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What Najibnomics can learn from Reaganomics

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By Shafiq Shamsi

Ronald Reagan entered the White House as America’s 40th president on 20 January 1981 where at that time, the US faced some of the bleakest economic era since the Great Depression of the late 1920s to 1930s. Unemployment rate, taxes and interest rates were all high and the national spirit low.

According to Reagan, the liberal policies had weakened the free market flow of its natural abilities with too many government taxes, too much money spent by the government and too many heavy government regulations. This became the focal point of his campaign as he promised to provide something different; cut taxes, control government spending and get the government out of the way.

Some sarcastically called his plan “Reaganomics” but this former actor-president was undeterred. He knew that only if people had money in their pockets and incentives to invest and build businesses would jobs be created, inflation under control and interest rates reduced.

In August 1981, he signed the Economic Recovery Tax Act of 1981, which brought reduction in individual income tax rates, the expensing of depreciable property, incentives for both small businesses and savings. So it began the Reagan recovery.

Five years on, the Tax Reform Act of 1986 brought the lowest individual and corporate income tax rates of any major industrialized country known to the world where the individual tax rate alone for example was lowered from 50% to 28% to the great relief of the American citizens.

Reagan’s tax cuts saved the median-income two-earner American family of four close to $9,000 in taxes from what they would have owed in 1980. In comparison, Malaysia has lower income taxes when measured against most western countries but questions abound as to whether other forms of taxes are reasonable.

During Reagan’s presidency also, the American government spending plummeted from 10% in 1982 to just over 1% in 1987, the first time it ever happened in well over a decade. While in Malaysia, government spending increased 60% from US$26.39 billion in 2009 to US$42.43 billion in 2013.

In the provision of employment, the eight-year Reagan administration created 20 million new jobs where its direct beneficiaries expanded beyond one segment of society. This may perhaps be one of Malaysia’s salient points as jobs did indeed increase albeit marginally. In a year-on-year comparison, unemployment rate in the country improved from 3.1% in September 2013 to 2.7% in 2014.

As Malaysia seeks to transform itself under the leadership of Prime Minister Datuk Seri Najib Tun Razak into a high-income nation by 2020 and with a focus to attract investments in Islamic finance, high technology industries, biotechnology and services, admittedly Malaysia may need a more daring approach rather than popular votes before we can proudly wear the high income hat. Much as they say still needs to be done, and learn too from past successful models like the Reaganomics.

 

Over the eight years of the Reagan Administration:

• 20 million new jobs were created and unemployment fell from 7.6% to 5.5%.
• Inflation dropped from 13.5% in 1980 to 4.1% in 1988.
• Net growth of families earning between $20,000 and $50,000 annually grew by 2%.
• Real gross national product rose 26%.
• Prime interest rate was slashed by more than half, from an unprecedented 21.5% in January 1981 to 10% in August 1988.