In his speech accepting the Democratic presidential nomination, President Clinton decried "the bad old days of the '80s," implying that he would save the country from experiencing anything like that decade again if he were reelected.
Considering that almost everybody over the age of 30 can still remember the '80s, it's somewhat amazing that the president would suggest we wanted to be spared. It's amazing, too, that there are so many misconceptions, distortions and downright falsehoods extant about a period so recent in our history.
Just what was the president warning us against? Surely it wasn't what happened to inflation, interest rates or energy prices.
The country entered the 1980s with an annual inflation rate of 12.5% and the prime interest rate at 21% (no, that's not a misprint). Real income of the median family had fallen about $3,000 between 1973 and 1981 – the worst drop since the Great Depression. President Jimmy Carter told a town meeting in Bardstown, Ky., in 1979 that there were "two problems of our country – energy and malaise."
By 1987, inflation stood at 3.5%, the prime interest rate at 8.25%, and the median family had gained back that lost $3,000 in real income. The federal government had abandoned most efforts to prevent gasoline shortages and high gasoline prices after the late 1970s, resulting, not surprisingly, in an abundant supply of gasoline at lower prices. That, and an economy that grew by more than 3% yearly during the Reagan years, took care of the malaise.
But wait, somebody will say, the rich got richer and everybody else got poorer during the Reagan years. The Congressional Budget Office reported that aftertax family income fell over the decade for every income class except the next to lowest 10% and the highest 10%.
Well, that's not exactly right. The CBO chose for its own reasons to report on the period 1977 to 1988, thus including the high-inflation years from 1977 through 1980 before Reagan took office. As former Harvard economist Lawrence Lindsey, now a member of the Federal Reserve Board, pointed out in his book The Growth Experiment, the rich did get richer in the early part of Reagan's first term because they derive much of their income from investments and interest rates were still high. But looking only at the Reagan years, 1981 through 1988, every income class had real gains.
Incidentally, in the first year of the Clinton administration, income inequality between the richest and poorest families increased more than in any year of the Reagan administration. For that matter, the income gap was higher after the first Clinton year than at any other time since World War II.
But we still haven't dealt with those tax cuts for the rich in the 1980s, which may have been what President Clinton had in mind, given Bob Dole's tax-cutting proposals in this campaign.
But that's not exactly the real tax cut story, either. After Reagan cut the rates, the richest taxpayers reported more taxable income and paid twice as big a share of the total income tax burden as before – 14% in 1986 versus 7% in 1981. Professor Lindsey calculates that the government collected more tax revenue from upper-income taxpayers (those reporting incomes above $200,000 a year) at a 50% top rate than it would have at 70%.
Taxpayers with incomes ranging from $75,000 to $200,000 paid about 92% of what they would have paid under the old law. But the big reductions went to those earning between $20,000 and $50,000 (they paid about 14% less) and to those earning under $20,000 (they paid about 18% less).
In 1981, federal tax revenues took 20.2% of gross domestic product, the highest percentage in history – until last year. The Reagan tax cuts actually returned federal revenues to about where they have been ever since World War II, within a narrow range of 17 to 19% of GDP.
Reagan didn't contend in the 1980s (nor does Dole in the 1990s) that tax revenue would continue to rise without interruption after a cut in rates. The Reagan administration did estimate accurately that as much as 40% of the revenue loss from the tax cuts would be recouped as a result of higher economic growth in the nation.
The Reagan tax cuts didn't cause the deficit to soar; increased spending was the culprit. Where spending had been 21.8% of GDP in the Carter administration, it rose to 23.2% under Reagan and 23.4% under George Bush.
So if President Clinton was inveighing against high government spending when he talked about the bad old days of the '80s, we say, "Hear, hear." But other than that, maybe a return to those bad old days of the '80s might not be so bad at all.