REAGANOMICS

'Reaganomics' (a portmanteau of "Reagan" and "economics," coined by radio broadcaster Paul Harvey) is a term that has been used to both describe and decry free market advocacy economic policies of U.S. President Ronald Reagan, who served from 1981 to 1989 and economic policies perceived as similar. The four pillars of Reagan's economic policy were to 1) reduce the growth of government spending, 2) reduce marginal tax rates on income from labor and capital, 3) reduce regulation, and (4) control the money supply to reduce inflation (sound money policy). Reaganomics William A. Niskanen In attempting to cut back on domestic spending while lowering taxes, Reagan's approach was a departure from his immediate predecessors.
Reagan assumed office during a period of high inflation and unemployment, which had largely abated by the time he left office. It continues to be a matter of debate to what extent this was caused by Reagan's fiscal policies and to what extent it was due to other factors, such as the inflation-fighting monetary policies of the Federal Reserve under Paul Volcker and a large decline in oil prices caused by the resolution of supply shocks in the Middle East.

Contents

Policies

Economic Record

Theoretical justification

Support for Reaganomics

Criticism of Reaganomics

Humor

See also

Footnotes

References

External links

Policies

Reaganomics had its roots in two of Reagan's campaign promises: lower taxes and a smaller government. Reagan reduced income tax rates, with the largest rate reductions on the highest incomes; a time of battling inflation combined with broken promises from the Democratic-controlled Congress to cut spending, Reagan raised deficit spending to its highest level (relative to GDP) since World War II. As a result, there has been endless debate on whether the economic trends of the Reagan years actually came from the free market, or from government stimulus of the kind advocated by Keynesian theorists.
With the Tax Reform Act of 1986, Reagan and Congress sought to broaden the tax base and reduce perceived tax favoritism. In 1983, Democrats Bill Bradley and Dick Gephardt had offered a proposal to clean up/broaden the tax base; in 1984 Reagan had the Treasury Department produce its own plan. The eventual bipartisan 1986 act aimed to be revenue-neutral: while it reduced the top marginal rate, it also partially "cleaned up" the tax base by curbing tax loopholes, preferences, and exceptions, thus raising the effective tax on activities previously specially favored by the code. Economists of most affiliations favor cleaning up the tax code, since tax preferences and exceptions "distort" economic decisions.
The historical experience of Reaganomics is of a leveling off of non-defense spending after decades of increase, increased defense spending, and large federal deficits. Nobel Prize-winning economist Milton Friedman has pointed to the number of pages added to the Federal Register each year as evidence of Reagan's anti-regulation presidency (the Register records the rules and regulations that federal agencies issue per year). The number of pages added to the Register each year declined sharply at the start of the Ronald Reagan presidency breaking a steady and sharp increase since 1960. The increase in the number of pages added per year resumed an upward, though less steep, trend after Reagan left office. In contrast, the number of pages being added each year increased under Ford, Carter, George H.W. Bush, Clinton, and others.^[1]
The question of how much of the overall trend of deregulation can be credited to Reagan remains contentious. The economists Raghuram Rajan and Luigi Zingales point out that many of the major deregulation efforts had either taken place or begun before Reagan (we might note the deregulation of airlines and trucking under Carter, and the beginning of deregulatory reform in railroads, telephones, natural gas, and banking). They argue for this and other reasons that "the move toward markets preceded the leader [Reagan] who is seen as one of their saviors." (In their book Saving Capitalism from the Capitalists p. 268.) Economist William Niskanen, a member of Reagan's Council of Economic Advisers and later chairman of the libertarian Cato Institute, writes that deregulation had the "lowest priority" of the items on the Reagan agenda [1] and that Reagan "failed to sustain the momentum for deregulation initiated in the 1970s." The apparent contradiction with Friedman's data may be resolved by seeing Niskanen as referring to ''statutory'' deregulation and Friedman to ''administrative'' deregulation. In sum, a large study by economists Paul Joskow and Roger Noll concludes that the changes in economic regulation "simply do not reflect a sudden ideological change in federal executive branch views....many of the significant changes in economic regulation began during the Carter administration and were initiated by liberal Democrats.... it is not particularly productive to refer to a generic deregulation movement or to think of it as a consequence of the election of Ronald Reagan." (In ''American Economic Policy in the 1980s,'' ed. Martin Feldstein, NBER 1994, pp. 371-72.)

