We Need More Reagan, Not Less

Had A "Reaganite" Plan

Executed the Plan

In a recent op-ed, David Brooks claims that what he calls the "post-Trump" Republican party will have to reject Reaganism in favor of a new organizing philosophy. While Brooks admits that the "Reagan orthodoxy" was "right for the 1980s," he also claims that this template is "increasingly obsolete."  In particular, Brooks claims that: "[t]he Reagan worldview was based on the idea that a rising economic tide would lift all boats.  But that's clearly no longer true." Analogizing to Thomas Kuhn's work on scientific revolutions, Brooks observes that today's Republicans "are still imprisoned in the Reaganite model . . . ask Reaganite questions [and] propose Reaganite policies." Because the Reaganite model no longer works, Brooks says, conservatism is in a crisis state and must develop a new model.   Among other things he suggests that conservatives turn away from economic theory and embrace Sociology because, in his words: "Homo economicus is a myth and conservatism needs a worldview that is accurate about human nature."

Brooks' assessment of modern Republican ideology rests upon a crucial assumption, namely, that a robustly rising economic tide does not lift all boats.  However, he offers no evidence to support this assumption.  To be sure, the current economic recovery has left out millions of Americans.  Some cannot find jobs and others must work two or more part-time jobs to make ends meet.  Total employment rose a mere 10 percent from 2009 through 2014. Median household income, is still below what it was in 2008, and poverty rates are still higher. In 2015, the United States experienced its 10th straight year of economic growth below 3 percent, apparently a record, though not the sort of record that any country brags about.  (GDP growth in 2015 was 2.4 percent.)

Still, these data shed no light whatsoever on the "Reagan worldview," or the usefulness of "Reaganite policies" derived from economic theories assuming that human beings are rational actors that respond to incentives.  In March, 1983 President Reagan, who had majored in Economics, predicted that his policies across-the-board tax cuts (inspired by John F. Kennedy), reduced regulation and free trade would produce an economic recovery that would be "powerful and sustained."  (The second photo above depicts President Reagan signing the Economic Recovery Tax Act of 1981.)  He was correct. Between 1983 and 1988 (inclusive), the economy grew at an annual average rate of 4.6 percent, more than twice the rate of growth during this most recent recovery. During the same period median real household income rose 10.9 percent and rose another 1.8 percent in 1989. The economy added 17,913,000 jobs, increasing total employment by 20.1 percent, twice the rate of the current recovery.  Exports skyrocketed as more productive U.S. industries won new markets abroad.  Tax relief allowed Americans in all economic classes to keep more of their income. Rules indexing the standard deduction and tax brackets for inflation preserved the value of the deduction and protected low and middle income taxpayers from the sort of "bracket creep" that had pushed Americans of modest means into higher tax brackets in the late 1970s.  A significant portion of the tax burden shifted from the middle class to those in the "top one percent" of the income distribution.

None of this is to say that the Reagan recovery improved the lives of each and every American.  Still, the difference between that recovery and the most recent one is stark indeed. It is little wonder that, less than two years into the Reagan recovery, the American people resoundingly reelected President Reagan in a landslide, i.e., 49 of 50 states and nearly 59 percent of the popular vote.  In so doing the voters rejected former Vice President Mondale's platform of higher taxes, Trump-like economic protectionism and more intrusive federal regulation.  The economy continued to grow into 1990, thus constituting the longest peacetime expansion in U.S. History.

This blogger believes that most Americans would be thrilled by an economic recovery similar to that which occurred between 1983-1990.  Any decision to reject the "worldview" that helped produce that recovery should be based on sound argument and hard evidence, not cavalier speculation.  We need more Reagan.  Not less.

Should Candidates (and Voters) Be More Optimistic?

