QUORA: ‘How did Reaganomics get the country back on track?’

 QUORA: ‘How did Reaganomics get the country back on track?’

I posted this answer:

It’s a bit simplistic to say Reaganomics got the country back on track. It’s largely true, but there's more to the story. Reaganomics was part of a larger trend toward freer markets and globalization of trade. Reagan’s policies can’t get all of the credit. But they deserve a lion’s share of the credit, because he accelerated the deregulation trend of the Carter Administration and his radical restructuring of income tax rates—cutting top rates from 70% to 39% and ultimately to 28%—refocused the economic incentives from stagnation to growth.* 

Reagan’s policies corresponded to an amazing resurgence in American economic power, which in turn corresponded to dramatic global economic improvements. Reagan would avoid taking credit, instead placing credit with “We the People''—the “men and women who raise our food, patrol our streets, man our mines and factories, teach our children, keep our homes, and heal us when we're sick -- professionals, industrialists, shopkeepers, clerks, cabbies, and truckdrivers.” The result was a predictable outcome of freer markets—the economy took off, with a job and innovation-filled expansion that many did not expect, except of course Reagan himself. Reagan understood that people working and trading for personal benefit is the fountainhead of economic prosperity, and that more freedom and minimal government obstructionism was all they needed.

Let’s examine the record.

As the economic expansion took hold, after the 1980 - 82 “double dip recession”—the third and fourth in 14 years— GDP growth surged 8% growth out of the box, and averaged 4% from 1983 through the end of the century (compare that to today’s “new normal” of 2% growth). And that powerful expansion was accompanied by a phenomenon that was thought impossible by the prevailing 1970s logic of Phillips Curve economics: The strong expansion was accompanied simultaneously by falling inflation (12.5% to 3,4%), falling interest rates (19% to 8%), and falling unemployment (10.8% to 3.9%). 

Thanks to Britain’s Margaret Thatcher and other world leaders, such as Red China’s Deng Xiaoping, the successor to madman Mao Zedong, free market-oriented policies spread around the world, igniting a surging global trend of prosperity. Global extreme poverty plummeted from more than 40% in 1980 to less than 10% today. At the same time, the share of the world population living middle class (or higher) lives has passed 50%. How much Reaganonmomics inspired the global free market trend, as opposed to following it, is a matter of debate. But either way, Reaganomics played a significant role in advancing it, not least of which by giving voice to free markets and individualism.

All of this astounding progress now faces multiple threats, especially the growing attacks on global free trade, the resurgence of central planning ideologies, and the Environmentalists' war on reliable energy, especially fossil fuels. But as to the question, How did Reaganomics get this country back on track? Simple. He recognized that “In this present [1970s] crisis, government is not the solution to our problem; government is the problem,” and pursued policies to reduce government interference and thus give private individuals more freedom and incentive to work, innovate, take risks, and trade for their own personal betterment.

* [I emphasize rate, rather than tax, cuts. Between 1983, when Reagan’s first round of tax rate cuts were fully implemented, and 1989, Reagan’s last year in office, individual federal income tax revenues rose 55% as the economy soared, rising every year in that period. A tax policy that leads to strong increases in federal income tax revenues can hardly be called a tax cut.] 

Related Reading:

There's a Hole in the Middle of Doughnut Economics by Steven Horwitz

"Trickle-Down Economics": Anti-Capitalists' Insulting Portrayal of the "Common Man"

Global Poverty Decline Denialism: An anti-market ideologue tortures the data at The Guardian. By Ronald Bailey for Reason

The Growth of the World’s Middle Class May Be the Greatest Story of Our Age

Did the New York Times Just Vindicate Reaganomics?

We now have a Biden Doctrine. It makes me nervous.

EXCERPTS:

First, it is a fundamentally pessimistic view of America’s recent history. Sullivan recalls the glory days of American economic power after 1945, but then notes that in “the last few decades” that strength has waned. He talks about the hollowing-out of the country’s industrial base, the export of American jobs and the atrophying of industries. We “stopped really focusing on building,” Sullivan said, as he summarized the subsidies, tariffs, bans and investments that are at the heart of Biden’s new approach.

Ironically, only a couple of weeks before Sullivan made his speech, the Economist had a cover story on “America’s astonishing economic record.” It begins with 1990 — often used as the start of the rot in the narrative of decline — and points out that despite the rise of huge new economies such as China and India, the United States’ share of global gross domestic product has stayed roughly the same since then: around 25 percent. During that same period, America’s share of the Group of Seven’s economic output increased substantially, from 40 percent to 58 percent. Today, eight of the world’s 10 biggest companies are American. In 1989, only four were American (and six were Japanese). As for building, during these decades, the United States created and built the information economy, surely one of the greatest transformations and advances in human history.

In 1990, the great fear in the United States was of being overtaken by Japan, then seen as the predatory economic power that was eating our lunch. But, as the Economist notes in the same edition, in 1990, the income per person in the United States was just 17 percent higher than in Japan; today it is a staggering 54 percent higher. Look at demographics or energy or leading technology companies, and everywhere you see the United States in a dominant position. Perhaps we got something right.

It's Time to Bury the "Trickle-Down" Myth

Capitalism: The Unknown Ideal—Ayn Rand

Three Cheers for "Trickle-Down!"

Related Listening:

Carter Trumps Reagan on Deregulation [CATO, 14 minutes]