Limbaugh, Hannity ignore '80's interest rate cuts in prescribing Reaganesque tax cuts to end recession

In recent discussions of the economic recovery package supported by President Obama, Sean Hannity and Rush Limbaugh have repeatedly claimed that President Reagan's tax cuts were responsible for ending the recession in the early 1980s, suggesting that tax cuts, and not government spending, would be the most effective policy to end the current recession. However, several economists have stated that while fiscal policy had some impact during that period, in the words of an August 1983 Congressional Budget Office (CBO) report, "[l]ower interest rates after mid-1982 permitted the recovery to begin." Contrary to Limbaugh and Hannity's suggestion that policies implemented under Reagan would be effective at fighting the current recession, as Nobel laureate Paul Krugman has noted: "Right now, the [federal funds] interest rate is zero. The Fed[eral Reserve] can't rescue us this time, and that's why we can't do the things we did in the '80s."

The recession to which Hannity and Limbaugh referred began in July 1981 and ended in November 1982. The federal funds rate peaked at 20 percent in late May 1981 and dropped to 9.5 percent by mid-October 1982, while the discount rate peaked at 14 percent in early May 1981 and dropped to 9.5 percent in mid-October 1982.

Discussing the economic recovery plan on the February 9 edition of Fox News' On the Record, Hannity stated, "[W]e do have an example that did work. This -- and by the way, this is not the worst economy since the Great Depression. Ronald Reagan had 21.5 percent interest rates he inherited. ... [I]nflation was rampant. Unemployment -- we had lost 10 million new jobs. We have experienced tough economic times. His answer was to drop the top marginal rates to 70 to 28 percent." Hannity claimed that because of Reagan's tax cuts, "We created 21 million new jobs, doubled revenues to the government, and we had the longest period of peacetime economic growth in American history," adding: "That is my answer. Go give the money to the American people."

On January 30, Limbaugh made a similar claim in response to the assertion by CNN chief business correspondent Ali Velshi that "[t]his is not the economy that Ronald Reagan ever saw. We have not seen anything like this in our lifetime. Anybody who tells you this is how it works is lying," Limbaugh said: "[I]n 1986, GDP was down over 6 percent. We were in a recession. What was the centerpiece of Mr. Reagan's economic recovery plan, Mr. Velshi? Let me spell it for you: T-A-X-space-C-U-T-S." Limbaugh continued: "When Ronald Reagan took office in 1981, the top marginal tax rate, Mr. Velshi, was 70 percent. When Ronald Reagan left office in 1989, the top marginal tax rate was 28 percent. The only way you can say the tax cuts didn't lift us out of a recession is if you want to lie like Bill Clinton did and claim that the '80s were the worst economy in the last 50 years. But you go back, you look at the prosperity that was created by those tax cuts throughout this country, look at the prosperity that was created through the '90s that Bill Clinton got to claim the credit for."

However, many economists credit the Federal Reserve's reduction of key interest rates with initiating the recovery from the 1981-82 recession -- a change in monetary policy that is not currently available. For example, the August 1983 CBO report, titled "The Economic and Budget Outlook: An Update," concluded that "[l]ower interest rates after mid-1982 permitted the recovery to begin":

The Economy At Mid-1983

Recovery started in December 1982 from the deepest postwar recession, the second of two since 1980. Both recessions were brought on by monetary restriction aimed at bringing inflation under control. Lower interest rates after mid-1982 permitted the recovery to begin. Real GNP grew at a 2.6 percent annual rate in the first quarter and at an 8.7 percent annual rate in the second quarter of 1983.

The report also concluded: "A dramatic decline in inflation, a fall in interest rates from levels that were extraordinarily high to levels that are merely high, and the stock market boom have contributed to the improvement in economic conditions."

Additionally, Michael Mussa, a member of Reagan's Council of Economic Advisers, wrote in an essay for American Economic Policy in the 1980s (University of Chicago Press, 1995) that when the Federal Reserve cut the discount rate a half percentage point on July 20, 1982, it "signal[ed] the beginning of what would become a four-and-a-half-year period of quite rapid monetary expansion. During this period, interest rates, both short and long term, would be driven significantly lower, and the U.S. economy would substantially recover from the devastation of both inflation and recession."

