Paul Krugman Asks Whether the Economy Is Headed Towards a “Lost Decade”

[mawilson 2,133]

Debt to GDP ratio was 32.5% when The Gipper took office and it was 53.1% when he left. Bush 1 managed to bring it up the 66.1%. Starting at that 66.1%, Clinton managed to leave office with a 56.4% ratio (first reduction since Carter) which Bush II then turned into a 83.4% ratio over his two terms. There's nothing revisionist about it. Just the numbers.

All they do is prop up the economy in the short term at the expense of future generations and call it "recovery".

[Mr. Big Dog 10,747]

And a very narrow view of what a good recovery is. You can cherry pick bad numbers out of any recovery and declare is a bad one. If your honest about it you must admitt the best recovery of the 20th century belongs to Reagan and supply side economics.

Based on what? Federal debt and deficts exploded under Reagan. Median wages decreased and the unemployment rate at the end of Reagan's two terms was only marginally better than what it was when he took office. I'm not sure what you base that success claim on.

Take Clinton's two terms, on the other hand and all the indicators are favorable. Unemployment was low when Slick Willy left, deficit spending was contained and the debt relative to GDP had actually decreased. Those were the days when things looked good.

Edited June 7, 2010 by Mr. Big Dog

[JohnSmith2007 353]

Based on what? Federal debt and deficts exploded under Reagan. Median wages decreased and the unemployment rate at the end of Reagan's two terms was only marginally better than what it was when he took office. I'm not sure what you base that success claim on.

Take Clinton's two terms, on the other hand and all the indicators are favorable. Unemployment was low when Slick Willy left, deficit spending was contained and the debt relative to GDP had actually decreased. Those were the days when things looked good.

I lived and worked through both administrations. Trust me, things were much better when Reagan left office than when Clinton did. The economy that Reagan inherited was as worse if not more so than the one Obama got. There is no comparison, things were much better after Reagan.

[Mr. Big Dog 10,747]

I lived and worked through both administrations. Trust me, things were much better when Reagan left office than when Clinton did. The economy that Reagan inherited was as worse if not more so than the one Obama got. There is no comparison, things were much better after Reagan.

Because you say so? The numbers don't show it.

[JohnSmith2007 353]

Because you say so? The numbers don't show it.

Sure they do. The economy was in the tank after Carter and was roaring along 8 years later. Much better than anything any president has done since.

[JohnSmith2007 353]

Economic Committee reported in April 2000:2

In 1981, newly elected President Ronald Reagan refocused fiscal policy on the long run. He proposed, and Congress passed, sharp cuts in marginal tax rates. The cuts increased incentives to work and stimulated growth. These were funda-mental policy changes that provided the foundation for the Great Expansion that began in December 1982.

As Exhibit 1 shows, the economic record of the last 17 years is remarkable, particularly when viewed against the backdrop of the 1970s. The United States has experienced two of the longest and strongest expansions in our history back to back. They have been interrupted only by a shallow eight-month downturn in 1990-91.

Even with the growing surplus, however, a small but vocal faction in Congress opposes any policies that would allow taxpayers to keep more of their own money through real tax cuts and that generally would shift power from the government to the people. This attempt to rewrite history should not be surprising. Proponents of additional government spending try to make the Reagan boom appear to be a bust because they fear that Reagan's success will help President Bush build popular support for lower taxes, further deregulation, and reduced government spending. But their rhetoric is easily countered by the evidence.

history confirms the soundness of the Reagan, and now Bush, approach to economic policy. Under President Reagan, federal revenues increased even with tax cuts, federal spending did not decrease, the country experienced the longest period of sustained growth during peacetime in its history, and the rich paid more taxes proportionately than they had before the tax cuts were implemented.

HOW DID THE REAGAN TAX CUTS AFFECT THE U.S. TREASURY?

Many critics of reducing taxes claim that the Reagan tax cuts drained the U.S. Treasury. The reality is that federal revenues increased significantly between 1980 and 1990:

Total federal revenues doubled from just over $517 billion in 1980 to more than $1 trillion in 1990. In constant inflation-adjusted dollars, this was a 28 percent increase in revenue.3

As a percentage of the gross domestic product (GDP), federal revenues declined only slightly from 18.9 percent in 1980 to 18 percent in 1990.4

Revenues from individual income taxes climbed from just over $244 billion in 1980 to nearly $467 billion in 1990.5 In inflation-adjusted dollars, this amounts to a 25 percent increase.

