President Reagan campaigned on and implemented a four point economic recovery program:
- Cut Marginal Tax Rates. The marginal tax rate is the tax rate that would apply to the next dollar earned. That is what most affects incentives to work, save, invest, start new businesses, expand existing ones, and take productive risks. When President Reagan entered office, the top marginal income tax rate was 70%. After his 1981 25% across the board tax rate cut, and his 1986 tax reforms, that rate was cut all the way down to 28%. But because of the booming economic growth that resulted, federal revenues still doubled while Reagan was President. Reagan’s tax rate cuts followed President Kennedy’s similar cuts, from the 91% top marginal tax rate when he first entered office, which created the 1960s economic boom.
- Deregulation. Regulation can impose costs draining private businesses just like taxation. Plus it can involve outright legal barriers to productive activity. Reagan actively pursued responsible deregulation for his entire two terms as President, which resulted in lower prices for consumers.
- Cutting Government Spending. Neither Reagan nor Trump believed in Keynesian economics, the established orthodoxy that increased government spending, deficits and debt are the means to economic recovery and growth. Reagan argued that increased government spending, deficits and debt just further drain the private sector of funds it can productively contribute to growth. That is why he cut $31 billion worth of public spending in 1981, close to 5% of the federal budget then, or the equivalent of about $200 billion in spending cuts for the year today. In constant dollars, non-defense discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983. In constant dollars, this non-defense discretionary spending never returned to its 1981 level for the rest of Reagan’s two terms. By 1988, this spending was still down 14% from 1981. Even with the Reagan defense buildup, which Reaganites claim won the Cold War without firing a shot, total Federal spending declined from a high of 23.5% of GDP in 1983 to 21.3% in 1988 and 21.2% in 1989, a real reduction in the size of government relative to the economy of 10%.
- Stabilizing monetary policy. When Reagan entered office, the US economy had been suffering from double digit inflation for years. Reagan openly and publicly supported restrained monetary policy guided by market prices for gold and other precious commodities. He later made appointments to the Fed committed to carrying out that policy. Almost like magic, inflation was cut in half after 1 year, and then cut in half again the next year, to 3% in 1983. Even today, that accomplishment merits official recognition and award for Reagan’s economic advisors, even posthumously if necessary.
The Reagan recovery started in official records in November, 1982, and lasted 92 months without a recession, setting a new record for the longest peacetime expansion ever.
During this initial 7 year recovery, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third largest in the world at the time, to the US economy. In 1984 alone, real economic growth boomed by 6.8%, the highest in 50 years.
Nearly 20 million new jobs were created during the recovery, increasing US civilian employment by almost 20%. Unemployment fell from double digits to 5.3% by 1989.
Real per capita disposable income increased by 18% from 1982 to 1989, even more for those at the bottom, meaning the American standard of living increased by almost 20%. The poverty rate, which had started increasing during the Carter years, declined every year from 1984 to 1989, dropping by one-sixth from its peak.
In their 2008 book, The End of Prosperity, leading “supply-side” economists and Reagan advisors Art Laffer and Steve Moore point out that this Reagan recovery grew into a 25 year boom, with just slight interruptions by shallow, short recessions in 1990 and 2001. They write:
“We call this period, 1982-2007, the twenty-five year boom — the greatest period of wealth creation in the history of the planet.”
Similarly, Steve Forbes wrote in Forbes magazine in 2008,
Between the early 1980s and 2007 we lived in an economic Golden Age. Never before have so many people advanced so far economically in so short a period of time as they have during the last 25 years. Until the credit crisis, 70 million people a year [worldwide] were joining the middle class. The US kicked off this long boom with the economic reforms of Ronald Reagan, particularly his enormous income tax cuts. We burst from the economic stagnation of the 1970s into a dynamic, innovative, high tech-oriented economy. Even in recent years the much maligned US did well. Between year-end 2002 and year-end 2007 US growth exceeded the entire size of China’s economy.
In other words, the growth in the US economy from 2002 to 2007 was the equivalent of adding the entire economy of China at the time to the US economy.
