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reagan's soulIn 1980, that terrible year of stagflation, when Ronald Reagan was gaining the Republican nomination for president, dueling editorials appeared in the Wall Street Journal about “The Battle for Reagan’s Soul.” The first, by that title, came from neo-conservative sage Irving Kristol, who alerted readers that an effort was on by the establishment to capture Reagan. Individuals like Alan Greenspan, one supposes, and other Nixon-Ford leftovers were counseling Reagan not to strive to get everything he wanted. In the interest of a balanced budget and defense buildup, said prudence, he should go easy on tax cuts and even a stringent monetary policy.

Lewis E. Lehrman, the raconteur entrepreneur, piled on with “Stop the Battle for Reagan’s Soul.” Just do it all, Lehrman said, implying cut taxes, strong defense, robust trade, modest safety net, spare regulation—and gold-based money. Lehrman’s logic: if you do it all, you’re likely to get everything. If you do a little, here comes nothing.

Thirty-four years later, in our own semi-stagflation summer, we have a new intra-GOP dust-up. One wing of the party is saying there is too much focus on tax cuts. “Give Reagan a Rest,” as one of the entries put it, contending that focusing on rates is out-of-touch in Obama’s America. The manifesto of this movement, Room to Grow, somehow came out the very day that one if its personifications, Rep. Eric Cantor, got crushed in his primary by the sense-talking free-marketeer Dave Brat.

Nice and ludicrous, in other words, this dust-up. The thrust of Room to Grow and the like is that child tax credits and block grants dished out to local pols is the way conservatives could win over the middle class. Whining about 40% marginal tax rates in an era of the top 1% is “so 1979” (Ross Douthat’s phrase).

Let’s not get so heated up as to miss the point that the messiah Obama has inverted the tax code. There is seriously regressive taxation in this country—not progressive, regressive. The more you make, the less you pay, that kind of regressive.

The top statutory income tax rate at the moment is 42.5% (with the mandatory Medicare add-on included), beginning on about half a million in income. Whoever pays this is a sucker. There are so many exemptions and opt-outs in the code, procured by the many millionaires care of their K Street agents, that to pay the top rate is to say you didn’t try. The effective tax rate for tippy-top earners is probably about 20%, if not 10% or 5%. Hence the phony clamor for the “Buffett rule.”

Middle-income? Thanks to the child credit which enamors the GOP moderates, its phase-out takes the statutory federal tax rate on the fourth quintile of income to 30%. Say you live in California and have kids and make $110K (which is to say Joad-clan like money). Your marginal tax rate is basically 40%. If you’re a dual-earner, the social security cap doesn’t apply, so your marginal rate on the next ten grand would be over 50%.

Working class? As Casey Mulligan has shown, these guys are looking at marginal rates around 100%. Obamacare has loaded up on the poor-people subsidies and working-people phase-outs to such a degree that you often take home as much money at $30,000 per year as you would working your fingers to the bone to get to $50,000.

The tally of our current marginal tax rates: rich, negligible; middle-class, stifling; working class, pick-pockety.

The moderates say don’t focus on cutting tax rates. Yet cutting tax rates is the easiest way to devalue exemptions and ease the bite of phase-outs. They be clueless!

Reagan’s problem in the 1980s is that he did not quite do it all, as Lehrman had suggested. He did almost all. He cut tax rates, spending came nicely down over the long arc of 1983-2000, the bloated Pentagon won the Cold War care of Lech Wałęsa’s prayers, the regulatory explosion planned in the 1970s didn’t happen—and then a few things got left on the table.

Reagan ramped up the war on drugs and the police state—big mistake of commission. But the one great thing that Reagan never did was a formal reform of the monetary system. In 1971, the United States opted for fiat money, taking the dollar off gold, and we got the stagflation decade. When Reagan entered office, the Federal Reserve found religion and pretended the dollar was on gold, organizing monetary policy such that the private price of gold stayed low and constant at around $325 per ounce.

