Did Reaganonomics Set Stage For Growth In The 1990s?

See The real lessons of Reaganomics, at least as I see them by James Pethokoukis of AEI.

"If you want to promote pro-market policies by citing the success of Reaganomics, don’t do it the wrong way. And the wrong way is suggesting that the Reagan tax cuts paid for themselves. They didn’t (although their deficit impact was smaller than a static analysis shows). And that’s true whether you look at (a) income tax revenue/GDP or (b) real GDP growth to real revenue in the 1970s vs. 1980s, or (c) academic research.

Nor should you suggest the Reagan tax cuts immediately ushered in a period of crazy-go-nuts hypergrowth. They didn’t. Real GDP growth in the 1980s was about the same as the 1970s. Nor was their a pickup in productivity.

But, but, but … the way to judge a huge change in public policy is over the long term. “Making changes to the tax system and regulatory policies of a mammoth economy like the U.S. is like turning the rudder slightly on a supertanker: The initial effects are small, but it leads to a big shift in course over time,” economist Michael Mandel wrote in a fantastic 2004 magazine piece on Reagan’s economic legacy. This is especially true of sweeping tax reform and how changes in tax rates affect “investment in schooling, occupational choice, and business creation and development,” as AEI’s Aparna Mathur, Sita Slavov, and Michael Strain explain in “Should the Top Marginal Income Tax Rate Be 73 Percent?”

Looking at the economic performance in the 1980s alone may not provide the best evidence for the success of Reagan’s pro-market policies — despite their help in transitioning out of the volatile, high-inflation 1970s — especially given the role of monetary policy during that decade and natural post-recession rebound. Adopting a longer perspective brings the realization, for instance, that after 1980 only countries adopting aggressive pro-market reforms gained on America, in terms of per capita GDP. Sorry, Old Europe. But this from Mandel seems even more important:

In a way that few have realized, Reagan’s economic legacy is inextricably interwoven with the Information Revolution that the IBM PC helped kick off. His message of competitive markets, entrepreneurial vigor, and minimal regulation found a willing audience in an era of rapid technological change, where innovation was opening new opportunities seemingly every day. Reagan’s first term saw the creation of such future giants as Sun Microsystems, Compaq Computer, Dell, and Cisco Systems (CSCO) — the greatest entrepreneurial burst of new companies since the early 20th century. … Taken together, the changes Reagan championed in the tax system fostered innovation and entrepreneurialism even as they encouraged the development of venture capital and investment in human capital. And Reagan’s willingness to push for more flexible labor markets and less regulation helped companies react faster to economic changes, including new technologies. As a result, the impact of the policies Reagan set out in the 1980s, which slowly worked their way through the economy, helped lay the groundwork for the Information Revolution of the 1990s.

Mandel points out (a) the 1981 cut in top rates “made it far more attractive for people to raise their incomes by getting more education or taking the risks of starting a company; (b) the 1986  tax reform was especially beneficial to “idea-based” firms such that  companies such as Oracle and Microsoft that saw big drops in their average tax rates.

That stuff aside, these stories make to me — not surprisingly —  intuitive sense. I certainly want to believe them. Of course, as Mandel also points, the “Reagan helped cause the 1990s tech and productivity boom” argument isn’t universally held. And you say rising inequality and wage stagnation, I say 50 million net new jobs and a 40% rise in real incomes. As liberal economist Jason Furman once wrote before becoming an Obama economic adviser, “[People] are substantially better off than they were 30 years ago.” And in a way that few, especially on the left, would have predicted in 1980.

At the same time, you still have to pay the bills today.  The US debt-GDP ratio is three times higher than when Reagan took office, and we are only now feeling the fiscal impact of all those retiring Baby Boomers. So smart tax reform should focus on boosting long-term productivity (and providing middle/working-class tax relief as Reagan did) while also making sure it doesn’t make the red ink flow even faster. Meanwhile, when presidential candidate Hillary Clinton talks about the roaring 1990s, Republicans shouldn’t be afraid to suggest the Gipper and an embrace of optimistic, entrepreneurial capitalism just may have had a key role to play in the Long Boom and America’s continuing global innovation dominance."