August 16, 2006
Reaganomics II Posted by John Steele Gordon at 03:20 PM EST Fred Smoler writes, “Did the Reagan tax cuts produce an increased propensity to save? Nope. The U.S. savings rate fell from a high of 12 percent in 1982 to under 7 percent in 1989.”
This is an artifact of the very cramped definition of “savings” used by the government to determine the savings rate. The savings rate (the percentage of disposable income not spent) has been going down for most of the last 25 years and has from time to time actually been negative. Yet the net worth of the median household has been rising briskly in the same time period. How can that be? Well, the main reason is that mortgage payments on real estate, the main assets of most U.S. households, don’t count as savings. Neither do rising real estate values, until they are realized. So in many areas of the country, families have had zero savings rates while seeing their net worth rise by 10 percent a year, which means it doubles every 7.2 years. As Al Smith once said, “The United States will be the first nation to go to the poor house in an automobile.”
He writes, “Did the deficits shrink on Reagan’s watch? Nope. Over the long boom tax receipts nearly doubled, but the deficits ballooned.”
The “Reagan deficits,” like “tax cuts for the rich,” are a Democratic talking point. For one thing, Article I, Section 9 of the Constitution requires that “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; . . .” In other words, the President cannot spend one dime of public money unless Congress directs him to do so, and the House of Representatives was in Democratic hands throughout the Reagan presidency. I suspect that, had it been up to Reagan—i.e., if he and he alone determined the federal budget—there would have been no federal deficit. He would have spent heavily on what he deemed important—rearming the military, for instance—and cut heavily into or eliminated programs he didn’t like in order to balance the budget.
But every program, no matter how silly or outdated, has its beneficiaries, and they will always fiercely defend it. Congress, as usual, took the path of least resistance and funded both Reagan’s programs and all the others. The President has very limited powers to control spending, thanks in good measure to the most misnamed act of Congress in the history of the Republic, the Budget Control Act of 1974. So, with limited political capital, Reagan chose to fight other battles.
In fact the so-called Reagan deficits were merely a continuation of the Nixon, Ford, and Carter deficits. The national debt tripled in the 1970s. But because of the raging inflation of that decade, the debt, as a percentage of GDP, declined. It was only when Paul Volcker, with the encouragement of Ronald Reagan, broke the back of the inflation with sky-high interest rates and a sharp recession, that the chronic deficit spending began to loom large in the public consciousness.
Congress is still pathologically incapable of controlling spending, because the political pressure from the specific beneficiaries of programs is much more intense than the political pressure from the population as a whole to control spending. The Wall Street Journal yesterday (subscription only) had an editorial about the wages of federal workers. The average federal worker earns twice as much in wages and benefits as the average worker in the private sector. Add to that the facts that federal workers have almost total job security—not many layoffs for bureaucrats—and are very, very difficult to fire for cause, and it is not surprising that the federal “quit rate” is far, far lower than in almost any private-sector industry. How much does the extra pay for federal workers amount to? Well, if they were paid what the average worker in the private sector earns, one third of this year’s projected budget deficit of $296 billion would vanish.
If Medicaid and Medicare were run with the same bureaucratic efficiency and fraud levels as private health insurance—and there is no reason other than politics that they can’t be—the federal budget would be in handsome surplus.
Fred Smoler writes, “I have never quite understood why my fellow citizens reelected Reagan in 1984, but I do not thereby assume that they were dolts, any more than John Steele Gordon is obliged to assume Americans [were] dolts because they reelected Clinton.”
I didn’t vote for Clinton, but he had a very weak Republican opponent in 1996 and still couldn’t capture a majority of the popular vote. Reagan won an overwhelming landslide in 1984. I think Reagan’s political triumph is easy to understand: By almost any measure you care to use, except the growth of the national debt, the country was in better shape—often far better shape—than it had been in 1980, economically, geopolitically, and spiritually.
The last should not be discounted as a force in politics. America is a nation of optimists—after all most of us are descended from people who chose to take a big chance in coming here—and Reagan’s sunny optimism was a blast of fresh air after the dismal years of the late seventies when we were led by the well-meaning but humorless, clueless, and preachy Jimmy Carter. Reagan changed the national mood almost overnight, and the people loved him for it, despite whatever faults he might have had.
There was another time when a new President’s spiritual power changed the mood with equal swiftness and equally good political results. That was on March 4, 1933, when Franklin Roosevelt assured a desperate nation that it had nothing to fear but fear itself. The Great Depression began to lift that very day.
That’s why, if there are ever to be more Presidents on Mount Rushmore (and I hope there won’t be), they will be FDR and Ronald Reagan. They both sang to the American soul.
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