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

Calvin Coolidge leads the Roaring 20s

Calvin Coolidge (1872-1933)
U.S. President (1923-1929)

Silent Calvin Coolidge became president in 1921 after the untimely death of Warren G. Harding. Calvin would see to it that the economic policies of his predecessor moved forward.  By doing so, he helped move the nation through the greatest period of economic prosperity in the history of the United States. 

John Calvin Coolidge was born in Plymouth Notch, Vermont, on July 4, to John and Victoria Coolidge.  He was painfully shy as a child, so much so that he had difficulty making friends. He was also afraid to talk to his teachers, and for this reason he struggled somewhat with his schooling.

While this was true, he proved to be a great public speaker, and perhaps for this reason he made a great lawyer and politician.  He learned about law by reading for a Northampton law firm, and in 1897 he earned a license to practice law.  He began his political career a year later when he was elected as Northampton city councilman.

In 1906 he was elected as a representative to the Massachusetts legislature, of which he served two terms.  While other republicans opposed the women's suffrage movement, Coolidge supported it. After taking a couple years off to spend time with his young family, in 1911 he was elected to the senate.  

As occurs many times in world history, what sets one person above another is being in the right place at the right time.  During his second year as senator, Coolidge was faced with the difficult task of dealing with the strike of textile workers from the mills in Lawrence, Massachusetts. 

The strikers marched toward the mills in 1912 claiming that they were underpaid. It became so concerning that law officials of Lawrence called in the state militia to protect the mills and keep the peace. 

Coolidge was able to convince the mill to give a wage increase instead of a cut, and the strike was thereby called off.  This was a huge success for the young politician, as it would help set up the stage for his future success as a politician.

The Massachusetts Militia tries to keep order in Boston, 1918.

A similar event occurred in 1918 after Coolidge had been elected governor of Massachusetts.  The war had left many workers in the U.S. with low wages, and the police force of Boston was no different. They formed a union and went on strike.

Coolidge sided with the police officers, saying they deserved fair wages.  On the other hand, he thought it was dangerous for them to be on strike, because no one was defending the people.  So he called in 4,800 National Guard troops to police the city. With Coolidge's approval, the commissioner refused to rehire the striking workers and trained new officers were hired and trained to replace them.

When Samuel Gompers, leader of the Federal Labor Union, complained to Coolidge about the harsh treatment of striking police officers, Coolidge said, "There is no right to strike against the public safety by anybody, anywhere, anytime."

The city of Boston agreed to provide its police force with large salary increases and improved working conditions.  Yet Coolidge's successful handling of the Boston Police Strike, and especially those 15 words to Gompers, gave Coolidge national recognition. 

Also setting the stage for his future success as a politician was the work of other politicians.  During the Great War the highest marginal income tax rate was increased to 74 percent in order to pay off the debt.  Although, after the country became embittered in a depression, there were calls by the public, media, nearly every republican, and some democrats to cut taxes in order to spur economic growth. 

Amid the depression of 1920-1921, republicans won both houses of Congress, and the executive -- Warren G. Harding was elected president -- in a landslide election. Cutting income taxes was at the top of the agenda.

Harding's secretary of the treasury, Andrew Mellon, was a strong proponent of cutting taxes, even going as far to say that taxes had become so high that many people found ways to get around paying, resulting in loss of revenue. Plus he believed the high tax rate was a burden to economic recovery and growth.

In April 11, 1921, Harding called for an extraordinary session of Congress to revise the federal revenue and tariff laws. There were some who called for significant tax cuts, although others noted the ongoing expenses of paying off debt accrued during WW1. 

Ultimately, the bill that was signed by Harding cut the top marginal tax rate from 74 to 58 percent.

After Harding died, Silent Calvin Coolidge saw to it that the economic policies of Harding were continued.  He would sign the Revenue Act of 1924 that reduced the top marginal rate to 46 percent, and the Revenue Act of 1928 that reduced this rate to 25 percent.

On top of this, Harding, before he died, was able to cut federal spending by 40 percent, making him, and Coolidge, the only presidents ever to reign in both spending and taxes after passages of the 16th amendment allowing Congress to levy taxes on individuals and corporations.  

As a result of the Harding/ Coolidge spending and tax cuts, what occurred over the next several years was nothing short of amazing, and a quintessential example of what would ultimately be referred to as Supply-Side economics. 

Between 1921 and 1928 , revenue to the government rose from $719 million to $1164 million, or a whopping 61 percent.   So, through the hard work of both Harding and Coolidge, the 1920s was the greatest period of economic expansion in the history of the United States.  

The economy during the 1920s grew faster than any time in American history up to that time, and America became the richest country in the world. The stock market and land values soared, and there were more rich people than ever before.

Yet while the rich got richer, the middle class got richer and so to did the poor. The great part about this all was that it happened not by pushing forth progressive tax and spend programs, and not by robbing Peter to pay Paul, but by reducing the size and scope of the government, thus creating opportunities for all.  

