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Old 02-04-2012, 11:30 AM  
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Why the GOP should stop invoking Reaganomics

Before you start reading, realize that Bruce Bartlett wrote this. He's the guy that helped formulate many of Raygun's policies.

http://www.washingtonpost.com/opinio...6mQ_story.html

In their debates, ads and speeches, the candidates for the Republican presidential nomination are vying for the label of most Reagan-esque.

On taxes, “I take the Reagan approach,” former senator Rick Santorum said at a recent Florida debate.

On the economy, “under Ronald Reagan, we had . . . the right laws, the right regulators, the right leadership,” former House speaker Newt Gingrich said in a debate before his South Carolina primary victory.

Judging from the candidates’ tax proposals, they seem to believe that the most Reagan-like candidate is the one with the biggest tax cut. But as the person who drafted the 1981 Reagan tax cut, I think Republicans misunderstand the premises upon which Reagan’s economic policies were based and why those policies can’t — and shouldn’t — be replicated today.

I was the staff economist for Rep. Jack Kemp (R-N.Y.) in 1977, and it was my job to draft what came to be the Kemp-Roth tax bill, which Reagan endorsed in 1980 and enacted the following year. Kemp and Sen. Bill Roth (R-Del.) proposed cutting tax rates across the board by about a third, lowering the top rate from 70 percent to 50 percent and reducing the bottom rate from 20 percent to 8 percent. (Though when the Reagan tax cut was enacted in 1981, the bottom rate was reduced to 11 percent.)

While our aim was to increase growth and employment, we were intent on doing so in a way that did not exacerbate inflation, which was the nation’s top problem.

After all, growth was not particularly sluggish in the late 1970s — the economy grew at 5.4 percent in 1976, 4.6 percent in 1977 and 5.6 percent in 1978. (We haven’t seen three consecutive years as good since.) But people didn’t feel very prosperous because inflation and unemployment were high. The unemployment rate was around 7 percent during those three years, and inflation accelerated, going from 4.9 percent in 1976 to an astonishing 13.3 percent in 1979.

We believed that inflation contributed to unemployment because when workers got cost-of-living pay increases, they were pushed into higher tax brackets. In turn, this required them to ask for bigger pay increases to try to maintain their after-tax income. This cycle increased the cost of employment for businesses and discouraged them from hiring more workers.

According to the Tax Policy Center, the total federal tax rate (including both the employer and employee share of the payroll tax) for a four-personfamily earning the median national income more than doubled between 1965 and 1979, from 11.5 percent to 23.1 percent. The marginal tax rate — the tax on each additional dollar earned — rose from 17 percent to more than 36 percent. This “tax wedge” — the difference between a business’s cost of employment and the employee’s after-tax reward — also explained why unemployment was high despite robust growth.

Keynesian economics, which was the dominant theory at the time, said that higher taxes would curb inflation by reducing people’s disposable income and spending, and that any tax cut would exacerbate inflation. Our thinking, by contrast, was that lower taxes would increase the incentive to work, save and invest; if that led to an increase in the supply of goods and services, then the impact would be anti-inflationary.

Mainstream economists also argued that the cost of bringing down inflation, even a little bit, would be extraordinarily high. In a May 1978 paper, Brookings Institution economist Arthur Okun calculated that bringing the inflation rate down by just one percentage point would cost 10 percent of a year’s gross national product.

If Keynesian theory was correct, the 1981 Reagan tax cut, which reduced revenue by close to 3 percent of GDP per year, should have been massively inflationary. But in fact, inflation dropped like a rock, from 12.5 percent in 1980 to 8.9 percent in 1981 and 3.8 percent in 1982, where it basically stayed for the rest of the 1980s.

Of course, the Federal Reserve’s tight money policy did the heavy lifting on reducing inflation. But if Okun’s estimate had been even remotely correct, we should have gone through another Great Depression. Although the 1981-82 recession was painful, it was brief and not very deep. Real GDP fell 1.9 percent in 1982 but bounced back nicely, rising 4.5 percent in 1983 and 7.2 percent in 1984.

