Economic Growth

Remarks prepared for delivery by Empower America co-director Jack Kemp at ‘2001: An Economic Outlook’
Sponsored by The Ronald Reagan Presidential Foundation and Investors Business Daily, 02/09/2001


Ladies and Gentlemen and distinguished guests, it is an honor and a real pleasure for me to speak to you today about Reaganomics and the economic outlook for 2001 and beyond. Let me begin by thanking our hosts this morning, The Ronald Reagan Foundation and Library and the Investor’s Business Daily, for giving us the opportunity not only to honor Ronald Reagan but to reflect on his legacy to America and what it means for our nation’s future. It was my privilege to be here at the dedication of the library and to speak here just ago two years ago.

Back when Ronald Reagan and we supply siders were trying to change the way America and the world thought about taxes and economic policy, we had only the Wall Street Journal to broadcast our ideas. Today, we have in addition the sound thinking and effective editorializing of IBD, which adds enormously to our ability to preach the supply-side gospel. So, thank you Wesley Mann and Bill O’Neil and all your good folks at IBD, and thank you Mark Burson and the entire Reagan Foundation.


What a remarkable set of circumstances have brought us to this point in history. Almost 20 years ago to the week—the same week in which we celebrate Ronald Reagan’s 90th birthday—President Reagan’s program for economic recovery and expansion was sent to the Congress. Those policies—what came to be called Reaganomics—not only were successful then, they continue to drive us more powerfully than ever to a better, freer, more prosperous future.

What a fabulous 70th birthday present to the nation Reaganomics was, and what better tribute to the president we call the “Gipper” than this living legacy of prosperity and opportunity for every American to participate in the American Dream. And now two decades later, we are able to enjoy another Reagan birthday present to our nation, this time his 90th, in the form of a new book entitled Reagan In His Own Hand, by Marty and Annelise Anderson and Kiron Skinner. It is truly thrilling for me to pick up this book and be able to follow Ronald Reagan’s thought process as he developed his ideas and figured out how to communicate them to the American people on virtually every topic under the sun. For me, though, the best thing about the book is that it definitively repudiates the liberal-left idea that Ronald Reagan was only a communicator of his speechwriters’ ideas.

Two profound truths about Ronald Reagan should stay with us always. As Jeff Bell observes in the Weekly Standard’s 90th birthday tribute to the President, Reagan’s exceptional communications skills often were given more weight than his actual message. But as Bell says, “his decisions about what to communicate were even better.” Exactly! And what he chose to communicate was the all-encompassing lodestar of “freedom.” As Bell also reminds us, Reagan is a true “hedgehog” in Isaiah Berlin’s famous metaphor, who knew one “big thing”—freedom—and relentlessly advanced it with grace, skill, and good humor. From tearing gown the Berlin Wall and lifting the Iron Curtain across Europe to tearing down barriers to growth and lifting up opportunity for every American to reach his or her potential.

Reading Reagan In His Own Hand, I am struck by just how much policy makers today stand on his shoulders and are influenced by the world view developed in these writings—even liberal politicians who continue to besmirch his name for political advantage honor his memory by the “Reaganite” positions they now espouse and principles they accept as given. Ronald Reagan’s intellectual journey, translated into his extraordinary political leadership, has transformed our thinking about economic issues, and indeed about the role of government itself. Truly we are all “Reaganites” now, especially President George W. Bush, whose commitment to his program of across-the-board tax rate reductions and pro-growth policies seems to grow stronger every day.

Washington Post columnist David Broder wrote a marvelous birthday tribute to what he called “Reagan’s enduring influence” in American politics, acknowledging that “there’s been no burnout for Reagan’s ideas,” which he said “live on.” As Mr. Broder said, “The Bush tax cut is 100 percent Reaganomics,” resting on President Reagan’s central concepts that “wealth creation spurred by lowering marginal tax rates is the surest way to expand economic growth,” and that it is “immoral for the government to take as much as it ha[s] been taking from Americans.”


