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Posts Tagged ‘Reagan’

As you can see here and here, I’m a huge fan of Ronald Reagan.

But it’s not just that the Gipper had good rhetoric. He also did a decent job of restraining spending and he significantly lowered marginal tax rates.

Combined with other pro-market reforms and his stalwart willingness to rein in inflation, as well as the fact that his policies led to the collapse of the evil Soviet Empire, I don’t think it’s an exaggeration that Reagan saved America.

That being said, he may not be the greatest president of the 20th century.

I’ve already shared a famous Calvin Coolidge video to show he said the right things. But, even more important, he did the right things.

Here’s some of what Amity Shlaes wrote about Coolidge for today’s Wall Street Journal.

…while Reagan inspired and cut taxes, he did not reduce the deficit. He did not even cut the budget. But if you look back, past Dwight Eisenhower and around the curve of history, you can find a Republican who did all those things: Calvin Coolidge. …The 30th president cut the top income-tax rate to 25% (lower than the 28% of the historic Reagan cut of 1986). Coolidge reduced the national debt and balanced the budget. When he departed the White House for his home in Northampton, Mass., he left a federal budget smaller than the one he found. …”I am for economy, and after that I am for more economy,” Coolidge told voters… The jovial Harding had vetoed only six bills. Coolidge vetoed 50. “It is much more important to kill bad bills than to pass good ones,” Coolidge once advised his father.

That last sentence should be repeated as often as possible. Indeed, it’s the reason why I mocked USA Today for calling Congress unproductive.

Since I’m guessing more than 90 percent of legislation undermines our liberty, we’re far better off when lawmakers do nothing.

Anyhow, you won’t be surprised to learn that the Gipper appreciated Coolidge.

President Reagan recognized Coolidge’s achievement, and upon taking office in 1981 he had a neglected Coolidge picture restored to a place of honor near Lincoln and Jefferson in the Cabinet Room.

And if you want to see some evidence of Coolidge’s superb economic stewardship, here’s a look at what happened with both economic output and the burden of government spending.

Coolidge Record

One final point. Just like Reagan was far from perfect, the same is true of Coolidge. I’ve never studied the economics of the 1920s, but it seems likely that some of the policies of that decade (perhaps excess credit expansion by the Federal Reserve?) helped set the stage for an economic downturn.

Though it’s also clear that the statist policies of Hoover and Roosevelt turned the downturn into a Great Depression.

Bush and Obama are sort of the modern version of Hoover and Roosevelt, though fortunately not nearly as bad.

Obama, for instance, raised the top tax rate from 35 percent to 39.6 percent as part of his class-warfare agenda. Hoover, by contrast, boosted the top rate from 25 percent to 63 percent and FDR then pushed it to 77 percent.

P.S. I already gave Amity’s new book on Coolidge a plug as part of my post about the flat tax-sales tax debate at Hillsdale. But in case you didn’t get the hint, here’s where you can order it.

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I shared a remarkable chart last year exposing Obama’s terrible record on job creation.

It showed that the economy enjoyed big employment increases during the Reagan and Clinton years, but it also revealed anemic data for the Obama years.

That’s not a surprise since Reagan was the most pro-freedom President since World War II and Clinton almost surely comes in second place.

Yes, Clinton did raise tax rates in his first year, but he put together a very strong record in subsequent years. He was particularly good about restraining the burden of government spending and overall economic freedom expanded during his reign.

He was no Reagan, to be sure, and the anti-government Congress that took power after the 1994 elections may deserve much of the credit for the good news during the Clinton years. Regardless, we had good economic performance during that period – unlike what we’ve seen during the Obama years.

Which makes this Michael Ramirez cartoon both amusing (in a tragic way) and economically accurate.

Obama v Reagan + Clinton

Since we’ve had relatively weak numbers for both jobs and growth this entire century, it would have been even better if the cartoon showed Bush and Obama both trying to raise the bar.

The real lesson is that big government is bad for jobs and growth, regardless of whether politicians have an “R” or “D” after their names.

P.S. Interestingly, now that the election is over, even the Washington Post is willing to publish charts confirming that Obama’s economic track record is miserable.

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Tonight is going to be special.

But not because of the election. It will be special because I’ll be playing my final softball games of the year.

I had this poster in my room. Great memories.

That being said, I can’t help but think back in time to an election night that was very special.

I’ve already expressed my view that Ronald Reagan was the greatest President of the past 100 years. Indeed, his only competition is from Calvin Coolidge.

I was fortunate to be politically active at the time, having started a Students for Reagan group at the University of Georgia (where we beat native-son Jimmy Carter by a 2-1 margin in the campus mock election).

At the risk of being self-indulgent, let’s re-live the happy memory of what happened 32 years ago. Just imagine how these NBC News journalists must have hated making this announcement.

Let’s also enjoy this moment from CBS News. Gee, don’t Walter Cronkite and Dan Rather look happy?

What a great night that was, followed by these great words just a couple of months later.

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I’ve pulled evidence from IRS publications to show that rich people paid a lot more to Uncle Sam after Reagan reduced the top tax rate from 70 percent to 28 percent.

The good ol’ days

But the Gipper wasn’t the only one to unleash the Laffer Curve. The United Kingdom saw similar dramatic results when Margaret Thatcher lowered the top tax rate from 83 percent to 40 percent. Allister Heath explains.

During the 1970s, when the tax system specialised in inflicting pain, the top one per cent of earners contributed 11pc of income tax. By 1986-87, with the top rate down to 60pc, that had increased to 14pc. After the top rate fell to 40pc in 1988, the top 1pc’s share jumped, reaching 21.3pc by 1999-2000, 24.4pc in 2007-08 and 26.5pc in 2009-10. Lower taxes fuelled a hard-work culture and an entrepreneurial revolution. Combined with globalisation and the much greater rewards available for skilled workers, Britain’s most successful individuals earned a lot and paid a lot in tax.

In other words, Margaret Thatcher’s supply-side tax rate reductions paid big dividends, both for the economy and for the Treasury.

Unfortunately, just as American politicians have forgotten (or decided to ignore) the lessons of the Reagan era, British politicians also have gravitated to a class-warfare approach. Allister points out that this is having a negative impact.

Yet times are changing, and not just because of the recession. HMRC recently slashed its forecasts for revenues from the top 1pc. It now believes the number of people expected to report £500,000 or more in earnings will fall by a tenth this year; those on £2m are set to drop by a third.

Why have the numbers headed in the wrong direction? There are almost certainly lots of factors, but tax policy has moved in the wrong direction and presumably deserves part of the blame. The top income tax rate is now 45 percent. The value-added tax has jumped to 20 percent. Allister provides more details.

Capital gains tax is too high. Luxury homes transactions are falling because of higher stamp duty. Britain is now a high tax economy; this is distorting work and investment decisions, gradually shifting talent and capital overseas. The overwhelming majority of high earners are already contributing disproportionately to the exchequer; tightening the screws further will be disastrously counter-productive. The lesson of the past 30 years is clear: the best way to entice the rich to pay even more tax is to keep rates low and allow them to get even richer.

I have to admit that I don’t want anyone to pay more tax, but I’m even less happy about punitively high tax rates. So I’m reluctantly willing to let the clowns in government have more money in exchange for a tax system that is more conducive to economic growth.

Here’s my Laffer Curve video, which explains more about the relationship of tax rates, taxable income, and tax revenue.

The ultimate goal, of course, is to shrink the central government so that the legitimate functions of the state can be financed at very low tax rates. Heck, if the United States and the United Kingdom had the kind of limited governments that existed 100 years ago, neither nation would even need a flat tax. A few user fees and excise taxes would suffice. Now that’s hope and change.

