How Ronald Reagan Saved the Dow

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On this day in economic and financial history...

Opening the oil-slicked floodgates
A decade of an artificially depressed U.S. oil industry finally came to an end on Jan. 28, 1981, when President Ronald Reagan lifted the last remaining oil price controls on gasoline, propane, and American-sourced crude. The oil industry was again allowed to control pricing and distribution, which was estimated to potentially increase gasoline prices by $0.06 to $0.12 per gallon over the already high $1.25 per gallon paid at the end of 1980 -- equal to about $3.50 today.

Oil price controls had been instituted by the Federal Energy Administration beginning in 1971 and augmented in the wake of the devastating OPEC embargo of 1973. As early as 1975, government economists were warning that the controls would prove ineffective and give foreign producers greater leverage over oil pricing. American motorists felt the pain acutely at the pump, as the price of a gallon of gas had quadrupled from 1971 to 1980. The markets had difficulty handling these higher prices as well, as evidenced by the progress of the Dow Jones Industrial Average (INDEX: ^DJI) over the course of the 1970s. The first controls were instituted in August of 1971, when the Dow hovered near 900 points. On Jan. 28, 1981, the Dow closed at 943 points.

Deregulating oil proved to be one of Reagan's best economic decisions. By the end of his final year in office, the price of a gallon of gas had dropped to $0.91, which in real terms meant that its price had been cut in half since the end of 1980. After breaking past the 1,000-point level for good at the end of 1982, the Dow would go on to enjoy one of the longest and largest bull runs in its history. Although oil prices dropped as a result of deregulation, it became much more viable to develop American sources, and the Dow's largest oil representative thrived. For the rest of Reagan's presidency, ExxonMobil (NYSE: XOM) shareholders enjoyed a total return of 332%.

Here's to Louis!
If you're reading this while having a glass of milk or orange juice -- or, better yet, a refreshing beer -- then you might want to thank Louis Pasteur, who first gained a U.S. patent for the anti-spoilage process that bears his name on Jan. 28, 1873. Titled "Improvement in Brewing Beer and Ale," Pasteur's patent advanced the germ theory that he is largely credited with, particularly in the description of how air may be introduced to the fermentation vessel only through a heated tube or a cotton filter "for the purpose of either killing or extracting any germs which it may contain."

Today, pasteurization is widely used for a variety of foods and beverages, including beer and wine, but also juices, dairy products, syrups, and canned food. Anheuser-Busch InBev (NYSE: BUD  ) was the first American brewer to use pasteurization in the 19th century when it was just getting started under Adolphus Busch, and it is now the largest brewer in the world. An estimated $505 billion worth of beer was sold around the world in 2012. The global milk industry, which produced 721 million tons of the protein-packed liquid in 2010, also has Pasteur to thank for its profits.

How do you say "this is a bad deal" in Swedish?
In a move billed as its biggest step into the luxury automobile market yet, Ford (NYSE: F  ) agreed to buy the auto operations of Sweden's Volvo for $6.45 billion on Jan. 28, 1999. It was a time of intense mergers and acquisitions around the world, and auto industry analysts gave Ford high marks for trying to broaden its appeal in Europe while simultaneously bolstering its tarnished safety reputation with Volvo's gold-standard reputation. Ford CEO Jacques Nasser said at the time: "What we are really buying here is generations of hard work and dedication. ... We are buying the strength of the brand ... and we are buying a team that is incredibly best in breed in terms of its worldwide capacity and research and development."

These high hopes never translated into big profits. Just 11 years later, Ford sold Volvo off to the parent company of China's Geely Automobile for just $1.5 billion, a 77% loss on the original purchase price. The Economist derided the deal as "worse than those figures suggest" by noting that Ford also "had to support the Swedish carmaker through years of losses and even now it faces further expenses ... that will eat up much of the meagre sum it is getting for Volvo." A year after the sale, Ford's net income shot up to to more than double its earlier levels. Perhaps this was just a bad relationship that had been long overdue for a breakup.

What has Ford learned from its failed efforts to buy into the luxury auto segment? And, more importantly, will it continue to apply those lessons wisely (and to the benefit of shareholders) going forward? You can learn more about this leaner, smarter, greener Ford in the Fool's exclusive research reports. Our best industrials analysts are on the case, digging up the information you need to determine whether Ford's still a great buy, or if it's time to let this red-hot engine cool off a bit before getting behind the wheel again. Want to learn more? Click here to subscribe today.

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  • Report this Comment On January 28, 2013, at 2:38 PM, kmacattack wrote:

    I liked Reagan personally very much, and voted for him. However, looking back at Reagan's adoption of Arthur Laffer's "Laffer Curve" after Laffer convinced the President that if he drastically cut top tax rates from 70% to 28%, the economy would take off and every American would benefit from the "trickle down prosperity." Virtually all of Reagan's cabinet economists were against Laffer's proposal, and several warned Reagan that the country's deficit would soar, government demand for money would cause interest rates to skyrocket and the country would likely be in a severe recession within a year if Reagan cut top tax rates so drastically. I'm not going to write a dissertation about Reaganomics, but you can read Dr.David Stockman's essay "HOW MY GOP DESTROYED THE US ECONOMY" and learn a great deal. Reagan produced two severe recessions, the second culminating in the stock market crash of October 1987, when the Dow dropped the equivalent of 2,500 points in a single day. Along the way to 1987, Mortgage interest rates soared to 18.5% for a prime fixed rate in 1985, unemployment hit 10.75% the same year, and banks, S&L's, mortgage companies and businesses failed in record numbers not seen since Herbert Hoover's Great Depression. The same deregulation, corruption, risky energy and real estate loans, stocks bought on margin, TRIPLING THE National debt which took 200 years to accumulate in 8 years, etc. killed the economy by the end of Reagan's 2nd term.

