Varney, Moore revive Reagan tax cut myth to attack Obama's stimulus

Stuart Varney and Steve Moore claimed that that President Obama's stimulus plan has failed, while President Reagan stopped the recession of the early 1980s with tax cuts. In fact, economists have said the stimulus helped promote economic recovery, and that the recession was ended under Reagan primarily due to federal interest rate cuts.

Moore, Varney claim Obama stimulus failed to stop recession while Reagan tax cuts succeeded

Moore: Obama should “do what Reagan did, you cut the tax rates,” because stimulus has failed. On the June 29 edition of Fox News' Your World, The Wall Street Journal's Steve Moore stated that “the problem is we're not leading. We led under Ronald Reagan and showed the world how to get out of this crisis by cutting taxes, deregulating.” Guest host Stuart Varney then asked, “Is the present stimulus plan a failure?” Moore replied, “I don't think there's any question about it. I think the only person in America who doesn't believe that is Paul Krugman.” Moore added that Obama's “Plan B” should be to “do what Reagan did -- cut those tax rates.”

Varney: The stimulus “has not worked,” Reagan stopped recession by “unleash[ing] the power of private enterprise.” After Democratic strategist Julian Epstein cited several statistics demonstrating that the stimulus has had a positive impact, Varney stated, “We spent a trillion dollars and it has not worked,” and asked Epstein to “agree” that it “has not worked as advertised. It was advertised at keeping the unemployment rate at 8 percent. It has not worked as advertised.” After Epstein again cited increases in GDP and employment and commented that "[w]e have had in one year of economic recovery ... the most significant economic turnaround in the last 50 years," Varney stated: “When Ronald Reagan took office in January of 1981, interest rates were around 15, 16 percent, the prime was at 21 percent. Unemployment was 10 percent. Inflation was at double digits. That was a serious situation, very serious. And what did he do? He unleashed the power of private enterprise, of individuals. And we went on, straight on to prosperity for 20 years. That's what happened. ... Obama has done exactly the opposite. He has used government money. Government has been the agent by which he tries to refresh the economy, and it's failed. The economy is already slowing down again.”

Economists say stimulus helped economic recovery

Wall Street Journal: 70 percent of economists surveyed said stimulus helped. The Wall Street Journal reported on March 12 that 38 of the 54 economists it surveyed “said the American Recovery and Reinvestment Act boosted growth and mitigated job losses, while six said the legislation had a net negative effect.”

ABC News: Most on panel of economists “think the economy would be worse” without the stimulus. ABC News reported on February 18 that “most” of the economists on its panel “think the economy would be worse today without the big aid package, which totaled $787 billion and was signed into law by President Obama on Feb. 17, 2009.”

NABE: 83 percent say stimulus raised GDP. A February survey of 203 members of the National Association for Business Economics (NABE) found that "[e]ighty-three percent believe that GDP is currently higher than it would have been without the 2009 stimulus package (ARRA)."

USA Today: Surveyed economists said “stimulus package saved jobs.” USA Today reported on January 25:

President Obama's stimulus package saved jobs -- but the government still needs to do more to breathe life into the economy, according to USA TODAY's quarterly survey of 50 economists.

Unemployment would have hit 10.8% -- higher than December's 10% rate -- without Obama's $787 billion stimulus program, according to the economists' median estimate. The difference would translate into another 1.2 million lost jobs.

Independent and private analysts agree stimulus significantly raised employment over what would have happened otherwise

CEA: As of first quarter of 2010, ARRA raised employment “by between 2.2 and 2.8 million.” In its third quarterly report on the American Recovery and Reinvestment Act of 2009, the Council of Economic Advisers (CEA) stated: “The CEA estimates that as of the first quarter of 2010, the ARRA has raised employment relative to what it otherwise would have been by between 2.2 and 2.8 million. These estimates are similar to those of other analysts, and are broadly consistent with the direct recipient reporting data available for 2009:Q4.”

CBO estimates job impact of between 1.2 and 2.8 million. CBO estimated in May that as of the first quarter of 2010, the stimulus package "[i]ncreased the number of people employed by between 1.2 million and 2.8 million" and "[i]ncreased the number of full-time equivalent jobs by 1.8 million to 4.1 million compared with what those amounts would have been otherwise." CBO also estimated that the unemployment rate would be 0.7 percent to 1.5 percent higher today without the stimulus package.

IHS/Global Insight estimates job impact of 1.7 million “by the first quarter of 2010.” stated on February 17 that "[u]sing updated estimates provided to PolitiFact, IHS/Global Insight estimates that 1.7 million jobs will be created or saved by the first quarter of 2010." The CEA report also cites this estimate from IHS/Global Insight.

Moody's estimates job impact of 1.9 million by the first quarter of 2010. The post further stated that "[u]sing updated estimates provided to PolitiFact ... Moody' estimated that 1.9 million jobs will be created or saved" by the first quarter of 2010. The CEA report also cited this estimate from Moody's

Macroeconomic Advisers estimates job impact of 1.5 million in first quarter of 2010. The CEA report stated that Macroeconomic Advisers estimates that the Recovery Act raised employment by 1.46 million as of the first quarter of 2010, citing an analysis provided to CEA.