People were happy during the 1920s, and this is best shown by songs such as "Happy Days are Here Again," by Richard Alger and Jack Yellen.

Without the burdens of government regulations and taxes, businesses had abundant resources to invent, create and produce. They were able to expand their inventories, build new buildings, and hire new workers.  The result was the lowest unemployment rate in the history of the United States.

Many corporations and individuals were raking in money like never before, and they obtained this money as a bi-product of the soaring economy. 

These excellent free market conditions lead to the Industrial Revolution, where entrepreneurs like Henry Ford were able to mass produce goods and services and make them abundantly available to the public at a decent price.  Skyscrapers were rising. Factories were becoming a common site,  and were hiring unskilled workers at a record pace. 

Electric appliances were making their way into homes, such as the dishwasher and washing machines, thus allowing women to finally get out of the homes and into the workplace.  This helped spawn the woman's movement which lead to women's suffrage.

It was during this time that luxuries such as the radio and telephone became common household objects, and vehicles such as the Model T were being purchased by people who never thought they'd ever be able to afford such a luxury.

In essence, this was the first time in American history where average Americans, even those who just a few years earlier were not very well off, were making enough money to not just to afford food and clothing, but material and luxury items to help them fully enjoy life (selfish things for selfish reasons).

Overall, there were plenty of jobs for everyone.  The rich got richer.  The middle class got richer.  The poor got richer.  And not only that, with the superfluous flow of money, people were happy too, hence the song: Happy Days Are Here Again.

Never before had there been a period of economic growth as what occurred during the Roaring 20s.  The gain in overall standard of living was unmatched by any historical period ever. 

This was called the roaring 20s. People were having fun, and it was the result of freeing society from the burdens of federal regulations and taxes.  It was an idea conceived by great men like Andrew Mellon and signed into law by great men such as Warren G. Harding and Calvin Coolidge.

Warren G. Harding creates the roaring 20s

Warren G. Harding (1865-1923)
U.S. President (1921-1923)

In 1920 Warren Gamaliel. Harding was elected President amid a sharp depression. To fire up the economy, he signed into law a big tax cut, and became almost instantly popular.

He appeared to be the perfect fit to be president, as he was very good at making friends, keeping the peace, and speaking in public.  He was a very successful newspaper man and senator, and so it was only fitting that he would be an equally successful president.

He was a conservative, meaning he was a proponent of preserving traditional American values, and limiting the size and scope of government in order to allow businesses the freedom to grow and prosper. Nominated in an era where voters were tired of progressives who kept passing bills in an effort to perfect the world, Harding seemed the perfect fit to be president.

Prior to the progressive movement presidents admired and respected the Constitution, and believed it did not give the executive the power to solve the problems of individuals and businesses.  Yet this changed with the Woodrow Wilson administration when he signed into law regulations to improve conditions for laborers, to make sure products sold were safe for consumers, and to assure fair market conditions.

Such regulations were needed for a long time.  The problem was that once the dam broke, once Congressmen realized they could impede upon constitutional restraint in order to move forth their agenda, they went overboard by creating a bunch of laws that impeded upon personal liberties, such as the 16th amendment  that allowed Congress to levy taxes on individuals and corporations, and the 18th amendment prohibiting the sale of alcohol in 1920.

These amendments now made it possible for a progressive Congress to push forth their, which was to create a complete euphoric society where there were no poor, no war, no crime. Yet there was a price to pay for all these new regulations, and it was that they had to pay fore them.  S

So nearly as as soon as the 16th amendment was signed in 1913 by Woodrow Wilson Congress swiftly acted by passing the Revenue Act of 1913, which lowered the basic tariff from 40-25%, and, to make up for lost revenue, re-instated the federal income tax.

By 1920 the top marginal income tax had risen 73 percent, and this was done mainly to pay off the war debt.  Following the Great War the economy spun into a sharp decline, resulting in the depression of 1920 and 1921.  During this time the gross domestic product plunged 24 percent, from $91.5 billion in 1920 to $69.6 billion in 1921.  Unemployment jumped from 2.1 percent in 1920 to 4.9 percent in 1921.

Yet this depression is often forgotten mainly because it was so short lived, and because of the Great Depression.  It was short lived because Warren G. Harding, lead by his brilliant secretary of treasury, former banker Andrew Mellon, had a vision that the tax rate was so high, and spending so out of control, that it was preventing the economy from growing.

Mellon and Harding wanted to return America to pre-progressive times when the president did not impede upon individual and business freedom.  They believed doing so greatly benefit the American economic system and American morale. 

The first thing they succeeded at doing was cutting spending by 50 percent. This made it so that government did not need to take as much money from individuals and corporations to pay for government run programs.  The next task for Harding and Mellon was to get a significant tax cut through Congress.  

