A few weeks ago marked the silver anniversary of one of the most pivotal events in American economic and foreign policy history. It was twenty-five years ago on August 13th that Ronald Reagan signed into law the Kemp/Roth tax cuts, also known as the Economic Recovery Act of 1981 – legislation which helped set in motion the events which shaped the world in which we live today.
The bill reduced American income tax rates by approximately one-third across the board, and unleashed the pent up power of an economy besieged by double digit inflation, double digit interest rates and double digit unemployment.
The result was an economy that grew at phenomenal rates, created tens of millions of jobs, raised personal incomes and more than doubled overall revenues to the US Treasury, (something liberals and most economists said couldn’t happen). In addition, investment and entrepreneurship blossomed, helping to foster the technology boom that has impacted just about every aspect of our lives.
It was a simple economics lesson that provided demonstrable proof that taxes have a dynamic impact on human behavior. As Larry Kudlow put it recently, "Economic behavior responds significantly to the incentive power of low tax rates that raise the after-tax return on work, investment and risk taking”. In other words, people work harder and are more productive when they can keep more of the wealth that they create.
While the economic benefits alone make the Reagan tax cuts worthy of memorializing, the resulting economic growth and strength made it possible to overwhelm the Soviet Union in the Cold War. The fact that tax revenues dramatically increased made it possible for the US to finance a military buildup that forced the Soviets to spend themselves into oblivion in a vain attempt to keep pace.
The rapid growth in technological innovations made it possible to overwhelm the Soviets with the mere potential of what we could produce and bring to bear militarily. This, as well as the funding that such technology required, effectively ended the Soviet participation in the arms race, and ultimately the Soviet Union itself.
Article comments
1 - Maurice
Thanks for a great article.
Thanks for a reminder of what great LEADER President Reagan was.
2 - d
Thanks for a fact-free ode to supply-side economics. Unfotunately, the collapse of the Soviet Union (like any other historical event) can't be explained by single causes. Reagan and his tax cuts weren't in place during the late 1960s, when an already creaky Soviet bureaucracy began dumping 25% of its GNP into defense spending. By the early 1970s, a nation with the largest amount of arable land in the world -- the USSR -- was forced to depend on western grain shipments to feed its own people. A nation with some of the largest oil deposits in the world was incapable of meeting its own bloated needs and was forced to rely (once again) on imports from capitalist nations and their allies. And finally, Reagan and his tax cuts had little do do with the disastrous decision to invade Afghanistan, a war that cost the Soviet Union 15,000 lives and billions of dollars, all while stirring up ethnic and religious animosity within its own Islamic republics (several of which bordered on Afghanistan), helping to set in motion a process that would in its own way contribute to the unraveling of the USSR.
As for Reagans tax cuts, they did indeed generate "tens of millions of jobs" -- if 18 million can be described as "tens of millions," which I suppose it can -- but the overall health of the economy was somewhat less than you claim. Interestingly, while job growth was a factor in the 1980s as well as the 1990s, it is indisputable that the American economy grew more unequal during this period. The real value of the minimum wage fell beneath its value from the 1960s; the bottom 20% of the income scale saw their after-tax income fall by nearly 17% (indeed, the bottom three quintiles lost ground during the 1980s); and homelessness tripled during the Reagan years, even though one-fifth of all homeless Americans held down full-time jobs. The decade of the 1980s was indeed historically unique -- it was the first period in American history in which substantial economic growth did not correspond with wage growth.
At the other end of the scale, the top 20% of income-earners enjoyed all but about 2% of the wealth created during that decade; the top 1% saw their after-tax incomes grow by 72% and, by 1992, would be able to pat themselves with satisfaction, happy in their knowledge that they owned 42% of the nation's wealth.
Not all of this can be chalked up to Reagan's tax cuts, of course. Equally important to this story are the massive loans that the federal government, business, and private individuals took out during the 1980s, a decade whose economy almost literally floated on a sea of debt -- one of the many contributions of the Reagan years that "has impacted just about every aspect of our lives."