Economists attribute Reagan-era recovery to interest rate cuts

Federal interest rates dropped throughout early 1980s recession, but are already currently at near-record lows. The recession to which Varney and Moore referred began in July 1981 and ended in November 1982. The federal funds rate peaked at 20 percent in late May 1981 and dropped to 9.5 percent by mid-October 1982, while the discount rate peaked at 14 percent in early May 1981 and dropped to 9.5 percent in mid-October 1982. By contrast, the current federal funds rate is between zero percent and .25 percent, while the primary discount rate is at 0.75 percent and the secondary discount rate is at 1.25 percent.

CBO: “Lower interest rates after mid-1982 permitted the recovery to begin.” 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 Economy At Mid-1983

Recovery started in December 1982 from the deepest postwar recession, the second of two since 1980. Both recessions were brought on by monetary restriction aimed at bringing inflation under control. Lower interest rates after mid-1982 permitted the recovery to begin. Real GNP grew at a 2.6 percent annual rate in the first quarter and at an 8.7 percent annual rate in the second quarter of 1983.

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.”

Reagan economist suggest interest rate cuts drove economic recovery. Michael Mussa, a member of Reagan's Council of Economic Advisers, wrote in an essay for American Economic Policy in the 1980s (University of Chicago Press, 1995) 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, interest rates, both short and long term, would be driven significantly lower, and the U.S. economy would substantially recover from the devastation of both inflation and recession.”

Krugman: “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.” Nobel Laureate Paul Krugman said during the February 6, 2009, edition of MSNBC's Morning Joe that “in 1982, when the economy was deeply depressed, the Federal Reserve said, 'OK, we've got to do something about this,' and they cut interest rates from 13 percent to around 7 percent and the economy took off.” Krugman continued: “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. We have to have an approach that harks back to the things that worked very well in the first four years of the New Deal until Franklin Roosevelt was persuaded to go orthodox all over again."

Similarly, in a January 14, 2009, Rolling Stone article headlined “Letter to Obama,” Krugman wrote:

Compare the situation right now with the one back in the 1980s, when [Paul] Volcker [then chairman of the Federal Reserve] turned the economy around. All the Fed had to do back then was print a bunch of dollars (OK, it actually credited the money to the accounts of private banks, but it amounts to the same thing) and then use those dollars to buy up U.S. government debt. This drove interest rates down: When Volcker decided that the economy needed a pick-me-up, he was quickly able to drive the interest rate on Treasury bills from 13 percent down to eight percent. Lower interest rates on government debt, in turn, quickly drove down rates on mortgages and business borrowing. People started spending again, and within a few months the economy had gone from slump to boom. Economists call this process -- from the Fed's decision to print more money to the resulting pickup in spending, jobs and incomes -- the “monetary transmission mechanism.” And in the 1980s that mechanism worked just fine.

This time, however, the transmission mechanism is broken.

First of all, while the Fed can still print money, it can't drive interest rates down. Why? Because those interest rates are already about as low as they can go. As I write this letter, the interest rate on Treasury bills is 0.005 percent -- that is, zero. And you can't push rates lower than that.

Obama did cut taxes for Americans as part of stimulus package

The $787 billion American Recovery and Reinvestment Act included $288 billion in tax relief. As Media Matters for America has noted, the recovery act contained $288 billion in tax relief, including the Making Work Pay tax credit, an annual credit of $400 per individual or $800 for families. In addition, the recovery act included a temporary increase in the earned income tax credit, a temporary increase in the refundable portion of the child tax credit, an increase in the first-time homebuyer tax credit, and tax incentives for businesses.

William Gale: "[T]axes are literally at their lowest in decades." CBS News reported on April 15 that “taxes are at their lowest levels in 60 years, according to William Gale, co-director of the Tax Policy Center and director of the Retirement Security Project at the Brookings Institution.” CBS News further reported:

“The relation between what is said in the tax debate and what is true about tax policy is often quite tenuous,” Gale told Hotsheet. “The rise of the Tea Party at at time when taxes are literally at their lowest in decades is really hard to understand.”

Bruce Bartlett: "[F]ederal taxes are very considerably lower by every measure since Obama became president." Bruce Bartlett, former adviser to President Reagan and Treasury Department economist under George H.W. Bush, wrote on March 19 that “federal taxes are very considerably lower by every measure since Obama became president. And given the economic circumstances, it's hard to imagine that a tax increase would have been enacted last year” :

As noted earlier, federal taxes are very considerably lower by every measure since Obama became president. And given the economic circumstances, it's hard to imagine that a tax increase would have been enacted last year. In fact, 40% of Obama's stimulus package involved tax cuts. These include the Making Work Pay Credit, which reduces federal taxes for all taxpayers with incomes below $75,000 by between $400 and $800.

According to the JCT, last year's $787 billion stimulus bill, enacted with no Republican support, reduced federal taxes by almost $100 billion in 2009 and another $222 billion this year. The Tax Policy Center, a private research group, estimates that close to 90% of all taxpayers got a tax cut last year and almost 100% of those in the $50,000 income range. For those making between $40,000 and $50,000, the average tax cut was $472; for those making between $50,000 and $75,000, the tax cut averaged $522. No taxpayer anywhere in the country had his or her taxes increased as a consequence of Obama's policies.