Lying with statistics: efforts to discredit the economic achievements of the 1980s just don't add up

National Review, Oct 14, 1996 by Alan Reynolds

BY ANY measure of real output or income, economic growth has been much slower since 1993, when tax rates were last increased, than it was from 1983 to 1989, when tax rates were coming down. The agility with which some people deny such undeniable facts is quite remarkable. It usually involves some mixture of the following tricks:

1. Redefine the Eighties. This year's nomination for the annual John Berry award for economic illiteracy goes to . . . John Berry. On August 10, Berry wrote in the Washington Post that, "Despite the supply-siders' rosy view of what happened in the 1980s, productivity growth from 1986, when income tax rates reached their low point, through 1995 averaged less than 1 per cent a year." Defining 1986 to 1995 as "the 1980s" is a truly remarkable achievement in creative news reporting. It even surpasses the previous record set by Paul Krugman of Stanford, who starts "the 1980s" with 1977.

2. Compare this expansion with past recessions. In the Wall Street Journal of July 18, Steven Rattner of Lazard Frcres claimed the economy grew by only 2.4 per cent a year in the "Reagan - Bush" years. In order to come up with that low a figure Rattner had to place Reagan in the White House in 1980 rather than 1981, and have Bush leaving office in 1991 rather than 1993. Even after this artful dodging, however, Rattner still comes up with a number that is about the same as average growth during the Clinton "expansion." We have to add two recessions to the Reagan years, not just one, in order to get the growth rate down to the Clinton standard. But it makes no sense to compare growth rates during an expansion with any period that includes a recession.

3. Forget what happened when. Another reason why it is deceptive to include the 1981 - 82 recession in any comparison with the Clinton years is that tax rates were not reduced until 1983 - 84. In a July 17 letter to the editor in the Wall Street Journal, Rep. Maurice Hinchey (D., N.Y.) states that a "tax cut . . . took effect in 1981." This is flatly wrong. Thanks to "bracket creep," income taxes were a record share of GDP in 1981 - 82. Since the point of Rep. Hinchey's comment is to suggest that lower tax rates did not help the economy, it makes no sense to start measuring the impact of lower tax rates before tax rates were reduced.

John Berry also got the timing all wrong. He wrote that "Income-tax rates reached their low point" in 1986 - 95. In fact, income-tax rates reached their low point in 1988 - 90, and have been increased twice since then. Tax rates on income from capital (such as profits, dividends, and capital gains) -- which are particularly relevant to productivity -- were increased by the tax bill of 1986, and further increased in 1990 and 1993.

Steven Rattner writes that "Real hourly earnings are rising for the first time in 10 years." This is surely a roundabout way to confess that real compensation fell from 1992 to 1995, after rising by 7 per cent from 1981 to 1988. What Rattner is really saying is that wages and benefits in 1996 are back down to where they were ten years ago, which is nothing to brag about.

4. Glorify the Seventies. The Concord Coalition says, "To avoid being misled by the business cycle, growth should be measured from one business-cycle peak to the next. . . . [GDP] growth averaged 3.4 per cent from 1969 to 1980. In the 1980s, it dropped to 2.7 per cent. Clearly, the Reagan tax cuts had little effect."

Yet the period from 1969 to 1980 was not one business cycle, but three. There were nasty episodes of stagflation in 1969 - 70, 1974 -75, and 1980 - 82. The Concord Coalition is suspiciously vague about defining "the 1980s"; it appears to include recession quarters in 1980 and 1990. The figures look quite different when we actually follow the Coalition's advice and measure GDP gains "from one business cycle peak to the next." From the fourth quarter of 1973 to the first quarter of 1980, real GDP increased from $3,936 billion to $4,574 billion -- a grand total of 16.2 per cent. By the second quarter of 1990, real GDP had increased to $6,174 billion -- or 32.8 per cent. Clearly, the Concord Coalition's nostalgia about the Seventies is unwarranted, even aside from the insufferable inflation of that decade.

5. Blame President Bush for not handing Clinton a deep recession. In The New Republic (Sept. 2), Matthew Miller writes, "The boom supply-siders love to tout, the 3.8 per cent annual growth between 1982 and 1989, came mainly because we were emerging from a deep recession that left jobless rates in double digits and much idle capacity." Alan Blinder of Princeton makes this same excuse. Apparently, poor Bill Clinton was not so lucky as to inherit the same sort of mess that Jimmy Carter left on Reagan's doorstep, so it just isn't fair to compare the post - 1991 expansion with the post -1982 expansion. This story can explain only why it was easy to have rapid growth in early 1983 by regaining the ground lost during the recession. It certainly cannot explain how and why real GDP rose by 32.8 per cent between the first quarter of 1980 and the second quarter of 1990. Real GDP in the second quarter of 1983 was already back to the previous peak level of early 1981. After that we were not in a "recovery," but in a seven-year expansion. The graph shows that employment fell sharply in 1975, but dipped less far in 1981 -82. Indeed, employment in 1982 was higher than it had been in 1980. What the brief bounce after 1975 proved is that starting from a deep recession does not ensure a long and strong expansion. Note also that employment growth was above trend in the 1980s, but has been merely routine under Clinton.