Reaganomics Keeps Good Times Rolling

0 Comments | Insight on the News, Feb 28, 2000 | by Lawrence A. Kudlow, | Stephen Moore

This week America crosses one of the great economic milestones in our nation's history. We will break the record for the longest business-cycle expansion in U.S. history. The previous record was 106 months during 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 really are celebrating this month is the 18th conservative year of prosperity, according to the Cambridge, Mass.-based National Bureau of Economic Research.

It was Reagan's supply-side economic ideas -- the policy of marginal-rate tax cuts, a strong dollar, trade globalization (the Gipper started the North American Free Trade Agreement with a U.S.-Canadian free-trade agreement), deregulation of key industries such as energy, financial services and transportation and a rearmed military -- all of which unleashed a great wave of entrepreneurial-technological innovation that transformed and restructured the economy, resulting in an extended boom of prosperity that continues to yield economic benefits to this day.

The stock market provides compelling evidence that the real turning point of the U.S. economy was the early 1980s, not the early 1990s. From 1967 to 1982, 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 antimarket Keynesian fine-tuning policies caused the wealth of American families to vanish right before their very eyes.

In 1982, the Dow Jones industrial average plummeted 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 around 11,000). During the 1982-2000 Reagan bull market, stocks soared by 12 percent per year, raising the net worth of American households by some $30 trillion.

Today, more than 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.

The soaring capitalization of U.S. firms reflects the conversion of U.S. business into a dominant position in virtually every high-value information-age industry -- computer software, telecommunications, the Internet, fiber optics, semiconductors, biotechnology and financial services.

More evidence of the Reagan-induced boom comes from Michael Cox, an economist at the Dallas Federal Reserve Bank and coauthor of a 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 six 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, 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 economywide tax-cut effect that offset the 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 during the last five years.

Clinton's greatest economic achievement has been that most of his cocka-mamie policy ideas were never enacted into law. Remember the Btu tax, supposedly to promote energy conservation? Remember Robert Reich's $50 billion fiscal stimulus package? Remember, most of all, Hillary Rodham Clinton's health-care plan? Thankfully, we dodged all of these economic wrecking balls.

The lesson of the last 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 increases, reregulation and trade protectionism -- then more decades of technology-led growth clearly are 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.