HOW DID REAGAN'S POLICIES AFFECT FEDERAL SPENDING?

Although critics continue to focus on President Reagan's budget "cuts," federal spending rose significantly during the 1980s:

Federal spending more than doubled, growing from almost $591 billion in 1980 to $1.25 trillion in 1990. In constant inflation-adjusted dollars, this was an increase of 35.8 percent.6

As a percentage of GDP, federal expenditures grew slightly from 21.6 percent in 1980 to 21.8 percent in 1990.7

Contrary to popular myth, while inflation-adjusted defense spending increased by 50 percent between 1980 and 1989, it was curtailed when the Cold War ended and fell by 15 percent between 1989 and 1993. However, means-tested entitlements, which do not include Social Security or Medicare, rose by over 102 percent between 1980 and 1993, and they have continued climbing ever since.8

Total spending on all national security programs never equaled domestic spending, even when Social Security, Medicare, and net interest are excluded from domestic totals. In addition, national security spending fell during the Administration of the senior President Bush, while domestic spending increased in both mandatory and discretionary accounts.9 (See Chart 1.)

HOW DID REAGAN'S POLICIES AFFECT ECONOMIC GROWTH?

Despite the steep recession in 1982--brought on by tight money policies that were instituted to squeeze out the historic inflation level of the late 1970s--by 1983, the Reagan policies of reducing taxes, spending, regulation, and inflation were in place. The result was unprecedented economic growth:

This economic boom lasted 92 months without a recession, from November 1982 to July 1990, the longest period of sustained growth during peacetime and the second-longest period of sustained growth in U.S. history. The growth in the economy lasted more than twice as long as the average period of expansions since World War II.10

The American economy grew by about one-third in real inflation-adjusted terms. This was the equivalent of adding the entire economy of East and West Germany or two-thirds of Japan's economy to the U.S. economy.11

From 1950 to 1973, real economic growth in the U.S. economy averaged 3.6 percent per year. From 1973 to 1982, it averaged only 1.6 percent. The Reagan economic boom restored the more usual growth rate as the economy averaged 3.5 percent in real growth from the beginning of 1983 to the end of 1990.12

HOW DID REAGAN'S POLICIES AFFECT THE FEDERAL TAX BURDEN?

Perhaps the greatest myth concerning the 1980s is that Ronald Reagan slashed taxes so dramatically for the rich that they no longer have paid their fair share. The flaw in this myth is that it mixes tax rates with taxes actually paid and ignores the real trend of taxation:

In 1991, after the Reagan rate cuts were well in place, the top 1 percent of taxpayers in income paid 25 percent of all income taxes; the top 5 percent paid 43 percent; and the bottom 50 percent paid only 5 percent.13 To suggest that this distribution is unfair because it is too easy on upper-income groups is nothing less than absurd.

The proportion of total income taxes paid by the top 1 percent rose sharply under President Reagan, from 18 percent in 1981 to 28 percent in 1988.14

Average effective income tax rates were cut even more for lower-income groups than for higher-income groups. While the average effective tax rate for the top 1 percent fell by 30 percent between 1980 and 1992, and by 35 percent for the top 20 percent of income earners, it fell by 44 percent for the second-highest quintile, 46 percent for the middle quintile, 64 percent for the second-lowest quintile, and 263 percent for the bottom quintile.15

These reductions for the lowest-income groups were so large because President Reagan doubled the personal exemption, increased the standard deduction, and tripled the earned income tax credit (EITC), which provides net cash for single-parent families with children at the lowest income levels. These changes eliminated income tax liability altogether for over 4 million lower-income families.16

Critics often add in the Social Security payroll tax and argue that the total federal tax burden shifted more to lower-income groups and away from upper-income groups; but President Reagan's changes were in the income tax, not in the Social Security payroll tax. The payroll tax was imposed by proponents of big government over the past 50 years, and it is they, not Ronald Reagan, who should be held accountable for its distributional effects.

Nevertheless, even if one counts the Social Security payroll tax, the share of total federal taxes increased between 1980 and 1989 for the following groups:

For the top 1 percent of taxpayers, from 12.9 percent in 1980 to 15.4 percent in 1989;

For the top 5 percent of taxpayers, from 27.3 percent in 1980 to 30.4 percent in 1989; and

For the top 20 percent of taxpayers, from 56.1 percent in 1980 to 58.6 percent in 1989.

