In the face of economic sluggishness in the US, there is enough rationale to give the Reagan approach another try.
While different, Trump’s tax bill does move in the Reagan direction.
In March 1997, two Washington reporters published a book entitled Mirage: Why Neither Democrats nor Republicans Can Balance the Budget, End the Deficit, and Satisfy the Public. The authors were George Hager, then a reporter for the CQ Weekly Report, and Eric Pianin of the Washington Post. A blurb on Amazon described the book as “a story of wishful thinking compounded by a chronic failure of leadership”. The clear theme: the budget would never be balanced.
But the fiscal year that began just the following October produced a surplus of $21.9 billion. The next three years generated surpluses, respectively, of $126 billion, $236 billion, and $128 billion. When the paperback came out, the title had to be altered to reflect the intervening events that had totally negated the thesis. By then the book was worthless, and it quickly faded. Today Amazon lists it as “unavailable”—not even a tattered used copy to be found.
These were bright and accomplished reporters, and they weren’t alone. The vaunted Office of Management and Budget had projected a 1998 deficit of $339 billion; the touted Congressional Budget Office pegged it at $357 billion.
How did they all get it so wrong? Largely because they fell into the analytical trap of static thinking, a Washington occupational hazard. Under this mindset, there simply didn’t seem to be any way Congress could surmount the political and fiscal barriers standing athwart the necessary revenue generation or expenditure reductions needed for a balanced budget. After all, during president Bill Clinton’s first term, deficits had averaged $124 billion a year.
This slice of Washington fiscal history is worth noting amidst the squeals and warnings surrounding President Trump’s tax overhaul package, which passed by Congress with nary a Democratic vote. The CBO projects the tax bill’s negative impact on the deficit to be $1.5 trillion over a decade, and maybe it will be. But the experience of Hager and Pianin suggests we really don’t know, and neither do the so-called experts.
What we do know, based on the Clinton record, is that economic growth plays a huge role in these matters, and it can have a very big impact very fast.
The Clinton example is instructive. During his second presidential term, Clinton generated an average annual growth rate of 3.25 percent. That propelled the economy forward, generating greater increments of revenue and turning deficits into surpluses. Other factors played a role, too, including reduced defence outlays and greater fiscal discipline embraced by both parties after Republicans captured both houses of Congress in the 1994 midterm elections.
But the big factor was growth. Bear in mind that both the CBO and OMB calculate that, in today’s fiscal world, an extra 0.1 percentage point of growth would reduce deficits by $300 billion. Clinton’s predecessor, George Herbert Walker Bush, mustered an average growth rate of just 1 per cent during his four-year presidency, including a negative 1.55 per cent in the recession year of 1991. That swelled the deficit to more than 4.5 per cent of GDP in his final presidential year.
But Clinton, in his first term, boosted growth and brought that percentage down to 1.37 per cent. The budget soared into surplus for the following three years.
Consider also the case of Ronald Reagan, often attacked for saddling the country with huge deficits. To some extent he did. Following his big tax cut of 1981, and after the debilitating recession of 1981 and ’82, Reagan gave the country a 1983 deficit amounting to 5.88 per cent of GDP, a huge number by historical standards. But as economic growth gained momentum thereafter, deficits as a percentage of GDP dropped steadily, falling to just over 3 per cent in the Californian’s final fiscal year. That’s a big drop from a highly problematic figure to a manageable one. And growth led the way.
But if growth generates budget surpluses, what generates growth?
Again, Reagan’s presidency suggests the answer. He believed an economy unfettered by high taxes and regulatory impediments would generate economic energy and entrepreneurial zeal. The people would respond by saving, investing, working, building businesses, and creating jobs. When he reduced those taxes and regulations, growth quickly ensued, supplanting the “stagflation” of the Jimmy Carter years. Reagan gave the country a GDP growth rate of 6.2 per cent in 1984 and an average annual growth rate of 3.89 per cent after the early recession of his presidency.
Here I’m going to posit a provocative thesis that goes beyond Reagan’s impact during his own presidency. More than any other political figure of the 1980s and ‘90s, I believe Reagan deserves credit for the budget surpluses of the Clinton years. That’s because his famous 1986 tax-overhaul legislation—drastically slashing individual tax rates and eliminating preferences and “loopholes”—transformed the US economy, unleashing a long-term wave of digital innovation and entrepreneurialism that in turn fueled high productivity and economic growth during the Clinton years. That expansion filled federal coffers with large increments of new revenue. Ergo, surpluses for the first time in nearly 30 years—and for the last time since.
To those who greet this thesis with scepticism, I pose a question: is it possible to argue seriously that the high-tech revolution that transformed America would have occurred anyway had Jimmy Carter’s economic policies continued well into the 1980s, with a top individual tax rate of 70 per cent, a top capital gains rate approaching 50 per cent, and “bracket creep” hoisting American taxpayers into ever-higher tax levels as a result of runaway inflation the president couldn’t control? Anyone who remembers the economic dysfunction of those days and the resulting national ennui and sense of hopelessness would find it difficult to conceive of any high-tech boom materialising under such circumstances.
Assuming I’m right, is any of this relevant to Trump’s tax bill? Could his legislation unleash a similar surge of growth? Let’s stipulate that the Trump measures don’t compare to the 1986 overhaul in scope or sweep. The top individual rate remains at a still-high 37 per cent, the complexity of the code is not significantly addressed, and many big preferences survive. But the reduction in the corporate rate to 21 per cent from 35 per cent is highly significant, and the code’s distorting effects on economic decision-making are addressed in meaningful ways.
The point isn’t that the Trump programme will transform the US economy, as Reagan’s did. It’s that we simply don’t know what the impact will be, and we certainly have no reason to put any stock in CBO or OMB static-analysis projections on looming budget deficits a decade hence. History tells us that when government impediments to economic vibrancy are removed, good things usually happen, and economies begin to percolate. That certainly provides enough rationale for giving the Reagan approach another try in the face of so much economic sluggishness.
In the meantime, there’s no point to the cries of anguish and anger and vilification we’re hearing these days from opposition Democrats. Only time will provide a verdict on this bill.
This piece was first published on The American Conservative and has been republished here with permission.