P.S. I periodically share two great Reagan videos, which can be seen here and here, but I also have a couple of inspiring videos of Thatcher in action, which can be viewed here and here.

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The great Ronald Reagan famously said (and I am paraphrasing, since I do not remember the exact phrase) that the most dangerous words in the English language were “I am from Washington and I am here to help you.”

Those are very wise words, especially when we think of the damage politicians have done because of their impulse to “do something” when the economy stumbles. The problem is not that there is nothing that needs to be fixed. The problem is that the crowd in Washington is far more likely to make things worse rather than better.

And who better to explain this than Thomas Sowell.

Sowell starts his most recent column by explaining that politicians who want to “do something” almost always want to expand the burden of government spending, but he notes that this approach has meant deeper recessions and more economic suffering. And he cites Warren Harding as an example of a President who rejected the notion that bigger government was some sort of economic elixir.

…you might think that the economy requires government intervention to revive and create jobs. It is Beltway dogma that the government has to “do something.” History tells a different story. For the first 150 years of this country’s existence, the federal government felt no great need to “do something” when the economy turned down. Over that long span of time, the economic downturns were neither as deep nor as long lasting as they have been since the federal government decided that it had to “do something” in the wake of the stock market crash of 1929, which set a new precedent. One of the last of the “do nothing” presidents was Warren G. Harding. In 1921, under President Harding, unemployment hit 11.7 percent — higher than it has been under President Obama. Harding did nothing to get the economy stimulated. Far from spending more money to try to “jump start” the economy, President Harding actually reduced government spending.

Can we learn any lessons from Harding’s anti-Keynesian approach? Assuming we want more growth and less unemployment, the answer is yes (and we can also learn the lesson that Hoover was a moronic statist from the very beginning).

President Harding deliberately rejected the urging of his own Secretary of Commerce, Herbert Hoover, to intervene. The 11.7 percent unemployment rate in 1921 fell to 6.7 percent in 1922, and then to 2.4 percent in 1923. It is hard to think of any government intervention in the economy that produced such a sharp and swift reduction in unemployment as was produced by just staying out of the way and letting the economy rebound on its own. Bill Clinton loudly proclaimed to the delegates to the Democratic National Convention that no president could have gotten us out of the recession in just one term. But history shows that the economy rebounded out of a worse unemployment situation in just two years under Harding, who simply let the market revive on its own, as it had done before, time and time again for more than a century.

Allow me to actually quibble with what Sowell wrote. Harding didn’t “let the market revive on its own.” He helped the economy grow faster by shrinking the federal budget. As Jim Powell explained in National Review, “Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922.”

That’s a stunning statistic, akin to cutting more than $1.5 trillion from today’s bloated federal budget.

Sowell  also cites the achievements of the Gipper. Since I’ve posted some powerful comparisons of Reaganomics and Obamanomics, this is music to my ears.

Something similar happened under Ronald Reagan. Unemployment peaked at 9.7 percent early in the Reagan administration. Like Harding and earlier presidents, Reagan did nothing, despite outraged outcries in the media. The economy once again revived on its own. Three years later, unemployment was down to 7.2 percent — and it kept on falling, as the country experienced twenty years of economic growth with low inflation and low unemployment. The Obama party line is that all the bad things are due to what he inherited from Bush, and the few signs of recovery are due to Obama’s policies beginning to pay off. But, if the economy has been rebounding on its own for more than 150 years, the question is why it has been so slow to recover under the Obama administration.

By the way, Sowell also could have mentioned what happened in the United States immediately after World War II. The Keynesians were predicting a return to depression because of big reductions in government spending and the demobilization of millions of troops. But as Richard Vedder and Jason Taylor explained for the Cato Institute, the economy quickly adjusted and rebounded precisely because politicians didn’t revive the New Deal (and, as you can see from this video, President Reagan understood this bit of economic history).

Sowell also explains how FDR made a bad situation worse in the 1930s.

A great myth has grown up that President Franklin D. Roosevelt saved the American economy with his interventions during the Great Depression of the 1930s. But a 2004 economic study concluded that government interventions had prolonged the Great Depression by several years. Obama is repeating policies that failed under FDR.

In previous posts, I have cited both Sowell and the Wall Street Journal to make this very point, but I also call your attention to this post referencing the seminal work of Robert Higgs, as well as this video on the pernicious role of government intervention in the 1930s.

Last but not least, check out this video to understand more about FDR and his malignant views.

P.S. Fans of Professor Sowell can read more of his work here, here, here, here, here, hereherehereherehereherehereherehereherehere, and here. And you can see him in action here.

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I’ve done a few comparisons of economic performance under Reagan and Obama, sometimes using the interactive data from the Minneapolis Federal Reserve Bank.

And I’ve done a few TV interviews on the same subject.

But something was very different in this interview on the Fox morning show. I was asked to respond to the Obama campaign’s assertion that Barack Obama’s policies created more private-sector jobs than Ronald Reagan’s policies.

I confess that I did the interview without first checking the numbers, and may not have been overly animated since I was in Denver and had to wake up before 4:00 a.m., but I felt confident enough to joke about an intern torturing data in the bowels of the White House.

But now that I’m back at my desk and I’ve had a chance to review the numbers from the Bureau of Labor Statistics, I can now say, with full confidence, that Stephanie Cutter must be smoking crack (she’s also smoking hot, but that’s a separate discussion).

And her intern should be fired.

Here are the numbers for private sector jobs (technically “Private wage and salary workers”), looking at the first 42 months in office for both Reagan and Obama. I’m including both seasonally adjusted and raw numbers, just to show that there’s no way to slice the data to justify Ms. Cutter’s assertion.

And here’s a look at the comparative performance of Reagan and Obama, based on the percent increase in private jobs in the first 31 months.

I also looked at what would happen if agricultural and/or self-employed workers were added to the mix, but nothing changes. Reagan beats Obama with both hands tied behind his back.

And what makes these numbers even more stunning is that Obama took office in the middle of a downturn, so a lot of the job losses already had occurred. Reagan, by contrast, got hit with a recession after taking office. So even though I think that downturn can and should be blamed on Jimmy Carter, all of the job losses show up in Reagan’s column. Yet he still kicks the you-know-what out of Obama.

The lesson to draw from these numbers is that Presidents should reduce the burden of government if they want better economic performance. Saint Ronald understood this basic insight, but Barack the Destroyer somehow thinks America will be more prosperous if we mimic Europe’s welfare states.

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Last week, I jumped into the surreal debate about whether Obama has been the most fiscally conservative president in recent history.

I sliced the historical data from the Office of Management and Budget a couple of ways, showing that overall spending has grown at a relatively slow rate during the Obama years. Adjusted for inflation, both total spending and primary spending (total spending minus interest payments) have been restrained.

So does this make Obama a fiscal conservative?

And how can these numbers make sense when the President saddled the nation with the faux stimulus and Obamacare?

Good questions. It turns out that Obama supposed frugality is largely the result of how TARP is measured in the federal budget. To put it simply, TARP pushed spending up in Bush’s final fiscal year (FY2009, which began October 1, 2008) and then repayments from the banks (which count as “negative spending”) artificially reduced spending in subsequent years.

The combination of those two factors made a big difference in the numbers. Here’s another table from my prior post, looking at how the presidents rank when you subtract both defense and the fiscal impact of deposit insurance and TARP.

All of a sudden, Obama drops down to the second-to-last position, sandwiched between two of the worst presidents in American history. Not exactly a ringing endorsement.

But this ranking is incomplete. At that point, I was trying to gauge Obama’s record on domestic spending, and the numbers certainly provide some evidence that he is a stereotypical big-spending liberal.

