Rewriting Reality

Alan Reynolds has a great column on National Review Online today taking Paul Krugman to task for his constant efforts to distort the economic benefits that resulted from Ronald Reagan's policies. Reynolds describes typical "Krugmanian" tactics such as defining the "Reagan era" as the period between 1977 and 1991. Correct me if I'm wrong, but I'm pretty sure Jimmy Carter was inaugurated in 1977, not Ronald Reagan. And from 1989-1991 George H.W. Bush was busy undoing some of Reagan's economic accomplishments (raising individual marginal tax rates in 1990 for example).

Krugman also uses a typical liberal economist's tactic of focusing on hard to define metrics such as wealth distribution and poverty rates to refute overwhelming evidence of economic progress. From January 20, 1981 to January 20, 1989, the S&P 500 increased by 120%. Real annual GDP growth averaged 3%, while inflation and interest rates were reduced dramatically, during Reagan's term. Yet, in Krugman's world, the 80's were a failure because the bulk of income gains went to the top 1% of income earners, while the rest of Americans were left behind. Leaving aside the fact that this was not true, as Reynolds proves, the bigger point is that the idea that policies can be implemented to target what income group gains the most is pure hubris. Politicians are most effective when they get out of the way and let the private market innovate and create growth. Efforts to micromanage and pick favorite groups to benefit from growth continually cause more problems than they solve.

Ronald Reagan's accomplishments are many, but chief among them is lowering the top marginal tax rate for individuals from 70% (yes, 70%!) to 28%, thus increasing incentives to work and innovate and unleashing the entrepreneurial spirits of Americans. Paul Krugman seems to be offended by policies that allow Americans to decide how to spend and invest their money, as opposed to the government. Thus he has been engaged in a twenty year quest to discredit Reagan's policies and accomplishments. As Alan Reynolds says at the end of his column, can we please recall Krugman's ill-deserved Nobel Prize?


Anonymous said...

Don't forget Reagan's great accomplishment of raising the FICA tax to build up a trillion dollar surplus, that thank god Hank Paulson saw fit to distribute via TARP.

It defies common sense that raising the regressive FICA tax while cutting the rate on high earners from 70% to 28% is not intended to direct more wealth to the already wealthy. (Also, I think the top rate didn't go to 28 until 1987.)

viachicago said...

Context: The FICA tax was raised as part of a deal that was a result of that favorite DC creation, the bipartisan commission, chaired by Alan Greenspan. In general, it has been the Democrats who have insisted on retaining Social Security in its current regressive design, because they thought if benefits were delinked from contributions the program would lose its widespread support.

Reagan would have preferred to privatize Social Security but there are only so many battles you can fight in one administration and he already had plenty on his plate.

The top rate was reduced from 70% to 50% in Reagan's first round of tax cuts in 1981. The Tax Reform Act of 1986 reduced the top rate to 28% effective in 1988 (it was 38.5% in 1987). Once again, political realities prevented him from reducing it all the way to 28% in one fell swoop. But he got it there eventually.