“Reaganomics” by John Edward

John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column:

I am, in fact, the legitimate heir to the Reagan movement.
Newt Gingrich

America must decide who to trust: Al Gore’s Texas cheerleader, or the one who stood with Reagan.
(The cheerleader reference is to Texas Governor Rick Perry)
Ron Paul

There’s no question, the older I get, the smarter Ronald Reagan gets.
Mitt Romney

That guy who was too conservative — you remember him? (A reference to Reagan)
Rick Santorum

I understand why Senator Scott Brown would want to invoke the Kennedy legacy (however feebly) when running for office in Massachusetts. I understand why a candidate for the Republican nomination for President would want to establish their credentials as a Reagan Republican.

Candidate Reagan promised to cut taxes, increase defense spending and balance the budget. By President Reagan’s second term, Ron Paul was no longer standing with him. In his 1987 letter resigning from the Republican Party, Congressman Paul observed, “Ronald Reagan and the Republican Party have given us skyrocketing deficits, and astoundingly doubled national debt.”

Whether you call it supply-side economics or trickle-down economics or voodoo economics, President Reagan’s economic policies left a legacy we should all run away from. I do not understand why anyone would want to be associated with Reaganomics.

Reagan ran the largest peacetime deficits on record to that point. When he took office, the national debt was 32 percent of Gross Domestic Product (GDP). By the end of his eight-year tenure, the national debt was 52 percent of GDP. By the time his Vice-President George H. W. Bush left office, it was 63 percent.

During the Reagan Presidency, federal government purchasing almost doubled. That excludes welfare programs and social security. After adjusting for inflation, total federal spending increased by about 3 percent per year.

The basic approach of supply-side economics is to lower taxes for corporations and the wealthy. In theory, lower taxes will increase investment.

In reality, lower corporate taxes have minimal impact on economic activity. Taxes are a very small portion of the cost structure of firms. A marginal decrease in taxes will seldom make a difference for a company considering an investment. Such decisions are driven by expected rates of return and prevailing interest rates.

There was a sharp increase in investment in 1984. That was primarily due to dramatic cuts in interest rates by the Federal Reserve. In addition, business expectations improved as the economy started to recover from a severe recession early in the Reagan presidency.

During Reagan’s time in office, the economy grew by a modest 2.6 percent per year. The growth had much more to do with the Keynesian stimulus effect of increased government spending and lower taxes on consumers than any supply-side stimulus.

When Reagan took office inflation was over 10 percent. The top marginal tax rate was 70 percent of income. The effective corporate tax rate was almost 30 percent of profit. There may have been a case to be made for supply-side adjustments in 1981.

Inflation has been under control for thirty years. The top marginal tax rate is now 35 percent. A recent Congressional Budget Office analysis found the effective corporate tax rate was 12 percent in 2011. That is the lowest rate on record since they started tracking it forty years ago.

In 2012, the rationale for supply-side tax cuts does not exist.

President Reagan sold, or was sold on, the premise that lower taxes would result in increased tax revenues. The infamous Laffer curve was the basis for this false hope. Legend has it that economist Arthur Laffer drew his curve on a napkin while explaining it to the Deputy Assistant to President Ford, Dick Cheney.

It may have looked good on the napkin but it did not work. Tax revenue grew by less than both government spending and the overall economy in the Reagan years.

President Clinton also proved it is a fallacy that cutting tax rates will increase revenue. Clinton raised tax rates, tax revenue increased rapidly, and he balanced the budget.

N. Gregory Mankiw is an economic advisor to Mitt Romney. He served as the chair of President George W. Bush’s Council of Economic Advisors. He is also the author of a very popular Economics text.

In the first edition of his textbook he referred to those who advised Reagan that lower tax rates will result in increased tax revenue as “charlatans and cranks.” Mankiw did support President George W. Bush’s tax cuts, but as a demand-side policy.

President Reagan also sold the idea that the benefit of tax cuts for the wealthy would “trickle down” to the rest of us. The result was one of the most dramatic and disturbing trend shifts in United States economic history.

Economists refer to the period after World Was II and leading up to Reaganomics as the “Great Compression.” After the excessive inequality before the Great Depression, America became a much more equal society.

The policies of Ronald Reagan reversed that trend. “The gap between rich and poor in the U.S. now exceeds that of all other wealthy developed nations, “as noted in a recently released report from the Boston Indicators Project,

Reaganomics opened up a fire hose of wealth advancement for the rich. Low-income earners barely felt the trickle.

George H. W. Bush had it right when he was running against Reagan for the Presidential nomination – Reaganomics was voodoo economics. Reagan’s legacy is a “greed is good” mentality that caused the excessive inequality we suffer with today. His legacy is “spend and borrow” policies. As offered by then Vice-President Cheney, “Reagan proved deficits don’t matter.”

I really cannot understand how Tea Party advocates can refer to themselves as Reagan Republicans. Instead, they should be worshipping at the feet of former President Clinton.

Next month: a discussion of Clintonomics.