Way back in 1981, a former congressman named David Stockman became Ronald Reagan's Director of Management and Budget (OMB). He was the government's chief accountant and was responsible for the “balance sheet” of the United States.
He put forth a radical and unproven theory called “supply-side economics,” which partly theorized that lower corporate and personal taxes would act as a huge incentive to increase economic productivity. The idea was that it would produce a higher standard of living for the entire population. It also had the added bonus of eventually deriving more tax income for the government.
The plan was to reduce taxes meaningfully and immediately, but it was widely derided as economic heresy and branded “voodoo economics.”
Needless to say, any proposal that would give the government less revenue now would be met with little support in Congress. Actually, hardly anyone supported it except for Ronald Reagan and a small band of conservative thinkers who felt that a smaller government would be better for the overall economy.
A Little Help, Please
In the early 1980's, the U.S. economy was in the “Jimmy Carter malaise” after oil shocks and recession during the late 1970's. Interest rates were climbing sharply in order to fight pervasive inflation. It was not a good time economically in America, and times were tough for corporations and individuals alike. Plus, the stock market was suffering through a prolonged bear market that seemed never to end.
The economy needed something radical to get it going again.
Bucking the traditional wisdom and fighting almost all of Capitol Hill, Reagan pushed through a “supply-side” budget that cut tax rates dramatically and across the board. He was called every name in the book, from “cowboy” to “kook,” but he kept the vision of what “keeping more of what you earn” could do to foster higher productivity in the economy. It was called the “Reagan Revolution.”
Within one year since his “supply-side” budget was signed into law, the stock market began what may be the longest and strongest bull market in history.
The tax cuts worked.
History Usually Repeats Itself
Fast forward to the year 2002.
The stock market had just suffered a “technology meltdown” and the country had just suffered the worst domestic attack in our history. The economy was slowing dramatically and a recession seemed around the corner after many boom years in the stock market and general economy.
George W. Bush was faced with fighting a new war on terror. That was his mandate and priority — and it pushed many other initiatives aside. But rather than let the economy — and the country — suffer a malaise, he proposed a stimulus plan that took a page directly from the “Reagan Revolution.” He cut taxes across the board.
Like Ronald Reagan 20 years ago, many called the president a cowboy and a kook.
But, by cutting taxes on the middle class, he encouraged more domestic spending. By cutting the capital gains and dividend tax, he fostered more productive investment. By supplying favorable tax status to portions of corporate America, the president's policies provided incentive to businesses to hire employees and to spend on productivity-enhancing goods and services.
The facts and figures speak for themselves: a 4.6% unemployment rate, 5.4 million jobs created, 5.6% first quarter 2006 G.D.P. Plus, the largest increase in tax receipts in 24 years during the first half of this year. All this comes while we continue to fund and actively fight a seemingly open-ended war on terror.
By creating an environment that offers incentives to invest and spend, the administration has used fiscal policy to its best end; to make the economy grow. The Dow Jones Industrial Average is 45% higher than the 2002 lows. The Nasdaq Composite is up 90% during the same time period. The housing market has had a record-setting run. Worldwide markets have risen to record levels.
We still have plenty of issues to resolve before reaching economic nirvana — like getting the government to cut spending — but there is one fact that we can say with confidence: the tax cuts worked.