As the debt ceiling battle heats up and an economic Judgment Day looms, let me make a bold claim: Reaganomics always works, Keynesianomics always fails—and I can prove it. In my book "The New Reagan Revolution," I examine six economic crises of the 20th and 21st centuries. Three times, Reaganomics produced a long-term economic boom; three times, Keynesian "solutions" made a bad situation worse.
Keynesianomics, of course, refers to the economic theories of John Maynard Keynes (1883-1946), who taught that government can boost the economy by injecting money through deficit spending, and restrain inflation by raising taxes. This theory has never worked in practice. Keynesianomics (now known as Obamanomics) fails because every dollar the government pumps into the economy must be taken out of the economy through borrowing or taxation. It produces no net gain and creates no wealth.
Reaganomics succeeds because it frees the private sector to create wealth. The Four Pillars of Reaganomics are: (1) keep tax rates low; (2) restrain government spending; (3) reduce government regulation of the private sector; and (4) keep the dollar sound. Keynesianomics is about central control; Reaganomics is about keeping the free market free.
The three crises that disproved Keynesianomics were:
1. THE GREAT DEPRESSION. Triggered by the Crash of 1929, the Depression began eight months into Herbert Hoover's presidency. Many people mistakenly think Hoover was a free market capitalist. In reality, Hoover raised taxes (hiking the top marginal rate from 25% to 63%), boosted government spending by 47%, and strangled the free market with protectionism (the Smoot-Hawley Tariff Act).
In 1933, Franklin Roosevelt took office amid 25% unemployment. FDR created millions of make-work jobs with New Deal "stimulus" spending, yet unemployment never dipped below 14% throughout the 1930s. Roosevelt's Keynesian policies devastated the economy. From 1937 to 1939, the stock market lost almost half its value, car sales fell by one-third, and business failures increased by one-half. A decade into the Great Depression, unemployment stood above 20 percent.
People think FDR "brought us through the Depression." In reality, his Keynesian policies prolonged the Depression. He raised personal income taxes, corporate taxes, and estate taxes, and introduced the payroll tax. Through higher taxation and increased regulation, FDR made it more expensive to hire people in an era of high joblessness.
Another myth: "World War II ended the Depression." Fact: WWII only improved one economic indicator: unemployment. It's easy to cut unemployment when you draft 12 million men into the military! All other indicators—private investment, stock prices, personal consumption—remained depressed throughout the war. Roosevelt and Truman planned to propose a postwar Second New Deal—more government-subsidized jobs, housing projects, and socialized medicine—but Congress chose instead to cut taxes and spending, paving the way for postwar prosperity.
2. THE NIXON-FORD RECESSION. Unemployment and inflation were painfully high throughout the 1970s. Gerald Ford tried (and failed) to stimulate the economy with tax rebates, apparently unaware that consumer confidence is fueled by permanent tax rate cuts, not Keynesian rebates.
3. THE CURRENT ECONOMIC CRISIS. The mortgage crisis exploded during the 2008 presidential campaign. Both outgoing President Bush and incoming President Obama responded with Keynesian schemes. Bush called for the $700 billion Troubled Asset Relief Program (TARP). Obama pushed the $862 billion stimulus bill. To top it off, the Fed injected a jaw-dropping $3.3 trillion in liquidity and $9 trillion in short-term loans into the economy. That's weapons-grade stimulus! It should have nuked the recession—if Keynesianomics works. But Keynesian theory doesn't work—never has, never will.
The three crises that validated Reaganomics were:
1. THE "FORGOTTEN DEPRESSION" OF 1920. Near the end of Woodrow Wilson's presidency, the economy nose-dived. GNP fell 17% and unemployment soared from 4% to nearly 12%. A year later, Warren G. Harding took office, cut tax rates, slashed spending, and balanced the budget. The results were astonishing: By 1923, unemployment fell to 2.4%. Harding's successor, Calvin Coolidge, maintained Harding's Reaganomic policies, ushering in the Roaring Twenties, a decade of prosperity, price stability, and boundless optimism.
2. THE RECESSION OF 1960-61. From the end of World War II to 1960, America suffered four minor recessions. President John F. Kennedy decided to end the cycle of recessions that had plagued Eisenhower. In December 1962, he addressed the Economic Club of New York, saying, "It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now." He was describing, of course, the principles of Reaganomics.
JFK didn't live to see his tax cuts implemented, but Lyndon Johnson signed them into law in February 1964. The Kennedy-Johnson plan cut the top tax bracket from 91% to 70%, and the lowest bracket from 20% to 14%. In just one year, the economy expanded 5%, corporate profits rose 21%, personal income grew 7%, and unemployment plunged to 4.2 percent.
3. THE CARTER "STAGFLATION" ECONOMY. Under President Jimmy Carter, Americans suffered from "stagflation"—double-digit inflation, double-digit interest rates, and double-digit unemployment.
In 1980, my father, Ronald Reagan, was elected president. He curbed domestic spending and slashed the top marginal tax rate from 70% to 28%. His tax cuts generated 16 million jobs. Inflation fell from 13.5% in 1980 to 3.2% in 1983. The Reagan tax cuts produced 96 consecutive months of continuous economic growth from 1983 to 1990, and nearly doubled federal revenue.
In the acid test of real-world economics, Reaganomics is 3 for 3 while Keynesianomics (aka Obamanomics) is 0 for 3. It's time for our lawmakers and policymakers to face facts, because these facts don't lie: Keynesianomics has never worked, not even once.
And Reaganomics never fails.
Michael Reagan is the son of President Ronald Reagan and a political consultant. He is the founder and chairman of The Reagan Group and president of The Reagan Legacy Foundation. Visit his website at www.reagan.com. Portions of this column are adapted from his book The New Reagan Revolution (St. Martin's Press).
Michael Reagan is the son of President Ronald Reagan. He is a political consultant, founder and chairman of The Reagan Group, and president of The Reagan Legacy Foundation. He is the author of "The New Reagan Revolution" (St. Martin's Press). Visit his website at www.reagan.com.