It’s the Reagan Economy, Stupid

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 thisexpansion is sweet vindication for Clintonomics, they are wrong. Deadwrong. The politician most responsible for laying the groundwork for thisprosperous era is not Bill Clinton, but Ronald Reagan. America's economicturnaround started in the early 1980s, a decade before Bill Clinton arrivedin Washington. In fact, what we are really celebrating this month is theeighteenth consecutive year of prosperity, according to the Cambridge,Mass.-based National Bureau of Economic Research, the longest period ofconsecutive prosperity in the 20th century.

It was Reagan's supply side economic ideas -- the policy of marginal ratetax cuts, a strong dollar, trade globalization (the Gipper started NAFTAwith a U.S.-Canadian free trade agreement), deregulation of key industrieslike energy, financial services and transportation, and a re-armed military-- all of which unleashed a great wave of entrepreneurial-technologicalinnovation that transformed and restructured the economy, resulting in along boom prosperity that continues to throw off economic benefits to thisday.

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

In 1982, the Dow Jones Industrial Average swooned to its nadir of 800. Overthe rest of the Reagan years the market more than tripled. In the 1990s itwould nearly quadruple (to 11,000 today). During the 1982-2000 Reagan bullmarket 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 20years, the Dow-Jones would have to soar to about 120,000 by 2020. IfWashington politicians do no harm, and stay on Reagan's road, even thisoutsized dream remains possible.

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

The soaring capitalization of U.S. firms reflects the triumph of Americanbusiness in virtually every high-value information-age industry -- computersoftware, telecommunications, the Internet, fiber optics, semiconductors,biotechnology and financial services. Even more breathtaking advances arein store as nanotechnology, molecular electronics and cheap energy creatingfuel cell advances loom just over the horizon. Even many of America's moretraditional "rust belt" industries, like the auto industry, industrialequipment, and steel--all of which were largely left for dead in the malaisedecade of the 1970s--have recorded productivity-enhanced comebacks. You cantune out the declinists who still complain about America de-industrializing;for 20 years the U.S. has been continually re-industrializing for the newinformation economy.

More evidence of the Reagan-induced boom comes from Michael Cox, aneconomist at the Dallas Federal Reserve Bank and co-author of the brilliantnew book The Myth of Rich and Poor. Cox recently calculated that since thedawning of Reaganomics 18 years ago, the U.S. economy has slumped intorecession for just 6 of the last 200 months, or a mere 3 percent of thetime. That is an almost unprecedented stretch of growth considering thathistorically 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 policiesextended disinflation, creating an economy wide tax cut effect that offsethis mistaken 1993 tax increase. Free trade measures during the mid-1990salso constituted a tax-cut stimulus effect. Importantly, the RepublicanCongress forced Clinton into swallowing his opposition and signing into lawkey measures such as welfare reform, the balanced budget bill, capital gainstax cuts and expanded savings accounts. The Gingrich and Co. heirs toReagan's legacy helped restore business confidence, setting off a phenomenalinvestment boom over the past five years. Bill Clinton's greatest economicachievement has been that most of his liberal policy ideas were neverenacted into law. Remember the BTU tax? Remember Robert Reich's $50billion fiscal stimulus package? Remember, most of all, Hillary's healthcare plan? Thankfully, we dodged all of these economic wrecking balls.

The lesson of the past 20 years, hopefully learned for all times, is thatwhen American entrepreneurs and workers are liberated from heavy-handed andintrusive fiscal policies, punitive tax rates, and destabilizing monetarypolicies, the U.S. economy's growth potential is almost limitless. IfWashington officials can resist four key prosperity killers -- highinflation, big tax hikes, re-regulation and trade protectionism -- then moredecades of technology-led growth is clearly possible.

Prospective budget surpluses should be rebated back to taxpayers in the formof across-the-board reductions in marginal tax-rates for individuals andbusinesses. Social Security payroll tax surpluses should be returned to theworkforce in the form of personal retirement accounts for long-run marketinvestment returns. Trade liberalization should be expanded. The Federalgovernment should be brought into the Internet age with a massiveorganizational restructuring and a move toward horizontal integration.Consumer choice should be the key to health care and education reform. As afraction of national income, government spending should be brought down toabout 15%.

It was Reagan's vision of economic freedom that blazed the path toprosperity. Numerous countries in Europe, Latin America and Asia are nowadopting free market policies. For its part the U.S. must not rest on itslaurels. To maintain our leadership abroad, there is more work to be donehere at home. A frequently confused and agitated political class need onlyconsult Ronald Reagan's compass of liberty and freedom in order to arrive atthe next right decision.

Lawrence Kudlow and Stephen Moore

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