Justified Optimism

Maybe Not

In a recent Washington Post opinion piece, Jonathan Capehart praises President Obama's optimism about America's future, optimism the President recently expressed in his final state of the union address. Capehart also analogizes President Obama's optimism to that expressed by President Ronald Reagan in the latter's 1989 farewell address.  In that address, President Reagan referred to America as a "shining city on a hill" that was, at the end of his administration, "more free, more prosperous, more secure and happier than it was eight years ago." Capehart also chastises the current field of Republican presidential candidates for rejecting such optimism. According to Capehart, these candidates repeatedly invoke Reagan, but "bombard us with gloom, doom and defeatism."

Capehart is certainly correct that both President Obama and President Reagan struck optimistic tones as their administrations came to a close.  He is also correct that many Republican candidates for President seem anything but optimistic about the nation's current trajectory.  At the same time, Capehart does not mention the fact that most Americas do not seem to share President Obama's optimism. For instance, two thirds of Americans believe the nation is "on the wrong track," compared to 55 percent early in President Obama's first term.  (Go here for these data.)  Only one third of Americans believe that today's children will be better off than their parents.  (See here.)  The rate of new business formation is near a 30 year low. Capehart does not consider the possibility that glum Republican presidential candidates are simply reflecting the mood of the people --- Republicans, Democrats and Independents --- they hope will elect them.

Of course it may be that the American people are simply unduly pessimistic about what the future holds for this country. However, a little reflection, informed by recent economic history, suggests that there is significantly less reason for optimism about the nation's economic future than there was when Reagan delivered his farewell address in 1989.  While President Reagan left his successor a booming economy resulting in robust job creation, President Obama's successor will inherit a tepid economic recovery which has left millions of Americans behind and with little or no prospect of improvement.

Like President Obama, President Reagan inherited a deteriorating economy.  When Reagan took office in January, 1981, the prime interest rate had just hit 21.5 percent, inflation was running over 13 percent, and unemployment was 7.5 percent, on its way to 10.8 percent in December, 1982.

Like President Obama, who proposed an economic stimulus package that Congress would later pass, President Reagan proposed a package of tax cuts also designed to stimulate the economy, and Congressman Jack Kemp led the Congressional efforts to enact Reagan's proposals.  (To his credit, President Obama would later award Kemp the Medal of Freedom.)   The plan, which cut tax rates for all Americans, was similar in design and rationale to that offered by President John F. Kennedy in 1962.  As previously explained on this blog, President Kennedy sold his plan as an effort to stimulate economic growth, reduce unemployment, and, ultimately, eliminate the short run budget deficit that such cuts would produce.   As President Kennedy explained in a December, 1982 speech to the Economic Club of New York:

"The purpose of cutting taxes is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring about a budget surplus."

Congress enacted President Reagan's proposed tax cuts in the summer of 1981.  While a portion of the cuts took effect immediately, most were phased in over the next three years.  His administration also accelerated the pace of deregulation. What followed was a veritable economic boom.  While the economy contracted in 1982, a recovery started in November of that year.  Over the six year period 1983 through 1988, the American economy grew at an annual rate of 4.6 percent on average.  (See here)  During the same period, total employment increased from 88,993,000 in January, 1983 to 106,906,000 on December 1, 1988, a 20.1 percent net increase. (See here).

The economy has not experienced a similar boom under President Obama, despite passage of his stimulus package.  The economy contracted during 2009 and began a recovery in the summer of 2009. Over the six year period of 2010 through 2014, GDP grew an average of 2.2 percent, less than half the rate during the Reagan boom, with annual growth never exceeding 2.4 percent.   During the same period, total employment grew from 129,717,000 in January, 2010 to 143,242,000 in December, 2014, a 10.3 percent net increase.  (See the sources cited in the prior paragraph for these data.)

In short, the rate of economic growth during the Reagan recovery was more than double the rate for Obama recovery.  Moreover, the rate of employment growth during the six years of the Reagan recovery was more than 60 percent higher than the rate during the first six years of the Obama recovery.  Nor is there any indication that the Obama recovery is picking up steam, with 2015 growth predicted to be a disappointing 2.5 percent.  (By contrast the economy grew 3.7 percent in 1989.)  It is little wonder that many Americans are pessimistic about the nation's economic future.  Even former President Bill Clinton recently expressed his view that, if elected, former Secretary of State Hillary Rodham Clinton would "do what needs to be done now to restore prosperity."  Like former President Clinton, many Americans are old enough to recognize robust economic growth when they see it, and they know this is not it.