Cherish and honor the Reagan legacy we should, but build on it we must. During the past decade we have departed from the path of lower tax rates, less regulation and non-inflationary/non-deflationary monetary policy that were the hallmarks of Reaganomics. Recently a confluence of events and policy mistakes—specifically rising tax rates, an excessive tax burden, a new bout of regulations and deflationary monetary policy—have put the economy into a stall from which it may not recover before experiencing a very hard landing.

So, at this moment of twin transitions to a new century and a new governing administration, it’s an exciting time to be talking about reducing tax rates, fundamentally reforming the tax code, reformulating Social Security as a worker-investment and personal retirement program, replacing discretionary monetary policy at the Fed with a commodity-based price rule and leveraging America onto a higher long-run growth path that will leave no person behind.

For the first time since 1981 Congress and the president are preparing to cut tax rates across-the-board. the Reagan tax cuts were very courageous and audacious, since then there were deficits as far as the eye could see. I, like President Reagan, had faith in the program and predicted in 1981 that if we held to the course there would be surpluses as far as the eye could see. Today that prediction has come true, and President Bush has the unprecedented opportunity offered by 10-year cumulative budget surpluses almost twice the size he anticipated last year, when he first formulated his tax cut plan—nearly $6 trillion, according to the latest Congressional Budget Office projections.

With these record surpluses, impervious even to a temporary economic slowdown, it’s appropriate, necessary, and vitally important to think even more Reagan-like about broader and deeper tax rate reductions. In fact, it’s time to move past the fiscal austerity of debt retirement and return to high-octane growth policies that keep budgets balanced and the economy growing. It’s time to win another one for the Gipper and keep economic opportunity expanding into every corner of America.


I had the privilege of being present at the creation of Reaganomics as one half of the Kemp-Roth tax cutting team. Can you believe it: the top income tax rate was 70 percent here in the US and in Great Britain it was 91 percent—98 percent on so-called “unearned” income.

Reaganomics, a.k.a. supply-side economics, was defined as a commitment to low tax rates, maximizing rewards for work, savings, and investment at the margin, stable money, and (I would add) free and open global markets where capital, goods, and services can move across national boundaries with minimal interference from government. The extraordinary events and ideas that shaped the Reagan economic program were all in some sense responding to the dread, and at that time perplexing, phenomenon known as ‘stagflation’—unemployment and inflation rising in tandem. This could not happen, we were told by Keynesian economists who believed in a Phillips-Curve trade off between unemployment and inflation. But it did. And it’s not surprising they couldn’t figure out how to stop it.

Those same Keynesian demand-side economists told us we just needed tax hikes to restrain inflation and a pumped-up money supply to keep the economy afloat. That’s like stepping on the brake and the accelerator at the same time—the economy overheats but doesn’t go anywhere. And what did we get for our Keynesian efforts? Continuing stagnation, low productivity, soaring interest rates and record inflation.

Some others had a different idea. A then obscure Canadian economist named Robert Mundell, later to win the Nobel Prize, and his student at the University of Chicago, Art Laffer, pointed out that one key factor in stagflation was a disastrous tax policy. They argued that our steeply progressive tax structure made people’s tax liability rise automatically even as their real income fell in a period of rampant inflation. Mundell and Laffer pointed out what should have been obvious: that higher unemployment would just make things worse, and the only answer was to increase incentives to work save and invest so that people’s after-tax income and after-tax return on investment would rise. That would produce more investment and higher productivity, which would create new higher-paying jobs and reduce unemployment, and it would increase the supply of goods and thus reduce inflation.

To me as a congressional backbencher and former professional football quarterback, this was intuitively sensible, and extremely important. For four years I preached the virtues of what famously became known as supply-side tax cuts and a commodity price rule to restore the value of the dollar and tame inflation. Seldom have iconoclastic ideas turned into reality so quickly, even though the tax cuts were delayed by the bean counters at OMB. That first supply-side analysis was soon translated into the Kemp-Roth 30% across-the-board tax cut plan, which was embraced by Ronald Reagan in his 1980 campaign and enacted into law in 1981, reinforced by indexing against inflation to end bracket creep.

