Re: OT - Why Reagan's 1981 tax cut was not what caused the 1983 recovery

you are trying to re-write history. i don't even have time to correct your
errors. i got as far as reading how high the interest rates got "A recent
textbook calls Volcker's policy the "well understood" cause of the recession
early in Reagan's term.

were you even alive during that recession? it started long before Reagan
took office. it was, in fact, one of the main reasons he beat carter. a
little fact checking might save a lot of embarassment. do you even remember
carters 'malaise' speech?

the truth is, the dems fucked up the economy, and Reagans policies (yes, he
had a complete policy as you have pointed out, NOT just tax cuts (which were
an important part of the recovery in spite of your scepticism) which the
dems named 'trickle down' worked. they ended the carter recession and set
the stage for a huge economic revival.

you cant look at things in isolation. Reagans policies worked. carters 'tax
and spend' policies did not.

take care,
paul
az




"Mr Soul" <google@xxxxxxxxxxxxxxx> wrote in message
news:1129587618.345502.209030@xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
> Since you took your car in, it steers more precisely and absorbs
> potholes better. "It's the alloy wheels," says the dealer who talked
> you into buying them. Yet you also got new shock absorbers, springs,
> and tires. How can he prove that the wheels made much difference?
>
> Claims about the 1981 Reagan tax cut face the same problem. The tax
> reform had good features, such as indexing tax brackets to inflation.
> And top marginal rates had been too high at 70% (even if Reagan went
> too far in cutting rates - more on that later). But what about the big
> claim - that the "supply-side" effects of the tax cut caused the
> economic surge that followed, from 1983-89?
>
> The evidence undermines it. The cuts played a small part in spurring
> the expansion, not a leading role. The real stars were other economic
> factors that improved markedly during the era. And as we'll see later,
> evidence shows that the contribution the cuts did make had nothing to
> do with supply-side theory. Here are six things that really mattered to
> the recovery:
>
> 1. Business cycles go down and up David Stockman, Reagan's director of
> the Office of Management and Budget and a key architect of Reaganomics,
> didn't think the tax cut caused the growth of the 1980s. He wrote,
> "There was nothing new, revolutionary, or sustainable about this
> favorable turn of events [the growth of 1983-89]. The cycle of boom and
> bust had been going on for decades and ...its oscillations had reached
> the high end of the charts. That was all." [The Triumph of Politics, p.
> 377.]
>
> Business cycles - the growth-bust cycle Stockman referred to - have
> oscillated, if irregularly, since the dawn of capitalism. They swung
> more widely than usual during Ronald Reagan's first term. The term
> began with the worst recession since World War II, but Stockman has
> good reasons to say that it would have ended without the 1981 tax cut:
> most economists agree that this recession was caused and ended mainly
> by Federal Reserve policy, as I'll explain next. And it is typical of
> business cycles that the quickest growth comes right when the recovery
> starts, so we should not to be impressed by the zippy 7.5% growth in
> 1983, the year of the rebound. That kind of catch-up growth usually
> follows recessions, as idled factories and laid-off employees get to
> work again. Since the 1981-82 recession was exceptionally bad, the
> rebound was likely to be extra strong with or without a tax cut.
>
> Still, just referring to "business cycles" doesn't actually explain
> much by itself. Business cycles are not a force of nature; they have
> human causes. Economists have argued about these causes for a long time
> (see this excellent survey). It is becoming increasingly clear that
> there is by no means just one cause; both sides of transactions -
> selling and buying, or "supply" and "demand" - can pull the economy up
> and down. As we'll see, both sides contributed to the Reagan cycle.
>
> 2. Paul Volcker slays inflation and slashes interest rates The key
> "supply-slide" cause of the Reagan recession and boom, to which
> Stockman does give some credit, was the inflation-beating strategy of
> Paul Volcker, chair of the Federal Reserve Board from 1979-87. In 1981,
> Volcker curbed the growth of the money supply, which pushed interest
> rates to levels not seen since the Great Depression. The "effective
> Federal Funds Rate" (below 6% in 1977) soared, sometimes to around