President Trump is now following this same four point economic program, updated for today. His tax reform plan focuses on cutting tax rates on business and industry, where America suffers today from the highest top marginal income tax rate in the developed world, probably the entire world, at nearly 40%, counting state taxes. The average worldwide is 22.5%, 18.9% in Europe, 20.1% in Asia.
Working with the Republican leadership in both houses, Trump’s tax reform plan proposes a 15% corporate rate, with a special “pass-through” rate of 20% on mostly unincorporated smaller businesses — sole prorpietorships, partnerships, subchapter S Corps, LLCs. America’s business tax rates would then go from the highest in the world to one of the lowest, from hopelessly uncompetitive to world leading.
Trump’s tax reform plan includes highly favorable, immediate, “expensing” or full tax deductions in the year incurred, for the expenses of capital investment. That would apply to investment in new tools and equipment making workers more productive, which translates into higher real wages for working people, which are determined by worker productivity. The nation’s leading tax policy experts at the Tax Foundation say such expensing has an even more powerful effect in promoting economic growth and increased jobs and wages than cutting marginal tax rates.
Trump’s tax reform plan also includes cutting tax rates on capital gains, dividends, and interest by 50%, abolishing the death tax, a special levy on lifetime accumulations of capital, and the alternative minimum tax (AMT). It would also provide for territoriality, or taxing international businesses in the country where income is earned, which would update the US tax code to follow the worldwide trend.
Repealing and replacing Obamacare would provide for another $1 trillion in tax cuts, mostly reversing marginal income tax rate increases on capital income, which are tax poison for the economy. The employer mandate, a counterproductive, effective tax increase on jobs, and the individual mandate, a tax increase on the middle class, would also be abolished.
President Trump’s budget for 2018 proposes $3.6 trillion in spending reductions over 10 years, the most ever proposed by any President in a Budget. That would reduce the federal deficit by $5.6 trillion over 10 years, when the budget will be completely balanced, without any tax increases. Gross federal debt today is 106% of GDP, which means we currently owe more than our entire economy produces in a year. But under President Trump’s budget, that would decline to 79.5% by 2027.
Trump’s budget proposes badly needed increases in defense spending, from $585 billion last year, to $722 billion by 2027, an increase of nearly 25%. That is pro-growth because increased national defense increases the security that capital investment in the country won’t get destroyed in a war. That would increase capital investment in America, promoting economic growth, jobs, wages and incomes.
Trump’s budget further proposes an increase in public and private infrastructure investment of $1 trillion over 10 years. Spending and investment in infrastructure can be pro-growth, because sound infrastructure supports increased production and GDP.
Finally, Trump’s monetary policies will be very similar to Reagan’s as well, promoting a stable dollar, neither soaring against foreign currencies, nor declining. That promotes growth because it assures investors that the dollars their investments earn will be as good and of as much value as the dollars they invest.
The real long term US economic growth rate has historically been 3.5% to 4% a year, which would double the economy every 20 years of so. Reagan’s economy averaged 4.5% real growth on average during the boom he generated in the 1980s. President Kennedy’s real growth averaged over 5% (5.2%) during the boom he generated during the 1960s. While Obama couldn’t get economic growth up over 2% while he was President, these Trump policies would likely produce a real economic recovery with growth of around 6% for a couple of years.
That is again because economies recovering from recessions grow faster than normal for a couple of years or so, until the economy catches up to its long term economic growth trendline. With Obama’s slow growth for almost a decade, the US economy is currently $3 trillion behind where it would be with just a normal recovery. After that initial booming economic growth, Trump’s consistently pro-growth policies would likely restore American economic growth to at least the same 4.5% annual real growth on average as during the 1980s.
That long term growth would restore America’s world leading, unchallenged superpower status. As economic historian Brian Domitrovic says in his book Econoclasts: The Rebels Who Sparked the Supply Side Revolution and Restored American Prosperity, “The unique ability of the United States to maintain a historic rate of economic growth over the long term is what has rendered this nation the world’s lone ‘hyper power.’”