Of course, GDP and employment growth are not the only indicators of national well-being.  A nation might choose policies that alleviate poverty or result in a more equitable distribution of income, even if such polices cause somewhat smaller economic growth.  However, there is no indication that slower growth has bought us greater equality or lower poverty.  Poverty rates are higher than when President Obama took office and lower than 1989, when President Reagan left office.  (See page 12 of this report.)  Income inequality is by many accounts on the rise.  The Reagan boom brought greater wealth and less poverty; the Obama recovery has been disappointing by comparison.

None of this is to condone the sort of pessimism that Capehart claims to see in today's crop of Republican candidates.  In 1980 then-citizen Reagan believed the country was moving in the wrong direction but was nonetheless optimistic about America's future.  In particular, he had faith in the power of free markets and individual initiative and a plan for unleashing both to serve the common good.  With the help of Congress, his administration implemented that plan, and the rest is (economic) history.  Hopefully one of the current presidential candidates will follow Reagan's example and articulate an optimistic vision for the nation's future coupled with a workable plan for making that vision a reality.

Conservatives Embracing Science, While the Left Balks

Accepts Science 

Ditto

Rejects Science/Thinks He Knows Better

Senator Marco Rubio (R-Florida) and Pat Robertson, both pictured above, have made news recently, both embracing the scientific consensus that the earth is 4.5 Billion years old.   As Senator Rubio, a Roman Catholic,   put it:  "Science says (the earth) is about 4.5 billion years old.  My faith teaches that's not inconsistent. . . . God created the heavens and the earth, and science has given us insight into when he did it and how he did it."   Mr. Robertson, a Southern Baptist and the Chancellor of Regent University, put things this way:

"Bishop Ussher [who opined that the Earth was created in 4004 BC] wasn't inspired by the Lord when he said that it all [creation of the Earth and Man] took 6,000 years. It just didn't. You go back in time, you've got radiocarbon dating. You got all these things and you've got the carcasses of dinosaurs frozen in time out in the Dakotas.  They're out there. So, there was a time when these giant reptiles were on the Earth and it was before the time of the Bible. So, don't try and cover it up and make like everything was 6,000 years. That's not the Bible."

Mr. Robertson's remarks won the praise of national luminary "Bill Nye the Science Guy," who expressed hope that Mr. Robertson would continue to press his view on the age of the Earth.  Previously Mr. Nye had argued that the belief that the Earth is 6,000 years old "threatens science."

Unfortunately, some public officials still reject basic scientific teachings.  For instance, as previously explained on this blog, President Obama's repeated claim that tax cuts caused the recent "Great Recession" contradicts basic economic science of the sort taught to thousands of college freshmen each year in the United States and around the world.  More recently, Vice President Biden (pictured above) joined the anti-science chorus, claiming, again contrary to basic economic science, that tax cuts and increased spending during the G.W. Bush Administration caused the Great Recession.  Here's what the Vice President said, during his debate with Congressman Paul Ryan.  According to the Vice President:

"And, by the way, they [Republicans] talk about this Great Recession [of 2008-2009] as if it fell out of the sky, like, 'Oh, my goodness, where did it come from?' It came from this man [Congressman Ryan] voting to put two wars on a credit card, to at the same time put a prescription drug benefit on the credit card, a trillion-dollar tax cut for the very wealthy. I was there. I voted against them. I said, no, we can’t afford that."