But the main debate is about which president was the biggest overall spender. So I’ve run through the numbers again, and here’s a new table looking at the rankings based on average annual changes in inflation-adjusted primary spending, minus the distorting impact of deposit insurance and TARP.

Obama is still in the second-to-last position, but spending is increasing by “only” 5.5 percent per year rather than 7.0 percent annually. This is obviously because defense spending is not growing as fast as domestic spending.

Reagan remains in first place, though his score drops now that his defense buildup is part of the calculations. Clinton, conversely, stays in second place but his score jumps because he benefited from the peace dividend after Reagan’s policies led to the collapse of the Soviet Empire.

Let’s now look at these numbers from a policy perspective. Rahn Curve research shows that government is far too big today, so the goal of fiscal policy should be to restrain the burden of government spending relative to economic output.

This means that policy moves in the right direction when government grows more slowly than the private sector, as it did under Reagan and Clinton.

But if government spending is growing faster than the productive sector of the economy, as has been the case during the Bush-Obama years, then a nation eventually will become Greece.

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A financial columnist named Rex Nutting recently triggered a firestorm of controversy by claiming that Barack Obama is not a big spender.

Here’s the chart he prepared, which certainly seems to indicate that Obama is a fiscal conservative. Not only that, it shows that Republicans generally are the big spenders, while Democrats are frugal with other people’s money.

In some ways, these numbers don’t surprise me. I’ve explained before that Bush bears a lot of blame for the big expansion in the burden of government this century, and I’ve specifically pointed out that he deserves the blame for most of the higher spending from the 2009 fiscal year (which began October 1, 2008).

That being said, Nutting’s numbers seemed a bit nutty. Sorry, couldn’t resist. Nutting’s numbers actually seem accurate, including the fact that he decided that Obama should be responsible for $140 billion of the spending in Bush’s last fiscal year (a number he may have taken from one of my posts).

But sometimes accurate can be misleading, so I decided to dig into the data.

I went to the Historical Tables of the Budget from the Office of Management and Budget, and I calculated all the numbers for every President since LBJ (with the exception of Gerald Ford, whose 2-year reign didn’t seem worth including).

But I corrected a big mistake in Nutting’s analysis. I adjusted the numbers for inflation, using OMB’s GDP deflator.

As you can see, this changes the results. My chart isn’t as pretty, but based on the inflation-adjusted average annual growth of outlays, it shows that Clinton was the most frugal president, followed by the first President Bush and Obama.

With his guns-n-butter Keynesianism, it’s no big surprise that LBJ ranks last. And “W” also gets a very low grade.

But then I figured we should take interest payments out of the budget and focus on inflation-adjusted “primary spending.” After all, Presidents shouldn’t be held responsible for the national debt that existed before they took office.

Looking at these numbers, it turns out that Obama does win the prize for being the most fiscally conservative president in recent memory. Reagan jumps to second place. Clinton is in third place, which won’t surprise people who watched this video, while W and LBJ again are in last place.

But I don’t want my Republican friends to get too angry with me, so let’s expand our analysis. Just as we don’t want to blame Presidents for net interest payments on debt that was accrued before their tenure, perhaps we should make sure they don’t get credit or blame for defense outlays that often are dictated by external events.

There’s obviously room for disagreement, but most people will agree that the Cold War and 9/11 meant higher defense spending, regardless of which party controlled the White House. Similarly, the collapse of the Soviet Empire inevitably meant lower military expenditures, regardless of whether Republicans or Democrats were in charge.

So let’s now look at primary spending after subtracting defense outlays (still adjusting for inflation, of course). All of a sudden, Reagan jumps to the top of the list by a comfortable margin. LBJ and W continue to score poorly, but Nixon takes over last place.

But it’s also worth noting that Obama still scores relatively well, beating Clinton for second place. Inflation-adjusted domestic spending (which is mostly what we’re measuring) has grown by 2.0 percent annually during his three years in office.

So does that mean Obama deserves re-election? Well, before you answer, I want to make one final calculation. Just as there are good reasons to exclude interest payments because they’re not something a president can control, we also should take a look at what spending would be if we don’t count the cost of bailouts.

To be sure, these types of expenditures can be controlled, but if we go with the assumption that the federal government was going to re-capitalize the banking system (whether using the good FDIC-resolution approach or the corrupt TARP approach), then it seems that Presidents shouldn’t get arbitrary blame or credit simply because some financial institutions failed during their tenure.

So let’s take the preceding set of numbers and subtract out the long-run numbers for deposit insurance, as well as the TARP outlays since 2009. And keep in mind that repayments of TARP monies (as well as deposit insurance premiums) show up in the budget as “negative spending.”

As you can see, this produces a remarkable result. All of a sudden, Obama drops from second to second-to-last.

This is because there was a lot of TARP spending in Bush’s last fiscal year (FY2009), which created an artificially high benchmark. And then repayments by banks during Obama’s fiscal years counted as negative spending.

When you subtract out the big TARP spending surge, as well as the repayments, then Bush 43 doesn’t look quite as bad (though still worse than Carter and Clinton), while Obama takes a big fall.

In other words, Obama’s track record does show that he favors an expanding social welfare state. Outlays on those programs have jumped by 7.0 percent annually. And that’s after adjusting for inflation! Not as bad as Nixon, but that’s not saying much since he was one of America’s most statist presidents.

Allow me to conclude with some caveats. None of the tables perfectly captures what any president’s fiscal record. Even my first table may be wrong if you want to blame or credit presidents for the inflation that occurs on their watch. And there certainly are strong arguments that bailout spending and defense spending are affected by presidential policies rather than external events.

And keep in mind that presidents don’t have full power over fiscal policy. The folks on Capitol Hill are the ones who actually enact the bills and appropriate the money.

Moreover, the federal government is akin to a big rusty cargo ship that is traveling in a certain direction, and presidents are like tugboats trying to nudge the boat one way or the other.

But enough equivocating. The four different tables at least show more clearly which presidents presided over faster-growing government or slower-growing government. More importantly, the various tables provide a good idea of where most of the new spending was taking place.

We can presumably say Reagan and Clinton were comparatively frugal, and we can also say that Nixon, LBJ, and Bush 43 were relatively profligate. As for Obama, I think his tugboat is pushing in the wrong direction, but it’s only apparent when you strip out the distorting budgetary impact of TARP.

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Last year, I did a popular post on what happens if you redistribute grades in a classroom.

Someone has turned this idea into a video, starring some well-known political figures.

And if you want to see a real-world example of how students react to this idea, here’s another good video.

By the way, I can’t resist being pedantic and re-explaining that socialism is not the same as redistributionism.

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On this day last year, I posted two charts that I developed using the Minneapolis Federal Reserve Bank’s interactive website.

Those two charts showed that the current recovery was very weak compared to the boom of the early 1980s.

But perhaps that was an unfair comparison. Maybe the Reagan recovery started strong and then hit a wall. Or maybe the Obama recovery was the economic equivalent of a late bloomer.

So let’s look at the same charts, but add an extra year of data. Does it make a difference?

Meh…not so much.

Let’s start with the GDP data. The comparison is striking. Under Reagan’s policies, the economy skyrocketed.  Heck, the chart prepared by the Minneapolis Fed doesn’t even go high enough to show how well the economy performed during the 1980s.

Under Obama’s policies, by contrast, we’ve just barely gotten back to where we were when the recession began. Unlike past recessions, we haven’t enjoyed a strong bounce. And this means we haven’t recovered the output that was lost during the downturn.

This is a damning indictment of Obamanomics

Indeed, I made this point several months ago when analyzing some work by Nobel laureate Robert Lucas. And it’s been highlighted more recently by James Pethokoukis of the American Enterprise Institute and the news pages of the Wall Street Journal.