Republicans like to say that massive growth followed the Reagan tax cut. But average real GDP growth during Reagan’s eight years in the White House was only slightly above the rate of the previous eight years: 3.4 percent per year vs. 2.9 percent. The average unemployment rate was actually higher under Reagan than it was during the previous eight years: 7.5 percent vs. 6.6 percent.

Liberals argue that the real economic effects of Reagan’s policies show that they failed. However, I believe that these critics overlook the enormous importance of breaking the back of inflation at a relatively small economic cost — certainly far less than any economist would have thought possible in 1981. Reagan’s results should be measured against the (incorrect) expectation that a far more severe economic downturn would be needed to reduce inflation. On that basis, his policies were overwhelmingly successful.

When comparing Reagan’s policies with Republican proposals today, several things stand out. Inflation is low now. We are not looking at “bracket creep” or sharply rising taxes, as we were in the late 1970s. The top income tax rate is 35 percent, half the rate Reagan inherited. And federal revenue is at a 60-year low of about 15 percent of GDP, compared with a post-World War II average of about 18.5 percent.

These differences are essential to understanding why Reagan’s policies worked when they did — and why they are not appropriate today.

All of the evidence tells us that the economy’s fundamental problem today is not on the supply side but the demand side. According to a recent study by Credit Suisse, two-thirds of the difference in growth at this point in the business cycle, compared with previous cycles, is due to slower consumer spending. And low inflation — as well as widespread unemployment, vast stocks of unsold houses, empty factories and other indicators — tells us that money is tight, not loose, as was the case in the late 1970s.

“Low interest rates are generally a sign that money has been tight,” economist Milton Friedman wrote in 1997. Yet, absurdly, Republicans continually berate the Federal Reserve for being too easy; some even insist, insanely, that the United States should return to the gold standard, even though it was a key cause of the Great Depression.

Because inflation and interest rates are low, Fed policy is constrained today in ways it was not in the early 1980s. Back then, the Fed could bring down the federal funds rate to a little less than the inflation rate and create negative real rates, thus stimulating borrowing, investment and consumption. It can’t do that now because it can’t reduce market interest rates below zero.

Economic conditions are entirely different today than they were in Reagan’s era, and different conditions demand different policies. Those who say otherwise are simply engaging in cookie-cutter economics — proposing whatever was popular and seemed to work once, without regard to changing circumstances.
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Old 02-04-2012, 11:32 AM   #2
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'should'


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Old 02-04-2012, 11:47 AM   #3
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'should'


Brilliant comment dress up suzie. What shade of eye shadow are you going to be wearing for Chiefs games this year?
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Old 02-04-2012, 12:00 PM   #4
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I'm gay.
...we know.
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Old 02-04-2012, 12:04 PM   #5
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...we know.
Seriously, can you be anymore lame? You dress up as a dead drug addict and you edit posts with elementary level slams.

Bravo susie, bravo.
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Old 02-04-2012, 12:09 PM   #6
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Seriously, can you be anymore lame? You dress up as a dead drug addict and you edit posts with elementary level slams.

Bravo susie, bravo.
notice you didn't deny it.

...it's ok, man...embrace it...angry is no way to go through life, son.
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Old 02-04-2012, 12:38 PM   #7
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notice you didn't deny it.

...it's ok, man...embrace it...angry is no way to go through life, son.
Yea, stevie, I'm gay. It took you editing my post on CP for me to come out of the closet.

****ing clown shoes. I bet the article was too long and had too many big words for you to do anything other than post HCF level posts in the thread.
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Old 02-04-2012, 01:01 PM   #8
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Thought this was an interesting article...

Too bad it's been derailed.
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Old 02-04-2012, 01:09 PM   #9
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Thought this was an interesting article...

Too bad it's been derailed.
It is interesting. Pay dress up susie no mind. I bet patty stays away though.
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Old 02-04-2012, 01:53 PM   #10
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A dissenting opinion: http://www.brusselsjournal.com/node/92

I've shown a few highlights below, but they don't do justice to the article. If you truly want to know whether or not Reagan's economic policies were a success or a failure and you want to hear both sides of the story, you should read the article.

