- The Washington Times - Tuesday, June 15, 2004

The death of Ronald Reagan wasn’t just an occasion for his admirers to reminisce about his life and accomplishments. It was also a time for his detractors to try and tear him down.

Often, they have been aided and abetted by reporters who didn’t do their homework but repeated old, demonstrably untrue myths about Mr. Reagan’s economic program.

One such myth says Mr. Reagan sold America a bill of goods with his 1981 tax cut, promising it would lose no revenue. The June 21 Business Week, among others, repeated this myth. “Reagan and his supply-side advisers,” it said, “believed that big tax cuts would pay for themselves by generating higher tax revenues through greater economic growth.”

This is nonsense. No one in authority in the Reagan administration ever said the tax cut would pay for itself. The proposal the White House sent to Capitol Hill Feb. 18, 1981, clearly shows revenues were expected to decline significantly.

The document estimated the 1981 tax cut would reduce federal revenues cumulatively by $657 billion by 1986. No feedback effects were estimated. Revenue as a share of the gross national product was shown declining from 24.1 percent in 1986 without the tax cut to 19.6 percent with the tax cut.

Further, the White House estimate of federal revenue following enactment of the tax cut exactly tracked that of the Congressional Budget Office, then under Democratic control. In a March 1981 report, “Economic Policy and the Outlook for the Economy,” the CBO estimated the effect of the tax cut on revenue. On Page 47, one can see they were almost identical. Following are the figures:

The point is, whatever errors were made in estimating revenues, they were not based on the Laffer Curve or anything to do with supply-side economics. As it turned out, everyone’s forecast for federal revenues was wrong. They came in much lower than expected by the CBO and all private forecasters. This was not due to some trick played by Mr. Reagan, but a widespread error in predicting key economic variables.

This brings me to a second myth revived lately — that Mr. Reagan grossly overestimated how well the economy would do after the tax cut. The New York Times said June 10, “The budgets prepared by David A. Stockman, Mr. Reagan’s first budget director, adopted what was called a ‘rosy scenario’ — impossibly optimistic predictions about future growth, inflation and interest rates.”

Again, a simple check of the record shows this was just not so. A review of contemporary economic forecasts by the Carter and Reagan administrations and CBO shows the Reagan forecast not out of line but actually closer than the others.

Looking at real GNP growth, Mr. Reagan forecast an average rate of 3.9 percent between 1981 and 1986. Mr. Carter forecast 3.3 percent, and the CBO predicted 2.9 percent. It turned out Mr. Carter was exactly on the mark at 3.3 percent, but the Reagan forecast is clearly not outside the normal error range. It was too high, but the CBO was too low.

Mr. Reagan proved more accurate when forecasting nominal GNP. He predicted 11 percent, with Mr. Carter at 11.5 percent and the CBO 11.6 percent. As it turned out, all were far off. It came in much lower than everyone thought at just 8.2 percent.

Similarly, all the forecasts were off on unemployment. Mr. Reagan forecast 6.6 percent, Mr. Carter 6.9 percent, and the CBO 7.4 percent. CBO was closest, but still well off the actual 8.1 percent rate.

Finally, on inflation, the Reagan forecast again proved the most accurate. It predicted 6.7 percent, far below the 8.7 percent figure of Mr. Carter and the CBO’s 8.8 percent. This is in fact where Mr. Reagan was then most criticized for being too optimistic. No one thought inflation would be anywhere near as low as 6.7 percent. But in fact, the average for 1981 to 1986 was just 4.2 percent — well below the Reagan estimate.

In short, of the four key variables, Mr. Reagan was closest to on two and Mr. Carter and the CBO were closest on one each. This is a pretty good record and does not deserve denigration. Most private forecasters would be lucky to do as well.

Forecasting mistakes were made, but not because of supply-side economics or because anyone was lied to. Those who say so perpetuate a myth.

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.

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