Trumped-up Reaganomics

Iwan Morgan is Professor of US Studies and Head of US Programmes at the Institute of the Americas, University College London, and the author of the forthcoming book, "Reagan: American Icon" , which will be published in the UK in October and in the US in January.

Ronald Reagan’s name has been invoked in every presidential election since he left office in 1989.  Both Hillary Clinton and Donald Trump have already done so in 2016.   Clinton used  a famous Reagan ad from the 1984 election to attack Trump’s dystopian view of the country’s future in her nomination acceptance address to the Democratic National Convention in Philadelphia on 29 July: “He's taken the Republican Party a long way, from morning in America to midnight in America.” Not to be outdone, Trump positioned himself as the 40th president’s legatee in his economic policy address, delivered in Detroit on 8 August, by avowing that his economic renewal program would have as its centerpiece “the biggest tax revolution since the Reagan tax reform, which unleashed years of continued economic growth and job creation.”

“It’s Morning in America Again” turned out be something of a false dawn if adjudged on the record of the Reagan-era economy.  By the time the ad was aired, the burgeoning fiscal deficits of the 1980s were accelerating the financialization of the American economy that had first become evident in the previous decade.  The US kept interest rates higher than those of other nations for much of the 1980s as a means of attracting huge inflows of foreign capital to fund the massive expansion in government borrowing.  The strong dollar that resulted from foreign demand for American assets created an import boom while also making exports uncompetitive, developments that were detrimental to domestic manufacturing.  Meanwhile, the growing availability of capital promoted the ascendancy of the financial sector within the broader economy.  In essence, therefore, the current malaise of blue-collar America dates back to the 1980s, the decade when well-paid jobs in manufacturing began to diminish, the working middle-class began to worry about job security, and income inequality – which had been narrowing throughout the twentieth century – began the growth track to today’s grossly uneven distribution of wealth.

Trump’s claim that substantial tax cuts, largely skewed towards the wealthy, will kick-start the US economy on the road back to greatness should also be treated with skepticism.  Conservative economist Bruce Bartlett, who largely drafted the Kemp-Roth tax cut that became the basis for Reagan’s Economic Recovery Tax Act [ERTA] of 1981, makes this point cogently in a recent New York Times article.  As he notes, high federal taxes had become a disincentive to investment and productivity gains by the end of the 1970s and double-digit inflation penalized middle-class families by pushing them into higher tax brackets.  The tax burden has shrunk significantly since then, however.  Federal income taxes on the median American family — the midpoint of U.S. incomes — have dropped by more than half since the 1980s. Accordingly, it is difficult to see how a new round of tax reduction could somehow stimulate sufficient new investment and consumption to bring back the glory days of economic growth.

When were the glory days is another issue surrounded in myth.  The strongest economic growth rates recorded since World War II occurred in the immediate postwar period (1947-53), the 1960s, and the 1990s (all of them eras when a Democrat was in the White House). The 1980s did not experience economic growth on the scale of these other periods: the real (inflation-adjusted) growth of GDP over the course of this decade was actually less than in the economically troubled 1970s. The greatest economic achievement of the 1980s was the conquest of inflation, which was mainly the work of the Federal Reserve’s tight money policy of 1981-82 – though this victory came at the cost of the worst recession since the 1930s.  When the Fed reversed course in 1982, there was a spurt in economic growth, but this was due far more to the relative easing of monetary policy rather than to the Reagan tax cuts, and the rate of sustained expansion was less than spectacular.  

 Of course, Trump is not the only GOP presidential hopeful to resurrect Reagan’s image as a tax-cutter in support of his economic program.  Mitt Romney did so in 2012, George Bush in 2000 and 2004, and Bob Dole in 1996.  What is obscured by this memorialization is that Reagan’s record on taxes was complex. He certainly promoted the largest tax cut in US history in the case of ERTA in 1981, but he then obtained the largest peacetime tax increase hitherto in US history – the Tax Equity and Deficit Control Act of 1982 – to prevent the budget sliding even deeper into the red, and he secured the most significant tax reform in US history in 1986.  The Trump camp would do well to study the last of these in more detail.  The Tax Reform Act (TRA) of 1986 simplified the tax code into two bands, gave fairly even tax cuts to each of these, and exempted many low-income working Americans from personal tax payments.  To avoid inflating the budget deficit, this largesse was balanced by levying higher taxes on corporations and investors and by closing a goodly number of tax loopholes that benefited the affluent.  In other words, Trump is mistaken in citing ERTA to evidence Reagan’s significance as a tax reformer.  TRA was far more important in making the tax system simpler and more equitable, yardsticks of progressive tax reform.  However, it did very little to improve growth rates despite reducing the top personal tax rate to 28 percent (way down from its pre-ERTA level of 70 percent).    

 Whoever becomes America’s 45thpresident faces a huge economic challenge. The complexities of the globalized twenty-first century economy mean that there are no easy solutions to the problem of how to spread the benefits of economic growth widely in US society.  If properly understood, the past can offer guidance as to what needs to be done, but cannot provide the whole answer. The Republicans need to get over their fixation on the 1980s, but the Democrats, too, should be wary of seeing the halcyon 1960s and 1990s as their sure-fire guide to better days ahead.