http://www.opinionjournal.com/editorial ... =110007843
REVIEW & OUTLOOK
Still Morning in America
Reaganomics, 25 years later.
Friday, January 20, 2006 12:01 a.m.
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."
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Companies are still waiting for he other shoe to drop because the long term vs short term interest rate indicators are recessision material.
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