Some Hard, Harsh Truths About the Cult of Reaganomics ("It's the GOV's Money; Not YOURS!")

The Seattle Times ^ | 6/10/04 | Froma Harrop

[KentTrappedInLiberalSeattle]

Ronald Reagan did some fine things, but the economic theory that bears his name was not one of them. Reaganomics made the world safe for today's reckless tax-cutting. And the public hardly understands the social upheaval these policies will soon unleash.

Reaganomics held that cutting taxes and reducing the size of government would let loose the nation's entrepreneurial juices and lead to economic growth. Note that the theory comes in two parts. The fun part is cutting taxes. The not-so-fun part is reducing government. Do the first part without the second, and you end up with budget deficits and an exploding national debt.

That's what happened. And far from cutting government, Reagan expanded it, mainly through increased defense spending. The debt tripled.

To his credit, Reagan raised taxes when the deficits got out of hand. Not to his credit, his tax increases mostly targeted working people. We refer to the infamous 1983 hike in Social Security taxes.

Social Security is supposed to be a pay-as-you-go program. That is, today's workers pay Social Security taxes to support today's retirees. The program had been running a small deficit. Rather than fix it with a small increase in Social Security taxes, Reagan pushed through a big hike, thus giving birth to the Social Security surplus.

The idea was that Americans should start paying more Social Security taxes to prepare for decades hence, when the enormous baby-boom generation retires. But not a cent was ever set aside for that purpose. The Social Security surplus was simply spent. Overtaxing for Social Security reduces pressure on the income tax, which hits upper-income Americans the hardest. Many workers with low or moderate incomes saw their total tax bills actually rise under Reagan.

Reagan also raised a bunch of excise taxes, which he liked to call "revenue enhancements." One of them, a 5-cents-a-gallon tax on gasoline, was not bad energy policy, but it was a tax that affected the rich and poor equally.

But what about all that economic growth in the Reagan years? How can we call that dumb luck? Easily.

When Reagan took over, the American economy was in bad shape. No doubt about it. But it was already on the launching pad for takeoff. It didn't matter who was president.

Jimmy Carter's new Fed chairman, Paul Volcker, had just killed the inflation monster, but at the price of a deep recession. OPEC was collapsing at that time, along with energy costs. So what greeted the new President Reagan? An economy ready for an upturn, with falling gas prices and inflation gone. You didn't need a rocket scientist to get that baby off the ground.

Economic growth can run largely on debt for a while, but eventually the markets get nervous, which they did in October 1987, when they crashed. Adding to the excitement, Reagan had deregulated the savings-and-loan industry, leaving the taxpayers to guarantee the S&Ls' junk-bond investments. The game eventually ended, and the first President Bush had to clean up the mess.

Like Reagan, the current President Bush is a big spender. Unlike Reagan, Bush has done nothing to slow the snowballing deficits.

And there's another difference. When Reagan took office, the baby boomers were approaching the peak of their earning power. Thus, the nation was better able to pay down its debt. But the boomers will soon start to retire. They will drain tax dollars, not contribute them.

So only simpletons will insist that as a percentage of gross domestic product, Bush's deficits are lower than Reagan's and therefore of no consequence. This totally ignores the "implied" debts to the baby-boom generation, which make for terrifying numbers.

Imagine a childless two-income couple that earns $80,000, borrows $20,000 and has no savings. Now think of another couple with the same finances but that plans to send triplets to college next year. They're not at all in the same financial boat.

The awful thing about Reaganomics wasn't so much Reagan's actual economic policy, even though it got mighty sloppy. It is the cult of Reaganomics: the idea that cutting taxes is a free lunch, and never mind spending or future obligations. In a very few years, when tomorrow's retirees find themselves at war with younger taxpayers, everyone will wish they had never heard the word.

[mrbillxx]

No one is to blame for the ballooning defecits of the 80's except for the dem controlled congress. Almost everyone of Reagan's initial budget requests were less than the approved budgets and were refused by the dems.