by David Stockman, DailyReckoning: The American economy has been mangled by decades of assault on capitalist prosperity.
Growth is now dying because the Federal Reserve’s hit on corporate America that has strip-mined its balance sheets to feed the halls of Wall Street. Trillions of dollars have been thrown into financial engineering (stock buybacks, M&A deals and leveraged recaps) while neglecting real investment and productivity in Flyover America.
The single most important thing that speculators and bulls on Wall Street should be looking at now is where we came from. If Wall Street understood this, they wouldn’t continue to expect the “born again” Reagan stimulus that has been imagined since Trump’s inauguration.
The extent of what actually happened during the Reagan era is also important to examine. In the eight years after Reagan’s tax bill got handed out, the national debt and defense budget exploded. We had more red ink during in that eight year period than during the first 190 years of the Republic – in fact it doubled.
The national debt, which you can see starting in 1980 went from around $800-900 billion to well over $3 trillion. The share of GDP soared during that period.
This is how the Reagan defense and tax cuts were funded. The move left the nation’s fiscal accounts in a dramatically different condition than when it started. Even Ronald Reagan, with his best of intentions, went in believing he was going to end up with less national debt and balanced budgets – though he ended up adding $1.8 trillion.
The system in Washington is not as logical, rational and methodical as some of these Wall Street analysts want to believe.
The fact is that what actually happened with the Reagan tax cuts were dramatically bigger than anything that Donald Trump proposed during the campaign or had been found in the one page tax outline from April. The bars on the chart above show, sequentially, the size of the tax cuts relative to GDP over the following decade because it took 10 years to become effective.
When it became fully effective, the tax cut seen in the chart were 6-6.2% of GDP by the end of the decade. It took the federal share of GDP in terms of revenue down from a projected 23% to about 16%.
That is far beyond what anybody from the administration is talking about today. If you were to put this tax cut in today’s economic scale, it would amount to a $1.2 trillion per year tax reduction, when fully effected.
Yes, that would be a jolt in the economy.
At the same time, it would add to the massive debt levels already, which is something we can’t afford.
The idea that if a tax bill was to be revenue neutral, or at the very least a version of what Trump talked about for a lowered corporate tax, the plan still doesn’t hold a candle to the wind.
Such a move would be less than 2% of GDP – and likely at a level of 1%. That is nothing like what actually happened during Reagan. What actually happened then was the tax cut was so massive, the deficit exploded to over $200 billion.