Economic Record

During Reagan's tenure, income tax rates were lowered significantly, with the top personal tax bracket dropping from 70% to 28% in 7 years, The Historical Lessons of Lower Tax Rates Daniel J. Mitchell, Ph.D. but payroll taxes increased during Reagan's terms as well as the effective tax rates on the lower two income quintiles.^[2][3] Real Gross Domestic Product (GDP) growth recovered strongly after the 1982 recession and grew during Reagan's eight years in office at an annual rate of 3.4% per year, Gross Domestic Product slightly lower than the post-World War II average of 3.6%.^[4] Unemployment peaked at over 9.7% percent in 1982 then dropped during the rest of Reagan's terms, and inflation significantly decreased.^[5] A net job increase of about 16 million also occurred.
The policies were derided by some as "Trickle-down economics," "The Historical Record: Trends in Family Income, Inequality, and Poverty" in ''Confronting Poverty: Prescriptions for Change'', , S.H., Danziger, , 1994, due to the facts that the combination of significant tax cuts and a massive increase in Cold War related defense spending caused large budget deficits, Trickle-Down Economics: Four Reasons why it Just Doesn't Work Etebari, Mehrun the U.S. trade deficit expansion, and contributed to the Savings and Loan crisis,^[6] as well as the stock market crash of 1987. In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion,^[7] and the United States moved from being the world's largest international creditor to the world's largest debtor nation. Reagan Policies Gave Green Light to Red Ink Reagan described the new debt as the "greatest disappointment" of his presidency.
Donald Regan, the President's former Secretary of the Treasury, and later Chief of Staff, criticized Reagan for his supposed lack of understanding of economics: "In the four years that I served as Secretary of the Treasury, I never saw President Reagan alone and never discussed economic philosophy or fiscal and monetary policy with him one—on—one....The President never told me what he believed or what he wanted to accomplish in the field of economics.”^[8] However, Reagan's chief economic advisor Martin Feldstein, argues the opposite: "I briefed him on Third World debt; he didn't take notes, he asked very few questions....The subject came up in a cabinet meeting and he summarized what he had heard perfectly. He had a remarkably good memory for oral presentation and could fit information into his own philosophy and make decisions on it.^[9]

Theoretical justification

In his 1980 campaign speeches, Reagan presented his economic proposals as merely a return to the free-enterprise principles that had been in favor before the Great Depression. At the same time he attracted a following from the supply-side economics movement, formed in opposition to Keynesian demand-stimulus economics. This movement produced some of the strongest supporters for Reagan's policies during his term in office.
The belief by some proponents of Reaganomics that the tax rate cuts would more than pay for themselves was influenced by the Laffer curve, a theoretical taxation model that was particularly in vogue among some American conservatives during the 1970s. Arthur Laffer's model predicts that excessive tax rates actually reduce potential tax revenues, by lowering the incentive to produce. But while Federal Government tax revenues did increase significantly following the tax cuts of the Reagan years, that was mostly because of already scheduled increases in the Social Security Payroll Tax --while in contradiction to the Laffer Curve, revenues from the individual and corporate income tax fell substantially as a percentage of GDP. The dramatic increase in spending produced the budget deficits of that era.
Before Reagan's election, Reaganomics was considered extreme by the moderate wing of the Republican Party. While running against Reagan for the Presidential nomination in 1980, George Bush had derided Reaganomics as "voodoo economics"[2]. Similarly, in 1976, Gerald Ford had severely criticized Reagan's proposal to turn back a large part of the Federal budget to the states. Since Reagan's presidency, however, Republican federal politicians have for the most part continued to support his program of low taxes and private sector growth.

Support for Reaganomics

According to a 1996 study from the libertarian think tank Cato Institute:

★ On 8 of the 10 key economic variables examined, the American economy performed better during the Reagan years than during the pre- and post-Reagan years.

★ Real economic growth averaged 3.2 percent during the Reagan years versus 2.8 percent during the Ford-Carter years and 2.1 percent during the Bush-Clinton years.

★ Real median family income grew by $4,000 during the Reagan period after experiencing no growth in the pre-Reagan years; it experienced a loss of almost $1,500 in the post-Reagan years.

★ Interest rates, inflation, and unemployment fell faster under Reagan than they did immediately before or after his presidency.

