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|  | JUNE 10, 2004
By Michael J. Mandel Reagan's Economic Legacy His policies helped spur the 1990s boom and were integral to the high-tech revolution. But the poor paid a price On Aug. 13, 1981, President Ronald Reagan signed the legislation that defined his vision for the U.S. economy. The Economic Recovery Tax Act, also known as the Kemp-Roth bill, slashed taxes for many individuals and corporations and ushered in a new era. From that date on, government would play a far smaller role in the economy, and markets would reign supreme. Just the previous day, with far less attention and fanfare, IBM (IBM ) announced the introduction of its first personal computer, the IBM PC. Powered by a microprocessor from Intel (INTC ), which then had revenues of less than $1 billion, and sporting an operating system by a virtually unknown company called Microsoft (MSFT ), the IBM PC, and the machines that followed, took the country by storm. TAX CUTTER. In a way that few have realized, Reagan's economic legacy is inextricably interwoven with the Information Revolution that the IBM PC helped kick off. His message of competitive markets, entrepreneurial vigor, and minimal regulation found a willing audience in an era of rapid technological change, where innovation was opening new opportunities seemingly every day. Reagan's first term saw the creation of such future giants as Sun Microsystems (SUNW ), Compaq Computer, Dell (DELL ), and Cisco Systems (CSCO ) -- the greatest entrepreneurial burst of new companies since the early 20th century. It's likely that those companies would still have been founded, and would have prospered, even if Reagan hadn't been elected. Moreover, some of his policies, such as reduced support for nondefense research and development, were negatives for a tech-driven economy. But the Californian's program of slashing taxes was perfectly suited to -- and helped foster -- the new environment, with its emphasis on investment in human capital and ideas rather than heavy equipment. His tax bills -- including the 1981 legislation and the major 1986 Tax Reform Act -- whacked the marginal tax rates on top earners from 70% to about 30% and made it far more attractive for people to raise their incomes by getting more education or taking the risks of starting a company. FOSTERING INNOVATION. In addition, Reagan's 1986 tax-reform bill had another major impact. The new law helped support "idea-based" industries such as software and financial services. It lowered corporate tax rates for those companies while cutting or eliminating provisions in the tax code, such as the investment tax credit, that had primarily benefited old-line industries like utilities and railroads. The effect on corporate tax bills was immediate: Oracle's (ORCL ) average tax rate fell from 44% in 1986 to 32% once the law took effect. Microsoft's taxes saw a similar decline. Taken together, the changes Reagan championed in the tax system fostered innovation and entrepreneurialism even as they encouraged the development of venture capital and investment in human capital. And Reagan's willingness to push for more flexible labor markets and less regulation helped companies react faster to economic changes, including new technologies. As a result, the impact of the policies Reagan set out in the 1980s, which slowly worked their way through the economy, helped lay the groundwork for the Information Revolution of the 1990s. That's nothing to sneeze at, especially since technology has been the major factor driving the U.S.'s rapid productivity growth since 1996. FIERCE DEBATE. Still, there's heated dispute about just how important Reaganomics was to the tech boom. To Milton Friedman, the Nobel prize-winning economist, Reagan's tax cuts -- especially the 1986 bill -- were "one of the most important factors in the boom of the 1990s." Adds Robert A. Mundell, another Nobel laureate: "[They] made the U.S. economy the motor for the world economy in the 1990s, on which the great revolution in information technology was able to feed." Other economists, however, are far less willing to give Reagan credit for the boom. They argue that the big deficits generated by the drop in tax revenues were detrimental to business investment; had the red ink continued, it would have been much harder for companies to fund their spending on info tech in the 1990s. Instead, these economists believe far greater kudos go to President Bill Clinton for raising taxes and bringing down the budget deficit. "As for Reagan being responsible [for the 1990s boom], that's far-fetched," says another Nobel prize winner, Robert Solow of Massachusetts Institute of Technology. "What we got in the Reagan years was a deep recession and then half a dozen years of fine growth as we climbed out of the recession, but nothing beyond that."
BW MALL
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