Moreover, Krugman said during the February 6 edition of MSNBC's Morning Joe that "in 1982, when the economy was deeply depressed, the Federal Reserve said, 'OK, we've got to do something about this,' and they cut interest rates from 13 percent to around 7 percent and the economy took off." Krugman continued: "Right now, the interest rate is zero. The Fed can't rescue us this time, and that's why we can't do the things we did in the '80s. We have to have an approach that harks back to the things that worked very well in the first four years of the New Deal until Franklin Roosevelt was persuaded to go orthodox all over again."

Similarly, in a January 14 Rolling Stone article headlined "Letter to Obama," Krugman wrote:

Compare the situation right now with the one back in the 1980s, when [Paul] Volcker [then chairman of the Federal Reserve] turned the economy around. All the Fed had to do back then was print a bunch of dollars (OK, it actually credited the money to the accounts of private banks, but it amounts to the same thing) and then use those dollars to buy up U.S. government debt. This drove interest rates down: When Volcker decided that the economy needed a pick-me-up, he was quickly able to drive the interest rate on Treasury bills from 13 percent down to eight percent. Lower interest rates on government debt, in turn, quickly drove down rates on mortgages and business borrowing. People started spending again, and within a few months the economy had gone from slump to boom. Economists call this process -- from the Fed's decision to print more money to the resulting pickup in spending, jobs and incomes -- the "monetary transmission mechanism." And in the 1980s that mechanism worked just fine.

This time, however, the transmission mechanism is broken.

First of all, while the Fed can still print money, it can't drive interest rates down. Why? Because those interest rates are already about as low as they can go. As I write this letter, the interest rate on Treasury bills is 0.005 percent -- that is, zero. And you can't push rates lower than that.

Other examples of Hannity and Limbaugh claiming that Reagan's tax cuts alone were responsible for ending the 1981-82 recession, and suggesting those tax cuts are a model for what Obama should do, include:

• Discussing the economic recovery plan on the February 6 edition of Hannity, Sean Hannity asserted:

HANNITY: I keep using Reagan as a model, because you know what? Ronald Reagan dug -- he inherited a far worse economy. There were 21 and a half percent interest rates, double-digit inflation, lost 10 million new jobs. We had a malaise factor, and people were wondering if America's best days were behind us.

Reagan came in, he dropped the top marginal rates from 70 to 28 percent. He tried as hard as he could to limit the size, scope, and influence of government.

Hannity then falsely claimed that as a result, "Reagan created 20 million new jobs. He doubled revenues to the federal government. He gave us the longest period of peacetime economic growth."

• During the February 1 edition of his Fox News show, Hannity told Fox News contributor Bob Beckel: "You worked for Jimmy Carter. Jimmy Carter gave us 21 and a half percent interest rates, double-digit inflation. We lost 10 million new jobs. And [Limbaugh's] saying Reagan lowered the tax rate from 70 to 28 percent." Hannity went on to falsely claim that as a result, "We doubled revenues to the government. We created 20 million new jobs."

• Rush Limbaugh wrote in a January 29 op-ed for The Wall Street Journal: "Supply-side economists make an equally persuasive case that tax cuts are the surest and quickest way to create permanent jobs and cause an economy to rebound. That happened under JFK, Ronald Reagan and George W. Bush. We know that when tax rates are cut in a recession, it brings an economy back."

• During the January 28 edition of his Fox News show, Hannity stated: "Reagan had a far worse economy than [Obama] inherited: 21 and a half percent interest rates, inflation out of control. We lost 10 million new jobs. ... [Reagan] dropped the top marginal rates from 70 to 28 percent, we created 20 million new jobs, and we doubled revenues to the government. ... It was, you know, unprecedented success."

• During the January 27 edition of his Fox News show, Hannity stated: "You know, President Bush got us out of the recession and the negative impact of 9-11 with tax cuts. ... Reagan got us out of the Carter years with tax cuts."

• During the January 26 edition of his radio show, Limbaugh stated that "many supply-side economists who make an equally persuasive case that tax cuts are the surest and quickest way to create permanent jobs and cause an economy to rebound and recover. The Heritage Foundation can provide those figures from the administrations of JFK, who cut taxes major; from Ronald Reagan, who cut taxes; and George Bush the 43, who also cut taxes." Limbaugh added: "We know what happens when tax rates are cut in a recession. We know that it brings an economy back."

