It’s not the ’80s anymore
Did the Reagan-era tax cuts really lead to powerful gains in total U.S. economic output? Tom Scott and Mary-Jane Foster recall the reforms of 1981 and 1986 very differently.
Scott was a brash, 22-year-old college student from Milford, swept into the state Senate as a Republican in 1980, the year Ronald Reagan won the White House. He had worked for the Reagan campaign and was itching for tax cuts.
Foster was living in Fairfield, commuting to New York to appear in commercials and the occasional soap opera. The Democrat later became a lawyer, developer and two-time candidate for mayor in Bridgeport.
“The taxes were so high at the federal level that there’s no doubt the tax cuts unleashed economic activity,” said Scott, a real estate broker.
“I don’t remember that things got better for the middle class and poorer people,” said Foster, who co-founded the Bridgeport Bluefish baseball team and developed the ballpark.
As the most sweeping tax reform in 31 years works its way toward through Congress for President Donald Trump to zealously sign, the Reagan tax cuts of 1981 and reform of 1986 are widely viewed as a model. Economic growth spiked to a heady 7.3 percent in 1984 — even after adjusting for inflation — and stayed above 3 percent a year for seven years.
By contrast, the last time the United States saw growth over 3 percent for a year was 2005.
But were the tax cuts the reason? Many people say yes, and supporters of Trump’s cuts — which would blow at least a $1 trillion hole in the federal budget — are banking on it.
In fact, there were numerous forces at work in the economy back in the ’80s that combined to drive more production of goods and services. Most had nothing to do with the tax cuts.
“It really is pretty foolish to be drawing comparisons to today,” said UConn economist Fred V. Carstensen, who called the Trump cuts “the biggest single threat” to U.S. prosperity.
“We’re in a sweet spot in terms of the global economy,” Carstensen said. When it comes to tax changes, “You should be doing nothing right now.”
“It was a good time for fiscal stimulus when Reagan started in 1981,” said Jeffrey Frankel, a professor at the Kennedy School of Government at Harvard and former member of the White House Council of Economic Advisers, who was a staff economist for the council in the Reagan years. “This is a terrible time.”
Frankel has written about big differences within the reforms of 1981, 1986 and 2017 that make the current efforts less likely to spur growth.
“The truth is just tax policy alone doesn’t determine the course of the economy,” he said.
With that in mind, let’s look at eight factors that drove economic growth in the ’80s — which are not here today.
1. Baby boomers coming of age
Scott doesn’t like it, but he embodies part of the argument against the Reagan tax cuts as the main driver of growth. Born in 1958, he was in the peak years of the baby boom, a time when the labor force was not just expanding, but expanding with record numbers of college graduates — eager, like him, to make a mark. That alone was reason for optimism. An analysis by Joe Wiesenthal at Business Insider shows that in 1981, Scott’s age group — people age 20 to 24 — represented 4.7 percent of the population, compared with a projected 3.2 percent in 2021. There was plenty of money to pay for health and retirements for the World War II generation as the older boomers reached peak earning years. Today, we have a shrinking labor force barely able to pay for the boomers’ retirements.
2. Oil prices falling
Foster remembers lines for gasoline in the late ’70s that could last for hours. “I remember vividly, setting the alarm in the middle of the night and then going to get gas,” she said. Prices were high and supplies low, and that mattered greatly to the U.S. economy as a net importer of oil. The barrel price hit an average of $111 in 1980, adjusted to today’s dollar value. It fell sharply to $31 by 1988. Today the price has been under $45 for three years and it’s way more likely to go up than down.
3. Military buildup
Fighting the Cold War was the centerpiece of Reagan’s foreign policy and that meant huge spending in the ’80s, nowhere more than Connecticut. Today’s Pentagon outlays remain high and Trump promises to boost spending, but the percentage gains are not likely to match Reagan’s — and that paid for massive job totals at plants and bases.
4. Falling interest rates and the housing boom
Modern America has never seen interest rates and inflation as high as they were just before Reagan took office. As borrowing rates fell back to normal, and as the boomers nested, we had a virtuous housing boom that drove construction and consumer spending. Foster had children in 1984 and 1987, and remembers many families with four or more kids. Today we have exactly the opposite of what Reagan inherited: near-historic lows in interest rates and a healthy housing market (outside of Connecticut). As interest rates rise to ward off inflation — all the more because of these cuts — can we count on a millennial generation that’s not showing much enthusiasm for homebuying as they’re forced to spend more on mortgages with fewer tax deductions? Um … no.
5. Cuts to high top tax rates
The main course of Reagan’s cuts was a reduction of the highest marginal tax rates from 70 percent down to, eventually, 36 percent. That’s huge, as Scott pointed out. So if the Reagan tax reforms drove growth at all, it was because of that. Today the highest rate is 39 percent, which most economists agree is not a big drag on activity. And even if it does unlock new investment, “Unfortunately, there is no evidence that supports cutting the taxes of the companies or the wealthy result in trickling down to the lower and middle class,” said Kathi Mettler, an accounting professor at Fairfield University.
6. Corporate cash crunch
Coming off the brutal economy of the ’70s and the 1981 recession, with high interest rates, companies were hardly in position to invest. Any money that came their way through tax cuts was far more likely to see its way to more hiring and equipment purchases. Today, the Standard & Poor’s 500 companies are sitting on record or near-record cash hordes. “Profit share of national income is way up and investment spending is down,” Frankel said, even with all that cash. “They’re already using the cash to pay out high dividends and to increase share buybacks and executive compensation.” As for the Trump tax cuts for corporations, the centerpiece of the 2017 plan, “Those aren’t direct incentives to invest like an investment tax credit,” Frankel said.
7. Desktops and networking
For his 1986 re-election, Scott bought an early campaign management program called Hannibal and a computer to run it. The system let him and his volunteers track voters by house and generate targeted mail. It was part of the boom in desktop computing and networked mainframes, which companies added almost universally. Whether that drove economic growth in the ’80s is a matter of debate, as, Frankel said, the joke is that computers were showing up everywhere except the productivity numbers. But at the least, the computer boom ignited an industry and drove a stock market run-up. Today, many tech firms are maturing rather than coming of age.
8. Falling unemployment
Reagan had to tackle a recession-era jobless rate of 10 percent when he took office. Whether the tax cuts helped bring unemployment back to normal levels is again a matter of debate, but economic output and added jobs fed on each other. Today we’re at or near full employment, so we aren’t going to see an output boom from the tax cuts unless we see more workers. Unfortunately, they weren’t born 20 years ago and Trump’s Republicans won’t let them into the country from elsewhere — killing the only hope for 4 percent growth.