What Reaganomics meant to accomplish

July 5, 2011

Excellent piece by Brian Domitrovic of Forbes:

What was the point of Reaganomics? Starving the beast? None of the above. The point was to get the private sector booming. And could we ever use this as an objective today.

The prophet of the renaissance of the 1980s was the Reagan budget team’s economic forecaster, John Rutledge. Rutledge noticed that in the dozen years prior to 1981, money had been fleeing from the real economy, what with its taxes, regulations, and currency devaluations, and into tangible safe havens – especially commodities: oil, gold, and land.

Rutledge calculated that over the 1970s, some $11 trillion had migrated out of real economic enterprises into these hedges – a whopping number. And yet if the burdens on the economy were to lessen, a prodigious amount of money stood to flow back into the real sector, with epic growth, employment, and profits in tow.

This is of course what happened in the 1980s, as taxes got cut, regulation stymied, and money stabilized. GDP growth was north of 4% per year for a seven-year run, job creation was measured in the eight digits, and the stock market was off on a 15-fold advance. All because huge money had been parked elsewhere waiting for the real sector to become attractive again.

Sound familiar? Today, we see gold at $1500 an ounce, oil crossing $100, massive retained profits at corporations, and excess reserves at banks. And we’ve just endured a real estate bubble. If economically inert investments – vehicles that are not themselves businesses or their financing instruments – are capturing an extra-large portion of our financial capital, our economy is underperforming.

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[...] to James Pethokoukis, I came across this fascinating Forbes opinion piece: Which leaves a question. What was the point [...]