• On the January 13 edition of his Fox News show, Hannity stated that under Reagan, there was "21 and a half percent interest rates, inflation through the roof, high unemployment." MSNBC political analyst Pat Buchanan replied, "What Ronald Reagan did was he bet everything on the private sector. He cut the top rate from 70 to 50, then 25 percent rates across the board, then all the way down to 28 percent in 1986, and he had two bad years before they took effect, and it took off." Hannity later stated: "Trillion dollar deficits for the -- as far as the eye can see, and [Obama] said twice that government is -- the only answer to the economic problem. That's the opposite of what you're describing that worked for Reagan."

From the February 9 edition of Fox News' On the Record with Greta van Susteren:

HANNITY: Look at the -- look at their stock market then versus where it is now. It is not even comparable by any stretch of the imagination. But we do have an example that did work. This -- and by the way, this is not the worst economy since the Great Depression. Ronald Reagan had 21.5 percent interest rates he inherited --

VAN SUSTEREN: It is lousy. I -- we -- it may not be the worst, but it's lousy. I mean, there's a lot of people hurting --

[crosstalk]

VAN SUSTEREN: Yeah, it's lousy.

HANNITY: But inflation was rampant. Unemployment -- we had lost 10 million new jobs. We have experienced tough economic times. His answer was to drop the top marginal rates to 70 to 28 percent. We created 21 million new jobs, doubled revenues to the government, and we had the longest period of peacetime economic growth in American history. That is my answer. Go give the money to the American people.

From the February 6 edition of Fox News' Hannity:

SOPHIA NELSON (attorney): Sean, if I may, let me try to bring this home to very serious note. I was one of those people that lost my job to downsizing in June. I live in the Northern Virginia suburbs, very -- Loudoun County, upper-middle-class area. It's all around me. I see people losing jobs. They're losing homes. Homes are being foreclosed upon. This is real. And it's not just hitting the lower class. It's hitting the middle and the upper middle. Everyone --

HANNITY: Granted.

NELSON: -- it's hitting everybody. My point is this. This is not a job-creating bill. This is not going to help people like me -- attorneys, engineers, doctors. They're losing jobs, too. How is infrastructure going to really replace the jobs we've lost? And that's what concerns me. We're not really talking about the pain that's going on. And don't forget. We haven't done anything about this housing crisis. I don't see anything in the bill about that. So --

HANNITY: Well, let's -- look, the bottom line, we go to the Congressional Budget Office numbers, and they've analyzed the bill. They're saying exactly what Sophia is saying, that this is a big spending bill, this is a budget-busting bill, and this is back-ended, and it's not going to create jobs. They're -- that's what they're telling the very people they are supposed to recommend these things to.

CHRISTOPHER KENNEDY LAWFORD (author): I'm not an economist, Sean. I played one on TV, but I'm not an economist. But I will say this. I mean, this is a disaster. The economy is a disaster, and we've got to do something. This stimulus bill is 50-50 spending/taxes. I don't know what -- I don't think we're going to save -- save this economy by doing tax cuts. We tried that for the last eight years. It didn't work.

HANNITY: Well, wait a minute. Let's go back. And I keep using Reagan as a model, because you know what? Ronald Reagan dug -- he inherited a far worse economy. There were 21 and a half percent interest rates, double-digit inflation, lost 10 million new jobs. We had a malaise factor, and people were wondering if America's best days were behind us.

Reagan came in, he dropped the top marginal rates from 70 to 28 percent. He tried as hard as he could to limit the size, scope, and influence of government. And Reagan created 20 million new jobs. He doubled revenues to the federal government. He gave us the longest period of peacetime economic growth. Why not follow that model that we know works, that John Kennedy, by the way, supported tax cuts and dropping the top marginal rates? Why not follow that model?

DOUG SCHOEN (author): I think in part -- Chris is right. Forty-two percent of the bill is tax cuts. We're going to provide stimulus to lower-income Americans. We're going to give people more cash.

HANNITY: It's welfare. No, no, welfare as we know it is beginning again. An era of big government just started today.

From the February 1 edition of Hannity:

HANNITY: Because he [Limbaugh] is a deep conservative thinker. Look, when he's on serious, political commentary, he's saying -- look, for example, you want to know what the worst economy was? You worked for Jimmy Carter. Jimmy Carter gave us 21 and a half percent interest rates, double-digit inflation. We lost 10 million new jobs. And he's saying Reagan lowered the tax rate from 70 to 28 percent. And Andrea, what happened? We doubled revenues to the government. We created 20 million new jobs.

