President Ronald Reagan...
...Best Friend to Small Business
It’s hard to think of a better friend to small business – at least over the past near eight decades – than President Ronald Reagan.
Reagan, of course, was known as the Great Communicator. And those skills did not fail him when talking about small business and entrepreneurship.
For example, in his March 1983 proclamation on Small Business Week, President Reagan noted the role played by entrepreneurs in building the nation. He said: “Our Founding Fathers envisioned a nation whose strength and vitality would emerge from the ingenuity of its people and their commitment to individual liberty. They understood that a nation’s prosperity is dependent on the freedom of its citizens to pursue their hopes, dreams and creative ambitions. American entrepreneurs and small business owners enthusiastically embraced the challenges of freedom, and through the miracle of the marketplace, set in motion the forces of economic growth that made our nation uniquely productive. This pattern of economic development has inspired people throughout the world to look to America for a better life.”
He was an international emissary for free enterprise. In his May 1988 speech to students at Moscow University who were members of the Young Communist League, Reagan explained: “The explorers of the modern era are the entrepreneurs, men with vision, with the courage to take risks and faith enough to brave the unknown. These entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States.”
Reagan also had the ability to communicate the struggles that businesses face, as well as the moral imperative in business. Reagan noted in a June 1983 speech: “We hear so much about the greed of business. Well, frankly, I’d like to hear a little more about the courage, generosity, and creativity of business. I’d like to hear it pointed out that entrepreneurs don’t have guaranteed annual incomes. Before they can turn a profit, they must anticipate and deliver what consumers want…The truth is, before entrepreneurs can take, they must give.”
Reagan also was famous for using humor to make his points. In an April 1982 speech before the U.S. Chamber of Commerce, he observed: “Winston Churchill said that some see private enterprise as a predatory target to be shot, others as a cow to be milked, but few see it as the sturdy horse pulling the wagon. Well, this administration believes the workers, savers, investors, and the entrepreneurs of America have been milked and shot at long enough.”
However, if Reagan’s commitment to small businesses had been just rhetorical, then he would have been little better than most other politicians. Reagan, though, offered policy changes that had broad, positive impacts on businesses, investors and entrepreneurs.
Let’s recall how bad things were in 1980 when Reagan was running against President Jimmy Carter. The economy was in a recession and losing jobs. Real gross private domestic investment plunged by 11 percent. Inflation raged at more than 13 percent. The prime interest rate exceeded 15 percent.
Some of the so-called leading economic thinkers of the time saw no way out, and relegated the U.S. to permanent economic decline. Reagan, though, grasped that the source of our woes could be found in bad public policy. In his 1981 Inaugural Address, he declared: “In this present crisis, government is not the solution to our problem; government is the problem.”
It took a couple of years to dig out of this mess – including another recession in 1982 -- but Reagan got the nation moving ahead again by eventually getting the policy mix right. He supported a tighter monetary policy by the Federal Reserve in order to get inflation under control. On the fiscal side of the equation, he cut taxes and restrained regulation in order to improve incentives for working, investing and risk taking that would translate into faster economic growth and increased employment.
For example, under Reagan, the top personal income tax rate tumbled from 70 percent to 28 percent. For good measure, tax rates were indexed so inflation could not push people into higher tax brackets even though they saw no increase in real earnings.
Regarding his tax cut agenda and its impact on small business, Reagan told a joint session of the Alabama state legislature in March 1982: “Most new jobs in America are created by small business, and most small businesses pay their taxes by the personal rates, not the corporate rates. So the personal tax cuts will create jobs. Those who oppose it would only handcuff employers and further hurt the unemployed.” (The same holds today, by the way, for those who would like to rollback part of the 2003 cuts in personal income taxes.)
Reagan also understood exactly how the tax cuts worked. In his autobiography Ronald Reagan: An American Life, he wrote:
“The more government takes in taxes, the less incentive people have to work…
"And the principle applies as well to corporations and small businesses: When government confiscates half or more of their profits, the motivation to maximize profits goes down, and owners and managers make decisions based disproportionately on a desire to avoid taxes; they begin looking for tax shelters and loopholes that contribute nothing to the growth of our economy. Their companies don’t grow as fast, they invest less in new plants and equipment, and they hire fewer people.
"Any system that penalizes success and accomplishment is wrong. Any system that discourages work, discourages productivity, discourages economic progress, is wrong.
"If, on the other hand, you reduce tax rates and allow people to spend or save more of what they earn, they’ll be more industrious; they’ll have more incentive to work hard, and money they earn will add fuel to the great economic machine that energizes our national progress. The result: more prosperity for all – and more revenue for government.
“A few economists call this principle supply-side economics. I just call it common sense.”
On the regulatory front, according to economist Thomas Hopkins, the real costs of federal regulations actually declined from 1980 to 1988 under President Reagan, with subsequent years experiencing a steady increase in regulatory burdens.
Tax cuts and regulatory relief, along with a declining rate of inflation, resulted in a dynamic economic recovery. Levels of entrepreneurship rose dramatically. For example, the number of business tax returns jumped by 44 percent from 1980 to 1990. Meanwhile, the U.S. population increased by only 10 percent over that period.
Once Reagan’s original tax relief package was fully implemented in 1983, the economy took off. Real economic growth averaged an impressive 4.3 percent from 1983 through 1989. Real gross private domestic investment expanded by 53 percent from 1982 to 1989, while almost 18 million jobs were being created. For good measure, inflation declined from an average of 11.7 percent from 1979 to 1981 to less than 4 percent, on average, from 1982 through 1989.
Establishment economists, many politicians and various experts of the time saw nothing but gloom and doom at the dawn of the 1980s. Reagan, though, could envision the nation’s re-birth. That’s because Reagan understood how American entrepreneurship, small businesses and the real-world economy actually worked. Reagan’s faith in America’s entrepreneurial spirit was well placed. In return, the nation’s faith in Ronald Reagan was completely justified.
Raymond J. Keating serves as chief economist for the Small Business Survival Committee.
