Trumponomics vs. Reganomics

“Senator, I served with Jack Kennedy.   I knew Jack Kennedy.   Jack Kennedy was a friend of mine.   Senator, you’re no Jack Kennedy.”

When Dan Quayle compared himself to Kennedy during a 1988 vice presidential debate with Lloyd Bentsen, Senator Benson wanted to make his point clear.   He accomplished his goal … and his comment is legendary.

Today, many are comparing Donald Trump to Ronald Reagan, who became our US president in 1981.   Paraphrasing Bentsen, Trump is no Ronald Regan – at least, not yet.  Sure, ‘Donald’ rhymes with ‘Ronald’ … but that’s about where the similarities end.

Rest assured, I don’t make this comment in a disparaging way.   Years from now, in history’s spotlight, Trump may be viewed as one of Americas great presidents.   Or as one of our greatest failures.  Time will tell.

Economically, today’s world is far different than in Regan’s era.   ‘Reaganomics’ – which incorporate Reagan’s ‘supply side’ tax strategics – ushered in an era of dramatic tax cuts, increased military spending, a reduction in federal government ‘red tape,’ and a large increase in the national debt.

Actually, this is starting to sound a bit like Trumponomics, right?   The financial markets are projecting that same large increase in the national debt.

Well, hold on a minute…take a look at this chart, courtesy of Wikipedia:

When Reagan took office in 1981, the US tax code had 16 brackets beginning at 14% and peaking out at 70%!   But compared to 1944, the top tier was low!   🙂

The 1981 tax rate of 70% was believed by some to be egregious:   It applied to all income over $215,400.   And between 1981 and 1988, the top rate fell to 28%.   And had only 2 brackets.

From 70% down to 28%.   A massive reduction.  By comparison, Trump’s plan is fairly sedate.   Here are the ‘proposed tax brackets’ from Trump’s website:

Brackets & Rates for Married-Joint filers:

• Less than $75,000: 12%
• More than $75,000 but less than $225,000: 25%
• More than $225,000: 33%

Our current tax code is about the same up to a joint AGI of $411,500.   It’s the folks above this level who will get a break – reducing their top tax rate by about 6.6%.  Not insignificant, but not in the same league as the Reagan tax cut.

The bigger wild card is on the spending side of the equation.   Reagan oversaw a massive increase in the military budget … which, when combined with the tax cuts … significantly increased the annual deficit.   In April of 1982, the Cato Institute made this comment:

“The administration now projects overall federal spending of $762 billion for 1983, $803 billion for 1984, and, at this writing, admits deficits of $102 billion and $94 billion respectively.

Others, including the Congressional Budget Office, say the spending will be almost 10% higher and the deficits will be half again as high. The precise figures do not matter. In any case, they are elusive and subject to almost daily adjustments.

The point is the magnitude of the nation’s insolvency, and the factors that are causing it.”

‘Nation’s insolvency,’ eh?   Funny.   If that was insolvency, I wonder how they would describe today’s deficit.  🙂

Reagan successfully increased military spending by over 40% – by over $1 trillion during his 8 years in office.    At a time when global price inflation was staggering:

Note the peak in 1974?   The oil shock.   And then a second peak in 1981 – as Reagan took office.   Reagan inherited an inflation rate in the double digits.

Trump, of course, will not.  The bond market, however, is anticipating inflationary effects from Trump’s fiscal and military spending policies.   And the stock market movement is forecasting a GDP growth spike as a result.

Did Reagan’s policies usher in higher levels of GDP growth?   Per the BEA, GDP grew during his 8-year term at a 7.5% clip each year – by today’s standards, great growth.   But during the 8 year period before Reagan (1974 to 1981), US GDP grew at 10.7% per year.

Thus, a conclusion that Reaganomics, by itself, boosted GDP growth would be a stretch.

And while US GDP grew appreciably from 1981 thru 2015, our rate of growth was fairly similar to the other large, developed nations:

But China is in a league of their own:  While the US GDP grew about 5X, China’s GDP grew about 50X!  And our GDP as a percentage of total global GDP fell from 28% to 24%.

Our 2015 Defense Budget was $598.5 billion, 54% of all discretionary spending. Compared to the rest of the world, we spend a lot on our military:

U.S. military expenditures today about equal the next 7 largest military budgets around the world, combined.   For every $1 China spends on its military, the U.S. spends $2.77.   Further, in the decade following Sept. 11, 2001, US military spending increased 50% (adjusted for inflation) while every other US program – things like education, health care, public transit, and science –grew by 13.5%.  Yes, military expenditures have been falling in amount during the last 5 years, but they remain more than 50% higher than in 2000.

Let me summarize with these comments:

1. The Trump tax cut proposals are not as far-reaching as Reagan’s.
2. During the campaign, Trump claimed he will demand our allies pay an increased portion of their defense costs.   Per Trump, America’s military largess is over.  Budget limitations and policy changes may keep military spending down.
3. If the Reagan era is any indicator, it is unlikely the US will experience an exceptional increase in GDP growth as a result.

Needless to say, we don’t know what the future holds.   Yet our financial markets continue to make predictions of higher inflation and increased GDP growth.  If Reagonomics is a predictor of Trumponomic effects, neither appears likely.

• Terry Liebman