Ralph Reiland: Cutting taxes cut 'misery index'
Inaugurated as the 40th president in January 1981, Ronald Reagan inherited the “stagflation” of the 1970s, a stagnating economy with unemployment and inflation escalating simultaneously.
The “misery index,” the unemployment rate plus the inflation rate — an indicator of how the population is doing economically, with a higher number signifying larger economic and social costs — increased steadily during the pre-Reagan Carter presidency, reaching a post-World War II peak of 20.76 in 1980, up from 13.55 in 1977, 13.69 in 1978 and 17.07 in 1979.
In Keynesian economic policy, the trade-off between unemployment and inflation, as illustrated by what economists call the “Phillips Curve,” shows the cure for joblessness is a growing economy, with a negative side effect of more inflation; the cure for inflation is a slowing economy, with a negative side effect of more unemployment. With both inflation and unemployment at high levels, the Keynesian solution for less inflation and less joblessness is less growth and more growth, respectively, a contradictory and unworkable prescription.
Instead, what worked in delivering a strong economic turnaround — replacing high unemployment, high inflation and an elevated misery index with higher GDP growth, lower joblessness, less poverty, decreased inflation and overall greater economic well-being in both the 1960s and 1980s — were the Kennedy and Reagan tax cuts.
Kennedy's cuts, proposed in 1962 and signed into law in February 1964, three months after his assassination, reduced overall income tax rates by 20 percent, dropped the top marginal tax rate on income from an anti-growth, confiscatory 91 percent to 70 percent, cut tax rates on capital gains and dividends, and reduced the corporate income tax rate from 52 percent to 48 percent. Coming off a major recession in 1957-58 that had the misery index peaking at 9.57, that number declined in the first two years of Kennedy's presidency to 7.76 in 1961 and 6.77 in 1962. Following the Kennedy-formulated tax cuts in 1964, the misery index further declined to 6.44 in 1964 and 6.10 in 1965, numbers unmatched over the next five decades.
Similarly, the misery index declined steadily during Reagan's White House years, dropping by nearly half from 17.97 in 1981 to 9.57 in 1988.
The improved economic performance and prosperity of the 1980s was launched and strengthened by tax reforms during Reagan's presidency that cut capital gains taxes, lowered personal and corporate income tax rates, and reduced the top marginal tax rate on income from 70 percent to 50 percent in 1981 and further to 28 percent in 1986, generating the largest, longest period of wealth creation in history.
The tripling of the stock market from 1982 to 2000 raised the net wealth of U.S. households by approximately $30 trillion. Inflation-adjusted median household income rose by 12 percent in the Reagan years, reversing widespread inflation-adjusted income declines in the 1970s. And the American economy overall was one-third larger by the conclusion of Reagan's presidency in 1989 than at its beginning in 1981.
Ralph R. Reiland is associate professor of economics emeritus at Robert Morris University and a local restaurateur (firstname.lastname@example.org).