Like President Obama's claim about tax cuts, Vice President Biden's claim that deficit spending caused the recent recession is economic nonsense, akin to a claim that the Earth is flat or the center of the Universe.  Just as there is a scientific consensus that the Earth is 4.5 Billion years old, there is a longstanding scientific consensus that increasing the deficit, whether by tax cuts, increased spending or both will stimulate aggregate demand, increase employment and increase the nation's real economic output.  See e.g. N. Gregory Mankiw, Macroeconomics, 296 (7th Edition 2010) (explaining how tax cuts increase the budget deficit and thus aggregate demand and national output); Rudiger Dornbusch and Stanley Fischer, Macroeconomics, 73-83, 401-11 (2d Edition 1981) (explaining how tax cuts and spending increases can increase aggregate demand and thus national output).  The only exception is for cases in which the economy is already at full employment.  In such cases, deficit spending cannot increase output but can only result in inflation.  However, so far as I know, no one contends that the economy was at full employment when, say, Congress enacted the so-called Bush tax cuts in 2001.  In the same way, the economy was at less than full employment when President Kennedy proposed across-the-board tax cuts in an effort to "get the economy moving again."

Of course, there are other reasons to oppose budget deficits and the resulting increase in the national debt.  For instance, government borrowing to encourage consumption can crowd out private investment, thereby partly (but only partly) offsetting any resulting increase in national output.  A nation could decide to forgo higher GDP in the short run in the hopes that, in the longer run, increased private investment will increase national productivity and thus potential national output.  But it bears emphasis that this argument against increased deficits assumes that such deficits increase national output, contrary to Vice President Biden's assertion.

Oddly the economics profession has been relatively silent in the face of this Administration's rejection of basic economic science.  To be sure, hundreds of economists endorsed Mitt Romney in the recent general election.  Six of these individuals were past recipients of the Nobel Prize in Economic Science.  However, so far as I know, no such economist has called out President Obama or Vice President Biden for their rejection of basic science.  This is surprising, because the rejection of economic science can have serious real world consequences for millions of ordinary Americans.  (Imagine if, instead, the President and Vice President claimed that vaccinations do not work or that smoking does not harm your health.  Surely the relevant scientific professionals would (properly) be up in arms.)

Perhaps the economics profession needs its own "Bill Nye the Science Guy" to shame public figures who reject basic economic science. 

Is There A Student Debt Crisis?

Costs More Than Average Student Debt Burden

In a recent post on the Becker-Posner blog, Nobel laureate Gary Becker sheds some useful light on the controversy over growing student debt.  As Becker explains, such loans overcome a market failure caused by the (legal) inability of students to pledge their human capital and thus future earnings to lenders as collateral.   (Absent such collateral, private lenders would decline to lend or charge exorbitant rates.) Thus, he says, the availability of such loans provides access to a college education to many students who otherwise could not afford it.

At the same time. Becker also recognizes that student debt has risen significantly since the 1980s.   Indeed, as others have reported, student loan debt has reached $1 trillion dollars, an amount equal to Americans credit card debt and auto loan debt.  Becker attributes this rise to higher tuitio, viz. "[t]he proximate cause of the increase in student loans has been the sharp rise in tuition at both state and private colleges during this time period."   Two thirds of American college students take out some debt, and the average debt of those who do is $23,000.   That's less than the price of a Fiat-Chrysler Town and Country Minivan, pictured above, which has a manufacturer's suggested retail price of $29,995.

Unlike some pundits, however, Becker does not, like some on the right, chastise colleges and universities for high tuition or call for debt forgiveness like some on the left.  Instead he points out that college education, including an education financed with debt, has, since the 1980s, increased in value faster than increases in tuition.  (One might add that, despite these tuition increases, tuition and fees still pay only part of the cost of a college education; alumni, federal grants and, at public colleges, states, pay the rest.  Moreover, published tuition and fees are only a sticker price.  Many students receive discounts, including discounts of 100 percent in some cases.)   "As a result," he says, "the rate of return on college education in the United States – benefits net of all costs- grew greatly during the past 30 years[,]" thereby explaining why a larger proportion of young Americans have been attending college in recent years despite tuition increases.

Becker acknowledges that these debts can burden students after they graduate.  Still, he recognizes that the large returns from a college education make it relatively easy to repay them, given that college graduates earn on average $30,000 more annually than high school graduates.  Indeed, as Becker points out, graduates could readily repay even $50,000 in debt in short order with the higher earnings they receive as a result of a college education.