But don't let any of this distress you. Keep muttering the usual Hail Marys about "incentives to growth" and "peace through strength" -- and by all means, continue to watch and read Larry Kudlow -- and everything will be fine.
3 - Peter J
Nice response d, I thought for sure that this was going to be another post-mortem 'hail to the chief' and his ridiculous 'trickle-down economics'.
In all fairness though, it did indeed 'trickle'. From the top 1% to the top 20%.
4 - d
Actually, it trickled up. In 1979, the top 1% owned 23% of the nation's wealth. By 1992, it owned 42%. The top 20% did quite well during this period, but did not enjoy the spectacular blessings bestowed upon the hyper-rich.
5 - Arch Conservative
Well D I could also write a lengthy post about how Clinton wasn't really the reason for the economic prosperity in the 1990's but rather the driving force was the .com/internet boom in the private sector but that's another topic for another day.
Suffice it to say that there's god, then Jesus, then the Gipper, then the rest of us.
6 - Dave Nalle
Actually, it trickled up. In 1979, the top 1% owned 23% of the nation's wealth. By 1992, it owned 42%. The top 20% did quite well during this period, but did not enjoy the spectacular blessings bestowed upon the hyper-rich.
But at the same time as the rich got richer people at every level of the economy gained material wealth and income at a faster rate than inflation, so no one suffered for the success of the rich. Amazing.
And BTW, wealth is not 'bestowed' even upon the very rich. It's earned.
Dave
7 - Arch Conservative
"And BTW, wealth is not 'bestowed' even upon the very rich. It's earned.
Dave"
You better watch out what you say Dave. That little bit is bound to be construed as blasphemous ravings of a madman by certain individuals on BC.
How dare you suggest that not everyone is ENTITLED to unimaginable wealth and imply that those who currently possess such wealth are not all evil,corrupt, ammoral villians?
8 - troll
d says - *homelessness tripled during the Reagan years, even though one-fifth of all homeless Americans held down full-time jobs.*
Dave says - *people at every level of the economy gained material wealth and income at a faster rate than inflation, so no one suffered for the success of the rich.*
such a disconnect over the meaning of and facts about suffering in our economy is disconcerting
9 - Clavos
troll says - such a disconnect over the meaning of and facts about suffering in our economy is disconcerting
It is indeed, troll.
I, for one, would welcome some documentation for their assertions from both Ds on this point.
In particular, small d quotes a lot of "facts" without telling us where they come from.
10 - Arch Conservative
For the life of me I can't understand this animosity toward all who are better off than oneself. I don't know where it comes from but suspect it actually has something to do with the absolute refusal to admit one's own shortcomings and failures and instead blame others for these shortcomings and failures.
Nancy seems to be the worst of all. She seems to be immediately suspicious of anyone that has a dollar more than her in thier pockets. They are immediately construed as corrupt, big business automatons, in some dastardly plot to keep everyone else down.
Yeah there's corruption in corporate America and government today. But this simple fact alone does not mean that every American who wasn't born with a silver spoon in thier mouth is bound for a life of poverty, hardship and misery.
All I see here on BC everyday is one big pityfest in which a bunch of malcontents blame evewryone but themselves for all of their problems. It might be somewhat comical if it weren't so utterly pathetic.
I think you folks need to accept certain things about our society and move on.
11 - Dave Nalle
d says - *homelessness tripled during the Reagan years, even though one-fifth of all homeless Americans held down full-time jobs.*
Dave says - *people at every level of the economy gained material wealth and income at a faster rate than inflation, so no one suffered for the success of the rich.*
such a disconnect over the meaning of and facts about suffering in our economy is disconcerting
troll, I don't know what 'd' was going on about, but I certainly wasn't discussing the Reagan administration. Plus the increase in homelessness during that period had absolutely nothing to do with the economy. It resulted from the policy in several states of releasing huge numbers of people from state-owned mental hospitals who had previosly been kept off the streets at government expense.
On the issue of economic parity, the facts are simple. Since 2000 the rate of increase of wages has exceeded the rate of inflation by at least 1% per year and in some years it's been considerably more. So the rich may be getting richer, but so is everyone else, even if it's as a lower rate.
