by Mike Kimel
A Random Observation About the 1970s… and the 1980s
People often point to the stagnation of the 1970s, and the Reagan administration that followed, as evidence that cutting taxes leads to faster economic growth. But the same folks rarely look at the flip-side of things, and when they do, they don’t reach consistent conclusions. Here’s an example of what I mean. Real GDP grew 14.5% from the first quarter of 2003 to the last quarter of 2007. That is a 20 quarter period. I started with 2003 because that’s the year that tax rates dropped to 35%, and it was also more than a full year after the 2001 recession. I picked the last quarter of 2007 as the end point because the economy peaked in that quarter.
What followed, of course, was the Great Recession. 2003 Q1 to 2007 Q4 were the years of the Greenspan Put, and the real estate bubble. If it isn’t clear, I am cherry-picking, purposely selecting a period that best showcases the the 35% top marginal income tax rate era.
Now, 14.5% growth over 20 quarters lacks context. So here’s context. Take any consecutive 20 quarters beginning no earlier than Q1 of 1970 and ending in Q4 of 1980. There are 25 such periods. Only seven of them, or 28% of those periods, saw real growth rates below 14.5%. 72% of those periods had real GDP growth rates above 14.5%. (It is worth noting that four of those seven periods began in 1970 or Q1 of 1971 and that Carter didn’t take office until Q1 of 1977.)
Now, the 1970s were the decade of the Oil Embargo, the Iranian Revolution, inflation, stagflation, polyester, the Bee Gees and big sideburns. Big sideburns for crying out loud. They were also an era with top marginal tax rates of 70%. And yet, they compare very favorably to the best years we’ve seen since tax rates fell to 35%.
Now… let us discuss a more recent period. Reagan famously cut taxes – top rates were at 70% when he took office, and by 1986 were down to 50%. In 1987 they were cut to 38.5%, and then to 28% in 1988. They rose slightly to 31% in 1991. Finally, under Clinton, in 1993, top marginal tax rates rose to 39.6%. So we’d expect exceptionally rapid growth from 1987, ending around 1993, right? Well, pick any quarter from 1986 Q1 to 1991 Q4 and consider the growth in real GDP over a twenty quarter period. Every single one comes in with growth in real GDP below 14.5%.
That is, every single one under-performs the period that under-performs the 1970s. (I guess we can say those periods were under-performing squared.) The conclusion is clear, but I’m sure it is different to folks on different ends of the political spectrum.