Unfortunately, the jobs chart is probably even more discouraging. As you can see, employment is still far below where it started.

This is in stark contrast to the jobs boom during the Reagan years.

So what does this mean? How do we measure the human cost of the foregone growth and jobs that haven’t been created?

Writing in today’s Wall Street Journal, former Senator Phil Gramm and budgetary expert Mike Solon compare the current recovery to the post-war average as well as to what happened under Reagan.

If in this “recovery” our economy had grown and generated jobs at the average rate achieved following the 10 previous postwar recessions, GDP per person would be $4,528 higher and 13.7 million more Americans would be working today. …President Ronald Reagan’s policies ignited a recovery so powerful that if it were being repeated today, real per capita GDP would be $5,694 higher than it is now—an extra $22,776 for a family of four. Some 16.9 million more Americans would have jobs.

By the way, the Gramm-Solon column also addresses the argument that this recovery is anemic because the downturn was caused by a financial crisis. That’s certainly a reasonable argument, but they point out that Reagan had to deal with the damage caused by high inflation, which certainly wreaked havoc with parts of the financial system. They also compare today’s weak recovery to the boom that followed the financial crisis of 1907.

But I want to make a different point. As I’ve written before, Obama is not responsible for the current downturn. Yes, he was a Senator and he was part of the bipartisan consensus for easy money, Fannie/Freddie subsidies, bailout-fueled moral hazard, and a playing field tilted in favor of debt, but his share of the blame wouldn’t even merit an asterisk.

My problem with Obama is that he hasn’t fixed any of the problems. Instead, he has kept in place all of the bad policies – and in some cases made them worse. Indeed, I challenge anyone to identify a meaningful difference between the economic policy of Obama and the economic policy of Bush.

  • Bush increased government spending. Obama has been increasing government spending.
  • Bush adopted Keynesian “stimulus” policies. Obama adopted Keynesian “stimulus” policies.
  • Bush bailed out politically connected companies. Obama has been bailing out politically connected companies.
  • Bush supported the Fed’s easy-money policy. Obama has been supporting the Fed’s easy-money policy.
  • Bush created a new healthcare entitlement. Obama created a new healthcare entitlement.
  • Bush imposed costly new regulations on the financial sector. Obama imposed costly new regulations on the financial sector.

I could continue, but you probably get the  point. On economic issues, the only real difference is that Bush cut taxes and Obama is in favor of higher taxes. Though even that difference is somewhat overblown since Obama’s tax policies – up to this point – haven’t had a big impact on the overall tax burden (though that could change if his plans for higher tax rates ever go into effect).

This is why I always tell people not to pay attention to party labels. Bigger government doesn’t work, regardless of whether a politician is a Republican or Democrat. The problem isn’t Obamanomics, it’s Bushobamanomics. But since that’s a bit awkward, let’s just call it statism.

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Alan Blinder has a distinguished resume. He’s a professor at Princeton and he served as Vice Chairman of the Federal Reserve.

So I was interested to see he authored an attack on the flat tax – and I was happy after I read his column. Why? Well, because his arguments are rather weak. So anemic that it makes me think there’s actually a chance to get rid of America’s corrupt internal revenue code.

There are two glaring flaws in his argument. First, he demonstrates a complete lack of familiarity with the flat tax and seemingly assumes that tax reform simply means imposing one rate on the current system.

Here’s some of what he wrote in a Wall Street Journal column.

Many useful steps could be taken to simplify the personal income tax. But, contrary to much misleading rhetoric, flattening the rate structure isn’t one of them. The truth is that 100% of the complexity inheres in the definition of taxable income, which takes up millions of words in the tax laws. None inheres in the progressive rate structure. If you don’t believe that, consider the fact that the corporate income tax is virtually flat once a corporation passes a paltry $75,000 in taxable income. Is it simple? Back to the personal tax. Figuring out your taxable income can be quite an effort. But once that is done, most taxpayers just look up their tax bill on an IRS-provided table. Those with incomes above $100,000 must perform a simple calculation that involves multiplying two numbers together and adding a third. A flat tax with an exemption would require precisely the same sort of calculation. The net reduction in complexity? Zero.

I can understand how an average person might think the flat tax is nothing more than applying a single tax rate to the current system, but any public finance economist must know that the plan devised by Professors Hall and Rabushka completely rips up the current tax system and implements a new system based on one tax rate with no double taxation and no loopholes.

Heck, the Hall/Rabushka book is online and free of charge. But Blinder obviously could not be bothered to understand the proposal before launching his attack.

What about his second mistake? This one’s a doozy. He actually assumes that taxable income is fixed, which is a remarkable error for anyone who supposedly understands economics.

…flattening the rate structure won’t make the tax code any simpler. It would, however, make the tax system far less progressive. Do the math. …Someone with $20 million in taxable income pays nearly $7 million in taxes under the current rate structure, with its 35% top rate. Replace that with a 23% flat tax, and the bill drops to just under $4.6 million.

In other words, he assumes that people won’t change their behavior even though incentives to engage in productive behavior are significantly altered.

In a previous post, I showed how rich people dramatically increased the amount of income they were willing to earn and report after Reagan lowered the top tax rate from 70 percent to 28 percent.

To Blinder, this real-world evidence doesn’t matter – even though the rich paid much more tax to the IRS after Reagan slashed tax rates.

For more information, here’s my flat tax video.

And here’s the video on the global flat tax revolution. Interestingly, there are now about five more flat tax jurisdictions since this video was made – though Iceland abandoned its flat tax, so there are some steps in the wrong direction.

Makes you wonder. If the flat tax is such a bad idea, why are so many nations doing so well using this simple and fair approach?

But be careful, as this cartoon demonstrates, simplicity can mean bad things if the wrong people are in charge.

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One of my frustrating missions in life is to educate policy makers on the Laffer Curve.

This means teaching folks on the left that tax policy affects incentives to earn and report taxable income. As such, I try to explain, this means it is wrong to assume a simplistic linear relationship between tax rates and tax revenue. If you double tax rates, for instance, you won’t double tax revenue.

But it also means teaching folks on the right that it is wildly wrong to claim that “all tax cuts pay for themselves” or that “tax increases always mean less revenue.” Those results occur in rare circumstances, but the real lesson of the Laffer Curve is that some types of tax policy changes will result in changes to taxable income, and those shifts in taxable income will partially offset the impact of changes in tax rates.

However, even though both sides may need some education, it seems that the folks on the left are harder to teach – probably because the Laffer Curve is more of a threat to their core beliefs.

If you explain to a conservative politician that a goofy tax cut (such as a new loophole to help housing) won’t boost the economy and that the static revenue estimate from the bureaucrats at the Joint Committee on Taxation is probably right, they usually understand.

But liberal politicians get very agitated if you tell them that higher marginal tax rates on investors, entrepreneurs, and small business owners probably won’t generate much tax revenue because of incentives (and ability) to reduce taxable income.

To be fair, though, some folks on the left are open to real-world evidence. And this IRS data from the 1980s is particularly effective at helping them understand the high cost of class-warfare taxation.

There’s lots of data here, but pay close attention to the columns on the right and see how much income tax was collected from the rich in 1980, when the top tax rate was 70 percent, and how much was collected from the rich in 1988, when the top tax rate was 28 percent.

The key takeaway is that the IRS collected fives times as much income tax from the rich when the tax rate was far lower. This isn’t just an example of the Laffer Curve. It’s the Laffer Curve on steroids and it’s one of those rare examples of a tax cut paying for itself.

Folks on the right, however, should be careful about over-interpreting this data. There were lots of factors that presumably helped generate these results, including inflation, population growth, and some of Reagan’s other policies. So we don’t know whether the lower tax rates on the rich caused revenues to double, triple, or quadruple. Ask five economists and you’ll get nine answers.

