September 15, 1997

September 15, 1997 | Commentary on Federal Budget

ED091597b: Supply-Side Vindication

President Clinton and the current Congress are both scrambling to take credit for the vigorous economy. And who can blame them?

Inflation is low, unemployment has dipped below 5 percent, productivity is growing steadily, and for the first time in recent memory people are talking about what might be done with a budget surplus.

In a recent essay, Washington Post columnist James Glassman noted two problems with the idea that the president and Congress produced the current boom: First, politicians don't produce anything. Second, anybody with a memory knows the roots of our current prosperity date back 15 years.

That was when America learned that the best thing government can do for the economy is to leave it alone. In other words, it isn't what government or politicians do that produces prosperity--it's what they don't do. If they don't tax and don't regulate, the economy will grow.

Fifteen years ago, the government drastically reduced taxes and curbed regulation. Since then, the economy has grown steadily. Who grew the economy? The men and women of America's entrepreneurial sector who compete to produce better goods and services at cheaper prices.

Which politician got the government out of the way so the economy could grow? Ronald Reagan.

In the late 1970s, Big Government had the economy in a deadly head-lock. Bad fiscal policies, a top tax rate of 70 percent, and massive regulations had stifled the economy and created an atmosphere of pessimism. Productivity was virtually nil. Inflation rose while household income fell among all income groups. The bottom fifth of earners lost 12.7 percent in inflation-adjusted income from 1978-1982.

Reagan changed all that. Amid howls of protest from those who now claim credit for our prosperity, Reagan--encouraged by the late economist Norman Ture and others--pushed Congress to cut taxes and deregulate wherever possible. The result? Productivity surged, inflation felled and tens of millions of new jobs were created. And the bottom fifth of earners won an 11.9 percent increase in inflation-adjusted income from 1982-1989.

What about the government? How did it fare under Reagan's policies? Tax receipts since 1980 have risen 205 percent. Indeed, we're on the verge of wiping out the deficit through economic growth.

Remember how, in the 1980s and early 1990s, liberals scoffed at the notion that a strong economy--spurred by lower taxes--could balance the budget? Well, during the 1980s they did their best to prevent it from happening. The liberal Congress raised spending even faster than Reagan's hands-off policies could bring in revenue.

But in the past few years, the conservative Congress has helped hold spending increases down. The result: Ronald Reagan's supply-side economic boom is getting ready to overtake government spending for the first time!

Cutting taxes to increase economic activity, thereby increasing the government's tax revenue--that was called "Voodoo Economics." Democrats and Republicans alike chided those nutty "supply-siders." Now, those wacky predictions are coming true.

Clinton and Congress didn't wipe out the deficit. Supply-sider Ronald Reagan gave the economy needed breathing room. Liberals, try as they may since then, have been unable to dismantle the basic framework Reagan established. Tax increases have slowed the rate of economic growth, but they have failed to kill America's powerful economic machine.

Instead of admitting the Reagan detractors were wrong, President Clinton is doing what any good politician would do--taking credit for the ongoing supply-side boom. In retrospect, it seems prophetic that Reagan had a plaque on his desk in the Oval Office that read, "There is no limit to what a man can do or where he can go, if he doesn't mind who gets the credit."

There's enough good news here for credit all around. But the lion's share should go to the president who led the way. So hats off to Ronald Reagan.

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Note: Edwin J. Feulner, Ph.D. is president of The Heritage Foundation, a Washington-based public policy research institute. Additional information about The Heritage Foundation can be found on the World Wide Web (www.heritage.org).

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

Related Issues: Federal Budget