All that had to be done was to make this standard, even statutory. The time frame was 1983 to 2000. The U.S. would commit to buying and selling gold freely at $325. Never happened. The door was left open for discretionary money. Thus came the woeful Fed adventurism that gave us the 2000s. There would never have been the capital misallocation that ruined the 21st-century economy had we been on gold, and we had ample opportunity to do just that.

If Republicans want to complete Reagan’s agenda, limit government and make the dollar convertible. The prosperity will be so great, the only casualties will be the redundancies in government employment. But in the face of abundance, these once-again-good people will find themselves in the real world, better off financially, if not in terms of their very soul.

Books on the topic of this essay may be found in The Imaginative Conservative Bookstore. Republished with generous permission of Forbes.

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2 replies to this post
  1. If you check out the site, you’ll can check for yourself the enormous fluctuations in inflation even from year to year during the period in the 1800s when the United States was on the Gold Standard and did not have a central bank. So, large fluctuations in inflation mainly depending on whether or not there are new discoveries of gold is one obviously problem with the gold standard. I realize the author of this article did not also suggest getting rid of the Federal Reserve, as many who advocate returning to the Gold Standard do, but I don’t think there would be much difference with the gold standard with or without a central bank. I stand to be corrected on that though, but preferably by an economist and not by a historian.

    (I know some people say that uses computes some statistics that may be based on some of the most reliable data, but I’d say it’s a ‘best guess’ and it probably isn’t all that far off. Certainly, the trends that it shows are likely quite accurate, even if the exact amounts may not be. For what it’s worth, I tend to find that people find the site to be very accurate when it produces the results they want, and it’s not at all accurate when it gives them findings that don’t agree with what they expected.)

    Another main problem is that as most known gold reserves are in South Africa and Russia, returning to the gold standard would effectively take U.S control of its money supply out of its own hands and into the hands of those nations. In the case of Russia, they aren’t a nation that has U.S interests in mind.

    There are quite a number of smaller additional problems with the Gold Standard, but these are the main ones. As the author of this article did not spell out exactly how the Gold Standard would do the miraculous things he claims it would, I don’t have any specific claims to rebut, so, there’s no need to bring up the additional smaller problems with the Gold Standard.

  2. Finally, since I mentioned I implied that I disagreed with some of the historical claims made in this article, I’d like to point them out rather than just leave any impression that I was making an ad hom attack.

    1. 2014 semi stagflation dustup. Unless the author is one of the conspiracy theorists who believe the government is making up inflation numbers, this simply did not happen.

    2.This isn’t to do with history so much, but in regards to who pays the taxes. All the graphs I’ve seen show that there is essentially a flat tax rate already in the U.S, except for the very poor. From the 1-25% to 51-75% percentiles, they all basically pay the same effective rate.

    3.Government spending as a percent of GDP did not decline significantly until 1993. After peaking in that period in 1982 (which was the highest percent it had been since World War II) it dropped a bit more than a little until 1987, but went up from 1988 until 1992.

    4.While I don’t doubt that increasing defense spending had a factor in ending the cold war, the huge decline in oil prices at that time was likely far more significant. Ultimately Gorbachev giving up, partly because he didn’t think the Soviet Union could win, but likely mainly because he no longer believed in Communism, was the ultimate reason the U.S won the Cold War.

    5.I’m willing to defer to the author’s expertise that a dramatic increase in regulations was being planned by at least some, if not many in the senior non political civil service, but Jimmy Carter started the deregulatory process with deregulating much of the transportation sector. In this, Jimmy Cater was following up on the work of his predecessors Richard Nixon and Gerald Ford. This was at the same time that the author says a large expansion of regulations were being planned.

    6.In a similar vein, this also doesn’t make sense to me: (Reagan should go easy on) “even a stringent monetary policy.” The Federal Reserve is independent and was so even back then. It was President Carter who appointed Paul Volker as Chair, so the die was cast on the anti inflationary Fed policies before Reagan became President. Like many of Carter’s halting policies, he appointed Volker after appointing a complete failure as Fed Chair who replaced Arthur Burns, another complete failure, far too long for it to have any positive political benefit for Carter.

    I agree the ‘war on drugs’ was always a stupid idea, but ramping up the police state did seem like a good idea at the time, and it did address a real problem.

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