THE PROGRESSIVE CONSERVATIVE, USA
An Online Journal of Political Commentary & Analysis
Volume XIII, Issue # 286, December 10, 2011
Dr. Almon Leroy Way, Jr., Editor
Government Committed to & Acting in Accord with Conservative Principles
Ensures a Nation's Strength, Progress, & Prosperity
REAGANOMICS & THE AMERICAN CHARACTER
By Dr. William Philip "Phil" Gramm
THE AMERICAN ECONOMY BEFORE, DURING, & AFTER THE U.S. PRESIDENCY OF RONALD WILSON REAGAN: THE U.S. ECONOMY IN THE DECADE PRIOR TO
THE REAGAN PRESIDENCY -- WRONGHEADED ECONOMIC POLICIES & THE "STAGFLATION" OF THE 1970S -- REAGANOMICS AS THE REVIVAL OF AN OLDER
UNDERSTANDING THAT CENTRALIZED, UNLIMITED GOVERNMENT WILL EVENTUALLY DESTROY FREEDOM & THAT DECISIONS REGARDING THE ALLOCATION OF
SCARCE RESOURCES ARE BEST LEFT TO THE PRIVATE ECONOMIC SECTOR -- THE NEW ELEMENT TO REAGANOMICS: LAFFER CURVE THEORY -- THE IDEA
THAT TAX RATES AFFECT A PERSON'S INCENTIVE TO WORK, SAVE, & INVEST -- THE IDEA THAT LOWER TAXES CREATE MORE ECONOMIC ENERGY, WHICH
GENERATES MORE ECONOMIC ACTIVITY, WHICH PRODUCES A GREATER FLOW OF REVENUE TO THE GOVERNMENT -- REAGANOMICS, WHEN FULLY
IMPLEMENTED IN 1983: A 25-YEAR ECONOMIC GOLDEN AGE -- A PERIOD OF VERY RAPID ECONOMIC GROWTH, WITH ONLY TWO MINOR RECESSIONS
DURING THE PERIOD
FULL STORY:
What was the American economy like in the decade prior to the Reagan Presidency? The 1970s, for a myriad of reasons, were not a happy time. They featured a
combination of stagnation and inflation, which came to be called “stagflation.” The inflation rate peaked at just over 13 percent, and prime interest rates rose as
high as 21-and-a-half percent. Although President Jimmy Carter did not use the exact words, a malaise had certainly set in among Americans. Many wondered
whether our nation’s time had passed. A Time magazine headline read, “Is the Joyride Over?” Did we really need, as Jimmy Carter told us, to learn to live
on less?
Ronald Wilson Reagan did not believe America was in decline, but he did believe it had been suffering under wrongheaded economic policies. In response, he
offered his own plan, a program for creating economic freedom that came to be known as Reaganomics. Of course, most of Reaganomics was nothing new.
Mostly, it was the revival of an older understanding that unlimited government will eventually destroy freedom and that decisions regarding the allocation of
scarce resources are best left to the private sector. Reagan explained these old ideas well, and in terms people could understand.
But there was also a new element to Reaganomics, and looking back, it was a powerful element and new to the economic debate. It was the idea that tax rates
affect a person’s incentive to work, save, and invest. To put it simply: lower tax rates create more economic energy, which generates more economic activity,
which produces a greater flow of revenue to the government. This idea — which came to be known as the Laffer Curve — was met with media and public
skepticism. But, in the end, it passed the critical test for any public policy. It worked.
To be sure, there were a couple of major impediments to the economic success of Reagan’s program. First, the Federal Reserve System clamped down on the
money supply in 1981 and 1982, in an effort to break the back of inflation, and subsequently the economy slipped into the steepest recession of the post-World
War II period. Second, Soviet Communism was on the march, the U.S. was in retreat around the world, and President Reagan was determined to rebuild our
national defense as part of a program of peace through strength. All of these factors worked strongly against Reagan in the battle to revive the American
economy. Nor was it a forgone conclusion that his program would get through Congress. We shouldn’t forget that it was a tough program. For example, it
eliminated three Social Security benefits in one day: the adult student benefit, the minimum benefit, and the death benefit. Reagan’s program represented a
dramatic change in public policy.
With his great skill in communicating ideas, Reagan got his program through Congress. And despite Fed policies and large expenditures for national defense, his
program succeeded. I don’t want to bore you with statistics, but I will have to present some to make my case. Most importantly, I hope I will succeed in
demonstrating what a difference good policies make to the average citizen.
The evidence is, I think, overwhelming: the Reagan program, when fully implemented in 1983, ushered in a 25-year economic golden age. America experienced
very rapid economic growth and only two minor recessions in those 25 years, whereas there were four recessions in the previous 12 years, two of them big ones.
