Vegas
08-22-2007, 11:45 AM
http://www.theglobeandmail.com/servlet/story/LAC.20070822.RREYNOLDS22/TPStory/Business
Ottawa -- Supply-side economist Arthur Laffer, two-term adviser to president Ronald Reagan (1981-1989), tells this story of Mr. Reagan's first cabinet meeting.
Cabinet members and presidential advisers had assembled in the West Wing of the White House. Mr. Reagan entered the room and sat down. Ever the actor, he waited for silence, finally stood and said: "Gentlemen and ladies. I hate inflation. I hate taxes and I hate Communism. Do something about it." Then he walked from the room.
They did, indeed, do something. They cut tax rates across the board by 25 per cent and launched the longest and most powerful bull market in U.S. history.
As noted last week by New York Times financial journalist Floyd Norris, the Dow Jones industrial average had hit bottom at 776.9 on Aug. 12, 1982 - 25 years ago. In its quarter century bull run, the Dow reached its peak close - 14,000.41 - only six weeks ago before giving up more than a thousand points in a precisely timed silver anniversary correction.
The Dow average made its inaugural appearance at the New York Stock Exchange on May 26, 1896. It closed the day's trading at 40.94. Within two months, it had fallen 30 per cent and closed at its all-time low, 28.48.
The Roaring Twenties took it ever upward to 381.17 (Sept. 3, 1929), a 13-fold increase - and the Great Depression then took it almost all the way back (July 8, 1932) to where it started: 41.22. From inception, it took the Dow more than 75 years to reach 1,000; it took only another 25 years to reach 14,000, an 18-fold increase from its 1982 low.
Could this bull market run for another 25 years at the same pace as the last 25? If it did, the Dow would reach 250,000 by 2030.
This staggers the imagination - by the same degree that a Dow at 14,000 would have staggered the imagination back in 1982. When Mr. Reagan assumed office, the U.S. was in its 15th year of bear market stagflation and widely regarded as a world power in mortal decline. The U.S. Misery Index (inflation rate plus unemployment rate) routinely exceeded 20. (It's 6.5 now.) Three consecutive presidents - Democrat Lyndon Johnson and Republicans Richard Nixon and Gerry Ford - had tried all the fashionable Keynesian things (easy money, wage and price controls, frenzied exhortations, government "pump priming"); the Dow refused to hold above 1,000 (though it repeatedly tried).
The fourth of the bear market presidents, Democrat Jimmy Carter, had plaintively mused that it was game over for America.
There was more to the economic renaissance in the U.S. than the Economic Recovery Tax Act, of course, which Congress officially enacted Aug. 13, 1981, and which Mr. Reagan signed into law three days later, seven months after he took office and one year before the long bear market ended. Reaganomics combined lower tax rates, reduced regulation, free trade and sound money. At the Federal Reserve, chairman Paul Volcker tightened the money supply - and sent the country into a short, sharp recession. Reagan had wanted a 30-per-cent cut in tax rates immediately; Congress gave him a 25-per-cent cut across three years.
He was compelled to wait.
It was a close thing. Which force would prevail - recession or Reaganomics?
The old-school Republicans who counselled retreat? Or the radical young economists (mostly Arthur Laffer at the University of Southern California and Canada's Robert Mundell at Columbia University) who counselled advance? Widely ridiculed as an amiable dunce, Mr. Reagan refused to cave. Within two years, Reaganomics was turning the U.S. into the world's No. 1 tax haven, and the world's most productive economy.
In the remaining six years of his presidency, the Dow tripled. From its breakout in 1982 through the second quarter of 2007, it delivered a compound annual rate of return (notwithstanding all the corrections along the way) of 11.8 per cent. Silenced by the economic transformation around them, Mr. Reagan's opponents - all of them great advocates of deficit spending - accused him of profligate spending. The nation's debt did indeed increase by $2-trillion in the Reagan years; the nation's wealth, however, increased by $8-trillion.
Whatever the Dow Jones industrial average does in the next 25 years, Reaganomics will continue to shape history, perhaps at an accelerating pace.
It's rich in irony, isn't it? As a freshman at tiny Eureka College in Illinois - enrolment in 2007: 536 - Mr. Reagan witnessed the Dow at its Roaring Twenties peak. As a senior (Class of '32), he witnessed it at its Depression low. In this environment, he graduated with a major in economics from a humble institution that still (unlike, for example, Harvard) revered the classic liberal economists - Adam Smith, David Ricardo - and a laissez-faire approach.