ANDREA TANTAROS (media consultant): Yeah, and the bigger question is, why is the president of the United States picking a fight with Rush Limbaugh?

From the January 30 edition of Premiere Radio Networks' The Rush Limbaugh Show:

LIMBAUGH: Do you know what the GDP -- you know what happened to it in 1982? That was Ronald Reagan's second year in office. The GDP for 1982 was minus six-point-something percent, almost twice what the fourth quarter was in 2008. Not only is this economy right now nowhere near as bad as the Great Depression, it's nowhere near as bad as the recession of 1982 when we were coming out of Obama One, also known as Jimmy Carter. Now, I'll tell you when our gross domestic product is going to be minus 6.8 or seven or whatever, and I'll tell you when the misery index is going to get back up to 21 percent -- and that's two years after Obama's out of office in 2012.

You give him four years with nobody to stop him, and we're going to end up like 1982. We are not there now, and this is a lie that is being perpetrated. It is a myth that is being sold. It happened on CNN last night on Campbell Brown's show, No Bias, No Bull. Campbell Brown had as a guest a CNN business correspondent by the name of Ali Velshi -- Ali Velshi. Campbell Brown said: "This quote from, Rush Limbaugh today that's getting a lot of attention, The Wall Street Journal: 'Tax cuts are the surest and quickest way to create permanent jobs. We know that when tax rates are cut in a recession, it brings an economy back.' " Now, listen to the business correspondent of CNN in full-fledged ignorance mode.

VELSHI [audio clip]: This is not the economy that Ronald Reagan ever saw. We have not seen anything like this in our lifetime. Anybody who tells you this is how it works is lying. We don't know how it works. We have never seen anything like this before.

LIMBAUGH: Mr. Velshi, you are incompetent. You are a disservice to your business, except you fit right in at CNN. Disinformation, character assaults. This economy is nowhere near as bad as it was in 1982. In fact, Mr. Velshi, the entire economy, the GDP rose 1.3 percent for all of 2008. It was down 3.8 percent in the fourth quarter, but it grew 1.8 percent the whole year. Now, Mr. Velshi, after calling me a liar -- and I'm not even a business reporter, but you pretend to be -- in 1986, GDP was down over 6 percent. We were in a recession. What was the centerpiece of Mr. Reagan's economic recovery plan, Mr. Velshi? Let me spell it for you: T-A-X-space-C-U-T-S. In fact, Mr. Velshi, you may not have seen anything like this before, but I have. I've seen worse. I lived through worse.

When Ronald Reagan took office in 1981, the top marginal tax rate, Mr. Velshi, was 70 percent. When Ronald Reagan left office in 1989, the top marginal tax rate was 28 percent. The only way you can say the tax cuts didn't lift us out of a recession is if you want to lie like Bill Clinton did and claim that the '80s were the worst economy in the last 50 years. But you go back, you look at the prosperity that was created by those tax cuts throughout this country, look at the prosperity that was created through the '90s that Bill Clinton got to claim the credit for. But aside from all that, to go on a cable news network and call me a liar while you are as factually incorrect as you could possibly be?

From Limbaugh's January 29 Wall Street Journal op-ed:

Supply-side economists make an equally persuasive case that tax cuts are the surest and quickest way to create permanent jobs and cause an economy to rebound. That happened under JFK, Ronald Reagan and George W. Bush. We know that when tax rates are cut in a recession, it brings an economy back.

From the January 28 edition of Hannity:

HANNITY: See, but I pointed this out the other day. Reagan had a far worse economy than he inherited --

S.E. CUPP (columnist): Right. That's right.

HANNITY: -- 21 and a half percent interest rates, inflation out of control. We lost 10 million new jobs.

CUPP: Right.

HANNITY: What did -- he dropped the top marginal rates from 70 to 28 percent, we created 20 million new jobs, and we doubled revenues to the government.

CUPP: Yeah. Yeah.

HANNITY: It was, you know, unprecedented success.

CUPP: Tax cuts work. Tax cuts work.

HANNITY: They do.

CUPP: What bothers me about this is that this wasn't bipartisan. This is a Democratic package. Republicans were largely shut out. And the plan the Republicans had --

HANNITY: Yeah.