Dave
12 - Bernard
Dave - So the rich may be getting richer, but so is everyone else, even if it's at a lower rate.
So, since when has this become an acceptable turn of events? I guess humans being fair to each other isn't fashionable anymore.
You can't take your wealth to Heaven, nor should one expect the rich to gain extra divine favour for being rich - God doesn't care about your $$, but He does care about how you got it and what you've been doing with it. There is no prohibition against material wealth in the Bible... The real issue is not that someone is rich and others aren't, but what the rich do with their wealth and the POWER that comes with it... make a positive difference in this troubled world, or just wallow in one's wealth while other fellow human beings suffer?
On a more earthly personal note, money may buy some security, but it sure doesn't buy love, friendship, family, or happiness. No amount of wealth will compensate for depression, loneliness, or living a meaningless existence.
Oh, and by the way, if someone is rich, it means they probably did not earn it working in a factory, at a desk, or in a field! Wealth is earned as a combination of luck, upbringing, fortuitous connections, good timing, fire in the belly, unique talent, and smart planning. Working 60 hours a week for someone else has nothing to do with getting rich.
And that's the ugly truth on material affluence so celebrated in the Reagan Era - the 1980s. All bluster and bling, nothing meaningful of value or substance. Is the whole world really better off today as a consequence of feeding the greed?
13 - troll
Dave - when you began complaining that real people were being ignored in discussions of the economy that neglected the mobility factor I thought that you were onto something beyond posturing...
but you're back to what Huff called 'statisticulating' - here obscuring the economic circumstances in which real individuals find themselves when you use the (alleged) fact that wage increases outstripped inflation to imply that all boats are rising
*Since 2000 the rate of increase of wages has exceeded the rate of inflation by at least 1% per year...So the rich may be getting richer, but so is everyone else, even if it's as a lower rate.*
averages - even the median - do not necessarily reflect the 'reality on the ground' represented by this data set
an employer can take 100 workers cut the wages for some and raise the wages for others and end up with a group that is richer overall - but he can't legitimately claim the 'everyone' in the group is better off
14 - Dave Nalle
True, troll, but if you combine the groups going up slightly with the effects of upward mobility and individuals getting out of lower groups and moving to higher groups at a fairly impresive rate, what you have is a very, very positive picture of the wage/earnings situation on an individual basis, because 80% of the bottom group will move into a higher income bracket within a decade and even those who stay behind or the new people who enter the workforce at that level are earning a bit more than they were before.
And Bernard...
So, since when has this become an acceptable turn of events? I guess humans being fair to each other isn't fashionable anymore.
Fairness is an abstract moral issue which has nothing to do with capitalism or the forces that run the economy. It's relevant only to ones personal choices and actions.
You can't take your wealth to Heaven, nor should one expect the rich to gain extra divine favour for being rich - God doesn't care about your $$, but He does care about how you got it and what you've been doing with it.
God doesn't exist, so I doubt he actually cares about much of anything.
There is no prohibition against material wealth in the Bible... The real issue is not that someone is rich and others aren't, but what the rich do with their wealth and the POWER that comes with it... make a positive difference in this troubled world, or just wallow in one's wealth while other fellow human beings suffer?
The rich give to charity and do so generously. Look at what the Gates family is doing. Or our local example Michael Dell. Once you reach a certain level of income what else is there to do with all that money?
On a more earthly personal note, money may buy some security, but it sure doesn't buy love, friendship, family, or happiness. No amount of wealth will compensate for depression, loneliness, or living a meaningless existence.
You've clearly never been to Dallas.
Oh, and by the way, if someone is rich, it means they probably did not earn it working in a factory, at a desk, or in a field! Wealth is earned as a combination of luck, upbringing, fortuitous connections, good timing, fire in the belly, unique talent, and smart planning. Working 60 hours a week for someone else has nothing to do with getting rich.
No, the hard work is a big part of the process. Remember the old saying 10% inspiration and 90% perspiration. That certainly holds true. The ranks of the super-rich are overwhelmingly dominated by self-made men who worked incredibly hard to get where they are.