> 20%.4 A recent textbook calls Volcker's policy the "well understood"
> cause of the recession early in Reagan's term.
>
> Why such a draconian Fed policy? Because Volcker focused on slaying
> what he called the "dragon" of inflation, which had scorched the
> country throughout the 1970s. The inflation rate hovered between 5 and
> 10% for most of the decade, hitting double-digits twice. Volcker
> believed that "the economy will work better, more efficiently, and more
> fairly, with better prospects and more savings, in an environment of
> reasonable price stability." Price stability is "a situation in which
> ordinary people do not feel that they have to take expectations of
> price increases into account in making their investment plans or
> running their lives." (Volcker and Toyoo Gyohten, Changing Fortunes, p.
> 177-79). When Volcker came to office, there had been no price stability
> for a long time.
>
> Volcker's tight money slew the inflation dragon, but at a cost: an
> economic slowdown, then called the "Volcker Recession." With interest
> rates so high, banks rationed credit, businesses wouldn't borrow to
> invest, and residential investment fell by 40% - who would invest in
> housing when a 30-year fixed mortgage cost 18.5%? Unemployment reached
> almost 11%, and consumer spending on "durables" (like appliances and
> cars) plummeted.
>
> In later 1982, with inflation down, Volcker decided to ease up. The Fed
> Funds Rate dropped below 9% by the end of 1982, and below 6% by
> mid-1986. Inflation-adjusted interest rates (the ones that matter to
> businesses) remained high until the mid 1980s, partly because of the
> high borrowing by the US government discussed below. But rates
> gradually dropped through the mid-1980s. As mortgages finally became
> affordable, people bought housing - so much of it that residential
> investment rose by a stunning 46%. Housing is what led the 1980s boom.
> And Volcker's policy gave America the price stability he'd sought.
> Inflation settled in at around 3%. America's renewed sense of
> stability, says Volcker, laid "the essential base" for the recovery of
> the 1980s.
>
> Paul Krugman writes that the Reagan expansion "should be called the
> Volcker expansion." (Peddling Prosperity, p. 122). Volcker was
> appointed not by Reagan, but by Jimmy Carter. Admittedly, Carter chose
> Volcker without realizing what he was getting into; and Reagan deserves
> credit for letting Volcker proceed even after it was obvious what he
> was up to. But Reagan's admirers still have to admit that the inflation
> battle was won by a Carter appointee - and that faster money growth
> (after the slowdown) and lower expectations of inflation were the real
> bases of the 1980s boom, and were not caused by the tax cuts.
>
> 3. Oil prices come back to earth Did anything else affect the economy
> during this period? Yes - so many that even conservative economists
> have sometimes admitted that too many factors were at work to support
> the simple tax-cut claim.
>
> One supply-side variable was oil. You need it to produce or transport a
> huge range of goods. That's why since World War II, whenever oil prices
> have risen by 60% or more, a recession has almost always followed.
> Research has shown that other forces can't account for this effect.2
>
> How does this apply to the Reagan era? From 1978 to 1981, the
> inflation-adjusted US price of crude oil doubled.3 In terms of 2005
> dollars, it went from about $40/barrel to $86/barrel. The spike was
> largely caused by revolution and war in Iran and Iraq, which greatly
> reduced the oil supply.That spike came on top of a previous quadrupling
> of oil prices during the Arab oil embargo of 1973. In the 1970s and
> early 80s, few things could stress the economy like a spike in oil
> prices, and few things could bring relief like oil prices coming back
> to earth, as they did during Reagan's presidency - a 33% real decline
> between 1981 and 1983. By 1986, when the OPEC oil cartel collapsed,
> prices bottomed at about $20/barrel (in 2005 dollars). Lower oil prices
> were a "supply side" economic boost to the economy - and they certainly
> did not result from Reagan's tax cut.
>
> To Reagan's credit, the January, 1981 deregulation of gasoline prices
> did help reduce US gasoline shortages. This deregulation removed
> ill-considered price controls that had been imposed during the Nixon
> administration in response to the Arab oil embargo - and Reagan gets
> credit for wisely going along with Congress on removing this control.
> But doing so didn't increase world supply; all it did was improve the
> incentives of gas stations to supply gasoline to motorists. We can't