On April 11, 1921, Harding called for an extraordinary session of Congress to revise the federal revenue and tariff laws. There were some who called for significant tax cuts, although others noted the ongoing expenses of paying off debt accrued during WW1. Ultimately, a bill was signed by Harding to cut the top marginal tax rate from 74 to 58 percent.

Unfortunately for Harding, he had hired some of his best friends to posts in his administration, and, as it turned out, they were wheeling and dealing behind his back. One of the great scandals that brought down the Harding Administration was the Teapot Dome Scandal, where his “friends” got rich selling oil that was supposed to be set aside for public use.

Half way through his second year in office he died of what was initially recorded as a stroke, although historians later determined that he probably had a heart attack.  He had been suffering from high blood pressure and chest pain for quite some time, and he failed to heed the advice of his physicians. However, there were also rumors swirling that he killed himself  because he couldn't face the fact that he had let the public down. There were also rumors that he may have been murdered.  Yet no evidence of foul play ever appears. 

Either way, he was still a very popular president at the time of his death.  Yet once word got out about all the scandals the populace became angered and his popularity plummeted.   Most historians, therefore, judge Harding as one of the worst presidents because he failed to hire good enough people to posts in his administration.  

Still, because of his economic vision to reboot the American economy, as he lay dying on August 2, 1923, voters were very happy with him.  In fact, the people loved Warren G. Harding. 

Only the facts point to the truth

There are those who say you can find an article online to support just about any argument.  But I would like to disagree with this on the grounds that the facts only support one side.

Surely you can find an opinion peace supporting any argument, but the truth is only on one side.  For instance, let's consider tax increases.  You will find articles supporting the notion that tax increases result in more government revenue.  They will argue: it just makes sense.

But there are others who argue that tax cuts create more governmental revenue. They will cite the Laffer Curve as evidence that if you raise taxes above a certain point revenue starts to decline.  In such instances, if you cut taxes so they are at or below this point, you will assure a steady inflow of tax revenue.

The supporters of this later theory will also be able to cite historical evidence in support of this theory, as Warren G. Harding/ Calvin Coolidge cut taxes and watched as the economy soared.  John F. Kennedy, Ronald Reagan, and George W. Bush cut taxes and saw governmental revenue nearly double in all instances.

So the evidence is only on one side.  Surely both sides will cite evidence, but just that it sounds good is not sound evidence.

Values and Priorities

There are many people who read the Bible, and every one of them might have a unique way of interpreting it. This actually occurred recently between myself and one of my patients. We actually both had unique interpretations about the Tower of Babel.

However, in the end, we both decided that every Christian, every person who believes in God, or studies the Bible, however religious, should get two things out of it.

1. Virtues: We must all be virtuous above all else
2. Priorities: We must have our priorities in order

Jesus said that the most important commandment is to believe in God, and the second most important commandment is that you should love your neighbor, and treat your neighbor as you would yourself.

If we can skim it down, if you put God first, then you are putting virtues first. If you are putting your neighbors second, then you are thus putting God first, and thus virtues first. If you are a virtuous person, then you will not only love your neighbor, you will be loved by your neighbor.

So it comes down to -- bottom line -- values and priorities.

Austrian Economics creates prosperity

The names "austrian school," or "austrian economics," may not sound familiar to most Americans, yet if we call it by it's modern name, perhaps you'll recognize it. It's modern name is supply-side, or trickle down, economics. Perhaps a more fitting name for it is free market economics.

Ron Paul, in his book "Liberty Defined," describes the history of this economic philosophy:

The school of thought is named for the country of its modern founder, Carl Menger (1840-1921), an economist at the University of Vienna who made great contributions to the theory of value.  He wrote that economic value extends the human mind alone and is not something that exists as an inherent part of goods and services; valuation changes according to social needs and circumstances.  We need markets to reveal to us the valuations of consumers and producers in teh form of the price system that works within a market setting.  In saying these things, he was really recapturing lost wisdom that had earlier been understood by Frederic Bastiat (1801-1850), J.B. Say (1767-1832), A.R.J. Turgot (1727-1781), and many more throughout history.  But history needs people like Menger to rediscover forgotten wisdom.

Andrew Mellon and Jack Kemp were two economists who renewed interest in this philosophy, encouraging Calvin Coolidge and Ronald Reagan respectively to adapt it.  Both Coolidge and Reagan reduced taxes and regulations, and with government out of the way, the American economies of the 1920s and the 1980s soared to its greatest heights in American history.

Paul continues:

The Austrian school champions private property, free markets, sound money, and the liberal society generally.  It provides a way of looking at economics that takes into account the unpredictability of human action (absolutely no one can quantitatively know the future) and the huge role of human choice in the way economies work (in markets, consumers drive decisions over production), and explains how it is that order can emerge out of the seeming chaos of individual action  In short, the ustrian School provies the most robust defense of the economic system of the free society that has ever been made.

The Austrian School "had achieved mainstream status before the so-called Keynesian Revolution of the 1930s swept away the older wisdom.