as gold," as Reagan used to put it) and lower tax rates. On monetary policy, Reagan has won a resounding victory. Today, nearly all economists agree with Reagan's then-controversial belief that the sole purpose of monetary policy should be to keep prices stable. Double-digit inflation is a distant memory unlikely to recur anytime soon.

On tax policy, Reaganomics has also carried the day, if somewhat less completely. Tax rates in the U.S. are on average half as high now as they were in the 1970s, and almost every nation has followed the Reagan model of lower tax rates. Even Bill Clinton only dared to raise the top marginal income tax rate back to 39.5%, not 50% or 70%.

Nonetheless, tax cuts still stand in disrepute among most of the media, academics and Democrats in Congress, albeit for shifting reasons. When Reagan proposed his 30% across-the-board tax-rate cut, his critics howled that this would cause demand to rise and lead to hyper-inflation. In fact, supply rose faster than demand, and inflation fell to 4% from 13% and has fallen even lower since. When the economy went into a deep recession in 1981-82, Reagan's adversaries (and some of his own advisers) declared his tax cuts a failure. Reagan said stay the course, and the moment the final leg of the tax cut took effect, in January of 1983, the economy roared to life with an expansion that lasted more than seven years.

When the budget deficit rose in the mid-1980s, the liberals warned that if Reagan would not raise taxes interest rates would skyrocket. He didn't and rates didn't. After the 1987 stock market crash, liberal John Kenneth Galbraith wrote that "this debacle marks the last chapter of Reaganomics . . . and the irresponsible tax cuts." Again, Reagan refused to buckle, and two months later the stock market recovered and the expansion roared on--an expansion that didn't end until George H.W. Bush reversed course and raised taxes in 1990.

The Gipper's critics have written an economic history of the 1990s that they portray as a repudiation of Reaganomics. In this telling--known as Rubinomics--the Clinton tax hikes of 1993 ended the budget deficit, which caused interest rates to fall, which produced the boom of the mid- to late-1990s. In fact, the budget deficit hardly fell at all in the immediate aftermath of the tax hike, and while long-term interest rates fell in 1993, they shot back up again in 1994 almost precisely through Election Day (rising by some 230 basis points from October 1993 to November 1994).

On that day, voters repudiated the Clinton tax hikes and the specter of HillaryCare and gave Republicans control of Capitol Hill to govern on the Reaganite agenda of lowering taxes and shrinking runaway government. Both the stock and bond markets turned upward precisely on Election Day in 1994, beginning a whirlwind six-year rally. By 1998, growth and fiscal restraint delivered a budget surplus for the first time in nearly 30 years. In 1997 President Clinton signed a further reduction in the capital gains tax, which propelled investment and the stock market to even greater heights.

The latest chapter of this story is the 2003 income and investment tax cuts enacted by the current President Bush. As in 1981, opponents insisted those tax cuts would harm the economy by increasing the deficit and driving up interest rates. But in the two and a half years since those tax cuts passed, the economy and tax revenues have both surged.

Where Republicans have most strayed from the Reagan vision has been on controlling federal spending. But most still adhere to his tax-cutting lessons, with a few prominent exceptions (notably Senator John McCain). They should all recall the Gipper's words in his inauguration speech 25 years ago: "It is no coincidence that our present troubles parallel and are proportionate to the intervention and intrusion in our lives that result from unnecessary and excessive growth of government."

Ellie