Reaganomics Did ot Add Up

TRB

September 19, 1991|By TRB | TRB,TRB is a column in The New Republic by Michael Kinsley.

WASHINGTON — Washington. -- The Rushmorization of Ronald Reagan will feature, over the next few years, celebrations of the tenth anniversary of his various achievements. We just survived the first one, marking the legendary 1981 tax cut.

Most of the argument over President Reagan's tax legacy has focused on distributional questions: Did the rich get richer while the middle class stagnated and the poor suffered?

But Mr. Reagan never claimed to be Robin Hood. What he did claim is that he would cut taxes and lower the deficit, thereby stimulating private savings and investment and producing economic growth. How do those claims stand up?

Federal taxes took 20.1 percent of gross national product (GNP) in fiscal 1981 and will take 18.9 percent in 1991, a slight drop. (The 1989 figure was 19.3 percent, so you can't blame George Bush.)

Reaganites will say: Wait a minute, that 1981 tax cut was followed by a decade of almost annual tax increases. True enough. All were enacted, needless to say, over Mr. Reagan's famous dead body and Mr. Bush's famous read lips. Without them, the decade's $2 trillion debt would have been even larger. But you can't claim that tax cuts produced an economic miracle while conceding that the tax cuts were largely imaginary. That would be a miracle indeed.

Technically, the Reaganites' claim was merely that cutting marginal tax rates would produce a miracle, and marginal rates have indeed come down. On the hustings, Republicans understandably have not dwelt on the difference between lower tax rates and lower taxes, hoping people might miss the point.

But anyway, the biggest lowering of tax rates came in the 1986 tax reform. The official history of Reaganism puts this on a continuum with the 1981 cut. The real connection is that the 1981 bill enabled many big corporations to pay zero taxes. When Robert McIntyre of Citizens for Tax Justice stirred up a fuss, the Reagan administration defensively embraced a concept -- closing loopholes and lowering rates -- originally pushed by Democrats.

As for the deficit, you know what happened. Former Reagan aide Martin Anderson likes to insist that no Reagan official ever claimed that tax cuts would actually increase revenues. The true faith, Mr. Anderson says, was merely that cuts "would not lose as much revenue as one might expect."

Maybe so, but the Reaganites certainly did not trouble to correct those -- such as Arthur Laffer, brandishing his curve -- who made the free-lunch claim.

If Mr. Anderson is correct, though, this lends credence to Sen. Daniel Patrick Moynihan's conspiracy theory, that the tax cuts were intended to bankrupt the government on purpose, forcing cuts in spending. If so, they were a miserable failure. Federal government spending will take 23.9 percent of GNP this year, compared with 22.7 percent in fiscal 1981, a Jimmy Carter production. (The 1989 figure was 22.3 percent, so once again you can't blame President Bush for squandering the legacy.)

The items that have gone up are Social Security, defense and interest on the debt. As Mr. McIntyre notes, the GNP share taken by the rest of the government (excluding the savings and loan bailout) has shrunk dramatically, from 9.9 percent of GNP to 7.4 percent.

Whatever you may think of spending on defense or Social Security, the 1980s did not feature presidential attempts to prune either one. So the budget deficit cannot be pinned on a "big-spending Congress."

Savings? Personal savings plummeted in the 1980s. Princeton economist Alan Blinder points out that the average person was saving 23 percent less in 1990 than in inflationary 1980.

With help from huge government deficits, the net national savings rate also sank: It averaged 16.8 percent of in the decade before 1981, and 13.7 percent in the decade afterward. Mr. McIntyre calculates that business investment grew 2.1 percent annually in 1981 through '86, the glory years of special business tax incentives (like the capital gains preference), and 4.9 percent a year in 1986 through 1989, after tax reform wiped many of these out.

The 1980s were often described as America's "longest peacetime expansion," a locution designed to exclude the 1960s. But economically the 1980s were not peacetime. The defense buildup and its accompanying deficits were stimulative, an old-fashioned Keynesian way, just as the Vietnam war had been.

Much of the 1980s economic growth can also be attributed to women and baby-boomers entering the work force. Perhaps lower marginal tax rates induced women who otherwise would have stayed home to take paying jobs, or perhaps it was that two incomes came to be needed to support a middle class lifestyle that formerly could be financed by one.

But the spectacular 1980s are over-rated in any event. As Rob Shapiro of the Progressive Policy Institute observes, the decade's famous 20 million new jobs is certainly rivaled by the 13 million new jobs created in the last four years of the 1970s. From January 1983 to the beginning of the current recession, real output grew an average of 4.15 percent a year. It grew 4.35 percent a year during the dread late 1970s, gas lines and all.

Of course the late 1970s were a fool's paradise, leading directly to the super-inflation and subsequent vertiginous plunge of the early 1980s. The rest of the 1980s were a different fool's paradise, in which different warnings were equally ignored. Which brings us back to 1991.

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