There is a common misconception among a significant minority of Americans that former president Ronald Reagan was some kind of god who transformed the American economy from Hell in a Hand Basket to the New Utopia making everybody rich in the process.
That view, it would seem, is also held by one of his economic advisors at the time, Dr Arthur Laffer. Dr. Laffer was a member of President Reagan’s Economic Policy Advisory Board for both of his two terms (1981-1989).
He was also a member of the Executive Committee of the Reagan/Bush Finance Committee in 1984 and was a founding member of the Reagan Executive Advisory Committee for the presidential race of 1980.
He also advised Prime Minister Margaret Thatcher on fiscal policy in the U.K. during the 1980s. He was in Australia this week on a short speaking tour.
Dr Laffer is referred to by some as the father of supply-side economics. He is credited with the ‘Laffer Curve’ which somewhat simplistically points out that the optimal tax rate sits somewhere between 0-100%.
In an interview with Ticky Fullerton on ABC24’s The Business, he made the quite startling claim, “If you thought we did well under Reagan and Clinton, just wait until you see how well we’re going to do under the next president.”
By any measure, that’s a pretty big call. How he knows this was not clarified in the interview but it does call for some explanation of what really happened during the Reagan years.
Reagan supposedly favoured small government, yet over the eight years of his presidency spending as a percentage of GDP increased from 27.9% to 28.7%. He actually increased the size of government.
On the other side of the ledger revenues went from 25.1% of GDP in 1981, to 24.7% in 1988. So, apart from looking after the top end of town, he didn’t really reduce taxes at all.
He did in his first year, but then raised them several times thereafter. He never really cut spending at all. His budget deficits were legendary. His increases in military spending dwarfed any spending cuts.
The real hero, if there was one, for the American economic recovery in the 1980s was Paul Volker, a democrat, who served as chairman of the Federal Reserve under President Carter and re-appointed to that position by Reagan until 1987.
His method of tackling stagflation (high inflation and high unemployment), was to tighten the money supply by raising interest rates. They peaked at an unprecedented 21.5% in 1981.
On face value it worked, although not before causing great pain to the farming community and creating two severe national recessions.
But there were two other factors that may have rendered Volker’s actions unnecessary. One was the 1970’s oil crisis which was the main cause of the inflationary spiral.
The oil crisis spark a renewed search for more oil leading to an increase in production and a subsequent reduction in prices which fed through to a lowering of inflation.
The other was declining support for the union movement and their high wage demands, which eased the wage/price spiral.
Reagan came to the presidency after most of these factors had been set in motion. His initial tax breaks in 1981 made him look a hero particularly as things started to improve.
As a result he got the credit for work already done, similar to John Howard being credited for the 2000s economic success after Hawke and Keating had introduced all the necessary reforms to make that happen.
So, Laffer’s praise of the Reagan administration in lowering taxes seems quite misleading considering the earlier work by Volker when Jimmy Carter was president. It also ignores the impact of the end of the oil crisis in lowering inflation and the declining influence of the unions pay demands.
Laffer still believes that lower taxes are the key to economic growth. He supports the much discredited trickle down and rising boats theories and seems to ignore other areas of Reagan’s economic record.
By any measure, the national debt would be the biggest statistic by which Reagan should be measured. Over his eight year presidency, it doubled from $900 billion to $2.7 trillion. Not much evidence of spending restraint there.
Notwithstanding all that, plenty of people got rich with Reagan and a few, mostly bankers, got filthy rich. Most peoples’ living standards, however, only improved marginally.
Reagan also deregulated the finance industry enabling banks and Savings and Loan institutions to invest in ways nobody had ever dreamed.
It didn’t take much time for these groups to realise what they could do with other peoples’ money. During the Clinton years, some quite reckless sub-prime housing loans became available to people who could never pay them back.
There were plenty of warning signs of the dangers inherent in those decisions when the S&L’s began to fail, but nobody blamed Reagan.
Suddenly, financial institutions sprung up everywhere bundling ordinary peoples’ life-savings as investment stock together with bad mortgage stock, on-selling it to other institutions, insuring themselves with credit default swaps, all of which lay the groundwork for the Global Financial Crisis of 2008.
That is not to excuse Clinton of any responsibility but the reality is, it started with Reagan.
So, by what measure Dr Laffer expects the next American administration to be better than the Reagan/Clinton years is something of a mystery.
Perhaps someone out there can enlighten me.