The death of Ronald Reagan wasn’t just an occasion for his admirers to reminisce about his life and accomplishments. It was also an occasion for his detractors to try and tear him down. In many cases, they have been aided and abetted by reporters who failed to do their homework and repeated old myths about Reagan’s economic program that are demonstrably untrue.
One of these myths is that Reagan sold the country a bill of goods with his 1981 tax cut, promising that it would lose no revenue. Business Week, among others, repeated this myth in its June 21 issue. “Reagan and his supply-side advisers,” it said, “believed that big tax cuts would pay for themselves by generating higher tax revenues through greater economic growth.”
This is simply nonsense. No one in a position of authority in the Reagan administration ever said that the tax cut would pay for itself. The proposal that the White House sent to Capitol Hill on Feb. 18, 1981, clearly shows that it expected revenues to decline significantly.
The document estimated that the 1981 tax cut would reduce federal revenues cumulatively by $657 billion by 1986. No feedback effects whatsoever are estimated. Revenue as a share of the gross national product is shown to decline from 24.1 percent without the tax cut to 19.6 percent with the tax cut.
Furthermore, the White House’s estimate of federal revenue following enactment of the tax cut exactly tracked that of the Congressional Budget Office, which was then under Democratic control. In a March 1981 report, “Economic Policy and the Outlook for the Economy,” the CBO estimated the effect of the tax cut on revenue. On page 47, one can see that the estimates of the White House and CBO are almost identical. Following are the figures.
The point is that whatever errors were made in estimating revenues, they were not based on the Laffer curve or anything to do with supply-side economics. As it turned out, everyone was wrong about the forecast for federal revenues. They came in much lower than expected by the CBO and all private forecasters. This was not the fault of some trick played by Reagan, but a widespread error in predicting key economic variables.
This brings me to a second myth that has lately been revived — that Reagan grossly overestimated how well the economy would do after the tax cut. As the New York Times put it on June 10, “The budgets prepared by David A. Stockman, Mr. Reagan’s first budget director, adopted what was called a ‘rosy scenario’ — impossibly optimistic predictions about future growth, inflation and interest rates.”
Again, a simple check of the record will show that this was just not the case. A review of contemporary economic forecasts by the Carter administration, Reagan administration, and CBO shows that the Reagan forecast was not out of line and was actually closer to the mark than the others.
Looking at real GNP growth, Reagan forecast an average rate of 3.9 percent between 1981 and 1986. Carter forecast 3.3 percent and the CBO predicted 2.9 percent. It turned out that Carter was exactly on the mark at 3.3 percent, but the Reagan forecast is clearly not outside the normal error range. It was too high, but the CBO was too low.
Reagan proved to be more accurate when forecasting nominal GNP. He predicted 11 percent, with Carter at 11.5 percent and the CBO at 11.6 percent. As it turned out, all were far off. It reality, it came in much lower than everyone thought at just 8.2 percent.
Similarly, all the forecasts were off on unemployment. Reagan forecast 6.6 percent, Carter 6.9 percent, and the CBO 7.4 percent. CBO was closest, but still well off the actual rate of 8.1 percent.
Lastly, on inflation, the Reagan forecast again proved to be the most accurate. It predicted 6.7 percent, far below the 8.7 percent figure of Carter and the CBO’s 8.8 percent. This is in fact the area where Reagan was most criticized at the time for being overly optimistic. No one thought inflation would be anywhere near as low as 6.7 percent. But in fact, the average for 1981 to 1986 was just 4.2 percent — well below the Reagan estimate.
In short, of the four key variables, Reagan was closest to the truth on two, with Carter and the CBO closest on one each. This is a pretty good record and one that does not deserve denigration. Most private forecasters would be lucky to do as well.
Forecasting mistakes were made, but not because of supply-side economics or because anyone was lied to. Those who say so are perpetuating a myth.