I admire Robert Reich,
because he has a social conscience. However, if I were writing about the current
Republican/Obama tax cut, I would not help the Republicans put Ronald Reagan's
name on it. Outside of progressive circles, which reflexively blame Reagan, the
40th president is still popular, because the 1980s were the last of the good
times. Who prefers 21st century America to the Reagan 1980s?
In his
recent article "Reaganomics Redux" in
Reader Supported News, Reich writes that
"Ronald Reagan came to Washington intent on reducing taxes on the wealthy and
shrinking every aspect of government except defense." As Reagan's first
Assistant Secretary of the Treasury for Economic Policy, often labeled both in
praise and derision "the father of Reaganomics," I would like to offer a
different perspective.
Reagan came to Washington
to put an end to stagflation and the cold war. Keynesian demand management had
the wrong policy mix. Easy money pumped up aggregate demand, but high tax rates
reduced the response of supply to demand. Consequently, prices rose. The problem
was reflected in worsening "Phillips curve" tradeoffs between inflation and
employment. As time passed, higher rates of unemployment were required to bring
down inflation, and higher rates of inflation were required to boost
employment.
Washington was concerned,
including Democrats in Congress, because stagflation threatened every category
in the budget.
The supply-side policy,
which some label Reaganomics, reversed the policy mix. Monetary policy was
tightened to lower aggregate demand, and marginal tax rates were reduced in
order to boost the response of supply.
The policy worked. The
economy ceased to experience worsening tradeoffs between inflation and
unemployment. I described the policy change in my book, The Supply-Side
Revolution, published after exacting peer review by Harvard University Press
in 1984.
The Reagan tax rate
reduction was modeled on the John F. Kennedy tax rate reduction, which was
strongly supported by Reich's Keynesian colleagues in Kennedy's time. Both the
Kennedy and Reagan tax rate reductions cut marginal tax rates (the rate of tax
on additional income) proportionally across the board. Everyone got roughly the
same percentage cut in tax rates.
Both the Kennedy and
Reagan tax-rate reductions raised distributional issues. As the higher incomes
are taxed at higher rates, those with higher incomes pay far larger dollar
amounts. Thus, when rates are reduced, those with higher incomes get more
dollars back. But proportionally, both tax rate reductions were equal for
everyone. Progressives have focused on who got the most dollars back without
acknowledging that lower income people were suffering the most from
stagflation.
The Reagan tax rate
reductions on earned income were proposed as 30% across the board phased in over
three years. If memory serves, when enacted, they were a bit less. Using the 30%
figure, the top tax rate on wages and salaries was reduced from 50%--the tax
rate on a 19th century American slave -- to 35% -- a higher tax rate than that
imposed on medieval serfs.
In 1980 the top tax rate
on investment income ("unearned income") was 70%. It was not Reagan, but the
Michigan Democrat William M. Brodhead who put the amendment on the Reagan tax
rate reduction bill to reduce immediately the top tax rate on investment income
from 70% to 50%.
Reagan had rejected the
Treasury's proposal to reduce the tax rate on investment income. At 4:27 p.m.on
February 13, 1981, the Dow Jones wire service reported: "The White House said
President Reagan had rejected the Treasury proposal to reduce the maximum tax on
unearned income."
Supply-side economics did
not originate with Reagan. Supply-side economics grew out of the policy process
in the US Congress. During the 1970s, I was a member of the congressional staff,
both House and Senate and personal staffs and committee staffs. My best
Republican allies were Jack Kemp and Marjorie Holt in the House and Orrin Hatch
in the Senate. My Democratic allies were far more powerful -- Russell Long,
chairman of the Senate Finance Committee, Lloyd Bentsen, chairman of the Joint
Economic Committee, and Sam Nunn on the Senate Armed Services
Committee.
Everyone forgets, but
House Speaker Tip O'Neill, a Democrat, had an alternative tax cut bill to
Reagan's. O'Neill's bill cut personal income tax rates by 15%, but had expensing
-- one year write-offs for business investments -- in contrast to Reagan's
accelerated depreciation for business investment. My effort to have the Reagan
administration compromise with Tip O'Neill in order to gain expensing was
blocked by White House chief of staff Jim Baker.
There were more supporters
among Democrats in Congress for the supply-side solution to stagflation than
there were on Wall Street. Indeed, Wall Street was the greatest problem that the
Treasury team faced. Wall Street believed that the Reagan tax rate reductions
would cause the double-digit inflation from stagflation to go even higher and
destroy the values of their stock and bond portfolios. Wall Street's two
prestige economists, known as Dr. Gloom and Dr. Doom, along with Dow Jones'
Barrons, regularly beat me up in print as a "Keynesian inflationist."
The reason for Reagan's
military buildup was to bring the Soviets, with their broken economy, to the
negotiating table to end the cold war. That was Reagan's second great
achievement. The military/security complex was opposed to ending the cold war
because of the implied cut in the vast military budget. It was Reagan's
chief-of-staff Don Regan who got the deal done during Reagan's second
term.
It was later
administrations that reneged on the deal Reagan struck with Gorbachev and
created a new war against "Muslim terrorists" and courted former Soviet
republics as members of NATO.
I did not support the Bush
tax cuts, because they have nothing to do with the economy's problems since the
collapse of the Soviet empire two decades ago. Reich does not acknowledge the
devastating impact on American incomes and employment of the offshoring of
middle-class jobs in manufacturing and professional services. The Soviet
collapse caused socialist India and communist China to decide to get on the
winning side of "the end of history." Consequently, for the first time US
corporations had access to the massive supplies of Indian and Chinese labor. The
large excess supplies of labor in those countries meant that US corporations
could hire workers at wages far below their productivity. Thus the savings from
replacing American workers with Chinese and Indians translated into higher stock
prices, higher shareholder earnings, and large bonuses for managements, thus
worsening the income distribution.
It is the
before-tax incomes of corporate CEOs that have exploded from 30 times the
average wage to 300 times. Annual Wall Street bonuses from extreme debt leverage
now exceed the lifetime earnings of workers. To blame the worsening income
distribution on tax-rate reductions is to ignore the facts.
Jobs offshoring has
resulted in both manufacturing jobs and professional service jobs, such as
software engineering and IT, being sent to India and China with a corresponding
decline in US employment, income and consumer demand.
Reagan's supply-side
economic policy has nothing whatsoever to do with the post-1991 offshoring of
American manufacturing jobs and tradable professional
services.
None of us in the Reagan
administration had any inkling that the Bill Clinton and George W. Bush regimes
would deregulate the financial sector and unleash greed and debt leverage to
levels that the world has never before experienced.
No one in the Reagan
administration realized that the demise of the Soviet Empire would result in an
American Empire whose annual trillion-dollar military budgets would be financed
by cutting Social Security, Medicare, and income-support programs for the
poor.
None of us in the Reagan
administration, with the exception of the neoconservatives whom Reagan fired,
would have supported the policies of the George W. Bush administration or the
Clinton administration, which launched a war against Serbia on false premises
just as Bush did against Afghanistan and Iraq,
Reagan was not perfect --
especially Ed Meese's war on drugs and the neocon's plots -- but the Reagan
administration had no intention of establishing American hegemony over the
world. Empire is a neoconservative goal, not a conservative one.
Supply-side economics is a
necessary modification to Keynesian demand management, not a conspiracy to
enrich the rich.