Wednesday, September 3, 2008

Reagan: Strong economic growth in spite of Big recession

How quickly the media forgets. A Google search of “Fannie Mae,” produces 5,700,000 hits, and a Google search of “Palin,” produces 7,080,000 hits. The media sees McCain’s VP pick as 2.6 million hits more important than the solvency of Fannie Mae and Freddie Mac. For now, Fannie and Freddie were able slide by the media’s eye since shares rose on Tuesday when Freddie Mac said it would sell $4 billion in debt. We will see, but I imagine that their balance sheets look just as bad as they did two weeks ago.

How important is the Presidential race for the economy?

The chart shows annual real per-capita income growth during the last 7 Administrations. Ronald Reagan saw both the highest and lowest annual income growth, and Bill Clinton saw high and consistent positive income growth. The President (executive branch) controls partly fiscal policy - government spending or tax policies - that affects economic activity and income growth.

According to the National Bureau of Economic Research (NBER), recessions occurred during the the Presidencies of Richard Nixon, Gerald Ford, Jimmie Carter, Ronald Reagan (2 recessions), George H.W. Bush, and George W. Bush. Clinton is famed for his budget surpluses. On average, his Administration saw the highest growth rate, 2.49%, over the last seven Presidencies. However, he is the only President since Nixon that did not see a recession during his Presidency. Without a recession, one can pursue his agenda, a.k.a. raise taxes to balance the budget, with ease. In my opinion, this was just luck that an unforeseen negative shock (like an OPEC oil restriction or 9/11 terrorist attack) did not hit the economy while Clinton was President. If it had, then the graph may look very different.

On the other hand, President Reagan, who is known for his supply-side economics and strong defense spending, saw the third highest growth rate, 2.05%, over the last seven Presidencies. My mother is a huge Reagan fan, and the above chart illustrates her enthusiasm. In spite of the worst recession in 50 years, -2.9% growth in 1982, Regan was able to promote strong and positive economic growth throughout his Presidency. This is just 0.12% behind the Jimmy Carter Administration, and he inherited already strong and persistent growth from the 1960's and early 1970's. Supply-siders attribute the strong growth in the 1980's to Reagan's Economic Recovery Act of 1981, the largest tax reduction in history. I tend to agree.

There are plenty of variables that are not included here, but if there is a correlation between the Presidency and economic growth, Reagan, a Republican with his low tax rates, was certainly a strong and venerable President.


Please leave comments. Best, Rebecca Wilder

2 comments:

  1. But Reagan only had one significant tax cut (1981)...and in one year (1982), he signed the first of 7 (some conclude 10) tax increases over the next 7 years..That 1982 tax increase was the largest tax increase in history in terms of real dollars based on inflation.......All the while his debt growth approached 300% in his 8 years in the White House...He was a borrower and spender in that he took the US from being the leading lender nation in the world in 1981 to the world's leading debtor nation in 1988...One could say that "spend, borrow and tax" had more to do with the so-called "Reagan Recovery" than anything else...One could also conclude that the signficant increase in OPEC oil production (which resulted in a significant decline in gas prices at the pump) probably has a much a positive effect on the US and world economy than any fiscal policy Reagan or Congress engaged in.  Reagan was not a low taxer.  He was a big spender and a big borrower."

    If low taxes are the stimulus for recovery, we ought to be in the golden age of US economies since the industrialization ad urbanization of America.  We are arguably in a period of the lowest effective federal tax rates since Teddy Roosevelt did battle with the "Robber Barons" and FDR's expansion of government's role.

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