Quote:
Few Belgians have analyzed Reaganomics in such an exhaustive way as the retired financial consultant Willy De Wit from Antwerp. Today, he is a member of the Flemish independent think thank WorkForAll. Recently, he gave a lecture for “FACS” (Free Association for Civilization Studies), a Flemish libertarian think tank lead by Martin De Vlieghere. Loaded with facts and figures, De Wit proved that Reaganomics did deliver results and was a success story.

CRITICS OF REAGAN'S ECONOMIC POLICY

But before summarizing the lecture of Willy De Wit, let us listen to the opponents. Numerous they are and their voices ring loud in the media. In November 2001 Mia Doornaert, a well-known Belgian journalist, wrote: “Ronald Reagan was not a great American President”. In the same leading Flemish newspaper De Standaard, Evita Neefs wrote three days after Reagan's death: "America is losing a sympathetic blockhead. He was not particularly intelligent, but extremely charming". These sentences are typical for the prejudice against Reagan and his economic policy, a policy, that - according to the opponents - made the poor poorer and the rich richer and created a huge budget deficit and a gigantic public debt. Moreover (still in the opinion of the opponents) unemployment could only be reduced by low paid McJobs, or “hamburger jobs” as they are called in Belgium.
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WILLY DE WIT: REAGANOMICS SAVED THE ECONOMY

In the sixties and seventies, Keynes' economic theory was applied on a large scale. Keynes developed his ideas in the deep economic recession of the thirties, with its high unemployment. Keynes argued that governments should stimulate aggregate demand by massive spending and infrastructure works in order to invigorate the economy. Through the “multiplier” effect every dollar spent by the government would create a multiple in income. Unemployment would vanish, the tax base would broaden, and the budget deficit would disappear, Keynes argued. But during the oil crisis of the seventies, it became clear that Keynesianism did not work. Higher public spending did not resolve unemployment. On the contrary, unemployment increased in line with the increase of government spending. Moreover, unemployment and inflation appeared simultaneously, a fact which could not be explained by the dogmas of Keynesian thinking. The only thing they were able to do, was to give it a name : “stagflation”, which meant that we had a combination of creeping inflation, recession and unemployment. During the Carter years, inflation was at a staggering 13%. Huge interest rates were necessary to fight it. The interest rate on credit facilities reached the unbelievable level of 21%. The drama was complete when taxes were increased to fight both inflation and government deficits. During the Carter years, the top marginal tax rate on personal income rose to the insane record level of 70%. Experts dit not know how to agree on any economic policy. They simply had no solution!

THE FUNDAMENTAL FLAW IN KEYNESIAN LOGIC

A lot of recent studies indicate that an increase in public spending (as advocated by Keynes) does not stimulate the economy. The main reason is that money that could otherwise be spent efficiently by the private sector, is instead siphoned off for pork-barreling public works, very often with little or no return. Money to pay for deficit spending must come from somewhere else and, as usual, it is the taxpayer who must pay. The fundamental flaw in Keynesian logic is that it hardly makes sense to tax money away from productive people, thereby reducing their rewards, so as to spend it on unproductive goals. Some call it robbing Peter to pay Paul. The United Kingdom, home of Keynesianism, experimented with this medicine for years - only to get sicker and sicker, until Margaret Thatcher stopped it. A more recent example is Japan. This country has provided one of history’s best demonstrations that the Keynesian demand stimulus is a deeply flawed economic philosophy. Despite huge government outlays, the Japanese economy is still wallowing in the slump that has afflicted it for more than ten years. This point of view is confirmed by a recent study (based on multiple regression analysis) from the Flemish independent think tank WorkForAll. According to their analysis of the relationship between economic growth and the size of governments in 16 European countries, the two main causes leading to poor growth performance are excessive government spending and a demotivating tax structure, which put a heavy burden on work, income and profit.
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STAGFLATION BECAME RECESSION, EXPANSION FOLLOWED