And that's the ugly truth on material affluence so celebrated in the Reagan Era - the 1980s. All bluster and bling, nothing meaningful of value or substance. Is the whole world really better off today as a consequence of feeding the greed?
Unquesitonably, yes.
Dave
15 - Martin Lav
Leave it to someone who said this:
God doesn't exist, so I doubt he actually cares about much of anything.
To believe this:
the increase in homelessness during that period had absolutely nothing to do with the economy
And to convince everyone of this:
Fairness is an abstract moral issue
Dave,
To think that throwing mental incapables out in the street to fend for themselves doesn't save the government a few bucks in taking care of them and thus has nothing to do with the economy, is a little like thinking that without supremely rich people to create funds and endowments, there wouldn't be any help for the poor. Just like you don't believe in God or the concept of fairness, you believe Melinda Gates is just plain bored or has nothing else to do with her money. I think she should start a fund for you that will help pay for your security perimeter, the gun under your pillow and the prestone in your veins.
16 - Clavos
Arguing the existence or non-existence of god is humanity's greatest exercise in futility.
Neither side can definitively prove its stance, therefore the issue is irrelevant and pointless.
17 - Martin Lav
hmmm....your loss.
18 - Dave Nalle
Martin, as would be obvious to most readers, what I was saying was that the economy didn't cause the rise in homelessness, it was caused by government policy. Do you suggest that this basic point is incorrect? I'll give you that the government benefited financially in the short term, but that is also not a matter of economics, it's a matter of budgetary priorities.
While I do like the idea of a Melinda Gates Charity for Dave, I prefer to make my own way. One of the best things great charitable givers like the Gates' can do is set an example for others to follow with their smaller donations.
Dave
19 - Clavos
hmmm....your loss.
Can't lose what you never had, Martin.
20 - Martin Lav
Then you win Clavos.
Dave,
I get your point as I'm sure most readers do, but get mine, it's not FAIR and you say it's an abstract thought, but it's still not FAIR to throw sick people into the street, so you can balance your budget in order to spend more on defense to bankrupt the Soviets. So you're right it's not an economic issue, it's a moral one.
But morals and ethics I'm sure are abstract and pointless in debating....
21 - Dave Nalle
Good lord, Martin. I hope I never suggested streeting the marginally mentally ill was a good idea or fair or anything like that. It was a terribly flawed government initiative and an example of bad, lazy management. Even putting aside the morality of it, just on a public safety basis alone they should have found a better way to deal with them.
Dave
22 - Martin Lav
Then I take it that you are taking back what you said to troll in # 11 ?
23 - Drew
As to the wisdom of voodoo economics (Bush Sr's term), one could point out the three Reagan Recessions, or David Stockman's apostacy, or even the three record-level tax hikes Reagan subsequently signed into law.
But the truth is that the Soviet Economy (and military machine) could not sustain being bogged down in Afghanistan for years. People like to talk about the Cold War as if it was a real war, but in Afghanistan, the Soviets faced a real and determined enemy on their home turf.
My mother, before she died, predicted that our War in Iraq should never be compared to Vietnam, but rather to Afghanistan, as in "Soviet Invasion of."
These three years, and Bush's cultish devotion to tax cuts have proved her right. (If you eliminate the rise in the top 2% of wage earners, all other wage earners are actually losing money compared to inflation, and those figures don't even take into account the recent spike in gas prices.)
The truth is Ronald Reagan, overestimating the strength of Communism, did not see that it was doomed to collapse from its own flaws. So he tried to set us on a path over a cliff, hoping the Soviets would race there ahead of us in time for us to start braking. Reagan, Bush Sr. and Clinton (with Newt Gingrich's help) did set the brakes, sensibly realizing that government spending also creates jobs, and that a government that can't pay its bills really needs to cut spending before cutting revenue.
Then Bush came along, and put the gas pedal to the floor. Three years later, Bush and the archconservatives claim that we are soaring, not recognizing free-fall when they see it.