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Paul Abrams


Reagan and Clinton Raised Taxes in Recessions -- And Created 40 Million Jobs

Posted: 09/13/10 03:09 AM ET

--Great pitching always beats great hitting. And vice versa"--Casey Stengel, New York Yankees Manager

According to virtually everyone on Wall Street, and in financial editorial pages, allowing the Bush tax-cuts to expire for the wealthiest 2% will deepen the economic crisis they caused (and, by the way, when these Bush tax-cuts were unexpired and in full force and effect!).

Since there is not a scintilla of recent evidence to support that assertion, and strong evidence to the contrary, one may sleep soundly.

It is, however, positively flabbergasting to observe otherwise intelligent and knowledgeable economists swallow the political pablum that raising taxes in a recession inevitably chokes a recovery, especially with concrete evidence--in the persons of nearly 40M new jobs--to the contrary from the last two major recessions.

Economists ignore, or treat as relatively unimportant since they have more trouble understanding it, the most critical element of an economic recovery: individual and group human psychology, aka, confidence, not just in the future of the economy, but in the ability of our country to solve problems requiring collective action. A sounder fiscal future is accurately perceived as less risky. They also ignore the at-best tepid recovery from the minor recession of 2001 when taxes on the wealthy were cut.

Let me make, therefore, what should be an obvious assertion: raising taxes (or, more accurately, letting the cuts expire as they were designed) on the top 2% not only will not reduce economic growth, it will spur it. Capital flows will increase into the US, as it will be perceived as a safer haven. As a corollary, I will make another prediction: the wealthy will be even wealthier, there will be more of them, even after paying higher taxes, and, in good measure, because of them.

Why? Because raising taxes on the top 2% shows domestic and world markets that the US is serious about its long-term deficit problems, and is capable of making tough choices.

The evidence?

It worked for Ronald Reagan. It worked for Bill Clinton. Together, following their tax increases, nearly 40M new jobs were created. Bill Clinton even generated budget surpluses.

Of course, there was much else going on, both in the economy and otherwise during those periods, that makes it impossible to isolate a single causative factor. But that, really, is the larger point: raising taxes in a recession is not always good, but it is not always bad either.

Nor do I wish this to be interpreted as my belief that this pending 4.6% tax increase on the upper 2% is the solution to our economic problems. Of course, It is not. But, it will help, and the unquestioning acceptance of the principle that it will hurt will make other needed measures less potent.

In these instances, and now, with anxiety raised to fever pitch about debts and deficits--as occurred with less vitriol in 1981 and 1989--a bold move that reasserts control after 8 years of laissez-faire has a great psychological healing effect.

Under Reagan and Clinton, the recessions were accompanied by deficits growing, "as far as the eye could see". Moreover, Republicans' resistance to any tax increase, for any purpose, at any time, sent and still sends a message of infantile irresponsibility to the markets.

In 1982, at the same point in his Presidency as President Obama is now, but while jobs were still hemorrhaging and unemployment still rising in a recession, Ronald Reagan enacted the largest tax increase in American history--$100B additional taken from individuals and businesses by the Treasury. By January, 1983, Reagan's approval rating was down to 35%.

Because this was St. Ronald, and not a Democrat in the White House, there were no chicken-littles predicting the tax hike guaranteed the end of civilization, or even arguing that "people know how to spend their money better than the government" (true, of course, for some expenditures, not for others). Less than one year later, the economy began to emerge from its recession, job losses stopped, and unemployment began to recede. Nearly 17 million new jobs were created by the end of Reagan's term. Incidentally, Reagan raised taxes several more times during his tenure.

Mr. Clinton, in 1993, signed the largest tax increase in American history, and on top of George HW Bush's a couple of years earlier in the midst of a recession. After HW's tax increase, the GDP began to rebound as Bill Clinton took office, promising to focus like a laser on "the economy, stupid". After Clinton's 1993 tax increase on the wealthy, job growth began, and by the end of Clinton's term 23M new jobs had been created.

17M (Reagan) + 23M (Clinton) = ~40M new jobs after significant tax increases in recessions and as the economy had begun to rebound. Compare it to the nearly 8M lost under the disastrous George W Bush's economics policies focused on tax cuts for the wealthy, and one might start, just start, questioning whether the "you-can't-raise-taxes-in-a-recession" mantra might be just a bit overstated.

Unless a positive 40M compared to a negative 7.7M is, to you, "fuzzy math".

Indeed, the very same people who intone against raising taxes on the wealthy at evening soirees to raise money for anti-tax know-nothing legislators, trot into their well-appointed offices during the days, and take advantage of the improved market behavior they assured us would deteriorate the night before.

If it were not so serious, it would be amusing to observe.

Despite the inevitable moaning and groaning and predictions of doom, and the guaranteed apoplexy of the The Wall Street Journal, it is likely that the stock market will rally when the news becomes sufficiently certain.

But, although the Wall Street Journal is consistently anti-tax any time, any place, and for any purpose, the denizens of Wall Street themselves are consistently inconsistent, right wing ideologues by night, informed economic actors by day. When the psychology shifts, they "vote" with their feet--ideology and taxes be damned--if the opportunity exists to make a good buck. In that sense markets--as opposed to what its participants say--are refreshingly non-partisan.

It is really quite astounding. Listening to CNBC one hears a constant drone of "you cannot raise taxes in a recession" clap-trap to grab the Wall Street-by-night viewers, peppered with an occasional appearance of people such as former Labor Secretary Robert Reich--who is nonetheless never allowed to complete a full sentence--to provide a semblance of rationality.

Yet these very same Wall Street "pundits" (who, by the way, got it all wrong prior to the crash, but that does not shake their certainty), many of whom are practicing money-managers, "vote" quite differently with their, and their clients', dollars. If they acted as they intoned, the Dow would be at 1000 not 10,000.

It is, indeed, very good politics to inveigh against the Republicans' holding the middle class hostage to secure tax cuts for the wealthy. Tax cuts for the wealthy, apologizing to BP, and government subsidies for giant corporations, are what the Republican Party is all about, and this issue helps expose it.

But, it is even better economic policy.

Stay the course.


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