Monday, January 2, 2017

Ronald Reagan: Reaganomics

Ronald Reagan was one of the greatest presidents of all time because he followed the economic advice of Jack Kemp, who was an ardent supporter of Supply Side Economics. This inspired him to work with Congress to slash regulations and reform the tax code in an economic strategy that became known as "Reaganomics."

Reagan ran against incumbent Jimmy Carter and independent (and liberal republican Senator) John B. Anderson for President of the United States in 1980. Due to the unpopularity of the liberal President, and aided by a poor economy and the Iran-Contra Crisis, Reagan and the promise by Reagan won in a landslide.

Reagan received the highest number of electoral votes (489) ever by a non-incumbent presidential candidate. While Democrats maintained control of the House of Representatives, Republicans rode the Reagan wave of popularity to gain control of the Senate for the first time since 1955.

The election was also interesting because most polls had Ronald Reagan down by as many as seven points going into election night. However, as the results started coming in when polls closed, it quickly became apparent that the polls were wrong. About an hour and a half before California polls even closed, Jimmy Carter had conceded the election to Reagan.

In 1913, Woodrow Wilson signed the 16th Amendment, which created the progressive income-tax system. At that time it was a 1% levy on the wealthy. This top marginal income tax would creep up to 94% during the 1940s in order to pay for all of FDRs New Deal progressive (socialist) social programs.

So, the marginal income tax made it so that, as you make more profit, you pay more in taxes. Once you get up to the top income tax bracket, during the 1940s, you paid a 94% tax on all of your income. This would ultimately take a toll on the economy.

Reagan himself was a victim of the top income tax bracket having to pay a whopping 94% tax on that income during the 1940s and 50s. He was one of the top draws for Warner Brothers during this era, and once he crept up to the top bracket (aptly called "bracket creep) there was no incentive to keep making movies. This came at the expense of all the crew who put together his movies, who all had to look elsewhere for work.

The same type of situation was occurring in the rest of the nation due to high taxes to pay for out of control spending on progressive social programs, many born out of FDRs New Deal during the 1930s. Reagan referred to it as "creeping socialism."  The more people made, the less incentive they had to earn more. Once they made it to the top, they took their money and put it in a bank; they saved it rather than spent it.

Worded another way, "bracket creep" means that, as you make more income, you move into a higher income tax bracket. So, when Reagan came into office, the top marginal income tax bracket was 70%. Reagan believed that this acted as a disincentive to save, invest, expand, and create jobs and capital. This was socialism. It was the antithesis of capitalism.

One quick note here. To be fair, most people did not pay the 70% income tax. There were loopholes built into the system. These loopholes, or incentives, were created to get people to invest in the economy. Money could be put in certain places and you wouldn't have to pay a tax on that money. These loopholes made it so that some people, some very rich people, might have paid no taxes at all.

So, Reagan believed the way to stimulate the economy was to cut taxes, remove burdensome regulations, and cut spending. It makes sense. It's called capitalism. It's why some refer to conservatism as capitalism.

Would Reaganomics work? Well, note here that in 1981 the government, the U.S. Treasury took in from income taxes $480 billion. Save this thought for a moment.

In 1981, Reagan revealed his "program for economic recovery" to a Joint Session of Congress calling for $41.4 billion in cuts. These cuts would slash the Carter budget, although it would mostly slash programs created by FDR's Great Society. He did, however, vow to create a "safety net" for the poor, disabled, and elderly. He also called for a 30% tax cut and an increase in defense spending.

Reagan worked with republicans and democrats in Congress to push his agenda through. In the end, he earned the support of every republican along with 26 House Democrats.

At this time, Reagan enjoyed the support of two-thirds of Americans, and his highest approval rating. They really wanted to improve the economy, and they had Faith in Reagan's economic plan.

On March 30, 1981, Reagan was shot by John Hinckley Jr. He did not know immediately that he was shot. As soon as it was learned he was hit, he was rushed to the hospital, where he supposedly quipped to the nurses and doctors attending to him, "I hope we're all republicans here."

On April 28, 1981, Reagan appears before Congress for the first time since being shot. Some experts suspect that it was due to his rise in popularity following the assassination attempt that he was able to get his economic agenda through Congress.

Later that same year, Reagan's economic bill was approved by Congress. On July 39, 1981, he signed the Economic Recovery Act of 1981. However, rather than getting a 30% tax cut he had to settle for a 23% tax cut over three years. The top income bracket dropped from 70% to 50% and the lowest income bracket dropped from 14% to 11%. Over time, the top bracket dropped to 28%.