Of course, and as Becker notes, many college graduates are currently finding it difficult to obtain employment of the sort that such graduates have traditionally obtained.   Put another way, and as this blogger has explained in a related context, a strong macro-economy would alleviate many of the concerns about the economic sustainability of debt-financed higher education.  For instance, if unemployment were to fall to the level experienced during most years of the George W. Bush Administration or the Clinton Administration, college students would gladly borrow $23,000 or more to attend college, knowing that a college degree would significantly enhance their earnings prospects.  Unfortunately, the current economic recovery is very weak by historical standards, with no prospects for a strong recovery in sight. 

While Becker does not expressly say so, some of his observations imply that concerns about a "student debt crisis" are overblown or misplaced.  Capital markets and debt play an important role in a free society, allowing individuals with constrained liquity to make present investments that can pay dividends in the future, thereby benefiting individual investors and society at large.  Comparisons to debts taken on for consumption, e.g., the purchase of automobiles, are therefore misplaced.  Student loans exemplify this principle, allowing individuals of modest means to invest in human capital, thereby enhancing their own productivity, their own welfare and the welfare of society at large.  Such investments exemplify the economic dynamism necessary to economic growth and the expansion of economic opportunity.  However, until the Nation experiences a strong economic recovery, pundits on both sides of the aisle will likely continue to question the value of such investments, casting blame on a symptom of a much larger problem.

Lower Tax Brazil Overtakes Higher Tax Britain

Now Number Six

Brazil has apparently passed Great Britain to become the sixth largest economy in the world measured by GDP, according to this article in the UK Guardian.  (The United States is first, followed by China, Japan, Germany and France.)  Of course, Brazil's population of 203 million is more than three times that of Britain, with the result that Britain's per capita GDP is more than triple that of Brazil.  The Guardian article mentions several factors that it says account from Brazil's strong GDP growth relative to that of Britain.  For instance, Brazil has been exporting heavily to China, itself a rapidly growing economy.  Moreover, the banking and credit crisis in Britain, Europe and the United States has slowed the British economy as well as that of some of its trading partners.

The Guardian story leaves out another possible explanation for the divergence between British and Brazilian growth rates, namely, tax policy.  For, as previously reported on this blog, Brazil's top income tax rate is less than 30 percent, compared to a top rate of 50 percent in Great Britain.  (The top British rate, it should be noted, is the fourth highest in Europe, behind only Sweden, Denmark and the Netherlands.  In 2009, by contrast, Britain had the 13th highest rate in Europe.)  While Brazil has relatively high payroll taxes, one source reports that its tax to GDP ratio is nonetheless significantly lower than that of Britain's.  According to a previous article in the Guardian, some economists in Britain have contended that Britain's high tax rates are rendering the country less competitive internationally and slowing its growth.  Brazil's most recent triumph may be "exhibit A" supporting this assertion.  Nations rarely tax their way to prosperity.

Should Misleading Charts Accompany All Discussions of the Debt Ceiling?

Probably Not "Incoherent"

Useless Visual Aid

In a recent blog post, James Fallows, national correspondent for the Atlantic Monthly, asserts that one cannot both be concerned with structural budget deficits and simultaneously support the across the board tax cuts that President Bush convinced Congress to adopt early in his Administration. Fallows' main argument is a picture --- a chart, reproduced above, which originated in a recent opinion piece in the New York Times. The chart purports to quantify how various policy changes supported by Presidents Bush and Obama, respectively, have increased spending by the National Government and/or deprived the National Government of revenue it supposedly would have received. Among other things, Fallows claims that the chart "demonstrates the utter incoherence of being very concerned about the structural federal deficit but ruling out of consideration the policy that was the single largest contributor to that deficit, namely the Bush-era tax cuts." (emphasis in the original).

Fallows' assertion is unconvincing, to say the least. Here's why.

