Americans of a certain age will recall that which was Reaganomics. The four objectives of Reaganomics were reduction of government spending, reduction of marginal tax rates on labor and capital, reduced regulation, and reduced inflation by controlling the growth of the money supply. There were no changes made to transfer payment programs such as social security and medicare. Defense spending, however, increased substantially. The top marginal income tax rate was reduced from 70% to 28% and the corporate income tax rate was reduced from 48% to 34%. Tax brackets were inflation adjusted. Most of the bottom marginal tax bracket was tax exempt. Social security and excise taxes were increased and some deductions were eliminated. Price caps were lifted from oil, natural gas, cable television, long distance telephone service, and shipping. Banking was deregulated and antitrust laws were changed. Federal regulation on foreign exchange of currency was lifted.
The major achievements of Reaganomics were the sharp reductions in marginal tax rates and in inflation. Moreover, these changes were achieved at a much lower cost than was previously expected. Despite the large decline in marginal tax rates, for example, the federal revenue share of GDP declined only slightly. Similarly, the large reduction in the inflation rate was achieved without any long-term effect on the unemployment rate. One reason for these achievements was the broad bipartisan support for these measures beginning in the later years of the Carter administration. Reagan‘s first tax proposal, for example, had previously been endorsed by the Democratic Congress beginning in 1978, and the general structure of the Tax Reform Act of 1986 was first proposed by two junior Democratic members of Congress in 1982. Similarly, the “monetarist experiment” to control inflation was initiated in October 1979, following Carter’s appointment of Paul Volcker as chairman of the Federal Reserve Board. The bipartisan support of these policies permitted Reagan to implement more radical changes than in other areas of economic policy.
Reagan left three major adverse legacies at the end of his second term. First, the privately held federal debt increased from 22.3 percent of GDP to 38.1 percent and, despite the record peacetime expansion, the federal deficit in Reagan’s last budget was still 2.9 percent of GDP. Second, the failure to address the savings and loan problem early led to an additional debt of about $125 billion. Third, the administration added more trade barriers than any administration since Hoover. The share of U.S. imports subject to some form of trade restraint increased from 12 percent in 1980 to 23 percent in 1988.
Reaganomics led to a severe recession in 1982. There was more than enough blame to go around for each of these problems. Reagan resisted tax increases, and Congress resisted cuts in domestic spending. The administration was slow to acknowledge the savings and loan problem, and Congress urged forbearance on closing the failing banks. Reagan’s rhetoric strongly supported free trade, but pressure from threatened industries and Congress led to a substantial increase in new trade restraints. The future of Reaganomics depended largely on how each of the three adverse legacies was resolved. Restraints on spending and regulation sustained Reaganomics. Increased taxes and a re-regulation of domestic and foreign trade would have limited Reaganomics to an interesting but temporary experiment in economic policy.
We now have a Presidential candidate in Willard “Mitt” Romney whose track record shows he wants to return to these same failed economic policies. History shows there is no “trickle down” effect from the wealthiest individual and corporate tax brackets. History shows that what brings the nation out of depressive and recessive economic conditions is government spending, more of than not as a result of real or imagined war or conflict. What will not work is asking for an increase in supply when there is no demand. That is Mitt Romney‘s proposed solution. Perhaps the Romney plan is to have the wealthy purchase widgets from one another. Perhaps the plan is to continue the “no-bid” contract policies of the George W. Bush administration. Whatever the plan, the federal government needs more revenue. That doesn’t occur by osmosis. If Mitt Romney is willing to sign the Grover Norquist pledge agreeing not to increase taxes then he must have a viable alternative plan for increasing federal revenue. He does. It is to cut from social programs. That is not conservatism. Conservatism is reducing the size of fiscal government. It is also not socially libertarian. True conservatism is fiscal conservatism and social liberty. Romney is definitely a neocon, in the truest sense of the term. He is a former liberal who is opposed to the principles of Lyndon Johnson’s “Great Society.” The Great Society was a set of domestic programs in the 1960s. Two main goals of the Great Society social reforms were the elimination of poverty and racial injustice. New major spending programs that addressed education, medical care, urban problems, and transportation were launched.
Regardless of political stance or affiliation, those Americans who lived through Reaganomics and the after effects thereof, including the Wall Street Stock Market crash of 1987, should agree we have no desire or inclination to return to such failed policies. They are how we got where we are. We are going to have to pay our way out of debt. The economists can argue over whether those ends are best served by a flat tax rate or a return to higher marginal tax rates. Either way, reason says that those with 99% of the wealth should be paying 99% of the taxes. It’s the American Way. Patriotism means responsibilities as well as rights. The right to capitalism and the responsibility to pay taxes for that right are as American as the Constitution itself. Tax loopholes are an extremely liberal interpretation of the 16th Amendment. Neither party is served by having a President who stands on both sides of the aisle. It could not be more clear Mitt Romney does just exactly that.