"What would Reagan do" about unemployment? Answer: Reagan raised taxes

Blog ››› ››› MIKE BURNS

In an op-ed headlined "Unemployment: What Would Reagan Do?" American Enterprise Institute vice president Henry Olsen stated: "There is only one instance since World War II of the U.S economy increasing the employment-population ratio by five percentage points in a decade: the recovery that followed Ronald Reagan's tax cuts in 1983." In fact, Congress passed the Reagan tax cuts in 1981, and economists say it did not lead the nation out of recession. In 1983, Reagan actually raised taxes to shore up Social Security.

Olsen's underlying argument is essentially a regurgitation of right-wing talking points: the Obama administration's policies are misguided and ineffective; Reagan's economic policies brought unprecedented job growth and prosperity. Accordingly, Olsen claims that following the Reagan tax cuts in 1983, "the employment-population ratio recovered less than two years after hitting bottom. The momentum continued for the rest of the decade, fueled by the 1986 tax reform that lowered the top marginal income tax rate to 28%, allowing America to employ the millions of late baby boomers, women and immigrants who sought jobs." He concludes: "Rather than tear down Reaganism, our leaders in Washington should heed its lessons and unleash the private sector that alone can pull us out of our doldrums."

However, the claim that Reagan ended the "1979-82 recession" with 1983 tax cuts is pure myth; economists attribute Reagan-era recovery to interest rate cuts not tax cuts and Reagan actually signed a tax increase in 1982 and 1983.

An August 1983 CBO report, titled "The Economic and Budget Outlook: An Update," concluded that "[l]ower interest rates after mid-1982 permitted the recovery to begin." The report also concluded: "A dramatic decline in inflation, a fall in interest rates from levels that were extraordinarily high to levels that are merely high, and the stock market boom have contributed to the improvement in economic conditions." Economist and Nobel Prize winner Paul Krugman similarly stated that when then economy was depressed during the recession, the Federal Reserve "cut interest rates from 13 percent to around 7 percent and the economy took off."

Even Michael Mussa, a member of Reagan's Council of Economic Advisers, wrote in an essay American Economic Policy in the 1980s (University of Chicago Press, 1995) for that when the Federal Reserve cut the discount rate a half percentage point on July 20, 1982, it "signal[ed] the beginning of what would become a four-and-a-half-year period of quite rapid monetary expansion. During this period ... the U.S. economy would substantially recover from the devastation of both inflation and recession."

Lowering interest rates right now isn't possible, because, as Krugman has noted, "Right now, the interest rate is zero. The Fed can't rescue us this time, and that's why we can't do the things we did in the '80s."

Furthermore, Reagan actually raised taxes in 1982 and 1983. In a July 9 article titled "What Would Reagan Really Do?" Newsweek reported that, "In 1983, he raised the gasoline tax by five cents a gallon and instituted a payroll-tax hike that helped fund Medicare and Social Security." That payroll-tax hike came on the heels of Reagan's 1982 tax increase, which Newsweek stated was "the largest tax increase in U.S. history" at the time. Moreover, Reagan repeatedly increased taxes in the years following "to compensate for gaps in the government's revenue stream by raising rates," including raising the gasoline tax, eliminating loopholes worth $50 billion over three years, and supporting the Tax Reform Act, "which hit businesses with a record-breaking $420 billion in new fees."

So, to answer Olsen's question, when faced with rising unemployment rates and a sluggish economy, Reagan raised taxes. As much as this fails to fit the right-wing Reagan narrative, it's an indisputable fact. And Olsen's refusal to acknowledge that fact casts real doubt on his claim that the Obama administration's policies are "unlikely to do the job" on the economy.

Posted In
Economy, Taxes
Network/Outlet
Wall Street Journal
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