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event over the past quarter century has had a more profound impact
on the U.S. economy and the prosperity of the 1980s and '90s than
the Reagan tax cut of 1981.
It was signed
into law on August 15, 1981 — a day that will live in history as
a great American turning point.
Liberals to
this day continue to fanatically denounce the Reagan economic plan
— known as supply-side economics — as an economic catastrophe. Dick
Gephardt routinely warns against "repeating the mistakes of
the 1980s." In a recent TV interview he proclaimed that it
took the nation "15 years to dig out of the hole that Reagan
put us in."
The truth is
that the nation was in quite a deep hole of economic collapse when
Reagan was elected. We were in the midst of the worst economic depression
in 1980-81 than at anytime since the Great Depression of the 1930s.
Here is how Newsweek described the economy that Reagan inherited
from Jimmy "malaise" Carter: "When Ronald Reagan
steps into the White House next week, he will inherit the most dangerous
economic crisis since Franklin Roosevelt took office 48 years ago."
That was no exaggeration.
There is a
sharp contrast between the performance of the U.S. economy before,
and then after the Reagan tax cuts. In 1980 the U. S. inflation
rate hit a record high of 13.5%. Mortgage interest rates soared
to 20 percent creating a moribund housing industry. America was
rapidly deindustrializing. Unemployment had reached its highest
level in 40 years. We were literally teetering on the brink of a
1930s style depression. Economist Henry Kaufman of Salomon Brothers
reflected the gloomy mood of most Americans at that time when he
remarked, "I am aghast at how much our country has faltered."
In the early
1980s when I graduated from college, the economy was so bad and
jobs were so scarce, it was hard to get hired as a burger flipper
at the minimum wage.
Reagan's tax-rate
cuts — combined with his emphasis on sound money, deregulation,
and free trade — created a mighty economic expansion in the 1980s.
Bob Bartley of the Wall Street Journal described this period
as "the seven fat years." Any student of the 1980s, who
wishes to know what really happened to the economy in the Reagan
years must read Bartley's
invaluable book by that title. This expansion carried through
the 1990s as well — creating America's greatest sustained wave of
prosperity ever. "
The economy
grew by more than one-third in size. Growth was so high in the 1980s
that grouchy leftists were forced to resort to ridiculing the Reagan
years as the "decade of greed."
Consider what
happened to the net wealth of the nation over this lengthy period
of peace and prosperity. In 1982 the Dow Jones hit a low point of
792. When Reagan left office, the market had more than tripled in
value. Then in tripled again over the next 10 years. In other words,
after the Reagan tax cuts, the stock market soared from a low of
800 to well over 10,000 today. Miraculous is the only word to describe
this $15 trillion increase in Americans' wealth.
It wasn't just
the affluent who benefited from the 1980s expansion. After Reagan's
tax-rate cuts, real median family incomes, which had fallen sharply
during the stagflationary period 1977-82, rose by nearly 10 percent.
From 1981 to 1989, every income quintile — from the richest to the
poorest — gained income according to the Census Bureau economic
data.
The table below
shows that by 1989 there were 5.9 million more Americans whose salaries
exceeded $50,000 a year than there were in 1981 (adjusting for inflation).
Similarly, there were 2.5 million more Americans earning more than
$75,000 a year, an 83 percent increase. And the number of Americans
earning less than $10,000 a year fell by 3.4 million workers.
Incomes
Moved Up in the 1980s
(billions
1981 dollars)
| Workers Earning |
<
$10,000 |
>
$50,000 |
>
$75,000 |
|
1981
|
66.0 |
9.9 |
3.0 |
| 1989 |
62.6 |
15.8 |
5.5 |
| Difference |
-3.4 |
5.9 |
2.5 |
| % Change |
-5% |
60% |
83% |
Source:
Cato Institute calculations based on Bureau of the Census; U.S.
Statistical Abstract, 1996, p. 478, Table 740.
*Earning
levels are adjusted for inflation between 1981 and 1989.
But what about
the rise of the national debt that so many of Reagan's critics are
so hyper-obsessed over? Tax cuts didn't cause the surge in debt.
Spending did.
Between 1980
and 1990 the federal tax collections doubled from $500 billion to
$1 trillion. Tax rates went down, but tax payments went up, because
a prosperous economy always produces an overflow of tax payments,
just as a stagnant economy never generates sufficient tax revenues
to pay the bills. This is just as Reagan had predicted. I have always
believed that so many in the media and in academia have such a visceral
hatred of the Gipper is that he had this wonderful talent of proving
them wrong.
Reagan used
to take great joy in noting that when the economy roared back to
life in 1983 and 1984, "no one calls it Reaganomics anymore."
That's because Reaganomics was supposed to be a failure according
to the models of Harvard and other Ivy League Keynesian economists.
How frustrating it must have been for someone trained in economics
at tiny Eureka College to blow their decrepit theories away.
In the 1980s
incomes, employment, investment, wealth, consumer confidence, the
stock market, and tax-payments rose. Interest rates, inflation,
and bankruptcies plummeted. If the tax cuts of the 1980s were a
mistake, there are millions of Americans who believe we could use
mistaken policies like that again right about now.
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