In retrospect, it happened so quickly, but it didn’t seem that way at the time, and it didn’t happen by accident. In my view there were several pivotal events that paved the way for the successful supply-side revolution.

First, the editorial page of the Wall Street Journal under the aegis of Bob Bartley started promoting the ideas that became known as ‘supply side economics.’

Second, in 1978 Congress passed the Steiger Amendment, which cut the tax rate on capital gains from 49% to 28%.

Third, the taxpayer revolt and Proposition 13 right here in California.

Fourth, some leading Democrats began to sign on to the concepts, which was illustrated best when the Joint Economic Committee of Congress published a bipartisan annual report called “Plugging in the Supply Side” in 1980.

Even so, the supply side movement could have remained largely academic without its embrace by Ronald Reagan and his election in 1980. The Reagan economic program of across-the-board tax cuts, coupled with sound money and regulatory relief, opened up opportunities for American workers, investors, savers, and entrepreneurs that had been forestalled for many years by high tax rates, uncontrolled inflation, and massive economic uncertainty. Reagan truly launched the ‘growth economics’ that has dominated the public policy debate ever since, simply by understanding that when tax rates get too high, people’s financial, business, and economic decisions at the margin—how to deploy their next dollar earned, spent, saved, or invested—are driven by tax calculations rather than economic wisdom.

Given the fact that tax rate cuts are still regarded as ‘controversial’, more so than tax rebates, tax credits, tax-favored leasing arrangements, and so on, tells us that politicians still tend to forget that people work, save, and invest based on their after-tax income and rate of return. If we cut tax rates and increase the after-tax rate of return, people will engage in more productive activities. With rising after-tax returns, every productive force in the economy responds, and responds immediately and powerfully, to take advantage of the new opportunity to profit from work, saving, innovation, risk-taking, and investment.


Forgive me the history lesson, but it does seem at times that we fight the same intellectual battles, over and over because we forget the lessons of the past. There is no doubt in my mind that the only reason President Clinton succeeded as he did on the economy was Reagan policies and a conservative Congress.

Remember what happened right after President Clinton assumed the presidency and he tried to replace Reaganomics with Clintonomics. The first thing he did was to re-evaluate the circumstances in which he found the nation, and in light of larger-than-anticipated budget deficit projections, he determined that he must ask Congress to increase taxes rather than cut them as he had proposed during the campaign. Now, don’t get me wrong, the former president not only was justified in re-evaluating his meager tax proposals, but also obliged, in light of altered circumstances, to do so. But the mistake he made was to significantly increase tax rates rather than revising the small, narrowly targeted tax cuts he had proposed during the campaign into broad-based tax rate reductions across the board.

Had President Clinton prevailed upon Congress to cut tax rates in 1993, economic growth would have increased and the deficits would have shrunk of their own accord. Instead, the Clinton tax-rate increase merely perpetuated the sluggish economic recovery for three more years, turning it into the slowest economic recovery since the Great Depression, and consequently, large budget deficits persisted.

Lately there has been heated debate about whether to retire 100% of the public debt, rather than just let the debt decline naturally as economic growth continues. I submit that a policy of retiring all the national debt would create even worse problems than letting the public debt grow at an excessive rate.

If the government continues to command revenues at a record-high percentage of the GDP (now close to 21 percent) in order to run surpluses and wipe out the debt, then the government will reach a point where it is obliged to invest those surpluses in private assets, i.e., the stock market. Do you really want the United States to own shares of the same companies that are represented in your 401(k) plan or mutual fund? The last time I checked, government ownership of private assets was called—to be quite blunt–socialism.

Can you imagine the radio script Ronald Reagan would have written on this subject? Well, we don’t have to stretch our imaginations too far because, again, we have a radio script in his own hand that addresses the question of budget surpluses. In 1979 Reagan wrote “I have always believed that government has no right to a surplus; that it should take from the people only the amount necessary to fund government’s legitimate functions. If it takes more than enough it should return the surplus to the people.”