But we do know that the rich paid much more when the tax rate was much lower.

This is an important lesson because Obama wants to run this experiment in reverse. He hasn’t proposed to push the top tax rate up to 70 percent, thank goodness, but the combined effect of his class-warfare policies would mean a substantial increase in marginal tax rates.

We don’t know the revenue-maximizing point of the Laffer Curve, but Obama seems determined to push tax rates so high that the government collects less revenue. Not that we should be surprised. During the 2008 campaign, he actually said he would like higher tax rates even if the government collected less revenue.

That’s class warfare on steroids, and it definitely belong on the list of the worst things Obama has ever said.

But I don’t care about the revenue-maximizing point of the Laffer Curve. Policy makers should set tax rates so we’re at the growth-maximizing level instead.

To broaden the understanding of the Laffer Curve, share these three videos with your friends and colleagues.

This first video explains the theory of the Laffer Curve.

This second video reviews some of the real-world evidence.

And this video exposes the biased an inaccurate “static scoring” of the Joint Committee on Taxation.

And once we educate everybody about the Laffer Curve, we can then concentrate on teaching them about the equivalent relationship on the spending side of the fiscal ledger, the Rahn Curve.

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Here’s a blast from the past that should be resuscitated today. It’s a campaign commercial produced by the 1984 Reagan campaign.

And while it doesn’t have the substance and strength of the Gipper’s own words, the message is as appropriate in 2011 as it was in 1984.

The strength of this commercial isn’t just that it appeals to pocketbook concerns. It also makes the direct connection between higher taxes and higher spending, thus trumping the typical DC prevarication that higher taxes will be used to reduce red ink.

Speaking of which, the cartoon in this post is one of my best creations, probably surpassing Mitchell’s Law and Mitchell’s Golden Rule.

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Both President Reagan and President Obama had to deal with serious economic dislocation upon taking office.

But they used radically different approaches to deal with the problems they inherited. Reagan sought to reduce the burden of government, whereas Obama viewed government as an engine of growth.

So who had the right approach? This image, taken from an op-ed in today’s Wall Street Journal,  shows  quarterly economic growth (adjusted for inflation) for the seven quarters after the recession ended.

At the risk of sounding unscientific, Reagan mops the floor with Obama. Growth was much more robust under Reaganomics. The policy of Obamanomics, by contrast, is associated with sluggish economic performance. (Indeed, see this post, based on Minneapolis Fed data, for an even starker comparison.)

Most worrisome, the weak growth over the past seven quarters means the economy has not recovered the lost output caused by the recession. This is in contrast to past downturns, where a temporary fall in output was offset by a period of rapid growth when the recession ended. And since there’s no reason to expect a sudden boom now, this means a permanent loss of income for the American people.

To be sure, we have no idea what would have happened in the early 1980s without Reaganomics, just like we have no idea what would have happened the past few years if America had taken a different approach.

But when theory and evidence both point in a certain direction, perhaps it’s a good idea to at least consider the possibility that small government is better for prosperity than big government.

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There’s an interesting debate in the blogosphere about whether President George W. Bush was a conservative (here’s a good summary of the discussion, along with lots of links, though I especially like this analysis since it cites my work.).

I’ve already explained that Bush was a statist rather than a conservative, and you can find additional commentary from me here, here, here, and here.

Simply stated, any President who doubles the burden of federal spending in just eight years is disqualified from being a conservative – unless the term is stripped of any meaning and conservatives no longer care about limited government and constitutional constraints on Washington.

But if you don’t want to read the blog posts I linked above, this chart should make clear that Bush was a big spender, not only when compared to Reagan, but also compared to Clinton. Moreover, we’re only looking at overall domestic spending, so this doesn’t include Iraq, Afghanistan, and other defense expenditures. And these are inflation-adjusted dollars, so we’re comparing apples to apples.

But let’s also examine the burden of domestic spending as a share of GDP. As you can see, there actually was progress during the Clinton years, and significant progress during the Reagan years. But all that was completely wiped out during the Bush presidency.

These numbers should not be a surprise. During Bush’s tenure, we got the no-bureaucrat-left-behind education bill, two corrupt farm bills, a new prescription drug entitlement, two pork-filled transportation bills, an auto company bailout, and a TARP bailout for banks.

This was a time of feasting for special interest groups and lobbyists, to put it mildly.

If that’s conservative, then Ronald Reagan was a liberal.

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America faces a fiscal crisis. The burden of federal spending has doubled during the Bush-Obama years, a $2 trillion increase in just 10 years. But that’s just the tip of the proverbial iceberg. Because of demographic changes and poorly designed entitlement programs, the federal budget is going to consume larger and larger shares of America’s economic output in coming decades.

For all intents and purposes, the United States appears doomed to become a bankrupt welfare state like Greece.

But we can save ourselves. A previous video showed how both Ronald Reagan and Bill Clinton achieved positive fiscal changes by limiting the growth of federal spending, with particular emphasis on reductions in the burden of domestic spending. This new video from the Center for Freedom and Prosperity provides examples from other nations to show that good fiscal policy is possible if politicians simply limit the growth of government.

These success stories from Canada, Ireland, Slovakia, and New Zealand share one common characteristic. By freezing or sharply constraining the growth of government outlays, nations were able to rapidly shrinking the economic burden of government, as measured by comparing the size of the budget to overall economic output.

Ireland and New Zealand actually froze spending for multi-year periods, while Canada and Slovakia limited annual spending increases to about 1 percent. By comparison, government spending during the Bush-Obama years has increased by an average of more than 7-1/2 percent. And the burden of domestic spending has exploded during the Bush-Obama years, especially compared to the fiscal discipline of the Reagan years. No wonder the United States is in fiscal trouble.

Heck, even Bill Clinton looks pretty good compared to the miserable fiscal policy of the past 10 years.

The moral of the story is that limiting the growth of spending works. There’s no need for miracles. If politicians act responsibly and restrain spending, that allows the private sector to grow faster than the burden of government. That’s the definition of good fiscal policy. The new video above shows that other nations have been very successful with that approach. And here’s the video showing how Reagan and Clinton limited spending in America.

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Since February is the 100th anniversary of Ronald Reagan’s birth and I still haven’t gotten over my man-crush on the Gipper, I figured it would be interesting to look at Reagan’s fiscal record, particularly to see whether he was successful in restraining the growth of domestic spending.

There is lots of good information in the Historical Tables of the Budget, which is produced by the Office of Management and Budget. I was particularly fascinated by the data on inflation-adjusted total domestic spending (discretionary and entitlements), which can be obtained by adding columns E and H of Table 8.2.

As you can see in this chart, Reagan managed to limit average domestic spending increases to less than one percent per year. These figures, which are adjusted for inflation, show that spending has grown more than five times as rapidly during the Bush-Obama years.

The comparison is even more dramatic if we examine the average annual increase in inflation-adjusted domestic spending. In other words, we’re looking at how much spending increased each year, not the percentage change. During the Reagan years, overall domestic spending grew less than $10 billion per year, while spending has soared more than $100 billion per year during the Bush-Obama era. Remember that we’re using inflation-adjusted dollars, so this is an apples-to-apples comparison.

The final chart maps annual domestic spending (in constant 2005 dollars) for Reagan’s eight fiscal years on the right vertical axis and the 10 fiscal years of Bush-Obama on the left vertical axis. Two things stand out. First, the bailout dramatically affected outlays in recent years, both because of a huge jump in fiscal year 2009 and an artificial dampening in the past two years (because repayments from banks and other bailed-out institutions count as “negative spending” rather than revenues).