Ottawa -- Supply-side economist Arthur Laffer, two-term adviser to president Ronald Reagan (1981-1989), tells this story of Mr. Reagan's first cabinet meeting.
Cabinet members and presidential advisers had assembled in the West Wing of the White House. Mr. Reagan entered the room and sat down. Ever the actor, he waited for silence, finally stood and said: "Gentlemen and ladies. I hate inflation. I hate taxes and I hate Communism. Do something about it." Then he walked from the room.
They did, indeed, do something. They cut tax rates across the board by 25 per cent and launched the longest and most powerful bull market in U.S. history.
As noted last week by New York Times financial journalist Floyd Norris, the Dow Jones industrial average had hit bottom at 776.9 on Aug. 12, 1982 - 25 years ago. In its quarter century bull run, the Dow reached its peak close - 14,000.41 - only six weeks ago before giving up more than a thousand points in a precisely timed silver anniversary correction.
The Dow average made its inaugural appearance at the New York Stock Exchange on May 26, 1896. It closed the day's trading at 40.94. Within two months, it had fallen 30 per cent and closed at its all-time low, 28.48.
The Roaring Twenties took it ever upward to 381.17 (Sept. 3, 1929), a 13-fold increase - and the Great Depression then took it almost all the way back (July 8, 1932) to where it started: 41.22. From inception, it took the Dow more than 75 years to reach 1,000; it took only another 25 years to reach 14,000, an 18-fold increase from its 1982 low.
Could this bull market run for another 25 years at the same pace as the last 25? If it did, the Dow would reach 250,000 by 2030.
This staggers the imagination - by the same degree that a Dow at 14,000 would have staggered the imagination back in 1982. When Mr. Reagan assumed office, the U.S. was in its 15th year of bear market stagflation and widely regarded as a world power in mortal decline. The U.S. Misery Index (inflation rate plus unemployment rate) routinely exceeded 20. (It's 6.5 now.) Three consecutive presidents - Democrat Lyndon Johnson and Republicans Richard Nixon and Gerry Ford - had tried all the fashionable Keynesian things (easy money, wage and price controls, frenzied exhortations, government "pump priming"); the Dow refused to hold above 1,000 (though it repeatedly tried).
The fourth of the bear market presidents, Democrat Jimmy Carter, had plaintively mused that it was game over for America.
There was more to the economic renaissance in the U.S. than the Economic Recovery Tax Act, of course, which Congress officially enacted Aug. 13, 1981, and which Mr. Reagan signed into law three days later, seven months after he took office and one year before the long bear market ended. Reaganomics combined lower tax rates, reduced regulation, free trade and sound money. At the Federal Reserve, chairman Paul Volcker tightened the money supply - and sent the country into a short, sharp recession. Reagan had wanted a 30-per-cent cut in tax rates immediately; Congress gave him a 25-per-cent cut across three years.
He was compelled to wait.
It was a close thing. Which force would prevail - recession or Reaganomics?
The old-school Republicans who counselled retreat? Or the radical young economists (mostly Arthur Laffer at the University of Southern California and Canada's Robert Mundell at Columbia University) who counselled advance? Widely ridiculed as an amiable dunce, Mr. Reagan refused to cave. Within two years, Reaganomics was turning the U.S. into the world's No. 1 tax haven, and the world's most productive economy.
In the remaining six years of his presidency, the Dow tripled. From its breakout in 1982 through the second quarter of 2007, it delivered a compound annual rate of return (notwithstanding all the corrections along the way) of 11.8 per cent. Silenced by the economic transformation around them, Mr. Reagan's opponents - all of them great advocates of deficit spending - accused him of profligate spending. The nation's debt did indeed increase by $2-trillion in the Reagan years; the nation's wealth, however, increased by $8-trillion.
Whatever the Dow Jones industrial average does in the next 25 years, Reaganomics will continue to shape history, perhaps at an accelerating pace.
It's rich in irony, isn't it? As a freshman at tiny Eureka College in Illinois - enrolment in 2007: 536 - Mr. Reagan witnessed the Dow at its Roaring Twenties peak. As a senior (Class of '32), he witnessed it at its Depression low. In this environment, he graduated with a major in economics from a humble institution that still (unlike, for example, Harvard) revered the classic liberal economists - Adam Smith, David Ricardo - and a laissez-faire approach.