We need to examine what we did the last time America fell into a downward economic spiral.
In my new book, America’s Ticking Bankruptcy Bomb, I argue that the first step in defusing the bomb, and averting the coming bankruptcy of America, is to restore America’s world leading economic prosperity. Only another economic boom can hope to generate enough revenue to finance essential continuing obligations. And only another boom can reduce dependency sufficiently to enable us to make the necessary spending cuts to reduce the overwhelming deficits, debt and other liabilities that threaten the survival of the American Dream.
The American Dream is not over. This economy has another economic boom inside it just straining to break out. The book argues that the best way to see how to ignite such a boom once again is to examine what we did the last time America fell into a downward economic spiral.
When President Reagan was elected in 1980, America suffered double digit inflation, double digit interest rates, and soon double digit unemployment. Three worsening recessions starting in 1969 were about to culminate in the worst of all in 1981-1982, with unemployment peaking at 10.8%. Inflation raged at 11.3% in 1979 and 13.5% in 1980, or 25% in two years. The Washington establishment at the time argued that this inflation was now endemic to the American economy, and could not be stopped, at least not without a calamitous economic collapse.
The poverty rate started increasing in 1978, eventually climbing by an astounding 33%, from 11.4% to 15.2%. A fall in real median family income that began in 1978 snowballed to a decline of almost 10% by 1982. In addition, from 1968 to 1982, the Dow lost 70% of its real value, reflecting an overall collapse of stocks.
President Reagan campaigned on an explicitly articulated, four-point economic program to reverse this slow motion collapse of the American economy, which he implemented once elected:
1. Cut tax rates to restore incentives for economic growth, particularly incentives for increased production achieved by allowing producers to keep a higher percentage of what they produce. That encompasses incentives to start new businesses, expand businesses, and create jobs.
2. Cut government spending, embodied first in the 1981 Reagan budget cuts much vilified by the Left at the time. In constant dollars, non-defense discretionary spending declined by 14.4% from 1981 to 1982, and by 16.8% from 1981 to 1983. Moreover, in constant dollars, this non-defense discretionary spending never returned to its 1981 level for the rest of Reagan’s two terms! Even with the Reagan defense buildup, which won the Cold War without firing a shot, total federal spending declined from a high of 23.5% of GDP in 1983 to 21.3% in 1988 and 21.2% in 1989. That’s a real reduction in the size of government relative to the economy of 10%.
3. Anti-inflation monetary policy holding money supply growth to money demand, to maintain a stable value of the dollar.
4. Deregulation, to reduce costs for businesses and consumers.
These economic policies amounted to the most successful experiment in world history. The Reagan recovery started in official records in November 1982, and lasted 92 months without a recession until July 1990, when the tax increases of the 1990 budget deal created a short, shallow recession. This set a new record for the longest peacetime expansion ever, the previous high in peacetime being 58 months.
During this 7-year recovery, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third largest in the world at the time, to the U.S. economy. In 1984 alone, real economic growth boomed by 6.8%, the highest in 50 years. Nearly 20 million new jobs were created during the recovery, increasing U.S. civilian employment by almost 20%. Unemployment fell to 5.3% by 1989.
The shocking rise in inflation during the Carter years was reversed. Astoundingly, inflation from 1980 was reduced by more than half by 1982, to 6.2%. It was cut in half again for 1983, to 3.2%, never to be heard from again until recently.
Real per capita disposable income increased by 18% from 1982 to 1989, meaning the American standard of living increased by almost 20%, in just 7 years. The poverty rate declined every year from 1984 to 1989, dropping by one-sixth from its peak. The stock market more than tripled in value from 1980 to 1990, a larger increase than in any previous decade.
This economic recovery flowered into a 25-year, generation-long economic boom, which Art Laffer and Steve Moore rightly call in their book The End of Prosperity, “the greatest period of wealth creation in the history of the planet.” Steve Forbes rightly called it an “economic golden age.” This success was not just a matter of fortuitous correlation. Reversing the accelerating downward economic spiral of the 1970s into this unprecedented boom arose directly out of the timeless economic reasoning described above. This reasoning shows why these policies and their spectacular results are still instructive for today.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
Was the President done in by the economy, or by the politics of the economy?