Reagan, Clinton, Bush – A Three-Phase Experiment.
Have you wondered whatever happened to Supply Side Economics? This has been a Republican aspiration for four decades now, and was promoted by four different presidents. So… how did it all turn out? Let’s take a look. In the history of Supply-Side Economics we have a natural experiment in three phases. Phase 1 was the Reagan Challenge. Phase 2 was the Clinton Reversal. Phase 3 was the Bush Rechallenge.
In 1981, Reagan’s first year in office, we got our first big dose of supply side tax cuts in the Reagan Challenge. As we saw in my first video essay, Reaganomics – Explained, the first visible impact of the tax cuts was, disappointingly, a huge loss of government revenue, and an immediate spike in the federal budget deficit, which quickly topped out at nearly $200 billion and remained unacceptably high for the next decade.
The supply side impact on the national debt was equally disappointing. While 39 presidents before him had accumulated about a trillion dollars of debt in total over two centuries, Reagan alone borrowed nearly twice as much as that entire amount, nearly tripling our national debt in just eight years. As a solution to Carter’s modest budget deficits, Reaganomics was a miserable failure. As far as lifting the boats, it was hardly better. During Reagan’s presidency, median incomes went up by less than 3% in total, and the lower half actually did slightly worse.
The next experiment in our line-up was the reversal of Reaganomics by Bill Clinton in the tax act of 1993, which increased the top personal tax rate and raised the top corporate tax rate. In essence, Bill Clinton reversed supply-side-economics by raising taxes for job creators. As you can imagine, Republicans howled. Tax increases are going to kill job creation. Tax increases are going to make the deficit worse. Tax increases are going to strangle the economy. So, what happened?
Over 8 years, Clinton’s policies turned a $300 billion dollar deficit into a $200 billion surplus. While Reagan’s tax cuts had sent federal deficits spiraling out of control, Clinton’s tax increases reined them in. For the first time in decades, our budget was in the black. What about the flip side? Jobs growth? Did the Clinton tax increases suck the life out of job creation as predicted by supply side theory? Quite the opposite. During Clinton’s 8 years, nearly 23 million new jobs were created, an all-time record that still stands today.
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