Whoa!!! You actually believe that stuff? Well, I guess some education is in order:
Mrs. Clinton, meet Robert Mundell
Typically, Hillary Rodham Clinton got it all wrong. And her timing was especially bad. Three days after the Royal Swedish Academy of Sciences awarded the Nobel Memorial Prize in Economic Science to Robert Mundell, the intellectual godfather of Reaganomics in general and supply-side economics in particular, the first lady declared, "I don't think that Reaganomics and supply-side economics was the right direction for this country."
Recall that President Reagan inherited an economy characterized by a 13 percent annual inflation rate (two years in a row), rising unemployment, interest rates higher than 20 percent, a top tax rate of 70 percent applicable to so-called unearned income, annual, unlegislated, bracket-creep-induced tax increases affecting every wage earner, a currency under attack around the globe, a free fall in U.S. industrial competitiveness -- all the product of a thoroughly discredited Keynesian policy more adept at generating stagflation than non-inflationary growth. Would Mrs. Clinton really have preferred more of the same, something a second Carter term would have guaranteed? In fact, Reaganomics reversed the Carter policy mix, following the prescriptions advocated by Mr. Mundell --tight money to stop the inflation and supply-side tax cuts to spur economic growth and increased defense spending.
Though considered economic heresy by the Keynesian establishment, the successes of the Mundell-recommended policies are now utterly indisputable. Contrary to Keynesian predictions, which held that inflation could not be subdued in an environment of large tax cuts, the rate of consumer price inflation collapsed from 13 percent in 1980 to less than 4 percent in 1982. To be sure, the Fed's tight money policies produced a deep recession, for which Mr. Reagan was relentlessly blamed and repeatedly mocked for his determination to "stay the course." Who now will deny the sizable long-term benefits the economy achieved by defeating inflation, which was less than 2 percent last year.
Moreover, despite some backsliding on the marginal-rate, tax-reduction front in 1990 and 1993, today's maximum tax rates (39.6 percent for wage-and-salary, interest and dividend income and 19.8 percent for capital gains) are still substantially lower than the maximum rates Mr. Reagan inherited (50 percent for wage-and-salary income, 70 percent for interest and dividend income and 28 percent for capital gains). In addition, Mr. Reagan eliminated bracket creep by indexing tax brackets each year to account for inflation. With inflation subdued and net supply-side tax reductions still in place, albeit at a reduced level, the long-term results of Reaganomics are apparent to virtually everybody but the likes of Mrs. Clinton.
Yet, apart from Mr. Mundell and other supply-side gurus, who else predicted the prosperity that Reaganomics has produced? When Mr. Reagan began phasing in his 25 percent tax-rate reduction in 1981, who, besides supply-side optimists -- keenly aware of the incentive-producing effects of marginal tax-rate reductions -- would have believed that a nearly nonstop 17-year economic expansion, which has been interrupted by one of the shortest (eight months), most shallow recessions since World War II, would have been possible?
A discussion of Reaganomics would, of course, not be complete without addressing the budget deficit. So let's talk about it. In 1980, the federal budget deficit was $74 billion. It resulted from $134 billion in defense spending, $457 in non-defense spending and $517 billion in tax receipts. Between 1980 and 1988, total tax revenues increased by 75 percent (from $517 billion to $909 billion). This increase was not much different from the 82 percent growth in nominal gross domestic product (GDP). In 1988, Mr. Reagan's last year in office, annual defense spending had increased by $156 billion to $290 billion (compared to 1980). The 1988 deficit was $155 billion, reflecting an $81 billion increase over 1980's deficit. In other words, Mr. Reagan managed to increase defense spending by nearly twice the amount of the increase in the deficit. The defense buildup was, of course, indispensable in producing the Soviet Union's utter defeat in the Cold War. Apportioning part of this cost, in the form of debt service, to the future generations that will benefit from the Cold War victory hardly seems unfair.
The budget deficit peaked at $290 billion in 1992, four years after Mr. Reagan left office. How did the deficit nearly double in four years, especially when nominal defense spending was virtually frozen (inflation-adjusted defense spending declined by 9 percent) and tax revenues increased by 20 percent (nominal GDP increased by 24 percent)? The answer lies in an explosion of non-defense spending, which increased by 40 percent from 1988 to 1992, a growth rate that was 67 percent faster than the nominal growth of the economy. Reaganomics can hardly be blamed for the fact that Mr. Reagan's successor fed a Democratic Congress's insatiable appetite for non-defense spending.
When Republicans gained control of Congress in the 1994 elections, they imposed a modicum of restraint on nondefense spending, which increased by 17 percent between 1994 and 1998, compared to an increase of 23 percent in nominal GDP. Meanwhile, even at income-tax rates that were still substantially below the levels Mr. Reagan inherited, total tax revenues increased 37 percent (individual income-tax revenues increased by more than 40 percent) from 1994 to 1998, rising substantially faster than the growth rate of the economy and producing the first budget surplus since 1969. From here, that looks like complete vindication of Nobel laureate Mundell, Reaganomics and its supply-side component.
Perhaps Mrs. Clinton's refusal to acknowledge the facts results from her own experience. "If Reaganomics works at all," Mrs. Clinton wrote to her Whitewater business partner James McDougal less than two months after President Reagan signed the historic tax-reduction legislation in 1981, "Whitewater could become the western hemisphere's mecca."(sic) As we have observed before, Reaganomics was powerful enough to defeat the Soviet Union and propel the U.S. economy upon an unprecedented path of peacetime economic expansion. But even the will of Ronald Reagan and the intellectual candle power of Robert Mundell were not up to the task of rescuing a harebrained, bone-headed Ozarks real-estate deal and making Mrs. Clinton the rich woman she so desperately wanted to become. Perhaps that's her real complaint with Reaganomics and Mr. Mundell.
washtimes.com
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