Last May, investor Mark Dow wrote a fantastic post on his blog titled: Reagan’s Gone. You’re Old. Get Over it.
The gist was this: The Reagan economic playbook didn’t make sense in post-crisis America, and economic commentators needed to recognise that.
Reagan’s economic task was characterised by a need to fight inflation, address historically high taxes, and undo onerous regulation, all the while benefiting from a nice demographic tailwind.
The post-2008 period is nothing like that.
Fast-forward to post-2008. Whatever the opposite of pent-up demand is, that’s what we have. Inflation and interest rates are already low, household leverage is a major burden, consumption was pulled forward during the boom, and demography is no longer our friend. Plus, we have globalization acting like a supply shock to our labour pool, holding down wages. In short, the tailwinds are now headwinds. On the government side, unions are far less powerful today, there are no price and wage controls, and tax rates are low. It seems next to impossible to make the case that supply-side policies can have anywhere near the effect today that they had in the 80s.
Yet, so many still do. Much of our body politic is stuck—along with the bulk of the baby boomers—in the 1980s, still trying to relive those old battles in the rear-view mirror. The US has changed. The world has changed. The problems have changed. The emerging world is rapidly plugging into the grid, hungrier and willing to work for less. We need to be pragmatic. Adjust and compete. Look around the globe without preconceived notions and see what we can learn from others. Being stuck in the same old big government/small government debate keeps us from doing this. Sometimes supply-side policies are right and sometimes they’re not. Sometimes Keynesian polices are right, sometimes they’re not. Until we approach policies as tools in a toolkit and not as divine scriptures, we are going to be stuck in an ideological logjam, wasting precious time. Time to get off the ideological paradigm.
Of course, back then this message didn’t go very far.
But now … it seems to be gaining some traction.
In a great NYT column, Ramesh Ponnuru (a National Review writer, and a conservative in good standing) makes the same basic argument as Dow did. Times have changed. The challenges are different. Repeating the early ’80s playbook doesn’t make any sense today.
When Reagan cut rates for everyone, the top tax rate was 70 per cent and the income tax was the biggest tax most people paid. Now neither of those things is true: For most of the last decade the top rate has been 35 per cent, and the payroll tax is larger than the income tax for most people. Yet Republicans have treated the income tax as the same impediment to economic growth and middle-class millstone that it was in Reagan’s day. House Republicans have repeatedly voted to bring the top rate down still further, to 25 per cent.
A Republican Party attentive to today’s problems rather than yesterday’s would work to lighten the burden of the payroll tax, not just the income tax. An expanded child tax credit that offset the burden of both taxes would be the kind of broad-based middle-class tax relief that Reagan delivered. Republicans should make room for this idea in their budgets, even if it means giving up on the idea of a 25 per cent top tax rate.
Ponnuru goes on to make the same point regarding monetary policy. Whereas inflation was the big enemy in the early ’80s, that is not the case now.
Since the 2012 election, the GOP has been searching for a solution to the party’s woes (E.g. will salvation be found in immigration?). There are probably a few areas that need help, but the party’s economic dogma is disastrous. The obsession with tight monetary policy, austerity, and inflexibility on top tax rates is totally out of step with the moment, and what the economy needs to heal.
This advice from Ponnuru — who is nobody’s idea of a RINO — is a great sign.
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