This was the largest tax cut in American history. It was simply a form of what Jack Kemp referred to as supply-side economics, and what the media dubbed, "Reaganomics." It was basically allowing capitalism to work. It was capitalism.
This was how you stimulate economies.

The recovery does not happen right away. While the country waited anxiously for signs of economic recovery, ' popularity dipped to 35%. Things did not look good for the country as the recession steepened, with unemployment at a six-year high. The U.S. now faced its largest budget deficit in history. Some were even calling for tax hikes. Yet Reagan was patient and predicted for things to improve.

Reagan then has to make a difficult decision whether he slashes the military budget to reduce the deficit or increase military spending. Reagan decides in favor of military spending, noting his desire to create peace through strength. This would end up being one of the many great decisions of his presidency, as it would help end the Cold war and turn the U.S. into the world's Super Power.

However, Reagan's popularity is so low during the mid-term election that the democrats pick up 26 seats in the House of Representatives, although republicans manage to maintain control of the Senate.

In 1979, Jimmy Carter hired Paul Volcker  as chairman of the Federal Reserve Board in order to tackle high-interest rates. Volcker raised interest rates to 15% and lowered the money supply to force businesses to lower prices. He believed this would lower interest rates. In 1982, he believed interest rates were low enough, so he cut interest rates and flooded the economy with money.

The economy did not improve. Calls were made for Reagan to change course. Reagan, however, stubbornly (confidently) decides to stay on course. While these were very stressful times, this decision would be one of the greatest in the history of the U.S.

Finally, by the spring of 1983, the first signs of economic recovery started showing. This would the beginning of the Reagan economic boom, the greatest period of economic prosperity in the history of the United States.

To this day, liberals credit Volcker's decision to raise interest rates in 1979, and then lower them in 1982, as the reason for the Reagan economic boom. Conservatives, however, credit Reagan's economic plan, otherwise known as Reaganomics.

Now, back to our question above. Did Reaganomics work? In 1989, when Reagan left office, the top marginal tax rate had dropped from 70% to 28%. The U.S. Treasury that year took in $950 billion. This meant that supply-side economics, Reaganomics, caused the amount of money made by the Treasury to double over Reagan's 8-year term as President.

How did this happen, you ask? It happened because it created more taxpayers. It created more jobs by reducing the top marginal rate on people. Whey you tell people that you get to keep more of your money if you move up to a higher income tax bracket, they are going to go out and do whatever it takes to earn more money.

They are going to quit finding places to hide their money. They are going to quit saving it. They are going to quit looking for loopholes. They are going to take that money and try to earn more money. They are going to put that money back into the economy; circulate it.

You can also think of it this way. Smal business owners are Subchapter S. Corporations, meaning they file their income taxes on a personal form. When taxes were high, they found places to hide their money rather than finding ways to earn more money. When taxes and regulations were reduced, this provided them an incentive to take their money out of hiding to invest in new capital, to expand their businesses, and to create more jobs and hire more workers.

They are going to expand their businesses. They are going to  invest in more capital. They are, in turn, going to create more capital. They are, in turn, going to create more jobs. You will then have more people working. With more people working, you save more taxpayers. With more taxpayers, the Treasury makes more money.

Add to this the fact that Reagan also signed bills causing the capital gains tax came down. The corporate tax came down. This meant that there was more money in the private sector and not at the government level.

So, as Reagan proved, capitalism works where progressivism fails at stimulating the economy. The same economic plan worked for Calvin Coolidge during the 1920s and John F. Kennedy during the 1980s.

Supply-side means leaving money in the hands of the people, rather than taking it and putting it into the hands of government officials. It means letting people keep more of the money they work so hard to work. It encourages them to find creative ways to be more productive and to earn more income.

This works to the benefit of everyone, from the top down. In fact, this is why supply-side economics is often referred to as "Trickle Down Economics." It offers an incentive for people at the top to take risks, and when they work out, it works to the benefit of everyone. And, as was the case during the 1980s, all classes of people benefited at nearly every level. The rich got richer, the middle class got richer, and the poor got richer.

Reagan was confident capitalism would work. He knew it worked for Coolidge and Kennedy before him. And, to the benefit of the nation, he was right. Reagan's economic prowess lead the nation into the longest period of economic expansion in the history of the United States. It was all due to "Reaganomics."

References:
  1. Rush Limbaugh, "A Supply-Side Economics Lesson," http://www.rushlimbaugh.com/daily/2009/04/09/a_supply_side_economics_lesson, accessed 11/17/16
  2. Paul G. Kengor, "No Contest: The Reagan Stimulus vs. the Obama One," USA Today, http://www.rushlimbaughforum.com/contest-the-reagan-stimulus-the-obama-one-t4299.html, accessed 11/17/16