7/9/2010

 

Dear _____,

 

The following table is excerpted (with slight modifications) from an email I wrote 15 years ago.  It shows that, contrary to Reagan's detractors' propaganda, he did not cause a significant lasting increase in the federal deficit:

 

 

           DEFICIT

  F.Y.  BILLIONS  %GDP                 ADMINISTRATION    REAGAN TAX CUT PHASE

  ----  --------  ----                 --------------    --------------------

  1979    40,183                       Carter

  1980    73,835                       Carter

  1981    78,976   3%                  Carter

  1982   127,989                       Reagan            Yr 1: 5% tax cut

  1983   207,818   6% = peak deficit   Reagan            Yr 2: +10%=14.5%

  1984   185,388                       Reagan            Yr 3: +10%=23% cut

  1985   212,334                       Reagan

  1986   221,245                       Reagan

  1987   149,769                       Reagan

  1988   155,187                       Reagan

  1989   152,481   3%                  Reagan

  1990   221,384                       Bush

  1991   269,521                       Bush

  1992   290,160                       Bush

  1993  ~300,000                       Bush

 

 

 

Note that Reagan also cut the top federal personal income tax rate from 70% to 28%, and increased military spending to the point that the USSR collapsed in national bankruptcy, in large part from trying to keep pace!  At the same time, U.S. unemployment fell from over 10% down to 5.3%, while inflation and the poverty rate also both simultaneously fell.

 

For comparison, note that our current federal deficit is approaching 11% of GDP.

 

 

Comparing Reagan to Carter w/r/t deficits...   The key fact to remember is that in Carter's final fiscal year (1981), the deficit was 3% of GDP.  In Reagan's final fiscal year (1989), the deficit was also 3% of GDP.  What's more, by 1989, the federal deficit was entirely due to the carrying cost of the federal debt.  The operational budget (the budget not counting the interest on the debt) was actually in surplus.

 

The bottom line is that Reagan (and Laffer) were vindicated.  Of course their critics will never admit it, but it is a fact.

 

Note that Laffer never suggested that the improved tax revenues which he predicted would result from improved growth following tax cuts would be immediate.  It actually happened faster than I expected.  (You can do the math: e.g., if a hypothetical five percent across-the-board tax rate cut resulted in a half-percent annual growth increase, then it would take almost 10 years before tax revenues would exceed their level at the old, higher rate.)

 

Note also that in Reagan's third fiscal year (FY1984), the federal income tax went down by 10% (the final phase of his tax cut plan), yet the deficit simultaneously fell substantially.

 

(OTOH, when Reagan left office, the S&L industry was teetering on the brink of collapse.  Shouldn't that liability be counted as part of the '89 deficit?  OTGH, when Carter left office, the Social Security trust fund was teetering on the brink of insolvency, and the economy was nosediving into the worst recession since the great depression.  Shouldn't that liability be counted as part of the '81 deficit?  I figure those sorts of complaints kind of even out.)

 

Lots of people are confused by this.  Quoting again from my 1995 email:

 

 

You're not along in being confused by this.  I heard Nina Totenburg say, on the air, in a prepared news story (not off-the-cuff remarks) that Reagan's 1980 tax cuts resulted in mushrooming deficts.  I groaned.  She of all people should know better.  It is her job to know this sort of thing, and she has a staff to help her get it right.  In fact, Reagan didn't even take office until 1981, and the first 5% of his gradually-phased-in 23% tax cut didn't begin until FY 1982.

 

(And the initial Reagan deficits had more to do with the severe recession that had already begun back in 1981, during President Carter's final fiscal year.)

 

(And, of course, Congress has more to do with setting spending levels and budget deficits than does any President.)

 

Crediting the recent decline in the budget deficit to Clinton would be a mistake, too.  It is largely due to three factors, which are not the result of Clinton policy changes:

 

1) The "peace dividend" has allowed cuts in military spending.

   (Clinton did increase the size of the cuts.)

 

2) The S&L bailout is now generating (rather than consuming) revenue,

   as the RTC sells off the assets that it had previously bought.

 

3) A decline in interest rates reduced the cost of servicing the

   federal debt.

...

 

 

This is (slightly edited) from another email, of similar vintage:

 

 

On day one of the first Reagan fiscal year (FY1982), which was when the first of Reagan's tax and budget changes went into effect, the country was already deeply mired in recession.  Inflation and taxes and interest rates were high, unemployment and poverty rates were rapidly worsening, communism was on the march throughout the world, and the U.S. military was in a terrible state of unpreparedness.

 

That was the legacy of Jimmy Carter and the Democrats.

 

Just over a year later, the recession ended, and beginning in early 1983 unemployment and poverty levels began to fall.

 

Here's what happened:

 

    Oct. 1, 1980     - Start of Carter's 4th fiscal year, FY 81.

                       Economy was weak, but not yet technically in

                       recession.

    Nov., 1980       - Reagan won election in a landslide.

    Jan., 1981       - Reagan took office.

    Jan.-Sept., 1981 - Reagan and Congress struggled over Reagan's

                       proposed changes, enacting many of them.

                       Economy worsened into deep recession.

