Stephen Hayes criticized the Obama administration's response to the recession by reviving the myth that President Reagan ended the 1981 recession by cutting taxes. In fact, economists have said that the recession was ended under Reagan primarily due to federal interest rate cuts.
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Hayes claims Reagan ended recession by cutting taxes
Hayes: "President Reagan cut taxes and you had growth of 5 percent, 8 percent and 9 percent." During the August 2 edition of Fox News' Hannity, Steven Hayes said, "Go back and look at the aftermath of the 1981 recession. President Reagan cut taxes, and you had growth in consecutive quarters, I think, of 5 percent, 8 percent, and 9 percent," and that "the policies that President Reagan enacted led to -- the recovery was much more pronounced than we're seeing now."
Hannity: If Obama "followed Reagan policies, I would argue probably we're in a good position for a recovery." During the discussion, Hannity claimed, "The economy was in far worse shape when Reagan came into the presidency, and what's happening here is the Obama policies are the antithesis of those of Reagan." Hannity added that if Obama "had followed Reagan policies, I would argue probably we're in a good position for a recovery, but I think he went in the wrong way."
Economists attribute Reagan-era recovery to interest rate cuts
Federal interest rates dropped throughout early 1980s recession, but are already currently at near-record lows. The recession to which Hannity and Hayes 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. By contrast, the current federal funds rate is between zero percent and 0.25 percent, while the primary discount rate is at 0.75 percent and the secondary discount rate is at 1.25 percent.
CBO: "Lower interest rates after mid-1982 permitted the recovery to begin." An 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."
Reagan economist suggests interest rate cuts drove economic recovery. 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."
Krugman: "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." Nobel Laureate Paul Krugman said during the February 6, 2009, 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."
Obama did cut taxes for Americans as part of stimulus package
The $787 billion American Recovery and Reinvestment Act included $288 billion in tax relief. As Media Matters for America has noted, the recovery act contained $288 billion in tax relief, including the Making Work Pay tax credit, an annual credit of $400 per individual or $800 for families. In addition, the recovery act included a temporary increase in the earned income tax credit, a temporary increase in the refundable portion of the child tax credit, an increase in the first-time homebuyer tax credit, and tax incentives for businesses.
William Gale: "[T]axes are literally at their lowest in decades." CBS News reported on April 15 that "taxes are at their lowest levels in 60 years, according to William Gale, co-director of the Tax Policy Center and director of the Retirement Security Project at the Brookings Institution." CBS News further reported:
"The relation between what is said in the tax debate and what is true about tax policy is often quite tenuous," Gale told Hotsheet. "The rise of the Tea Party at at time when taxes are literally at their lowest in decades is really hard to understand."
Bruce Bartlett: "[F]ederal taxes are very considerably lower by every measure since Obama became president." Bruce Bartlett, former adviser to President Reagan and Treasury Department economist under George H.W. Bush, wrote on March 19 that "federal taxes are very considerably lower by every measure since Obama became president. And given the economic circumstances, it's hard to imagine that a tax increase would have been enacted last year":
As noted earlier, federal taxes are very considerably lower by every measure since Obama became president. And given the economic circumstances, it's hard to imagine that a tax increase would have been enacted last year. In fact, 40% of Obama's stimulus package involved tax cuts. These include the Making Work Pay Credit, which reduces federal taxes for all taxpayers with incomes below $75,000 by between $400 and $800.
According to the JCT, last year's $787 billion stimulus bill, enacted with no Republican support, reduced federal taxes by almost $100 billion in 2009 and another $222 billion this year. The Tax Policy Center, a private research group, estimates that close to 90% of all taxpayers got a tax cut last year and almost 100% of those in the $50,000 income range. For those making between $40,000 and $50,000, the average tax cut was $472; for those making between $50,000 and $75,000, the tax cut averaged $522. No taxpayer anywhere in the country had his or her taxes increased as a consequence of Obama's policies.