This post is the first of a series I envision to discuss the "Reagan Revolution", as initially envisioned under Reagan and as carried out by Republican presidents and Congresses through the following decades. It is time to debunk the Reagan myth for what it really is, because we cannot make the right decisions about the country's economic policies if we continue to gloss over the realities of who benefits most, who suffers, and what works and doesn't work to ensure a better qualify of life for all.
Right wing ideologues like to claim that the Reagan legacy is one of fiscal responsibility that produced on its "supply-side" and "trickle-down" philosophy a better life for everyone than could otherwise have been had. This myth is much in evidence these days--just look at the Heritage Foundation's "Real Reagan Economic Record: Responsible and Successful Fiscal Policy, written in 2001 to support the $1.6 trillion package of Republican tax cuts and claiming that "Congress should embrace President Bush's tax reform plan as a responsible return to the most successful economic policy of the 20th century." The article claims that tax cuts and deregulation accounted for growth through the 1980s and 1990s. Or look at today's reliance on the theoretically unfounded "Laffer Curve" that claims to depict how tax cuts pay for themselves to justify reducing taxes on the wealthy while paying for a $3-trillion war and not paying for the infrastructure repairs, especially to rail and energy, that we require to maintain our standard of living.
In hindsight, Bush's profligate "cut taxes and spend like crazy on short-sighted goals" administration of the last 8 years would look irresponsible compared to almost anything else, but our goal here is to see how these policies are the fiscal legacy of the Reagan approach of privatization and deregulation that permits large corporations to make their own rules and rip the government off while doing so and tax policies that ultimately support redistribution-up that permits the wealthiest Americans to hog their wealth rather than contribute appropriately to the public good. Today's result is a cavalier attitude towards fiscal soundness that willingly borrows from future generations to pay for the generous subsidies for agribusiness, millionaire's second homes, wealthy executives pensions, and Big Oil's rich paydays, and other percs.
Let's consider, first, whether tax cuts "pay for themselves" by generating economic growth that wouldn't have taken place without the tax cuts. That's the underlying hypothesis of the Heritage Foundation--that any growth that takes place not only is correlated with tax cuts but caused by them. In fact, tax cuts don't pay for themselves in growth--at best, they generate enough growth to account for about 10% of the loss of revenues. So they are actually a drag on long-term growth, as borrowings have to make up for the missing revenues (since spending cuts never will be that large).
Note that the Heritage Foundation claims that Reagan's 1981 tax cuts are responsible for two spurts of growth in the 1980s and in the 19990s. But that article doesn't really set out the facts.
First, the 1970s had been a time of stupendous inflation which had required a huge effort by the Federal Reserve. As a result, the initial Reagan tax cut acted as an important temporary stimulus to a deeply recessed economy, which was reinforced by Reagan's huge increases in military spending. See, e.g., James Tobin, Fiscal Policy: Its Macroecnomics Effects, Yale Journal of Politics, Spring 2001. Tobin concluded that the famous "supply-sider" (read---right-wing) in fact shepherded the country out of the recession to growth based on standard "demand-sider" (read--left-wing) strategies.
In practice Reaganomics turned out to be the biggest and most successful Demand-side fiscal gambit in peacetime U.S. history. What it was not was what it was intended to be, a Supply-side transformation of the economy. There was zero evidence that the American economy's capacity to produce goods and services at full employment was any greater at the end of the eighties than would have been prophesied a decade earlier without Reagan fiscal policy. Id.
Second, the Reagan tax cut of 1981 was followed, under Reagan, by the biggest tax increase in American history, in terms of taxes raised as a proportion of GDP, and then followed by additional tax increases every year that Reagan was in office until the last, and increases under Clinton and Bush I. Here's how Bruce Bartlett (an economist and Reagan adviser who supports Republican taxcutting policies) describes the Reagan tax increases that followed the Reagan 1981 tax cuts:
Reagan may have resisted calls for tax increases, but he ultimately supported them. In 1982 alone, he signed into law not one but two major tax increases. The Tax Equity and Fiscal Responsibility Act (TEFRA) raised taxes by $37.5 billion per year and the Highway Revenue Act raised the gasoline tax by another $3.3 billion. According to a recent Treasury Department study, TEFRA alone raised taxes by almost 1 percent of the gross domestic product, making it the largest peacetime tax increase in American history. Bruce Bartlett, A Taxing Experience, National Review Online, Oct. 29, 2003.