    To his credit, Reagan saw the error of his ways when he tried to eliminate many of the tax loopholes which made it possible for, in Reagan's words "A Bus Driver to pay higher taxes than a Millionaire."

    But getting rid of loopholes which have been bought and paid for with PAC money is like extracting a brain tumor which has tentacles spread all through the brain. I think Reagan did a masterful job of negotiating with Gorbachev to bring about and end not only to the cold war, but the repressive oligarchy, the former Soviet Union. Reagan would have made a great Secretary of State, but he had no business whatsoever running the US economy. The top 10% of Americans now control 81% of our economy, up from about 45% when Reagan was elected.

    The republican administrations of Reagan, GHW Bush and "W" Bush are responsible for over 90% of our $16 TRILLION national debt, according to David Stockman, who was Reagan's budget director, and his findings are supported by 5 other REPUBLICAN cabinet economists including Alan Greenspan and Bruce Bartlett. Prior to Reagan, the republican party was truly fiscally conservative. They would spend money, such as when Medicare was enacted, or we went to war, but they only did so if we found a way to PAY FOR IT. The TEA (Taxed enough already) Party crowd did NOT CARE about deficits until Obama was elected. Dick Cheney famously said " Deficits don't matter." We have spent Trillions on two wars, a Medicare drug plan, and INSANE tax cuts which overwhelmingly gave WELFARE to the top 2% "Job creators." As a reward, "W" Bush was repaid by the "job creators" with the loss of 19 million jobs, including the 4 million lost during the first 9 months of Obama's first term. I wonder how many jobs would have been lost if all that money hadn't been given away with no "carrot and stick" policy which might have REALLY produced jobs. Stockman contends that at least 70% of Reagan and Bush tax cuts did nothing but add to the national debt. If the "job creators" used the money to create jobs, those jobs must have been in China, and taxpayers shouldn't be paying for subsidizing jobs overseas. The TEA party needs to realize that our Income tax rates are at the lowest rates in history right now.

    If Mitt Romney had been elected, he was prepared to eliminate capital gains tax to fulfill a promise made to Sheldon Adelson in return for a promise of $100 million in campaign money "donated" to republicans. Adelson was backing Gingrich, because Gingrich promised him an end to the capital gains tax, which would save Adelson at least $2.5 Billion in taxes, a great return for "betting" $100 million on Romney after Gingrich crashed and burned in Florida. Romney's own tax rate would have dropped below 1%, because DUE TO A LOOPHOLE, his Commissions from Bain (carried interest?) were taxed at 15% instead of 36%, and these commissions amounted to about 95% of Romney's income. Harry Reid was essentially correct when he said that Mitt Romney paid no income tax. Capital gains taxes and the flat 15% rate are totally unrelated to income. A guy making 450K per year pays the same 15% when he sells stock at a gain that Romney, who made $23 MIllion in 2011 paid. It isn't income tax. Another "welfare for the wealthy" loophole which is KILLING social security and medicare is the exemption of ALL INCOME above the level of $106,800 to be exempt from paying in to Social Security. This welfare program is costing the Social Security fund about $500 BILLION per year, enough to fund Social Security and Medicare forever. But no one, other than Bernie Sanders (and the CBO), wants to talk about eliminating this loophole. Instead, the republicans suggest that even those making $10,000 per year need to be paying income tax, because they are "takers", and that seniors need to delay retirement or have their "entitlements" cut. I'm 62 and just retired to take care of my fully disabled wife. I paid in to Social Security for 47 years, and next month, I will begin to be rewarded with a retirement fund that I paid into. Yet the republicans consider retired military, social security recepients, the disabled, active duty military, and the working poor, which combine to account for about 42% of the 47% who "don't pay income tax." They never mention Halliburton, which has been on the government teat forever and hasn't paid income tax since Dick Cheney was CEO and moved corporate headquarters to Grand Cayman. They don't mention Fox "news" parent, NewsCorp, which made $10 Billion NET PROFIT in 2011 and paid ZERO income tax, plus got a fat $4,5 Billion REFUND out of Fort Knox, and the rest of us are supposed to pay back the deficit.

    I wonder how many school lunches for poor kids that $8 Billion given to Fox would pay for?

    The working poor include almost a million people who work for next to nothing at Wal Mart 30 hours a week @$7.25 per hour. Because Wal Mart pays so poorly, these people qualify for public housing assistance and food stamps. How does it make you feel to know that we are unwillingly all subsidizing Wal Mart Corp, while the 4 Walton heirs are worth the same money as 41% of the US population COMBINED, which is about 115 million people. All this INSANITY really began under Ronald Reagan. I still like the man, but would never vote for him again. How is our economy supposed to thrive when so many people are working for such low wages, which means they have NO disposable income? Hoover, Reagan and the two Bushes have proven beyond all doubt that "Trickle down prosperity" does not work. Clinton proved that "bottoms up" policy, raising minimum wage, slightly raising top tax rates, and enacting policies which will benefit ALL Americans, not just the top 2%, will produce economic growth and can even produce budget surpluses.

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