Four young economists (Paul Craig Roberts, Robert Mundell, Norman Ture and Steve Entin) and a journalist (Jude Wanniski) convinced Reagan to completely reverse the economic policy of that time. Their point of view was that high marginal tax rates were a disincentive to produce, to take risk, to invest and to save. In their opinion this “economy of discouragement” had to be transformed into an “economy of encouragement”. The reasoning was as follows: people are producing because it pays to do so. Consumption alone will not result in increased production when the incentives to do so are not there. When tax rates are raised, people reduce their participation in taxed activities, such as working, risk taking, saving and investing. When tax rates fall, people increase their participation. Fortunately, Reagan understood this logic immediately. Few people know that Reagan had a major in economics, which he obtained at the Eureka College (Illinois) in 1932. The economic theory he was taught was untouched by Keynesian thinking and, as a consequence, very appropriate to the problems of the eighties. Reagan followed the advice and took action. The top marginal tax rate of 70% was lowered in two phases: to 50% with the “ERTA” (Economic Recovery Tax Act of October 1, 1981) and in a later phase to 28% (The Tax Act of 1986). These tax cuts created 18 million new jobs in 8 years, lowered inflation to 4.3% and cut unemployment from 9.7% to 5.4%. One of the longest and strongest economic expansions since World War II had begun, with an average annual growth rate of 3.5%. But the first two years (1981 and 1982) were lost for Reagan. Fed chairman Paul Volcker fought inflation with a tight monetary policy and high interest rates. The Reagan administration urged Volcker to decrease monetary growth by a maximum of 50%, in order not to kill the tax cut program. But as the Federal Reserve is totally independent, Volcker cut money growth by 75% in 1981. The recession became even worse, and unemployment rose further. But after inflation had been defeated, money growth resumed and the Reagan expansion took shape.

DID THE POOR GET POORER AND THE RICH RICHER?

“Reagan gave money away to the rich, at the expense of the poor”, many critics claim. The table below proves the contrary. At the end of the Reagan presidency, the rich paid comparatively more taxes than before. As for the poor, their share in total tax revenues decreased. There was a simple reason for this: the lower tax rates were an important incentive for the rich to expand their economic activity.The tax base had become broader, and the lower rate on the broader tax base resulted in higher tax revenues.
Quote:
ENORMOUS PUBLIC DEBT?
It is often claimed that the budget deficit had risen to enormous proportions during the Reagan years. But between 1981 and 1989 the budget deficit increased only slightly, from 2.6% to 2.9% of GDP. The deficit peaked in 1983 to 6.1% of GDP (the Volcker recession with tight money).
Quote:
WHY THE CRITICISM?

It seems strange that these figures and these facts are not better known, says Willy De Wit. But probably it is not surprising, when we consider that a right wing ("conservative") president discredited the left wing ("liberal") economic policy. Increasing social outlays doesn’t make sense when you have previously created unemployment and poverty with a wrong economic policy. Reagan has shown that the redistribution of wealth with high tax rates brings no solution. Instead of redistributing wealth, it distributes poverty. The main reason for the opposition to Reagan’s economic policy, however, was that this policy was completely misunderstood at that time, mainly by the economic establishment. They did not see the fundamental difference between Keynesian thinking to stimulate demand, and the new supply-side approach by Ronald Reagan.

Keynesian thinking explained the economic achievement in terms of the level of spending. Deficit spending will keep employment high and will stimulate the economy. Cutting the deficit (for the Keynesians) would reduce spending and throw people out of work, raising the unemployment rate, reduce national income and hence produce less tax revenues. Reagan on the contrary brought a totally new perspective to economic policy. Instead of putting the emphasis on spending, supply-side economists showed that tax rates directly affect the supply of goods and services. Lowering tax rates mean better incentives to produce, to save, to invest and to take risks. In other words lower tax rates stimulate supply and not demand. The broader tax base will compensate at least partially for the lost revenue caused by the tax cut. Higher savings will result in increased investment and unemployment will disappear. Instead of pumping up demand to stimulate the economy, reliance would be placed on improving incentives on the supply side.