Second, you can’t blame the poor record of Bush and Obama on bailouts. The chart axes are designed to give a similar starting point for Reagan’s spending and Bush-Obama spending, and it is obvious that Bush’s approach of so-called compassionate conservatism meant a bigger and more wasteful budget for domestic spending. Obama promised hope and change, of course, but he grabbed the big-spending baton from Bush and continued in the same direction, though TARP payments and repayments make it more challenging to discern the precise impact of the “stimulus” and other Obama initiatives (Tables 8.6 and 8.8 of the Historical Tables have program-by-program data for those who want the gory details).

Last but not least, don’t forget that FY2009 began October 1, 2008, nearly four months before Obama took office, and the bad numbers for that fiscal year generally should be attributed to Bush. Yes, Obama added to FY2009 spending with an omnibus appropriations bill and the faux stimulus, but I’ve estimated that 96 percent of that year’s spending was the result of Bush Administration decisions.

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President Obama unveiled his fiscal year 2012 budget today, and there’s good news and bad news. The good news is that there’s no major initiative such as the so-called stimulus scheme or the government-run healthcare proposal. The bad news, though, is that government is far too big and Obama’s budget does nothing to address this problem.

But perhaps the folks on Capitol Hill will be more responsible and actually try to save America from becoming a big-government, European-style welfare state. The solution may not be easy, but it is simple. Lawmakers merely need to restrain the growth of government spending so that it grows slower than the private economy.

Actual spending cuts would be the best option, of course, but limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to gross domestic product.

Fortunately, we have two role models from recent history that show it is possible to control the federal budget. This video from the Center for Freedom and Prosperity uses data from the Historical Tables of the Budget to demonstrate the fiscal policy achievements of both Ronald Reagan and Bill Clinton.

Some people will want to argue about who gets credit for the good fiscal policy of the 1980s and 1990s.

Bill Clinton’s performance, for instance, may not have been so impressive if he had succeeded in pushing through his version of government-run healthcare or if he didn’t have to deal with a Republican Congress after the 1994 elections. But that’s a debate for partisans. All that matters is that the burden of government spending fell during Bill Clinton’s reign, and that was good for the budget and good for the economy. And there’s no question he did a much better job than George W. Bush.

Indeed, a major theme in this new video is that the past 10 years have been a fiscal disaster. Both Bush and Obama have dramatically boosted the burden of government spending – largely because of rapid increases in domestic spending.

This is one of the reasons why the economy is weak. For further information, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government.

Another problem is that many people in Washington are fixated on deficits and debt, but that’s akin to focusing on symptoms and ignoring the underlying disease. To elaborate, this video explains that America’s fiscal problem is too much spending rather than too much debt.

Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays. The bad news is that government already is far too big in the United States. This is undermining prosperity and reducing competitiveness.

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Ronald Reagan would have been 100 years old on February 6, so let’s celebrate his life by comparing the success of his pro-market policies with the failure of Barack Obama’s policies (which are basically a continuation of George W. Bush’s policies, so this is not a partisan jab).

The Federal Reserve Bank of Minneapolis has a fascinating (at least for economic geeks) interactive webpage that allows readers to compare economic downturns and recoveries, both on the basis of output and employment.

The results are remarkable. Reagan focused on reducing the burden of government and the economy responded. Obama (and Bush) tried the opposite approach, but spending, bailouts, and intervention have not worked. This first chart shows economic output.

The employment chart below provides an equally stark comparison. If anything, this second chart is even more damning since employment has not bounced back from the trough. But that shouldn’t be too surprising. Why create jobs when government is subsidizing unemployment and penalizing production? And we already know the so-called stimulus has been a flop.

None of this should be interpreted to mean Reagan is ready for sainthood. He made plenty of compromises during his eight years in office, and some of them were detours in the wrong direction. But the general direction was positive, which is why he’s the best President of my lifetime.*

*Though he may not be the best President of the 20th Century.

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Previous posts on this blog have featured charts showing that Obama’s policies are not working (see here and here). I even showed a cartoon making the same point.And I cited a column with data comparing Reagan and Obama.

The Heritage Foundation has a very powerful addition to this genre, a chart comparing job performance during the Reagan and Obama Administrations.

This is a remarkable image, but let’s start with some disclaimers. There are lots of factors that impact economic performance, and many of them are outside the control of politicians. Moreover, it is impossible to know what would have happened in the past two years or in the early 1980s if Obama or Reagan had chosen different policies.

But even with these caveats, it is difficult to look at this chart and not conclude that Obama’s big government policies are much less successful than Reagan’s small government policies.

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In a previous post, I commented on a Wall Street Journal column by former Senator Phil Gramm, calling attention to evidence that the economy is under-performing compared to what happened after previous recessions. This is an important issue, particularly when you compare the economy’s tepid performance today with the strong recovery following the implementation of Reaganomics. But there was another part of the column that also is worth highlighting. Much of what we are seeing from the Obama Administration is disturbingly reminiscent of the anti-growth policies of Hoover and Roosevelt, particularly the punitive class-warfare mentality. Here’s how Senator Gramm characterizes the similarities.

Today’s lagging growth and persistent high unemployment are reminiscent of the 1930s, perhaps because in no other period of American history has our government followed policies as similar to those of the Great Depression era. …The top individual income tax rate rose from 24% to 63% to 79% during the Hoover and Roosevelt administrations. Corporate rates were increased to 15% from 11%, and when private businesses did not invest, Congress imposed a 27% undistributed profits tax. In 1929, the U.S. government collected $1.1 billion in total income taxes; by 1935 collections had fallen to $527 million. …The Roosevelt administration also conducted a seven-year populist tirade against private business, which FDR denounced as the province of “economic royalists” and “malefactors of great wealth.” … Churchill, who was generally guarded when criticizing New Deal policies, could not hold back. “The disposition to hunt down rich men as if they were noxious beasts,” he noted in “Great Contemporaries” (1939), is “a very attractive sport.” But “confidence is shaken and enterprise chilled, and the unemployed queue up at the soup kitchens or march out to the public works with ever growing expense to the taxpayer and nothing more appetizing to take home to their families than the leg or wing of what was once a millionaire. . . It is indispensable to the wealth of nations and to the wage and life standards of labour, that capital and credit should be honoured and cherished partners in the economic system. . . .” The regulatory burden exploded during the Roosevelt administration, not just through the creation of new government agencies but through an extraordinary barrage of executive orders—more than all subsequent presidents through Bill Clinton combined. Then, as now, uncertainty reigned. …Henry Morgenthau summarized the policy failure to the House Ways and Means Committee in April 1939: “Now, gentleman, we have tried spending money. We are spending more than we have ever spent before and it does not work . . . I say after eight years of this administration we have just as much unemployment as when we started . . . and an enormous debt, to boot.”

