Secrets of Ronald Reagan's Economic Growth Policies

By: Jas Jain | Mon, Sep 5, 2016
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"But great as our tax burden is, it has not kept pace with public spending. For decades we have piled deficit upon deficit, mortgaging our future and our children's future for the temporary convenience of the present. To continue this long trend is to guarantee tremendous social, cultural, political, and economic upheavals.

"You and I, as individuals, can, by borrowing, live beyond our means, but for only a limited period of time. Why, then, should we think that collectively, as a nation, we're not bound by that same limitation? We must act today in order to preserve tomorrow. And let there be no misunderstanding: We are going to begin to act, beginning today." -- Ronald Reagan, first inaugural address, 20 January 1981 (my emphasis, Jas)

'Reagan taught us deficits don't matter.' -- Vice President Dick Cheney (repeated versions of this during 2002-04)

Since Donald Trump's announced economic team has some Reaganites and supply-siders it is important to understand what contributed to growth during 1980s. Before a doctor can make any recommendation, or prescription, the patient has to be examined for what the condition is. So, what were the economic and financial conditions when Reagan took office?

1. Economy was not technically in a recession but in the middle of what turned out to be a double-dip recession. The second dip began six months after Reagan's inauguration and was as serious a recession as the last recession that Obama inherited.

2. The economy had very little leverage, i.e., federal deficit and household debt, as % of GDP, were low and at or below trend. The federal govt had paid off the huge debt built up during the WW II and brought it down to 25% from above 100% of the GDP in 1945. The household debt was below 50% of GDP, not low but very sustainable, long-term.

3. Stock market was at historically low levels.

4. Housing prices were going up during 1970s, driven by demand, but were not high, historically. Very high interest rates kept the home prices in a serious check. There was no room for a bubble until the rates were to come down.


Factors That Would Contribute to Economic Growth In Near Term

There are cyclical and secular drivers of growth in an economy. There are short-term cycles that are termed business cycles, recessions followed by a recovery, and there are long-term cycles whose duration is in decades. Other things being equal the following would lead to near-term economic growth:

1. Increase in population. In the US there are three contributors to the population growth: (a) Natural Increase (births minus deaths); (b) Legal Immigration based on applicable laws; and (c) Illegal Immigration. The last one is the wild card and the US President could play a very important role.

2. Deficit spending. Cut is taxes for individuals and businesses, or increase in govt spending, or both, would lead to bigger deficits and directly contribute to near-term growth. GW Bush rebate checks were a blatant example of this.

3. Rapid appreciation in home prices, well above trend and growth in incomes.

4. Rapid appreciation in stock prices, well above trend and growth in GDP and corporate earnings.


Illegal Immigration has been de facto Policy of the US Govt Under Both Parties

What politicians in the US, especially the presidential candidates and Presidents, say about illegal immigration, deportations, securing the border, etc. are lies to pander to the voters. One of the TV networks played a 1995 State of the Union message by Bill Clinton that sounded very much like Trump today on the subject of illegal immigration! It is a very safe bet that if Trump were to get elected he would not deport 95%+ of illegal immigrants who are already in the country. Deporting 3-4 million, about 25-30% of the illegal, would plunge the economy into immediate recession under the current low growth environment. The #1 reason for not stopping the illegal immigration, let alone mass deportations, is that it would have immediate negative impact on economic growth via reduced demand. We are not talking about potential long-term benefits to legal residents, or other consequences.

No one did more to encourage continued illegal immigration than Ronald Reagan. He asked for and got Amnesty bill passed first and promised to secure the border and deport criminals later. Nothing, or less, was done to secure the border than what Presidents had done before and after him. Obama has a better record on deportations and securing the border than Reagan or GW Bush. Super rich and large corporations have no qualms with illegal immigrants. Large corporations benefit most directly from increased demand and most likely losers are workers, or the labor, with whom illegal immigrants compete. Labor's share of income, wages plus benefits, peaked during 1980-81. Happy Labor Day!


"Mortgaging Our Future," as Reagan had Warned In 1981, Became the Mantra and Addiction Since Reagan

Reagan's speech quoted at the beginning was not made during the political campaign but his first promise to the nation as the President. He got his tax cuts, his large increases in military spending, and did nothing to reign in other spending. He never submitted a budget that was lower than the last one. Federal debt outstanding, as % of GDP, started to increase under Reagan, after falling for 35 years before his taking the office, and has continued to rise except for a brief respite during the stock market bubble of late 1990s due to huge increase in tax revenue due to stock options related compensation.

"...the national debt tripled under Reagan's watch, reaching a staggering $2.7 trillion by the time he left office. Ironically, the government's gargantuan deficit spending during the 1980s ended up providing exactly the same kind of Keynesian stimulus to the national economy that Franklin Roosevelt's New Deal had provided during the Great Depression."

Reagan's warning, "to continue this long trend [of increased debt] is to guarantee tremendous social, cultural, political, and economic upheavals," would come to be true within few short years when the global economy plunges into a depression.


Housing and Stock Market Booms During Reagan's Term

The housing boom of 1970s continued, led by lower rates, and came to an end a year after Reagan's term. The boom and the following bust were much bigger in Southern California than in the rest of the nation. It led to Savings and Loan crisis. The stock market began a long bull market in 1982 and the cash of October 1987 was short lived due to govt intervention. Housing and stock market booms contributed to the economic growth but nothing compared to the stock market bubble of 1990s and the housing bubble of mid-2000s.


Financial Conditions for the Next President Are Nothing Like 1980

They are almost opposite. The leverage, in the form of debt, is extremely high. What worked during Reagan has no applicability for Trump, or anyone else. Increase in the Hispanic population under Reagan, mostly due to originally illegal immigrants, is not a viable option.

It is the debt, stupid!

 


 

Author: Jas Jain

Jas Jain, Ph.D.
the Prophet of Doom and Gloom

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