May 01, 2017
Steven Rattner went full Trump in his criticisms of Donald Trump’s tax cut plans in a NYT column this morning. Essentially, Rattner blamed the 1981–82 recession on Reagan’s tax cuts. The piece tells readers:
“For its part, the Reagan tax cut increased the budget deficit, helping elevate interest rates over 20 percent, which in turn contributed to the double-dip recession that ensued. The stock market fell by more than 20 percent.”
This hugely misrepresents the situation in 1981. Inflation had reached double-digit rates at the end of the 1970s due to the jump in world oil prices caused by the Iranian revolution. (Millions of barrels of daily exports were removed from world markets.)
Federal Reserve Chair Paul Volcker was determined to reduce inflation to low single digit rates. He jacked up interest rates to slow the economy before Reagan was even in the White House. The federal funds rate peaked at just under 19 percent in December of 1980. This rise in the federal funds rate is what caused the recession and the stock market plunge. (The stock market subsequently soared. This was arguably a result of Reagan’s tax cuts to the rich and corporations. The stock market measures the expected future value of after-tax corporate profits; it is not a measure of economic well-being.)
There are few, if any, economists who would blame the 1981–82 recession on the Reagan tax cuts. It is unfortunate that Rattner apparently feels he has to make this claim to argue against the Trump tax cuts.
It is also worth noting that Rattner’s concern about the government debt is hugely misplaced. The ratio of debt service to GDP is around 0.9 percent, near a post-war low. By comparison, it was over 3.0 percent of GDP in the early and mid-1990s. This is the burden the debt places on the economy.
Rattner also ignores patent and copyright rents. This is an alternative way in which the government imposes burdens on the public to pay for items. At present, patent rents in prescription drugs alone come to close to $400 billion a year, more than 2 percent of GDP. This is the difference between the patent protected price of drugs and the free market price. Effectively, patent and copyright monopolies are privately collected taxes. An honest analyst would have to include the effect of these monopolies in assessing the burden the government is creating for taxpayers in the future.
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