Exactly what I am trying to say, but summed up so perfectly in just a few words!

Alan Greenspan said it another way in his January 25 testimony before Congress, acknowledging this very dilemma: “Excessive surpluses, like excessive deficits, distort the structure of private economic growth, and that’s bad.”

I agree, but let me take it one step further:

Debt reduction does not lower interest rates; (In fact over the last 20 years interest rates and budget deficits have traveled in opposite directions three-fourths of the time. For example, in 1993 when the deficit was almost 4 percent of GDP, the interest rate on the 10-year federal bond was 5.87 percent, yet last year when we ran a surplus of 2.4 percent of GDP, that interest rate was over 6 percent. Sorry, President Clinton!)

Debt reduction does not increase national savings (Surpluses come at the expense of personal saving—almost every dollar of the surpluses have come directly out of personal savings which has fallen from slightly over 7 percent in 1993 to just about zero today.);

Debt reduction does not strengthen Social Security; and

Debt reduction does not promote economic growth.
I reiterate debt reduction does not promote economic growth. Economic growth reduces the burden of debt! (For example, although the debt held by the public rose by more than 50 percent from 1990 to 2000—from $2,410 billion to $3,639 billion—the debt burden on the economy actually fell from 42.4 percent of GDP to 36.2 percent because the economy grew faster than the debt during the same period.)


I am convinced that President Bush, too, understands the essence of growth economics. He and Vice President Dick Cheney along with Treasury Secretary Paul O’Neill are tenaciously and vigorously promoting across-the-board tax cuts in the face of fierce class-warfare rhetoric. Even though the CBO estimates that the budget surplus will be close to $6 trillion over the next ten years, some politicians are trying to frame the issue as a choice between retiring debt, and enacting ‘tax cuts for the wealthiest’ that would resurrect deficit spending. It’s not true, and we can’t let that false rhetoric drive us into what I call the ‘debt trap.’

Embarking on a crash course to retire the national debt as quickly as possible is no solution to the Social Security problem. Far from it; it would only divert us from beginning to do the only thing that will prevent us having to borrow huge sums in the future to patch up Social Security, namely allow workers to put a significant share of their payroll taxes in personal retirement accounts.

You guessed it, Ronald Reagan also had something important to say about this topic as well in two radio chats in 1977 and 1978. Reagan had a favorite habit of reading from the original 1936 official announcement of the beginning of Social Security and reminding people that none of the promises made in that announcement were kept: “Your Soc. Sec. Tax is not in a fund earning additional money. The rate of tax has long since gone beyond [the promised] 3% and the amount of earnings being taxed has risen way above the promised ceiling. The amount you get back is not more than you paid in nor is it more than you could get by putting your money in some other plan. Most of you with the present tax could buy in the open insurance market a retirement policy with life protection paying far more than present social security benefits. Truth is if we could invest our and our employers’ share of the Soc. Security tax in savings or insurance we could double the return promised by Soc. Security. It is time to totally reform the system if we are to prevent a total collapse.”


The Federal Reserve Board has a charge to keep and one thing I was glad to see a couple of weeks ago was Fed Chairman Alan Greenspan reversing himself on debt retirement and open the door for broad-based across-the-board tax rate reductions.

The Fed’s charge is to preserve the value of our money, no more, no less. The Fed should not be attempting to fine-tune economic growth, especially in pursuit of the harmful Phillips-Curve notion that too many people at work produce inflation. For the past couple of years, the Fed has deprived the economy of needed liquidity because it believed the economy was growing too fast, too much investment was occurring and too many people were at work. So it undertook to slow down the economy and eliminate “irrational exuberance” in the stock market with a deflationary monetary policy, as evidenced by the price of gold falling from $325 in 1998 to $263 today.