CUPP: -- cost half as much, would have created twice as many jobs in twice as fast a time.

CUOMO: They weren't shut out, though.

CUPP: Why wasn't that looked at?

CHRIS CUOMO (ABC Good Morning America co-anchor): To be fair, they weren't shut out. They had this big powwow. They all come up. They say they want a compromise. That's not what happened. Tax cuts definitely work as long as the people getting them spend that money. In this economy --

From the January 27 edition of Hannity:

HANNITY: One plan has always worked: tax cuts. You know --

DAVID BOIES (attorney): No.

HANNITY: -- President Bush got us out of the recession and the negative impact of 9-11 with tax cuts.

BOIES: No, but the --

[crosstalk]

HANNITY: Reagan got us out of the Carter years with tax cuts.

From the January 26 edition of The Rush Limbaugh Show:

LIMBAUGH: I have a serious proposal to make: the Obama-Limbaugh Stimulus Plan 2009. There is a serious debate in this country as to how best end the recession. Recessions will end on their own if they're left alone. The average recession will last five months to 11 months. The average recovery from each recession will last six years. What can make the recession worse is the wrong kind of government intervention. The wrong kind of government intervention is precisely what President Obama has proposed. I don't believe that his stimulus plan is a stimulus plan at all. I don't think it's designed to stimulate anything but the Democrat [sic] Party. It's designed to repair the power losses from the '90s forward of the Democrat Party and to entrench this party for, quote-unquote, eternal power, like Franklin Delano Roosevelt did with his New Deal.

Now, we have Keynesian economists that believe government spending on shovel-ready projects of all kinds, "infrastructure" -- schools, roads, bridges -- that's the best way, they think, to stimulate our staggering economy. There are just as many supply-side economists who make an equally persuasive case that tax cuts are the surest and quickest way to create permanent jobs and cause an economy to rebound and recover. The Heritage Foundation can provide those figures from the administrations of JFK, who cut taxes major; from Ronald Reagan, who cut taxes; and George Bush the 43, who also cut taxes. The blueprint is there. We can consult it. We know what happens when tax rates are cut in a recession. We know that it brings an economy back. There is recent polling that proves the American people are in favor of both of these approaches.

From the January 13 edition of Hannity:

HANNITY: Well, what do you make -- I think the biggest issue that's facing most Americans, and we'll get to it in a little more detail tonight, is the economy, Pat. Look, you were there in the Reagan years. You have the experience.

PAT BUCHANAN (MSNBC political analyst): Right.

HANNITY: Twenty-one and a half percent interest rates, inflation through the roof, high unemployment.

BUCHANAN: Thirteen percent inflation, right.

HANNITY: He -- top marginal rates from 70 to 28 percent, he cut them. The opposite.

BUCHANAN: What Ronald Reagan did was he bet everything on the private sector. He cut the top rate from 70 to 50, then 25 percent rates across the board, then all the way down to 28 percent in 1986, and he had two bad years before they took effect, and it took off. Now, FDR bet on government, all the way, you know -- regulations, spending, all the rest of it.

I will say this for FDR, the spending -- I mean the -- the economy went all the way down to '29 to '33, but by '36 industrial production was back where it was in '29, but then it fell off the cliff again. So the Reagan record is phenomenal. Hugely successful. Jack Kennedy was successful. And Coolidge and the great Warren Harding were successful.

HANNITY: But --

BUCHANAN: He cut taxes 70 percent to 25 percent.

HANNITY: But didn't FDR he -- he benefited -- if you want to talk about benefited --

BUCHANAN: Right.

HANNITY: -- there's no benefit from war, my father fought in World War II, but the war helped him economically. The war helped him economically.

BUCHANAN: The war no only helped him, the war is what really pulled us completely out of the --

HANNITY: Right.

BUCHANAN: -- out of that Depression, and unfortunately that's an argument for -- he didn't spend enough --

HANNITY: All right. We're running out of time.

BUCHANAN: -- in the '30s, he spent for '40s. Yeah.

HANNITY: We heard twice. Trillion-dollar deficits for the -- as far as the eye can see, and he said twice that government is -- the only answer to the economic problem. That's the opposite of what you're describing that worked for Reagan. Reagan created 20 million new jobs, longest period of peacetime economic growth.