The entire economic profession, along with the media could not believe that a former movie actor could come up with a revolutionary economic policy that completely contradicted the famous Keynesian theory. The reaction was fierce.
Quote:
After Reagan, the theory of supply-side economics was applied in numerous countries. In Iceland, David Oddson became prime minister in 1991. He inherited a poorly performing economy burdened by heavy income taxes. He lowered the corporate tax rate from 50% to 30%. During the next five years the economy grew by 5% per year. Government income did not fall and social outlays could be maintained.

Ireland is another example. In 1987 this country was the “sick man” of Europe, with a public debt of 135 % of GDP. After the elections of 1987 a new economic policy was introduced. Corporate tax rate was reduced from 32% to 12.5% and capital gains tax was lowered from 40% to 20%. Ireland is now the fastest growing country of the EU. Japan, to the contrary, is a classic example of the failure of a Keynesian demand-side policy. The economy has been in shambles for many years and public debt has risen to a gigantic 170% of GDP
This is why the GOP should continue to invoke Reaganomics. Because it worked, despite the attempts by the Left to rewrite history.
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Old 02-04-2012, 02:13 PM   #11
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Pffft... I quit reading with his explanation of what happened in the 70s. I'm sure he helped formulate policy like Paul Volcker helped Obama formulate policy.
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Old 02-04-2012, 02:20 PM   #12
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Reagan was a Keynesian with the Defense Department, but the difference is we got something for that, the Demise of the Soviet Union.
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Old 02-04-2012, 02:22 PM   #13
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Quote:
Originally Posted by Brainiac View Post
A dissenting opinion: http://www.brusselsjournal.com/node/92

I've shown a few highlights below, but they don't do justice to the article. If you truly want to know whether or not Reagan's economic policies were a success or a failure and you want to hear both sides of the story, you should read the article.

This is why the GOP should continue to invoke Reaganomics. Because it worked, despite the attempts by the Left to rewrite history.

Reagan's tax cut lasted one year, and then he passed the largest increase in history at that time. There were even other increases later. Reagan benefited from Volcker slamming on the brakes which tamed inflation but Reagan did resort eventually to a Keynesian stimulus himself. Doesn't this guy know this? Supply-side is just Keynesianism with a tax-cut on top. Stockman was there and wrote a book about how the Reagan Revolution never really materialized. RR did also bring his tax reform. However, Reagan did not cut govt he expanded it and not just regarding the military. Still, deficits soared under Reagan. Reagan's economy did see a recovery but it did bring large deficits. So it was a mixed bag.

It's not just the left who is re-writing history though. The Austrian school has pointed out RR's flaws—where it still shares with the left though.
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Old 02-04-2012, 04:22 PM   #14
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Quote:
Originally Posted by Brainiac View Post
A dissenting opinion: http://www.brusselsjournal.com/node/92

I've shown a few highlights below, but they don't do justice to the article. If you truly want to know whether or not Reagan's economic policies were a success or a failure and you want to hear both sides of the story, you should read the article.

This is why the GOP should continue to invoke Reaganomics. Because it worked, despite the attempts by the Left to rewrite history.

@ you the fact that you think that's an authoritative source or even a sufficient rebuttal. A reiteration of US right wing talking points by Belgian isn't a rebuttal. You get bonus dumbass points for the fact that it was written in 2005.

I hate to break it to you but Bruce Bartlett isn't a liberal by a long shot.
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Old 02-04-2012, 04:24 PM   #15
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Join Date: Feb 2009
Location: Fort Worth, TX
Casino cash: $11335
Quote:
Originally Posted by Stewie View Post
Pffft... I quit reading with his explanation of what happened in the 70s. I'm sure he helped formulate policy like Paul Volcker helped Obama formulate policy.
Typical gold buggery.

This guy writes something different than what I already believe so he's wrong. /stewie
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The diameter of your knowledge is the circumference of your actions. Ras Kass

Quote:
Originally Posted by Iowanian View Post
I'm just a little pussy from Iowa
Posts: 18,050
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