> credit the end of the oil shock to this policy any more than to the tax
> cut.
>
> 4. A "financial revolution" makes it easier to fund and grow a business
> Another piece of the puzzle - a big one - is that financing a business,
> and giving it entry into markets, became significantly easier.
> University of Chicago economists Raghuram Rajan and Luigi Zingales
> speak of "a veritable revolution"(5) in finance. As Rajan writes in a
> recent paper, "People can borrow greater amounts at cheaper rates than
> ever before, invest in a multitude of instruments catering to every
> possible profile of risk and return, and share risks with strangers
> across the globe." New methods of sharing and isolating risk have made
> it easier for lenders to take it on. The raising of capital is far more
> likely to be at "arms-length," depending less on personal connections
> and family advantages. These changes especially benefited small and
> young midsize firms, giving them much more access to funding than ever
> before. In addition, deregulation made it much easier for new
> businesses to enter markets that were previously protected.
>
> There is no doubt that this revolution has reduced the volatility of
> economic growth since the 1970s. So why did the revolution take place?
> Rajan lists three main forces: technical change (which greatly reduced
> the costs of computation and communication); institutional change,
> which "created new entities within the financial sector such as private
> equity firms and hedge funds, as well as new political, legal, and
> regulatory arrangements"; and deregulation, which "removed artificial
> barriers preventing entry, or competition," thus giving new firms more
> access to markets.
>
> The three forces interacted with each other. For example, as Rajan
> writes, "Information technology improved the ability of banks to lend
> and borrow from customers at a distance" - a development which forced
> states to rescind regulations protecting local bank monopolies. States
> that did relax such rules had faster economic growth than states that
> continued to protect their banks. New financial realities also led to
> the collapse the system of government-controlled international exchange
> rates, the Bretton Woods agreement, in 1971. In 1973, US policy began
> to favor the free cross-border capital transactions that had proved
> impossible to control in any case. The resulting freer international
> flow of capital made it more difficult for governments to support
> cartels or subsidize large incumbent firms - as they previously had
> done, with policies that had reduced competition and innovation.
>
> None of these forces result from Reagan or his tax cuts, and indeed all
> began before Reagan. (Click here for three examples of pre-Reagan
> governmental changes that contributed to the financial revolution.)
> Consider deregulation. The Wall Street Journal may give credit for
> deregulation to Reagan, but he deserves far less of it than Carter. In
> 1978, Carter deregulated the trucking and railroad businesses. His
> administration also deregulated, or started deregulation of, airlines,
> telephones, natural gas, and interest rates. Trucking and railroads had
> been regulated monopolies, with very high barriers to entry for new
> competitors, so that incumbents could get away with providing poor
> service at high prices. Transportation was a key element of the economy
> - it let firms get their goods to markets - so deregulation made an
> economic difference. But Reagan wasn't behind it.
>
> To give more credit for deregulation to Carter than to Reagan is not
> "liberal." According to William Niskanen, a conservative economist who
> was a member of Reagan's Council of Economic Advisers and later
> chairman of the Cato Institute, deregulation had the "lowest priority"
> of all the items on the Reagan agenda; the administration was not
> "willing to sustain the momentum for deregulation." Not that the
> momentum Niskanen speaks of came from the vision of Carter. Larger
> trends were at work - the three forces Rajan spoke of, not to mention
> growing research showing that the costs of regulation were higher than
> was previously understood.
>
> All of this would have happened, then, without Carter - and without
> Reagan.
>
> 5...6... "Demand-side" factors Many other factors contributed to the
> growth of the 1980s, notably the "demand-side effects" of the tax cut,
> which I'll discuss next. Increased defense spending by the Federal
> government also boosted "aggregate demand" in the US economy.
>


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