1. The chart inexplicably omits over $500 Billion --- the forgone revenue attributable to the two year extension of the Bush tax cuts to which President Obama agreed after the 2008 mid-term elections. (See this story.) Indeed, President Obama's own former director of the Office and Management and Budget, Peter Orzag, advocated such an extension shortly after he left the Administration. Fallows does not explain why we should ignore this forgone revenue.

2. The chart is also misleading in a more fundamental sense. In short, the chart is a gerrymandered portrayal of factors that drive spending, revenue and thus the deficit and resulting debt. In particular, the chart focuses exclusively on the fiscal impact of new programs adopted during the Bush and Obama administrations, respectively. Thus, the chart entirely ignores the cost of existing programs, adopted during previous administrations which, taken together, cost far more than the various programs and tax cuts portrayed in the chart. Indeed, according to one source, the National Government spent $28 Trillion in 2002-2010 alone. During 2002-2009, Fallows claims, the Bush tax cuts deprived the National Government of $1.8 Trillion in revenue, a figure that rises to about $2 Trillion if one includes the forgone revenue attributable to the cuts which Congress extended, with President Obama's agreement, after the 2010 mid-term elections. Thus, the Bush tax cuts equal a whopping 7.1 percent of the expenditures by the National Government during the period in question and are hardly the driving force in the current budget deficit, projected to reach $1.5 Trillion, or 10 percent of GDP, in 2011.

3. The chart ignores all sorts of tax deductions and loopholes, adopted before 2002, that, like the Bush-era tax cuts, deprive the National Government of revenue. Examples include the home mortgage interest deduction (including the deduction for second homes) and the tax exemption for employer-provided health insurance. (The former reduces annual tax revenue by $100 Billion per year.) Inclusion of these potential sources of revenue in the Fallows/New York Times Chart would reduce even further the apparent contribution of the Bush-era tax cuts to the deficit.

4. Finally, the chart and any arguments based upon it ignore entirely the long run link between structural deficits and economic growth (or lack thereof), a link emphasized by John F. Kennedy in his 1962 speech to the Economic Club of New York. As explained in an earlier post on this blog, JFK argued that across the board tax cuts during an economic downturn were the best way to encourage investment, work effort and economic growth and thereby, in the longer run, reduce the budget deficit. In JFK's own words:


"The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring about a budget surplus."

Of course, JFK did not believe that tax cuts alone would ultimately lead to a budget surplus. He also advocated spending restraint, arguing that reliance on government expenditures to stimulate the economy would "demoralize our government and the economy" and that government should not "spend more than can be justified on grounds of national need or spent with maximum efficiency."

In short, like Ronald Reagan two decades later, JFK believed that low tax rates were a precondition for economic growth and that tax cuts and spending increases had quite different impacts on the deficit over the longer run. Moreover, both Presidents advocated policies that helped innaugurate lengthy economic expansions and economic growth. Most Americans would gladly embrace the sort of "incoherence" that resulted in such strong and sustained economic growth and resulting job creation and economic opportunity.

France Rejects Obama-Style Stimulus Package

The Prime Minister of France has rejected calls by the French left for an "Obama-style stimulus plan." According to the International Herald Tribune, Prime Minister François Fillon has stuck by the French Government's $ 33 Billion plan to focus its stimulus package on building infrastructure and stimulating corporate investment in productive capacity.

According to Fillon:

"It would be irresponsible to chose another policy [i.e., the Obama-type stimulus sought by the left], which would increase our country's indebtedness without having more infrastructure and increased competitiveness in the end."

According to the IHT article, the French plan includes money for investments in roadbuilding, new power plants, modernizing France's electrical grid, improving rail facilities, rennovating ports, and improving water and natural gas distribution.

http://www.iht.com/articles/2009/02/02/business/frecon.php

Meanwhile, here in the United States, some are calling President Obama's stimulus package "Socialism in disguise."

http://www.foxnews.com/story/0,2933,483345,00.html

Whether or not the Obama/House plan is in fact Socialism, it is somewhat jarring to see a French Prime Minister criticize the US for being fiscally irresponsible ! The French stimulus plan focuses on improving the nation's overall productivity and not simply counter-acting the current slump.