Reagan Beacon of Economic Destruction

Published on Sunday, July 10, 2011 by Al Jazeera

Reagan Mythology is Leading US Off a Cliff

During Reagan's presidency, the US went from a creditor to debtor nation and marked a take-off for financial inequality.

by Paul Rosenberg

As things stand today, the US is hurtling toward a budget showdown in less than a month. Either President Obama will once again capitulate to extreme Republican budget-slashing demands, making Democrats seem as much of a threat to Medicare as Republicans, and virtually ensuring a GOP electoral sweep in 2012, or the US will default on its debt for the first time in its history, most likely plunging the world economy back into another five-continent recession, also costing Democrats the 2012 elections. These are the options left for a president and a political class completely divorced both from reality, and its own history of how one of the three greatest US presidents of all time steered the country from the brink of collapse eight decades ago

Corporate CowboyEntirely forgetting the real history of how Franklin D Roosevelt used activist government to save American capitalism from itself, the entire US political establishment is instead hypnotized by the false history woven around its most over-hyped president of all time: Ronald Reagan. Idolatry of Reagan's supposed tax-cutting wonders propels the now widespread economic belief that up is down, that cutting government spending is the way out of - rather than into - a severe recession. At the same time, idolatry of Reagan's supposed political wonders propels GOP extremists to ignore all other considerations.

Because of this hypnotism, America's political establishment has barely even begun to notice two unconventional possible ways out that remain, neither of which require anything from Congress, but both of which need bold presidential leadershipala FDR.

The first is to ignore the debt ceiling, relying directly on the 14th Amendment's statement that: "the validity of the public debt of the United States … shall not be questioned". The second is a proposal from maverick Republican Ron Paul to have the Federal Reserve Board destroy the $1.6 trillion in government bonds that it currently holds, which progressive economist Dean Baker recently wrote, "actually makes a great deal of sense". It might take some arm-twisting on Obama's part, but Congress has no say over the Fed, and central bankers have no great love of spreading financial panic.

In anything close to a sane world, either one of these two bold strokes would be widely hailed for avoiding a reckless threat to the still-fragile world economy. But we do not live in a sane world, and the idolatry of Ronald Reagan is one of the principle reasons why. This is why it behooves us to review some of the principle lies involved with Ronald Reagan's record, focusing specifically on the economy. What follows is but a brief rundown.

The idea that Reagan produced a uniquely booming economy is false

First, Reagan's record on the economy was not just exaggerated by his boosters, it's almost exactly the opposite of what they claim. It was a fairly ordinary time by the most common measurements of economic growth, looking good only in comparison with a selective time-slice of the 1970s. But once you start looking beneath the surface even the tiniest bit, the picture turns very dark indeed.

In terms of the most basic measure of economic growth - increase in gross domestic product (GDP) - the vaunted "Reagan boom" was an unremarkable period of time. If we look at Reagan's eight years, and compare them with Clinton's and JFK/LBJ's, Reagan comes in dead last, with 31.7 per cent compared with Clinton's 33.1 per cent and JFK/LBJ's 47.1 per cent. Only Nixon/Ford's eight years make Reagan look good, with a mere 26.2 per cent growth.

The idea that Reagan brought prosperity is true only for those at the top, not for average American workers

If we examine incomes, we discover that Reagan's eight years marked a real take-off for inequality, while average incomes stagnated. The income growth of the top once per cent was ten times that of everyone else during his term: 61.5 per cent versus 6.15 per cent. Under JFK/LBJ, the bottom 99 per cent actually did better: gaining 30.9 per cent compared with 26.9 per cent for the top once per cent. And while inequality continued to rise under Clinton, the bottom 99 per cent did more than twice as well as they did under Reagan, gaining 16.7 per cent compared with 56.6 per cent for the wealthiest one per cent.

The idea that Reagan was good for the American economy in general is false

Reagan was a disaster for the American economy in at least four fundamental ways:

Debtor Nation Status: Under Ronald Reagan, the US went from being the world's largest creditor nation to the largest debtor nation in just a few years - and we have remained the largest debtor nation ever since. In 1981, Reagan's first year in office, the US was a net creditor to the tune of $140.9bn. By 1984, that had shrunk to just $3.3bn - and the next year, the US shifted from being a creditor nation to a debtor nation for the first time in almost 70 years. By 1987, the US was a net debtor by $378.3bn - the largest debtor nation in the world. The figure rose to $532.5bn by the end of 1988, when Reagan left office.

De-Industrialization: While the percentage of industrial jobs in the economy had been declining since the 1950s, with the growth of the service sector, the raw number of industrial jobs continued to increase right up through 1979, just before the 1980/1982 double-dip recession. From that year onward, the number of industrial jobs began declining, with a smattering of years when the number would increase. In addition to the raw number of jobs declining, the number of unionized jobs and the number of jobs with American companies declined even further.

Personal indebtedness: The income stagnation that began under Reagan has had a devastating impact on personal savings. While it fluctuated considerably, the personal savings rate had more than doubled between 1949 and 1982, from 5.0 per cent up to 11.2 per cent. Ironically, one of the main stated purposes of the Kemp-Roth tax cuts, the basis for Reagan's 1981 tax cut bill, was to boost personal savings. Instead, they plunged precipitously, falling all the way down into negative territory by 2006.

Government Indebtedness: The idea that Reagan was "fiscally conservative" is false. The story of government indebtedness was even more bleak. Before Reagan, debt really wasn't a problem for America. From World War II to 1981, every president had reduced the debt as a percentage of GDP, except for the divided term of Nixon-Ford, which saw a tiny 0.2 per cent increase.