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Jonah Goldberg writes in National Review that President Obama is beginning to look like the next Herbert Hoover. This is rather ironic since the left wanted him to become the next Franklin Delano Roosevelt, ushering in a new era of politically-popular statism.
…the Great Depression discredited laissez-faire economics for a generation or more. Hoover, who was hardly the “market fundamentalist” FDR made him out to be, suffered largely from the (bad) luck of the draw, giving Democrats a chance to argue for a new deal of the cards. For reasons fair and unfair, Obama, who inherited a bad recession and made it worse, every day looks more like a modern-day Hoover, whining about his problems, rather than an FDR cheerily getting things done. Inadequate to the task, Obama is discrediting the statism he was elected to restore. 
Jonah makes a compelling case, particularly from a political perspective. But if we look just at economic policy, the Obama-as-FDR analogy is more accurate. Hoover was a big-government interventionist with failed policies. That’s a pretty good description of Bush. FDR got elected in 1932 by promising to fix the mess, which is akin to Obama’s hope and change message in 2008. And, just like FDR, Obama then continued the big-government interventionist policies of his predecessor. The only difference is that Roosevelt somehow was able to remain popular even though his policies kept the nation mired in depression for another decade. Obama, by contrast, is veering dangerously close to becoming another Jimmy Carter. Tom Sowell has some key details about the timing and impact of the Hoover-Roosevelt policies.
The history of the United States is full of evidence on the negative effects of government intervention. For the first 150 years of this country’s existence, the federal government did not think it was its business to intervene when the economy turned down. All of those downturns ended faster than the first downturn where the federal government intervened big time– the Great Depression of the 1930s. …if you look at the facts, they go like this: Unemployment never hit double digits in any of the 12 months following the big stock market crash of 1929 that is often blamed for the massive unemployment of the 1930s. Unemployment peaked at 9 percent, two months after the October 1929 crash, and then began drifting downward. Unemployment was down to 6.3 percent by June 1930, when the first big federal intervention occurred. Within six months, the downward trend in unemployment reversed and hit double digits for the first time in December 1930. What were politicians to do? Say “We messed up”? Or keep trying one huge intervention after another? The record shows what they did: President Hoover’s interventions were followed by President Roosevelt’s bigger interventions– and unemployment remained in double digits in every month for the entire remainder of the decade. There is another set of facts: The record that was set in 1929 for the biggest stock market decline in one day was broken in 1987. But Ronald Reagan did nothing– and the media clobbered him for it. Then the economy rebounded and there were 20 years of sustained economic growth with low inflation and low unemployment. Can you imagine Barack Obama doing another Ronald Reagan?

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National Review captures a key difference between Reagan and Obama, writing that Reagan was willing to incur short-run political pain to make America healthier and stronger.  Obama, by contrast, has pursued the free-lunch Keynesian approach. Only time will tell whether Obama becomes another Jimmy Carter, but he certainly isn’t doing himself any favors by continuously pushing to expand the burden of government.

Both men faced seemingly intractable economic problems with no easy solution, but Reagan understood that curing the nation’s debilitating inflation was going to involve a good deal of short-term economic pain and political unpopularity, and he was prepared to endure that. By contrast, Obama has done everything in his power to avoid painful corrections — at great cost to future taxpayers.  It is increasingly evident that his policies have merely put off these corrections or dragged them out, and that we have not avoided them at all. Reagan’s willingness to accept painful and unpopular but necessary economic adjustments — and Obama’s lack of the same fortitude — is the essence of what separates the two men. …The blowback that resulted from Volcker’s decision to put the economy into a coma was swift and severe. The sharp recession that ensued once Volcker started shrinking the money supply prompted Democrats and Republicans alike to introduce legislation to rein in the Fed. But Reagan refused to back any such action or even criticize Volcker in public. In private, Reagan was candid about what needed to be done, according to the late Bob Novak’s reporting on the subject: “I’m afraid this country is just going to have to suffer two, three years of hard times to pay for the [inflationary] binge we’ve been on,” Reagan said. It is impossible to imagine Obama speaking such unpopular truths in public or in private after having so often expressed the opinion that a massive debt-fueled government-spending program would create millions of jobs and reconstruct an economy torn asunder by years of binging on debt. …his unpopular moves laid the groundwork for three decades of unprecedented economic expansion. So far, we have seen no evidence that Obama’s unpopular policies will pay those kinds of dividends. Like Reagan, Obama inherited an economy with structural problems requiring painful adjustments. Unlike Reagan, he has tried to put off those adjustments or cover them up with feel-good stimulus programs. Reaganomics worked. Obamanomics? Let’s just say it will be interesting to see how much longer those trend lines overlap.

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This dropped in my inbox, along with some sarcastic commentary about politicians who talk trash about knowing “whose ass to kick.” If you think it’s funny, you’ll enjoy this gem from the archives.

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Here’s a very nice video mixing powerful statements by Ronald Reagan with the incoherent ramblings of the buffoons now in charge of Washington.

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I’m still dealing with the statist echo chamber, having been hit with two additional attacks for the supposed sin of endorsing Reaganomics over Obamanomics (my responses to the other attacks can be found here and here). Some guy at the Atlantic Monthly named Steve Benen issued an critique focusing on the timing of the recession and recovery in Reagan’s first term. He reproduces a Krugman chart (see below) and also adds his own commentary.

Reagan’s first big tax cut was signed in August 1981. Over the next year or so, unemployment went from just over 7% to just under 11%. In September 1982, Reagan raised taxes, and unemployment fell soon after. We’re all aware, of course, of the correlation/causation dynamic, but as Krugman noted in January, “[U]nemployment, which had been stable until Reagan cut taxes, soared during the 15 months that followed the tax cut; it didn’t start falling until Reagan backtracked and raised taxes.”

This argument is absurd since the recession in the early 1980s was largely the inevitable result of the Federal Reserve’s misguided monetary policy. And I would be stunned if this view wasn’t shared by 90 percent-plus of economists. So it is rather silly to say the recession was caused by tax cuts and the recovery was triggered by tax increases.

But even if we magically assume monetary policy was perfect, Benen’s argument is wrong. I don’t want to repeat myself, so I’ll just call attention to my previous blog post which explained that it is critically important to look at when tax cuts (and increases) are implemented, not when they are enacted. The data is hardly exact, because I haven’t seen good research on the annual impact of bracket creep, but there was not much net tax relief during Reagan’s first couple of years because the tax cuts were phased in over several years and other taxes were going up. So the recession actually began when taxes were flat (or perhaps even rising) and the recovery began when the economy was receiving a net tax cut. That being said, I’m not arguing that the Reagan tax cuts ended the recession. They probably helped, to be sure, but we should do good tax policy to improve long-run growth, not because of some misguided effort to fine-tune short-run growth.

The second attack comes from some blog called Econospeak, where my newest fan wrote:

I’m scratching my head here as I thought the standard pseudo-supply-side line was that the deficit exploded in the 1980’s because government spending exploded. OK, the truth is that the ratio of Federal spending to GDP neither increased nor decreased during this period. Real tax revenues per capita fell which is why the deficit rose but this notion that the burden of government fell is not factually based.

Those are some interesting points, and I might respond to them if I wanted to open a new conversation, but they’re not germane to what I said. In my original post (the one he was attacking), I commented on the “burden of government” rather than the “burden of government spending.” I’m a fiscal policy economist, so I’m tempted to claim that the sun rises and sets based on what’s happening to taxes and spending, but such factors are just two of the many policies that influence economic performance. And with regard to my assertion that Reagan reduced the “burden of government,” I’ll defer to the rankings put together for the Economic Freedom of the World Index. The score for the United States improved from 8.03 to 8.38 between 1980 and 1990 (my guess is that it peaked in 1988, but they only have data for every five years). The folks on the left may be unhappy about it, but it is completely accurate to say Reagan reduced the burden of government. And while we don’t yet have data for the Obama years, there’s a 99 percent likelihood that America’s score will decline.

This is not a partisan argument, by the way. The Economic Freedom of the World chart shows that America’s score improved during the Clinton years, particularly his second term. And the data also shows that the U.S. score dropped during the Bush years. This is why I wrote a column back in 2007 advocating Clintonomics over Bushonomics. Partisan affiliation is not what matters. If we want more prosperity, the key is shrinking the burden of government.

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Appearing on MSNBC, I explain why Reagan’s approach helped America. But I also warn that Obama is making America more like France.

For inexplicable reasons, some people have been giving me a hard time about my very snazzy jacket.

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If I was organized enough to send Christmas cards, I would take Richard Rahn off my list. I do one blog post to call attention to his Washington Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable attack. Now it’s time to address Derek Thompson’s critique on the Atlantic’s site.
 