    Oct. 1, 1981     - Day one of FY82 ("fiscal year 1982"), the first

                       Reagan fiscal year.  Carter's tax and budget

                       policies end, Reagan's begin.  Recession continued.

    ~Dec., 1982      - Recession ended.  By spring of 1983, unemployment

                       rate was finally falling instead of rising.

 

All the economic statistics continued to improve throughout both of Reagan's two terms.  Unemployment improved, year after year.  It fell from over 10% to about 5.3%.  Poverty levels fell steadily, too, though the improvement was slower: the percentage of Americans below the poverty line fell from 15.3% to about 13%.  (These figures can be found in almanacs.)

 

Per-capital personal income rose in every income quintile, from poor to rich.

 

Reagan, with the help of the Republicans who controlled half of Congress for six years, cut income taxes dramatically, in every tax bracket.  He cut the top income tax rate gradually, from 70% to 28%.  He eliminated entirely the requirement to pay income taxes for large numbers of working poor.  He eliminated most of the tax shelters which had enabled many rich people to avoid most income tax.

 

Here I quote Paul Greenberg in Bill Clinton's hometown newspaper, the Arkansas Democrat-Gazette, 10/31/1994, p. 4B:

 

"To quote the Urban Institute, which is scarcely a pro-Republican outfit, in the 1980s 'on average, the rich got a little richer and the poor got much richer... This pattern may be surprising to the general public, which has been led to believe that the poor were literally getting poorer over the past decade or two, and the incomes of the rich were skyrocketing.  This is simply not true.'"

 

But what about the federal deficit?  Didn't Reagan make it worse?

 

Nope!  Reagan inherited a budget deficit (in Carter's final fiscal year) which was 3% of GNP, and rising.  In Reagan's final fiscal year, the budget deficit was back down to 3% of GNP.  The peak was 6% of GNP, in 1983.

 

Most remarkably of all, Reagan also managed to bankrupt the USSR and win the cold war (with a bit of help mopping up, from Bush).  He restored the respect of the United States in the world, and restored the credibility of the U.S. military.  He arrested and reversed the march of communist tyranny throughout the world.  Today, democracy, rather than communist dictatorship, is on the march throughout the world.  Astonishingly, every country in the Americas except Cuba is now a democracy!  (If anyone ever says anything good about Castro, make 'em read "Against All Hope," by Armando Valladares -- that should cure 'em!)

 

To say that the Reagan Administration was successful is a severe understatement.  His success exceeded the wildest dreams of even his strongest supporters.

 

You had to have been there.  I am old enough to remember the 1970s, when there was a broad consensus that the United States was in irreversible decline, that communism was the future of the world, that we would never again see the prosperity and growth of the 1950s and early 1960s.  The USA was going the way of the British Empire, and the Roman Empire before that, we were told.  Our children would be poorer than us, because we were using up the last of our natural resources.  Our future was to be an era of "limits."

 

Reagan proved them all wrong, on every count.  The prosperity of the Reagan years exceeded even the prosperity of the 1950s and early 1960s.  He turned the "inevitable" victory of communist oppression into a joke...

 

 

BTW, don't feel bad.  Most people are confused about the history of Reagan's economic success -- such is the power of the Left's spin machine.  (If you want to understand how Reagan did it, read Revolution, by Martin Anderson.)

 

Even NCSU economist Mike Walden was confused about Reagan's record of declining deficits.   Ten years ago he mentioned the supposed soaring deficits of the Reagan years, and I corrected him, telling him that, as percentage of GDP, Reagan's deficits peaked in 1983, then fell.   He looked it up, discovered that I was correct, and sent me the following gracious email:

 

 

From: "Michael Walden"

Organization: North Carolina State University

To: dave@burtonsys.com (David Burton)

Date: Fri, 4 Feb 2000 08:54:24 -0500

 

From:                 David Burton

To:                   Michael Walden

Date sent:            Thu, 03 Feb 2000 23:37:25 EST

Subject:              Great presentation!

 

> Dear Dr. Walden,

>

> You delivered a terrific "mini-course" tonight, thanks for giving

> us all A+s.  :-)

>

> I'm the guy you wanted to exchange email with, about the peak

> deficit year (as % of GDP) in the 1980s.

>

> Regards,

>

> -Dave Burton

> Burton Systems Software: http://www.burtonsys.com/

> PO Box 4157, Cary, NC 27519-4157 USA

> Makers of TLIB Version Control 5.51 for Windows-NT/95/98/3.1x/DOS/OS2.

> Tel: 1-919-481-0149 or 481-6658   Fax: 481-3787   Home: 481-0098

 

Reply:  Dave:  Here are the deficit numbers as a % of GDP:

 

        1981:  2.6

        1982:  4.0

        1983:  6.1

        1984:  4.9

        1985:  5.2

        1986:  5.1

        1987:  3.2

        1988:  2.8

 

      So, yes, the peak was in 1983, but the % was still high in the

mid-1980s before declining in the late 80s.  - Mike Walden

 

 

I'll close with a "supply-side" quote for you, which predates Laffer:

 

"If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds..."

- Federalist no. 21, December, 1887  (Hamilton)

 

 
 
 

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