The debt-to-GDP ratio is much more significant than the debt alone, since the GDP represents the nation's total capacity to pay off the debt. And from WWII to 1981, the debt-to-GDP ratio fell from almost 120 per cent down to just down to just 32.5 per cent. The sharpest drop came early on, but even during the supposed "big government" heyday of the Kennedy/Johnson years, the ratio fell by over 16 per cent in eight years. Conservatives then might have complained about the debt - and they certainly did - but no one knowledgeable about economics took them seriously, because the debt grew significantly slower than our ability to repay it.

During Reagan's term, this changed dramatically. The ratio rose by over 20 per cent, and it rose another 13 per cent under his successor, George Bush Sr. It took a Democrat, Bill Clinton, to get the ratio headed down again - by almost 10 per cent during his two terms, before Bush Jr sent it skyrocketing again - by almost 28 per cent. It's rising fast under Obama as well - but that's to be expected as a result of the worst recession since the 1930s.

The idea that Ronald Reagan consistently opposed tax increases is false

The idea that Ronald Reagan always opposed tax increases is completely untrue. He raised taxes dramatically as Governor of California in 1967 - by a whopping 30 per cent. But he also raised them as president - 11 times. Sure, his 1981 tax increase, along with three smaller increases, was much larger than his total tax cuts. But his willingness to raise as well as lower taxes would have made him at least somewhat compatible with President Obama, and totally unacceptable to movement conservatives today, especially Tea Partiers.

Bruce Bartlett was a leading supply-side economist in the 1970s, who helped draft the Kemp-Roth tax bill as a staff economist for Congressman Jack Kemp. He went on to serve in both the Reagan and Bush I administrations. In an April 2010 blog post, listing Reagan's 11 presidential tax hikes and four tax cuts, Bartlett wrote: "It may come as a surprise to some people that, once upon a time in the not-too-distant past, Republicans actually cared enough about budget deficits that they thought raising taxes was necessary to bring them down. Today, Republicans believe that deficits are nothing more than something to ignore when they are in power and to bludgeon Democrats with when they are out of power."

Bartlett was obviously overstating his case, given how the debt skyrocketed under Reagan. But things would have clearly been much, much worse if Reagan had never raised taxes. And if Reagan were around today, he would no doubt be denounced as a "socialist" for all the tax increases he signed onto.

The idea that Reagan's tax cuts spurred job creation is false

As noted in Bartlett's table of tax cuts and increases, Reagan followed up his 1981 tax cuts with increases in 1982 and 1983. And for good reason: The unemployment rate - already high when Reagan took office - continued to skyrocket after his tax cuts were passed - peaking at 11.2 percent in 1983, when the jobless rate finally started to come down. The exact mixture of cause and effect over such an extended period may be subject to debate. But one thing is certain: Reagan's 1981 tax cuts did not magically result in job creation in anything like the way that conservatives nowadays mindlessly claim.

The idea that Reagan changed America's mind about taxes and the role of government is false

Political scientist James Stimson, author of Public Opinion in America: Moods, Cycles, and Swings, has constructed an index of economic liberalism based on hundreds of public opinion questions asked repeatedly over the years. This index reached a low-point in 1980 and rose dramatically for the next seven years, reaching a plateau at levels not seen since Nixon's first term, as if Reagan's rhetoric were convincing more and more people of the exactly the opposite of what he was saying.

This rise was reflected, for example, in four questions asked in the General Social Survey, the most-cited data source for social scientists after the US Census. Between 1980 and 1990, the number of people saying the government was spending "too little" nationally increased 27.4 per cent on health care, 32.9 per cent on education, 67.8 per cent on welfare and 46.7 per cent on the environment. The questions all reminded people that increased taxes might be required if more was spent.

What's more, 20 years after Reagan's election, in 2000, federal tax receipts as a percent of GDP were up 8.4 per cent over what they had been the year Reagan was elected, indisputable proof that government's role had ultimately not decreased across that time-span.

TIME Magazine Cover: Why Obama ♥ Reagan. Feb. 7, 2011The idea that Reagan was a singularly popular president is false

Reagan was quite fortunate in getting re-elected in 1984 when his popularity was particularly high, but that was not true of his record in general. According to Gallup, Reagan's overall average approval rating was only 52.8 per cent, lower than John F Kennedy (70.1 per cent), Dwight Eisenhower (65 per cent), GHW Bush (60.1 per cent), Bill Clinton (55.1 per cent), and Lyndon Johnson (55.1 percent). It's only modestly higher than George W Bush (49.4 per cent) and Richard Nixon (49.1 per cent).

Summing Up

Surveying all these lies in a single panorama, it should be clear that neither Reagan's economic record nor his political one should provide any case at all for embracing conservative economics. Quite the opposite: They clearly point to failure on both counts. What's more, the only reason his mythology is possible at all is because he significantly backtracked by raising taxes, when doing otherwise would have completely exposed the failure of his principal economic intentions.

President Obama is as drunk on Reagan's kool-aid as anyone else in Washington today. It will be difficult indeed for him to break the spell in time to save the country - and himself - from repeating the economic disaster that conservative policies led to just before he was elected.

One thing about Reagan is true, however: His wife did play a significant role in saving him from following ideologues into dangerous folly on a number of occasions. Perhaps Michelle Obama is America's last best hope. Perhaps she can see what her husband thus far cannot.

© 2011 Al Jazeera