At the risk of re-stating someone else’s argument, Thompson’s central theme seems to be that there are many factors that determine economic performance and that it is unwise to make bold pronouncements about policy A causing result B. If that’s what Thompson is saying, I very much agree (and if it’s not what he’s trying to say, then I apologize, though I still agree with the sentiment). That’s why I referred to Reagan decreasing the burden of government and Obama increasing the burden of government. I wanted to capture all the policy changes that were taking place, including taxation, spending, monetary policy, regulation, etc.Yes, the flagship policies (tax reduction for Reagan and so-called stimulus for Obama) were important, but other factors obviously are part of the equation.
 
The biggest caveat, however, is that one should always be reluctant to make sweeping claims about what caused the economy to do X or Y in a given year. Economists are terrible forecasters, but we’re not even very proficient when it comes to hindsight analysis about short-run economic fluctuations. Indeed, the one part of my original post that causes me a bit of guilt is that I took the lazy route and inserted an image of the chart from Richard’s column. Excerpting some of his analysis would have been a better approach, particularly since I much prefer to focus on the impact of policies on long-run growth and competitiveness (which is what I did in my New York Post column from earlier this week and also why I’m reluctant to embrace Art Laffer’s warning of major economic problems in 2011).
 
But a blog post is no fun if you just indicate where you and a critic have common ground, so let me know identify four things about Thompson’s post that rubbed me the wrong way.
 
1. To reinforce his warning about making excessive claims about different recessions/recoveries, Thompson pointed out that someone could claim that Reagan’s recovery was associated with the 1982 TEFRA tax hike. I’ve actually run across people who think this is a legitimate argument, so it’s worth taking a moment to explain why it isn’t true. When analyzing the impact of tax policy changes, it’s important to look at when tax changes were implemented, not when they were enacted (data on annual tax rates available here). Reagan’s Economic Recovery Tax Act was enacted in 1981, but the lower tax rates weren’t fully implemented until 1984. This makes it a bit of a challenge to pinpoint when the economy actually received a net tax cut. The tax burden may have actually increased in 1981 since the parts of the Reagan tax cuts that took effect that year were offset by the impact of bracket creep (the tax code was not indexed to protect against inflation until the mid-1980s). There was a bigger tax rate reduction in 1982, but there was still bracket creep, as well as previously-legislated payroll tax increases (enacted during the Carter years). TEFRA also was enacted in 1982, which largely focused on undoing some of the business tax relief in Reagan’s 1981 plan. People have argued whether the repeal of promised tax relief is the same as a tax increase, but that’s not terribly important for this analysis. What does matter is that the tax burden did not fall much (if at all) in Reagan’s first year and might not have changed too much in 1982. In 1983, by contrast, it’s fairly safe to say the next stage of tax rate reductions was substantially larger than any concomitant tax increases. That doesn’t mean, of course, that one should attribute all changes in growth to what’s happening to the tax code. But it does suggest that it is a bit misleading to talk about tax cuts in 1981 and tax increases in 1983. One final point. The main insight of supply-side economics is that changes in the overall tax burden are not as important as changes in the tax structure. As such, it’s also important to look at which taxes were going up and which ones were decreasing. This is why Reagan’s 1981 tax plan compares so favorably with Bush’s 2001 tax plan (which was filled with tax credits and other policies that had little of no impact on incentives for productive behavior).
 
2. In addition to wondering whether one could argue that higher taxes triggered the Reagan boom, Thompson also speculates whether it might be possible to blame the tax cuts in Obama’s stimulus for the economy’s subsequent sub-par performance. There are two problems with that hypothesis. First, a substantial share of the tax cuts in the so-called stimulus were actually new spending being laundered through the tax code (see footnote 3 of this Joint Committee on Taxation publication). To the extent that the provisions represented real tax relief, they were much more akin to Bush’s non-supply side 2001 tax cuts and a far cry from the marginal tax-rate reductions enacted in 1981 and 2003. And since even big tax cuts have little or no impact on the economy if incentives to engage in productive behavior are unaffected, there is no reason to blame (or credit) Obama’s tax provisions for anything.
 
3. Why doesn’t anyone care that the Federal Reserve almost always is responsible for serious recessions? This isn’t a critique of Thompson’s post since he doesn’t address monetary policy from this angle, but if we go down the list of serious economic hiccups in recent history (1974-75, 1980-82, and 2008-09), bad monetary policy inevitably is a major cause. In short, the Fed periodically engages in easy-money policy. This causes malinvestment and/or inflation, and a recession seems to be an unavoidable consequence. Yet the Fed seems to dodge any serious blame. At some point, one hopes that policy makers (especially Fed Governors) will learn that easy money policies such as artificially low interest rates are not a smart approach.
 
4. Thompson writes, “Is Mitchell really saying that $140 billion on Medicaid, firefighters, teachers, and infrastructure projects are costing the economy five percentage points of economic growth?” No, I’m not saying that and didn’t say that, but I have been saying for quite some time that taking money out of the economy’s left pocket and putting it in the economy’s right pockets doesn’t magically increase prosperity. And to the extent money is borrowed from private capital markets and diverted to inefficient and counter-productive programs, the net impact on the economy is negative. Thompson also writes that, “Our unemployment picture is a little more complicated than ‘Oh my god, Obama is killing jobs by taking over the states’ Medicaid burden!'” Since I’m not aware of anybody who’s made that argument, I’m not sure how to respond. That being said, jobs will be killed by having Washington take over state Medicaid budgets. Such a move would lead to a net increase in the burden of government spending, and that additional spending would divert resources from the productive sector of the economy.
 
The moral of the story, though, is to let Richard Rahn publicize his own work.

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I seem to have touched a raw nerve with my post earlier today comparing Reagan and Obama on how well the economy performed coming out of recession. Both Ezra Klein and Paul Krugman have denounced my analysis (actually, they denounced me approving of Richard Rahn’s analysis, but that’s a trivial detail). Krugman responded by asserting that Reaganomics was irrelevant (I’m not kidding) to what happened in the 1980s. Klein’s response was more substantive, so let’s focus on his argument. He begins by stating that the recent recession and the downturn of the early 1980s were different creatures. My argument was about how strongly the economy rebounded, however, not the length, severity, causes, and characteristics of each recession. But Klein then cites Rogoff and Reinhardt to argue that recoveries from financial crises tend to be less impressive than recoveries from normal recessions.
That’s certainly a fair argument. I haven’t read the Rogoff-Reinhardt book, but their hypothesis seems reasonable, so let’s accept it for purposes of this discussion. Should we therefore grade Obama on a curve? Perhaps, but it’s also true that deep recessions usually are followed by more robust recoveries. And since the recent downturn was more severe than the the one in the early 1980s, shouldn’t we be experiencing some additional growth to offset the tepidness associated with the aftermath of a financial crisis?
I doubt we’ll ever know how to appropriately measure all of these factors, but I don’t think that matters. I suspect Krugman and Klein are not particularly upset about Richard Rahn’s comparisons of recessions and recoveries. The real argument is whether Reagan did the right thing by reducing the burden of government and whether Obama is doing the wrong thing by heading in the opposite direction and making America more like France or Greece. In other words, the fundamental issue is whether we should have big government or small government. I think the Obama Administration, by making government bigger, is repeating many of the mistakes of the Bush Administration. Krugman and Klein almost certainly disagree.

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Both Ronald Reagan and Barack Obama entered office during periods of economic misery. But they adopted dramatically different solutions. Reagan reduced the burden of government and Obama increased the burden of government. So which approach worked best? In his Washington Times column, Richard Rahn compares the economy’s “recovery” performance under both Presidents. As you can see, Reaganomics is much better than Obamanomics.

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