What exactly did Reagan do? For starters, he cut the top tax rate from 70 percent to 28 percent. And yes, high income earners benefitted from these cuts. But, as
I used to say in Congress, no one poorer than I am ever hired me in my life. And, despite lower rates, the rich ended up paying a greater share: In 1979, the top
one percent of income earners in America paid 18.3 percent of the total tax bill. By 2006, the last year for which we have reliable numbers, they were paying 39.1
percent of the total tax bill. The top ten percent of earners in 1979 were paying 48.1 percent of all taxes. By 2006, they were paying 72.8 percent. The top 40
percent of all earners in 1979 were paying 85.1 percent of all taxes. By 2006, they were paying 98.7 percent. The bottom 40 percent of earners in 1979 paid 4.1
percent of all taxes. By 2006, they were receiving 3.3 percent in direct payments from the U.S. Treasury.
In the 12 years prior to the Reagan program, economic growth averaged 2.5 percent. For the following 25 years, it averaged 3.3 percent. What about per capita
income? In the 12 years prior to the Reagan program, per capita GDP, in real terms, grew by 1.5 percent. For the 25 years after the Reagan program was
implemented, real per capita income grew by 2.2 percent. By 2006, the average American was making $7,400 more than he would have made if growth rates had
remained at the same level as they were during the 12 years prior to the Reagan program. A family of four was making $29,602 more. During the 12 years prior to
Reagan, America created 1.3 million jobs per year. That number is pretty impressive compared to today’s stagnant economy. But, during the Reagan years,
America added two million jobs per year. That means, as of 2007, there were 17.5 million more Americans at work than would have been working had the growth
rates of the pre-Reagan era continued.
Inflation, which had been 7.6 percent for the previous 12 years, fell to 3.1 percent. Interest rates plummeted. The average homeowner in America had a monthly
mortgage payment of $1,000 less as a result of the success of the Reagan program. Poverty, which had grown throughout the 1970s, despite massive increases
in anti-poverty programs, plummeted, despite cuts to these programs. The poverty level fell from 15 percent to 11.3 percent. These results are tangible evidence
that government policy matters.
This is not to say that no mistakes were made. In order to secure lower tax rates, it became good politics to raise the number and amount of income tax deductions,
thereby removing about 50 percent of Americans from the tax rolls. In my opinion, that was a mistake, and I think we are suffering for it today. I believe everyone
should pay some income taxes. Nevertheless, the net result of the Reagan program was good for all Americans.
So, how does the Reagan recovery compare to the recovery going on today? In sum, this is the most disappointing recovery of the post-World War II period by
a large margin. I don’t think people understand what an outlier this recovery period is. If the economy had recovered from this recession at the rate it recovered
from the 1982 recession, which was roughly the same size in terms of unemployment, there would be 16.3 million more Americans at work today — in other words,
all those who say they are unemployed, plus almost 60 percent of “discouraged workers” who have dropped out of the labor force. If real per capita income had
grown in this recovery at the same rate it grew during the Reagan recovery, real per capita income would be $5,139 higher today. Both the Reagan program and
the Obama program instituted dramatic changes. One program worked. The other is failing.
In the end, government policy matters. The truth is, Americans are pretty ordinary people. What is unique about America is an understanding of freedom and
limited government that lets ordinary people achieve extraordinary things. We have been getting away from that view recently, but, if we can get back to that
understanding, which was Reagan’s, our nation will be fine.
Let me conclude by saying that the argument I am making is not just about money or GDP. It’s an argument about character.
If you want to see the effect of bad government policy on character, simply turn on the news and see how Greek civil servants have been behaving recently.
They are victimizers behaving like victims. Greek government policies have made them what they are. But what made Americans who we are is a historically
unprecedented level of freedom and responsibility. The real danger today is not merely a loss of prosperity, but a loss of the kind of character on which
prosperity is based.
I occasionally hire a man to do bulldozer work on my ranch. He doesn’t know a lot about foreign policy, but he knows a lot about the economics of the bulldozing
business. In his freedom to pursue that business and to be the best he can be at it, he’s the equal of any man. He’s proud, he’s independent, and he knows his
trade as well as anybody else in America knows theirs. That’s what America is about. For me, today’s battle, as it was in 1980, is not just about prosperity or goods
and services. It’s about freedom, and it’s about the kind of character that only freedom creates.
Copyright © 2011 Hillsdale College.
Reprinted by Permission from Imprimis,
A Publication of Hillsdale College, Hillsdale, Michigan.
Reprinted from Imprimis, Volume 40, Number 11, November, 2011.
LINKS TO RELATED TOPICS:
Political Economy -- Philosophies, Systems, & Public Policies:
Government, the Economy, & Economic Prosperity
American Government & the U.S. Presidency:
Presidential Politics & National Leadership
Currently Vice-Chairman of the Investment Bank Division of UBS, Dr. Phil Gramm served as a member of the U.S. House of Representatives from Texas’s Sixth
Congressional District from 1979-1985, and as a U.S. Senator from Texas from 1985-2002. Prior to his career in public service, he taught Economics at Texas A&M
University from 1967-1978. Senator Gramm earned both his B.A. and doctorate degrees in Economics from the University of Georgia.
The foregoing article by Gramm is adapted from a speech delivered by him at Hillsdale College on October 3, 2011, during a four-day conference on “Reagan: A
Centenary Retrospective,” sponsored by the College’s Center for Constructive Alternatives.
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