Commentary

It’s the Reagan Economy, Stupid

By Lawrence Kudlow and Stephen Moore
This essay first appeared in the February 1, 2000 Washington Times.
This week America crosses one of the great economic milestones in our nation’s history. We will officially break the record for the longest business cycle expansion in U.S. history. The previous record was 106 months in the 1960s.

However, while the chattering heads in Washington are claiming that this expansion is sweet vindication for Clintonomics, they are wrong. Dead wrong. The politician most responsible for laying the groundwork for this prosperous era is not Bill Clinton, but Ronald Reagan. America’s economic turnaround started in the early 1980s, a decade before Bill Clinton arrived in Washington. In fact, what we are really celebrating this month is the eighteenth consecutive year of prosperity, according to the Cambridge, Mass.-based National Bureau of Economic Research, the longest period of consecutive prosperity in the 20th century.

It was Reagan’s supply side economic ideas — the policy of marginal rate tax cuts, a strong dollar, trade globalization (the Gipper started NAFTA with a U.S.-Canadian free trade agreement), deregulation of key industries like energy, financial services and transportation, and a re-armed military — all of which unleashed a great wave of entrepreneurial-technological innovation that transformed and restructured the economy, resulting in a long boom prosperity that continues to throw off economic benefits to this day.

The trend of the stock market, shown in the accompanying chart, provides compelling evidence that the real turning point of the U.S. economy was the early 1980s, not the early 1990s. From 1967-82, the 15 years before Reaganomics, the Dow-Jones industrial average suffered one of its blackest bear markets in history, falling 23 percent in nominal terms and nearly 70 percent per year in inflation adjusted real terms. Stagflationary anti-market Keynesian fine-tuning policies caused the wealth of American families to vanish right before their very eyes.

In 1982, the Dow Jones Industrial Average swooned to its nadir of 800. Over the rest of the Reagan years the market more than tripled. In the 1990s it would nearly quadruple (to 11,000 today). During the 1982-2000 Reagan bull market stocks soared by 12 percent per year, raising the net worth of U.S. households by some $30 trillion. To match this performance over the next 20 years, the Dow-Jones would have to soar to about 120,000 by 2020. If Washington politicians do no harm, and stay on Reagan’s road, even this outsized dream remains possible.

Today, over 80 million Americans own stocks. This new Investor Class, which has become the invisible hand of politics, proves that Karl Marx is both dead and wrong. In present day America it is the workers who own the means of production. And they will vote their portfolios as well as their pocketbooks in future elections.

The soaring capitalization of U.S. firms reflects the triumph of American business in virtually every high-value information-age industry — computer software, telecommunications, the Internet, fiber optics, semiconductors, biotechnology and financial services. Even more breathtaking advances are in store as nanotechnology, molecular electronics and cheap energy creating fuel cell advances loom just over the horizon. Even many of America’s more traditional “rust belt” industries, like the auto industry, industrial equipment, and steel—all of which were largely left for dead in the malaise decade of the 1970s—have recorded productivity-enhanced comebacks. You can tune out the declinists who still complain about America de-industrializing; for 20 years the U.S. has been continually re-industrializing for the new information economy.

More evidence of the Reagan-induced boom comes from Michael Cox, an economist at the Dallas Federal Reserve Bank and co-author of the brilliant new book The Myth of Rich and Poor. Cox recently calculated that since the dawning of Reaganomics 18 years ago, the U.S. economy has slumped into recession for just 6 of the last 200 months, or a mere 3 percent of the time. That is an almost unprecedented stretch of growth considering that historically the U.S. economy has been in decline one-third of the time.

Yes, Bill Clinton deserves some credit for keeping the expansion moving. Along with Robert Rubin, his strong dollar and hands-off-the-Fed policies extended disinflation, creating an economy wide tax cut effect that offset his mistaken 1993 tax increase. Free trade measures during the mid-1990s also constituted a tax-cut stimulus effect. Importantly, the Republican Congress forced Clinton into swallowing his opposition and signing into law key measures such as welfare reform, the balanced budget bill, capital gains tax cuts and expanded savings accounts. The Gingrich and Co. heirs to Reagan’s legacy helped restore business confidence, setting off a phenomenal investment boom over the past five years. Bill Clinton’s greatest economic achievement has been that most of his liberal policy ideas were never enacted into law. Remember the BTU tax? Remember Robert Reich’s $50 billion fiscal stimulus package? Remember, most of all, Hillary’s health care plan? Thankfully, we dodged all of these economic wrecking balls.

The lesson of the past 20 years, hopefully learned for all times, is that when American entrepreneurs and workers are liberated from heavy-handed and intrusive fiscal policies, punitive tax rates, and destabilizing monetary policies, the U.S. economy’s growth potential is almost limitless. If Washington officials can resist four key prosperity killers — high inflation, big tax hikes, re-regulation and trade protectionism — then more decades of technology-led growth is clearly possible.

Prospective budget surpluses should be rebated back to taxpayers in the form of across-the-board reductions in marginal tax-rates for individuals and businesses. Social Security payroll tax surpluses should be returned to the workforce in the form of personal retirement accounts for long-run market investment returns. Trade liberalization should be expanded. The Federal government should be brought into the Internet age with a massive organizational restructuring and a move toward horizontal integration. Consumer choice should be the key to health care and education reform. As a fraction of national income, government spending should be brought down to about 15%.

It was Reagan’s vision of economic freedom that blazed the path to prosperity. Numerous countries in Europe, Latin America and Asia are now adopting free market policies. For its part the U.S. must not rest on its laurels. To maintain our leadership abroad, there is more work to be done here at home. A frequently confused and agitated political class need only consult Ronald Reagan’s compass of liberty and freedom in order to arrive at the next right decision.

Lawrence Kudlow is chief economist at Schroder & Co., Inc. and CNBC.com. Stephen Moore is an economist at the Cato Institute.