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Sunday, August 21, 2005

This Week's Imprimis

Ronald Reagan and the Spirit of Free Enterprise

Since Ronald Reagan's death, many inspiring speeches have been delivered and adulatory articles written about his presidency. But few of the tributes have recognized Reagan's greatest achievement, which was indispensable to the U.S. triumph in the Cold War and is crucial for the current war on terrorism. Reagan tapped the creativity of America's entrepreneurs to bring about a global, not just a national, economic revolution.

Poets describe creativity as "Promethean," referring to the mythical hero who brought fire to the earth. A Promethean era in world history, the Reagan presidency lit the fires of American creativity - and they have been roaring ever since. Reagan's ideas transformed American finance, global economics and world politics. They reverberated through Eastern Europe, the Soviet Union and China with the power of Joshua's trumpets. They made South Korea a more economically important and promising country than France or Germany.

To the defenders of the old order - Third World despots, legal monopolies, land trusts, gold funds, oil cartels, bureaucracies and tyrannies of all kinds - the Promethean roar was an insufferable racket. They mustered all their powers to prevent the transformation from occuring. The facts reveal their failure - and Reagan's success: Since 1980, U.S. marginal tax rates fell some 40 percent on income and 75 percent on capital gains and dividends, and the American economy added close to 36 million jobs. During the same time period, Europe and Japan created scarcely any net new employment outside of government. American companies now constitute 57 percent of global market capitalization, and the U.S. commands close to one half of the world's economic assets.
America, responsible for one fifth of global GDP in 1980, produced one third of global GDP in 2003. That is Ronald Reagan's legacy.

The Lasting Impact of Supply-Side Economics

The key to this awesome and unprecedented triumph was Reagan's dismantling of the confiscatory tax codes imposed on the capitalist world during World War II. Supporting Reagan's tax rate reductions was a movement of economists and journalists called supply-siders. We were so unpopular that Bob Dole used to crack a "good news/bad news" joke about a Greyhound bus going over a cliff. The good news was that it was "full of supply-side economists."
A central component of supply-side economics is the Laffer Curve - named for its inventor, the economist Arthur Laffer - which shows that low tax rates produce more revenue than high ones. Ronald Reagan understood and embraced the Laffer Curve. He would regale White House visitors with a story about actors and producers in Hollywood who simply stopped working when their marginal tax rates rose over 50 percent. A rate high on the Laffer Curve, as Reagan knew, means that more work for more income is less profitable than maneuvering to avoid taxes on existing income. According to my research, the correct curve shows that tax rates should be kept very low - well below 20 percent - and that higher rates tend to reduce long run government income and massively reduce private sector wealth.

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