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Has America Already Forgotten Ronald Reagan’s Success?

August 13, 2021 By E.J. Smith - Your Survival Guy

Then President Ronald Reagan in the Oval Office of the White House during his last term, Washington, D.C. By Carol M. Highsmith.

Those who forget history are doomed to repeat it. It’s a cliche, but true. It seems America has forgotten the lessons taught by President Ronald Reagan’s success. Chiefly, America seems to have forgotten the value of tax cuts and letting Americans keep more of their own money. Art Laffer and Stephen Moore remind them at The Wall Street Journal, writing:

Friday marks the 40th anniversary of Ronald Reagan’s first tax cuts—arguably the most consequential and controversial economic policy paradigm shift of the past half-century. The Reagan supply-side revolution went global. An analysis by the Organization for Economic Cooperation and Development found that the unweighted average top marginal income-tax rate among developed countries fell by a third, from 65% to 43%, after 25 years. Nearly every nation, from China to Costa Rica, imposes lower tax rates today than in the 1970s.

Alas, the U.S. needs to relearn the lessons of the Reagan tax cuts. President Biden has proposed a sweeping tax-policy reversal that would raise many tax rates—such as the capital-gains and death-tax rates—to levels even higher than in the Jimmy Carter years.

The U.S. economy was a wreck when Reagan took office, due to the combination of tax rates that rose to as high as 70% on some types of income and an inflation rate that hit 14% in 1980. The “misery index” (inflation plus unemployment) closed in on 22%, as a new gloomy term appeared in the economic lexicon: “stagflation.”

The Keynesian Democrats were out of ideas. The dean of liberal economists, Paul Samuelson, glumly advised that the only way to break the back of inflation was to tolerate another decade of very high unemployment. Reagan dismissed the austerity model and carried the banner of supply-side optimism. Borrowing from the young Rep. Jack Kemp, economists Robert Mundell and Mr. Laffer (one of the authors of this article) and these pages, Reagan persuaded Americans that the remedy to the decadelong malaise was to reduce the drag of regulatory and tax policy to encourage more work and production.

Lower tax rates, Reagan predicted, would reduce unemployment and help stabilize prices. This revolutionary concept wasn’t an easy sell even in the Republican Party. Many Republicans, including Sen. Barry Goldwater, had voted against the tax-rate cuts President John F. Kennedy advanced, and when Reagan proposed the idea, George H.W. Bush ridiculed it as “voodoo economics.” The Republican Senate leader, Howard Baker, called the policy a “riverboat gamble.”

The Economic Recovery Tax Act of 1981 cut rates for every income group by at least a quarter and brought the top tax rate down from as high as 70% to 50%. The Tax Reform Act of 1986 further reduced it to 28%. The bet paid off:

• Take-home pay rose for all income groups in the 1980s, and real median family income rose by nearly $8,000 (in today’s dollars) during the Reagan years. Real median family income climbed from $60,597 in 1981 to $68,299 in 1989, following steep declines during the Carter presidency. Tens of millions of Americans moved up the income scale in the 1980s; 86% of households in the poorest income quintile in 1980 had moved to a higher quintile by 1990.

• The 30-year mortgage-interest rate fell substantially—from more than 18% in 1981 to below 10% at the end of Reagan’s presidency. Inflation fell from nearly 14% in 1980 to less than 4% by the late 1980s. The misery index fell in half.

• Gross domestic product grew at an annual rate of 7.3% from 1981-89. As the late Robert Bartley, editor of these pages, put it in his 1992 book, “The Seven Fat Years,” that was the equivalent of “growing a new California.”

• From 1980 to 1990 tax revenues almost doubled in nominal terms even though most rates fell by more than half. The share of taxes paid by the richest 1% rose from 19% to 26% under Reagan and has subsequently grown to 40%.

• Reagan’s policies ushered in an unprecedented era of wealth creation. The Dow Jones Industrial Average before the Reagan tax cuts was at roughly 1000. Forty years later, it stands at 35000. The Federal Reserve Board calculates that the wealth of households in the U.S. has risen by nearly $100 trillion in real terms from 1980 to 2020.

The only complaint from liberal Democrats that carried much weight during the prosperity of the Regan era was that his policies allowed the debt to rise substantially. The national debt was 38% of GDP in 1983, but wealth was rising quickly. Compare this with Mr. Biden’s call for a deficit in the middle of an economic recovery that would raise the debt-to-GDP ratio well beyond 130%, three times what it was in Reagan’s worst year.

One of the most impressive repercussions of the Reagan tax cuts has been their staying power. While federal income-tax rates have meandered between 30% and 40% since Reagan left office, that’s a far cry from the 50 years before he took office, when the top tax rate never dropped below 63%. No serious politician considered raising rates back to their historic highs.

Until now. Mr. Biden wants to erase 40 years of progress and return to “That ’70s Show,” with runaway welfare spending and soak-the-rich economic policies. If Reagan were alive, we think we know what he’d say: “Well, there they go again.”

Action Line: Elect bold leaders who remember the lessons of the past. And if you can’t in your state, maybe it’s time to look for a better America.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.
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