Lagging indicators, just as with Reagan:
http://old.nationalreview.com/kudlow/kudlow200406100915.asp
Economists were vexed during the 1970s, as unemployment and inflation
rose together to stifle economic growth and all forms of investment. The
Keynesian Phillips-curve paradigm, whereby employment and inflation are
supposed to move in opposite directions, completely broke down. The Ivy
League formula of increasing the money supply to spur growth, and high
taxes to hold back inflation, had failed utterly.
Between the late 1960s and 1980, the U.S. inflation rate rose from 2
percent to 14 percent, while the unemployment rate gradually drifted
higher, from 4 percent to almost 10 percent. It was a period of decline
for the country. Americans were demoralized.
As stagflation became more deeply embedded in the U.S. economy, Soviet
adventurism in Central and South America, Asia, and elsewhere around the
world became more pronounced. The Soviets saw the U.S. cut and run from
Vietnam. Our Cold War adversary saw nothing but weakness emanating from
the U.S.
Ronald Reagan changed all that. From the moment of his swearing-in in
Jan� uary 1981, with his extraordinarily strong character and deep and
abiding faith in God, Reagan acted relentlessly to revive the nation.
More than any modern president, Reagan understood the link between
economic growth at home and American strength overseas. It was the
Gipper�s most brilliant insight. He acted swiftly to show our enemies
that we would produce the necessary economic resources to do whatever it
would take, for however long was necessary, to triumph over the
Communist menace.
Immediately upon assuming office, he reversed the economic policy of the
decline years. He brought down marginal tax rates, restoring the
incentives necessary for economic growth. He gave Federal Reserve
chairman Paul Volcker the strong ground to stand on, allowing him to
harden the value of the dollar and slay inflation.
At bottom, what became known as Reaganomics was a new pro-growth policy
mix of tax incentives at the margin and stable money. But there was
more. The Californian launched a massive military buildup totaling about
$1.5 trillion. He deregulated oil prices, proving the conventional
wisdom wrong as energy became much cheaper. He launched U.S.-Canadian
free trade. He was unyielding in his opposition to the air-traffic
controllers� strike, firing thousands of these government workers and
ending the anti-growth union stranglehold on private industry. He
created individual retirement accounts and 401(k)s, giving birth to the
investor class. He also slashed social spending by reducing domestic
program levels (excluding Social Security and health care) by nearly $50
billion in 1981. That amount would come to about $90 billion today.
By 1986, Reagan�s tax-reform plan left two marginal rates of 28 percent
and 15 percent, a long stone�s throw from the 70 percent top rate he had
inherited. His plan also cut about 2,000 pages from the tax code.
Ideas matter. Results quickly followed for Reagan. Between 1982 and
1989, the economy grew, adjusting for inflation, by 35 percent: more
than 4.5 percent per year. As growth was restored, tax revenues came
flowing in. Income-tax revenues grew by 50 percent during this period
even as tax rates dropped. By 1986, the inflation rate had fallen to 1
percent. By the end of his term, unemployment had dropped to 5.5
percent. Interest rates had plunged. The stock market had soared.
From July 1982 through the end of 1988, the S&P 500 averaged a near 21
percent annual gain. Brand-new industries arose in computing, software,
communications, and the Internet � original endeavors that completely
streamlined and transformed the American economy for the decades to
come. In effect, Reaganomics launched a 20-year boom, the longest
prosperity period in the 20th century.
Reagan critics to this day continue to harp on deficits and debt, rather
than the growth miracle produced by Reaganomics. But they are factually
wrong. Reagan inherited a budget gap of roughly 2.5 percent of the
economy. By the end of his two terms, he left it exactly where he found
it. In between, he restored our economic health and revitalized our
standing around the world.
By the time of his summit meetings with Soviet chairman Gorbachev,
Reagan was able to say calmly and diplomatically that the U.S. could
produce the goods and the Soviets could not. In the next few years, the
Berlin Wall came down and the Soviet Union collapsed.