Monday, October 12, 2009

A History of Ronald Reagan’s presidency; Economics.

Today we see that the Obama administration is considering giving short term tax breaks to companies to hire new employees admitting that tax cuts create jobs and increases destroy them. Since they are suddenly open to "new" ideas, and since we also know that Eric Holder has people trolling Facebook, Myspace, and other social networking sites along with conservative blogs hopefully they read this one. If you do Eric please give this to Obama, maybe as the second president from Chicago he can follow the wisdom of the first. Hey Barry, here is a little history lesson.

Going into the 1980 elections, on every front, the United States seemed in decline. Economically, socially, and in international relations, by 1980 America was in retreat. Yet at this point of weakness, the nation stood on the edge of its greatest resurgence since the months following Doolittle’s bombings of Tokyo. The turnaround began with an upheaval within the Republican Party.

Since the defeat of Goldwater in 64, the American conservative movement had steadily given ground. Nixon and Ford, at best, were moderates on most hot-button conservative issues, and other potential republican alternatives to Jimmy Carter, Nelson Rockefeller, for example, represented the blue-hair wing of the country-club GOP, which offered no significant change in philosophy from Jimmy Carter’s. Then onto the scene came a sixty-nine-year-old former actor Goldwaterite, and governor of California, Ronald Reagan. At one time a New Deal Democrat, who had voted for FDR four times. Reagan was found of saying that he “didn’t leave the democrat party, it left me.” Reagan contented that the liberals of the 70’s had abandoned the principles that made up the democrat party of JFK and Harry Truman, and that those principles - anticommunism, a growing economy for middle class Americans, and the rule of law, were more in line with the post-Nixon republican party.

Born in Illinois, he was the first president ever to have lived in Chicago, Reagan created an alter ego for himself with his portrayal of Notre Dame Football player George Gipp in “Knute Rockne, All American” in 1940, where he immortalized the line “Go out there and win one for the Gipper. When he was a student at Eureka College, he led a successful student strike aimed at restoring faculty members whom the school had fired, which later gave him the distinction of having been the only U.S. president to have led a student protest march. He headed the Screen Actors Guild in 1947, the Hollywood labor union for motion picture artists, energetically working to excise communists from its ranks, while at the same time endeavoring to clear the names of noncommunist who had been unfairly targeted by the FBI or HUAC. Just as the student strike had made him unique, the union experience marked him the only 20th century American president to have served in a union position.

In the general election campaign, Reagan ran on 3 simple promises: he would revive the economy through tax cuts and deregulation, cutting the size of government; he would wage the cold war with renewed vigor, and he would address the nation’s energy problems by seeking market solutions. He mollified moderates by naming George H. W. Bush, former CIA director, as his running mate. Turning Carter’s own once winning question around on Carter, the Gipper asked, “Are you better off today than you were 4 years ago?” He also dusted off the misery index, which had risen sharply under Carter. Short term interest rates, which had stood at 5.35% when Carter took office, had more than doubled to 12.29% in 1980.

On election eve, despite surveys showing Reagan trailing Carter, Reagan won so easily that the stunned democrats conceded the campaign while the polls were still open in California. Reagan carried the Electoral College 489-49, the most stunning and overwhelming loss for an incumbent since Hoover.

Liberal textbook writers have endeavored to distort and taint Reagan’s record more than they have any other subject except the Great Depression. They began by attempting to minimize the extent of Reagan’s massive and shocking victory by pointing to a low turnout, which in fact had been exacerbated by massive drives by liberals to register voters who in fact had no intention of ever voting.

Reagan was in fact widely read and perceptive too, in 1981, he had latched on to a path breaking book by George Gilder, “Wealth & Poverty,” which to the lament of mainstream academics, turned the economic world upside down with it’s supply side doctrine and stunning insights.

The Reagan Revolution shocked the FDR coalition to its roots. Even unions started to splinter over supporting some of Reagan’s proposals, and although publicly the democrats downplayed the extent of damage, privately democrat party strategist Al From was so shaken the he initiated a study to determine if Reagan was a fluke or if a broad transformation of the electorate had started to occur. He did not like the answers.

Going in, Reagan knew fixing more than a decade’s worth of mismanagement in energy, monetary policy, national security, and others areas of neglect would be a long-term process. It required a policy style that didn’t veer from crisis to crisis, but held firm to conservative principles, even when it meant disregarding short-term pain. Equally important, it meant that Reagan had to ditch the Carter “malaise” that hung over the nation like a blanket and replace it with the old-fashioned can-do optimism that was inherently Reaganesque.