On the other hand, the share of total federal taxes, if one includes the Social Security payroll tax, declined for four groups:

For the second-highest 20 percent of taxpayers, from 22.2 percent in 1980 to 20.8 percent in 1989;

For the middle 20 percent of taxpayers, from 13.2 percent in 1980 to 12.5 percent in 1989;

For the second-lowest 20 percent of taxpayers, from 6.9 percent in 1980 to 6.4 percent in 1989; and

For the lowest 20 percent of taxpayers, from 1.6 percent in 1980 to 1.5 percent in 1989.17

CONCLUSION

No matter how advocates of big government try to rewrite history, Ronald Reagan's record of fiscal responsibility continues to stand as the most successful economic policy of the 20th century. His tax reforms triggered an economic expansion that continues to this day. His investments in national security ended the Cold War and made possible the subsequent defense spending reductions that are largely responsible for the current federal surpluses. His efforts to restrain the expansion of federal government helped to limit the growth of domestic spending.

If Reagan's critics had been willing to work with him to limit domestic spending even further and to control the growth of entitlements, the budget would have been balanced five to ten years sooner and without the massive tax increase imposed in 1993. Today, Members of Congress from across the political spectrum should stand on the evidence and defend the Reagan record.

To the extent that President Bush's proposals mirror those of Ronald Reagan, his plan should be a welcome strategy to lower the tax burden on Americans and to make the system more responsible. If the advocates of big government in Congress cooperate with President Bush rather than merely continuing to fund obsolete, wasteful, and redundant programs, there is no limit to the prosperity that Americans can generate.

Peter Sperry is the Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

http://www.heritage.org/Research/Reports/2001/03/The-Real-Reagan-Economic-Record

[mawilson 2,133]

Sure they do. The economy was in the tank after Carter and was roaring along 8 years later. Much better than anything any president has done since.

It's easy to make the economy "roar" when you steal money from future generations of taxpayers.

[Texanadian 10]

One must remember what the economic climate was like at the time Keynesian economics became popular (mid 1930's). From 1929 to 1933, the amount of money in the economy had shrunk by 1/3rd. The Federal Reserve had been tightening during those years. And it held it's tight outlook through the 1930's until World War II happened. Looking at the banking system, again we had 1/3rd of the banks failing from 1929 to 1933. FDIC didn't exist yet. Do you think people were nervous about saving money in a bank?

Unfortunately due to the way banks loan out the same money several times, it's easy for good banks to have bank runs just like the bad banks got. If you deposit $1 into a bank (bank #1), the bank will keep about 10 cents of it and then loan out the other 90 cents to a different bank. Now the two banks will each have $1 of deposit on their records (actually $1.90) even though only $1 existed in the first place. Now if bank #1 has a run on it's funds, it's going to need to call in it's loans from bank #2. Bank #2 may have been financially strong with no problems. But now Bank #2 has to pay back bank #1 that $1 it borrowed. But.....you guessed it. Bank #2 has already loaned out that $1 to one of it's customers and now has to dip into money from somewhere else to pay back bank #1.

Now there are 3 varying ideas about the whys and results of the Great Depression. The Keynes approach was for government to spend it's way out of it and into a recovery. The Austrian school says that it was the over stimulated economy (easy credit) during the roaring 1920's that created the bubble and then burst of the great depression. Same theory about the early 2000's vs the economic fall out of 2007-2008. The Chicago school says that it was the monetary policy of the Federal Reserve bungling things in the start of the great depression that increased it from a moderately bad recession into a full blown crisis.

Unemployment stayed above 10% all the way through the 1930's until the start of WW2. When you take 12 million people out of the labor market and put them into the war, it's going to reduce unemployment.

Now as for Reagan and Clinton, again it comes down to the economic times they were in. Or to put it more bluntly, "being in the right place at the right time."