Bartlett, by the way, also believes that Bush has "bankrupted America" with his tax policies. See this 2007 Travis Smiley story. (Though he finds faults with the Bush team's version of supply-side thinking, he still believes that the supply-side story is the right one. New Keynesians disagree. For more on that, there's a good series of exchanges in Angry Bear back in April 2007, at these links: April 2007 Angry Bear exchange and this description of Bartlett's supply-side views versus New Keynesian supply side views.)
So while Reagan's legacy is the myth of a taxcutting policy that pays for itself and provides for growth, the Reagan fact is that the tax cut was in large part reversed by necessary tax increases--both in the corporate and individual income taxes and in payroll taxes, which together with significant government spending laid the foundation for the growth through the next decade, though the establishment of the Reagan myth about supply-side and tax cuts and the concommitant failure to adequately address the long-term deficit problem also laid the foundation for our fiscal mess today.
(Regretably, only about a third of the 1981 tax cut was reversed with corporate and individual tax increases in 1982, see Krugman, the Great Taxer. Much of Reagan's tax increase came about from regressive payroll taxes, which was not the best way to manage the need to undo the huge 1981 tax cuts. We have not yet truly acknowledged that the Social Security taxes are supporting regular budget spending and so should be made less regressive by charging them against capital income as well as wage income.)
The Center on Budget and Policy Priorities has a brief report that is relevant here--Evidence Shows That Tax Cuts Lose Revenue, July 18, 2008. The claim that tax cuts cause enough growth to pay for themselves, simply stated, is "false." Here's what they say about the 2001-2003 tax cuts, and the earlier Reagan cuts.
There is no evidence that the [2001-2003] tax cuts caused any increase in economic growth, let alone growth sufficient to offset their cost. In fact, the 2001-2007 economic expansion was among the weakest since World War II with regard to overall economic growth.  Moreover, revenue growth was very poor during 2001-2007. Real per-capita revenues fell deeply in 2001, 2002, and 2003 and have since risen to barely 2 percent above their 2001 level. Over the course of other postwar economic expansions, they grew by an average of 12 percent.
Previous tax cuts didn’t pay for themselves either. In 1981, when Congress substantially lowered marginal income tax rates on the well-off, supporters claimed the cuts would boost economic growth. In 1990 and 1993, when Congress raised marginal income tax rates on the well-off, opponents claimed the increases would harm the economy. In fact, the economy grew at about the same rate in the 1990s, following tax increases, as in the 1980s, following a large tax cut. And revenues grew twice as fast in the in the 1990s (3.5 percent in real per-capita terms) as in the 1980s (1.5 percent).
Of course, as Harvard economist Benjamin Friedman pointed out in a 1988 book, Day of Reckoning: The Consequences of American Economic Policies under Reagan and After, Reagan's fiscal policies of trying to do more with less taxes resulted in significant long-term fiscal damage: national debt of $2.8 trillion in 1988 (or $20,000 for each family of four), nearly half of which was then (and is now) owed to foreigners. See this Books of the Times review. (One realizes just how bad it is when considering that $2.8 trillion was considered a staggering amount of debt just 20 years ago. Under Bush, we are at about $9.5 trillion and counting--a 50-year high for debt as a percent of GDP--see the "national debt clock" at the left of this entry.) Here's what Friedman had to say about the future that the US would look forward to because of Reagomics (as quoted in the Times review):
''Becoming a nation of tenants rather than owners will jar sharply against our traditional self-perceptions. America will no longer be an owner, directly influencing industrial and commercial affairs abroad. ''At the same time, we will have to accept the influence and control exercised here by foreign owners. The transition is certain to be demoralizing and probably worse if potentially dangerous frictions also develop as the ordinary resentments of renters against landlords and workers against owners increasingly take on nativist dimensions.''
''How have we gotten into such a mess?'' he asks. Reaganomics - the decision to cut taxes in 1981 in the belief that the added stimulation to the economy would make up for lost revenues - was based on false hopes, ''a willing suspension of disbelief.'' It could be seen to be in error even before it was carried out. In retrospect, it was either ''an intellectual error of the first magnitude'' or ''deliberate moral irresponsibility on a truly astonishing scale.''
That was an especially lucid forecast of today's fiscal mess, and his description of the reaganomics program as possibly "deliberate moral irresonsibility on a truly astonishing scale" fits the Bush administration tax policy to a "T."