The Gipper accomplished this by refusing to engage in Beltway battles with reporters, or even democrats on a personal basis. He completely ignored the press, especially when it was critical. Laughing and joking with democrats, he kept their ideology, which he strenuously opposed, separate from the people themselves. These characteristics made it intensely difficult even for Washington reporters and die-hard democrats to dislike him.

Reagan flustered his opponents, who thought him intellectually weak, precisely because he didn’t micromanage and thus devoted himself to the truly important issues, often catching his adversaries completely unaware. His grasp of the details of government, clear in his autobiography, “An American Life,” shows that in one on one meetings over details of tax cuts, defense, and other issues, Reagan had mastered the important specifics.

To say that Reagan had a single most important issue would be difficult, for he saw rebuilding America’s economy and resisting Soviet communism as two sides of the same coin. Nevertheless, the key to the second came from success with the first, reviving the economy had to occur before the nation could commit to any major military expansion to resist the USSR.

Reagan steadily gravitated toward supply side economics, touted by economists Arthur Laffer and Jude Wanniski, The supply-siders emphasized tax cuts to stimulate investment by making it more lucrative to build plants and start businesses instead of stimulating consumer demand, a Keynes and democrats had practiced for years. Cuts in the margin made a tremendous difference in purchasing and investing, the supply-siders argued, and the Laffer curve proved that tax cuts could actually increase revenues. It was a revival of Mellon’s and Kennedy’s tax policies, both of which proved extremely successful. In Reagan’s hands it became Reaganomics.

With the economy in such disrepair, Reagan easily persuaded Congress to back the concept, but he asked for an immediate 30% across the board tax cut, instead Congress, afraid of appearing to favor the rich, strung the cut out for three years in 5, 10, and 10% increments through the Economic Recovery Act, passed in August of 81. Spreading the tax cuts minimized the stimulus impact Reagan had sought. The economy recovered, slowly at first, then after the last segment of the cuts were in place, rapidly. Lower capital gains rates caused investors to pump money into the economy as never before; their reported taxable income soared sevenfold and the amount of taxes paid by the investor classes rose fivefold.

When the tax cuts started to have their effect, production, employment, job creation, and entrepreneurship all surged, soon achieving near record levels. True to the supply-side promise, government revenues soared, increasing by more than 1/3 during Reagan’s 8 years. Yet despite the oceans of new money and Reagan’s constant foot on the brake, government continued to spend more than it took in, increasing outlays by nearly 40% in the same period. To restrain spending, Reagan cut a deal with Congress win which the democrats agreed to hold spending down in return for closing tax loopholes, this in effect raised taxes on industries producing luxury items. No sooner had Congress closed the deal than it passed new higher spending, generating sizable, but not record, deficits.

One of the most oft-repeated mantras of the 80’s that Reagan’s military buildup accounted for the extra expenditures was utterly false. Military budgets did grow, but barely. Defense spending never much exceeded 200 billion per year, whereas social spending under the democrats consistently remained slightly higher. After Reagan left office, domestic, non-defense spending was nearly double that of the Pentagon’s budget.

None of this seemed to faze average Americans, who could see by their wallets that the economy was growing by leaps and bounds. At the end of 8 years of Reaganomics, America’s revived industrial might had produced 14 million net new jobs. This was nothing short of stupendous, given that since 1970, all European nations combined had not generated a single net new job.

Most of the “gloomsters,” as one economist called them, were stuck in the manufacturing mind-set, but even manufacturing had not declined as they claimed. Production as a share of U.S. GDP dipped in the 70’s, but rose throughout the 80’s, reaching 36.1% in 89, the highest level in American history.

Without question, however, America’s traditional heavy industry had been taking it on the chin since 1970, causing the formation of the word Rust Belt. While the rust belt suffered a whole new computer industry grew up. Silicone Valley took over for Detroit as the most important economic hub in the nation. By the end of 80’s it took half as much labor to purchase a gallon of milk as it had in 1950, the peak of heavy-industry America; and the cost in labor of a gallon of gasoline had fallen by 2/3.

The result of the tax cuts, therefore, was not only revival of the economy but also restoration of confidence in American productivity and purpose. In addition Reagan had mounted a strong counterattack on liberalism’s dependency mentality, cracking it with the assistance of “blue-dog” democrats who supported his tax relief. If he had not entirely rolled back government, Reagan had at least destroyed liberal assumptions that only a steadily growing government sector could produce economic stability and prosperity. Yet tax cuts and the resurgence of the American economy only constituted part of Reagan’s success.

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