Now, rather than the soft landing Chairman Greenspan hoped to engineer, we are on the verge of a hard landing as a direct consequence of the Fed’s deflationary monetary policy. The only way to ensure that monetary policy going forward is neither deflationary nor inflationary, but rather supplies just the amount of liquidity that markets demand, is to replace discretionary monetary policy that targets interest rates with a rule-based monetary policy that calibrates the flow of liquidity into and out of the economy by a commodity-price rule, my preference being a gold-price rule by which the Fed adjusts liquidity so as to maintain its commodity-price target within a specified, narrow range. The Fed’s charge is not to “prevent the economy from growing too fast or too slow,” neither is it to “stimulate” the economy or “dampen” what it considers to be the excessive “animal spirits” of entrepreneurs and investors. The Fed’s charge to keep is stable money, period.

The Bush Administration too has a charge to keep: to free America from “debt-trap” policies and leverage America up onto a higher growth trajectory for the future. One means to that end is to fundamentally overhaul the tax code. The President’s plan for accelerated across-the-board tax rate reductions is a good start in that direction. Fortunately, circumstances have changed dramatically since candidate Bush put together his tax proposals almost a year ago, and it now is possible to move much more quickly toward fundamental tax reform.

Projected surpluses have grown and the economy is in a stall. Circumstances now cry out for a Reagan-like agenda that George W. Bush can make his own. Incorporating some ideas put forth by Forbes columnist Rich Karlgaard, I would like to suggest the outline of such an agenda.


  • Forget the artificial, self-imposed $1.6 trillion-dollar cap on the tax cut. Instead keep reducing tax rates until on-budget balance is achieved. Forget phase-ins, triggers and contingencies of all sorts. As long as there is a surplus in the non-Social Security portion of the budget, tax rates haven’t been cut enough. At a minimum, it should be possible to repeal both the 1990 and 1993 tax rate increases, immediately.
  • Cut capital gains taxes and index them for inflation, immediately. And, let’s eliminate the capital gains tax in pockets of poverty that are capital starved. It will raise money to help “pay for” the other rate cuts.
  • Increase the limits and lift the cap on IRAs, Roth IRAs and 401(k) retirement accounts. It is a better way for American to save than to run enormous budget surpluses.
  • Specifically for the technology sector, eliminate the ridiculous three-year write-off period for software and allow companies to write off (i.e., “expense”) the cost of software immediately; cut taxes that pose a huge obstacle to broadband deployment and the productivity gains it would produce. As Rich Karlgaard points out, excise taxes on DSL lines run to 40% in some areas—what he calls “Euro-sclerosis in our backyard.”
  • Specifically for the manufacturing sector, fix depreciation schedules for investment in plant and equipment with write-off periods that prohibit companies form recovering the full costs of their investments. Cost-recovery schedules for every asset class in the tax code should be shortened and indexed for inflation and the time value of money.
  • Until the tax code can be fundamentally overhauled, simplify taxes as much as possible within the current code. For example, eliminate the extraordinary marginal-tax-rate spikes caused by the Alternative Minimum Tax. As Rich Karlgaard says, simplification strips friction out of the system. Today’s required army of tax lawyers and accountants is in itself a tax of 2% to 3% on America’s GDP. “This burden sits heaviest on small businesses, the wheels of growth.”
  • Forge ahead as quickly as possible to transform Social Security into a payroll-tax-financed worker investment and personal retirement program by allowing workers to place a significant share of their payroll taxes into personal retirement accounts. To the extent that the payroll-tax diversion results in a shortfall of payroll tax revenue to pay current retirees’ benefits, the government could borrow funds from the personal accounts to make up the difference rather than borrowing from the Social Security Trust Fund to retire the national debt as it does currently.
  • If we can do that, and then move swiftly to reform our anti-growth, corrupting, and confusing tax code, with rates as low as possible, we will have done Ronald Reagan proud. As John Gardner eloquently observed, “There occurs at breathtaking moments in history an exhilirating burst of energy and motivation, of hope and zest and imagination, and a severing of the bonds that normally hold in check the full release of human possibilities. A door is opened, and the caged eagle soars.”
  • President Reagan understood this. Today, the eagle can soar once more. All we have to do is let it free.

    Thank you.