Let's not forget that Reagan lost in 1976 to Gerald Ford on the GOP ticket. I know of very few people who don't agree that a 50% top bracket is a better idea than the 70% bracket that existed when Reagan came into office. Reagan did raise taxes though. The Social Security act in 1983-84 eliminated the tax free payments for people receiving Social Security. And the rates went up for people paying into the system. But getting back to being in the right (or wrong) place at the right time. Reagan had the giant military budget of the 1980's trying to outdo the Soviets in the cold war. Clinton on the other hand came into office after the cold war ended. Military spending was much MUCH lower than it is now or during Bush II's term. This was the right thing for Clinton to spend less on the military budget. Clinton's pushing the top bracket up to 39% was still lower than the controversial move (at the time) of Reagan lowering the brackets from 70% to 50%.

Keynesian economics got sand kicked in it's face during the 1970's when we had stagflation. High inflation with high unemployment rates. The Keynesian idea simply wasn't working. Because high inflation is a sign of governments overspending. It was Paul Volker who was primarily responsible for the economic boom during the 1980's. He raised interest rates through the roof in order to get rid of the terrible burden of inflation. This caused the 1982 recession. No way around that. It had to happen. But since it happened right after the Reagan tax cuts, it was natural for the Democrats and Krugmans of the world to blame Reagan and his tax cuts for the '82 recession. Reagan does deserve credit for not trying to step in and "correct" the economy during that time. It's hard to stand aside and wait it out when the economy is in the tank......Once the inflation rates came down, we experienced the mid 80's economic boom. And why not? The 1970's tax rates were gone and the inflation burden had been reduced to a manageable level. Housing market came back after the 18% mortgage rates returned to the sub 10% levels.

Like I say, it was a matter of Reagan being in the right place at the right time. Volker was elected into office by Carter. And Carter was the one who started the deregulation of industry. It takes a number of years for Federal Reserve policy to eradicate inflation. It can't be done in one year. Volker started a steady rate of monetary policy around 1979 and it took until 1983 for it to really iron itself out.

[mawilson 2,133]

It's hard to stand aside and wait it out when the economy is in the tank......

Yet it's the right thing to do. Recessions happen for a reason. The economy needs to

deleverage and wring out imbalances. Any attempts to artificially prop up the economy with

stimuli, tax credits for home buyers and other spending programs will only delay the day of

reckoning and make it far more painful when the correction finally comes.

[ScottThuy 140]

Oh.. C'mon.. lets make sure everyone is making a "living wage" and bump up the minimum wage another few bucks.. That will make everything better.... won't cause additional inflation will it?

Its so azz backwards... make sure people get paid more money so they can spend more money and our consumption will go up.... but they forget the fact that the employers have to raise the price of goods/services sold to offset the increase in payroll...

Let the market correct itself... quit lending people money they cant afford to repay... its just another way to F with the not so free market....

If people actually earned salaries which represented thier true value to the market and only got loans they could afford to repay...(huge change in credit card/loan policies) the market would be far more stable... It's when some members in the game try to get over on others or try to influence others with $ for votes that the system goes awry...

They are trying to control something that has far too many variables in play to affectively manipulate..

Yet it's the right thing to do. Recessions happen for a reason. The economy needs to

deleverage and wring out imbalances. Any attempts to artificially prop up the economy with

stimuli, tax credits for home buyers and other spending programs will only delay the day of

reckoning and make it far more painful when the correction finally comes.

[Mr. Big Dog 10,747]

History confirms the soundness of the Reagan, and now Bush, approach to economic policy. Under President Reagan, federal revenues increased even with tax cuts, federal spending did not decrease, the country experienced the longest period of sustained growth during peacetime in its history, and the rich paid more taxes proportionately than they had before the tax cuts were implemented.

One wouldn't expect less from the boys over at Heritage. Aside from the raw numbers I have quoted earlier - rising debts and deficits, decreasing median wages and only marginally lower unemployment rates at the end of Reagan's two terms than what they were when he took office - even the Heritage foundation cannot deny the fact that federal outlays for means tested benefits increased dramatically under Reagan. That's not what happens in a sound and booming economy as people will earn their living rather than depend on Uncle Sam. Unless, of course, working no longer earns a living for a growing number of people. Which is precisely what happened in Reagan's boom - the pool of the working poor surely grew.

And just to put a bit of perspective onto the wisdom of rising tax receipts as a result of lower tax rates, this works to a certain point. Surely, when top tax rates are 60, 70 or 80%, lowering the tax rates will increase tax receipts. But there comes a point when lowering tax rates will lower the receipts. Otherwise, the maximum tax receipt would be had at a zero tax rate.