★ The only economic variable that was worse in the Reagan period than in both the pre- and post-Reagan years was the savings rate, which fell rapidly in the 1980s (possibly due to increased 'savings' through IRA and 401(k) accounts at the time). The productivity rate was higher in the pre-Reagan years but much lower in the post-Reagan years. (source)

Criticism of Reaganomics

Reagan's tax policies were accused of pushing both the international transactions current account and the federal budget into deficit and led to a significant increase in public debt. Advocates of the Laffer Curve contend that the tax cuts did lead to a near doubling of tax receipts ($517 billion in 1980 to $1,032 billion in 1990), so that the deficits were actually caused by an increase in government spending. However, critics point out that this alleged doubling of revenue is significantly smaller when looking at real inflation-adjusted figures ($1,077.4 billion in 1981 to $1,235.6 billion in 1988, measured in FY2000-dollars). Furthermore, an analysis from the Center on Budget and Policy Priorities states that "history shows that the large reductions in income tax rates in 1981 were followed by abnormally slow growth in income tax receipts, while the increases in income-tax rates enacted in 1990 and 1993 were followed by sizeable growth in income-tax receipts". Specifically, the analysis calculated that the average annual growth rate of real income-tax receipts per working-age person was 0.2% from 1981 to 1990 and a much higher 3.1% from 1990 to 2001.
The disinflation had been initiated by Fed chairman Volcker before Reagan assumed office. An anti-inflation monetary policy program had been begun by Fed Chair Volcker in the latter days of the Carter administration, but it took awhile to take hold, so that inflation was still near a historical peak around the time of the 1980 elections. It could be argued that instead of assisting Volcker in changing inflationary expectations Reagan's budget deficits threatened Volcker's monetary policy by fostering concern that the U.S. government might decide to inflate away America's rapidly growing debt. This in turn could have made it more difficult for the Federal Reserve to earn confidence in the sustainability of its low-inflation policies.
A recession occurred in 1982, his second year in office. This was central to Volcker's campaign against inflation: applying either the Phillips Curve or the NAIRU theory, high unemployment (almost 10 % of the labor force in both 1982 and 1983) undercuts inflation. Reagan benefited from the fact that Volcker relented (shifting to more expansionary monetary policy) after inflation had largely been beaten. Further, the sudden fall in oil prices around 1986 helped the economy attain demand growth without inflation in the late 1980s.
The job growth under the Reagan administration was an average of 2.1% per year, which is in the middle of the pack of twentieth-century Presidents.

Humor

Reagan himself made light of the term "Reaganomics." In a July 10, 1987 White House Briefing for Members of the Deficit Reduction Coalition, he said, "America astonished the world. Chicago school economics, supply-side economics, call it what you will — I noticed that it was even known as Reaganomics at one point until it started working [laughter] — all of it is fast becoming orthodoxy. It’s not just that Milton Friedman or Friedrich von Hayek or George Stigler have won Nobel Prizes; other younger names, unheard of a few years ago, are now also celebrated."
The impressionist Rich Little recorded the 1980s comedy skit "Reaganomics", in which he, as reporter David Brinkley, interviews Ronald Reagan about his economic policy. The President proceeds to deliver a convoluted explanation, which at the end prompts Brinkley to exclaim, 'Mr. President, that would be a mess!' Reagan responds, 'That's right!'

See also

★ Supply-side economics

★ Mellonomics

★ Monetarism

★ Rogernomics

★ Thatcherism

Footnotes

1. Freedom's Friend, , Milton, Friedman, Wall Street Journal,
2. Social Security and Medicare Tax Rates
3. Effective Federal Tax Rates: 1979-2001
4. Ronald Reagan's Legacy John Miller
5. Ronald Reagan
6. The S&L Crisis: A Chrono-Bibliography
7. Cannon, Lou (2001) p. 128
8. Regan, Donald T. (1988), p. 142
9. Lee, Susan. 1996. Hands Off: Why the Government is a Menace to Economic Health. Simon & Schuster. p. 223

References

★ Niskanen W.A. (1988) ''Reaganomics: An Insider's Account of the Policies and the People'', Oxford University Press, Oxford.

★ Boskin Michael J. (1987) ''Reagan and the US Economy. The Successes, Failures, and Unfinished Agenda'', ICEG.

★ Bienkowski Wojciech, Brada Josef, Radlo Mariusz-Jan eds. (2006) ''Reaganomics Goes Global. What Can the EU, Russia and Transition Countries Learn from the USA?'', Palgrave Macmillan.

External links

Online Debate between Proponent and Opponent:

★ Journalists Dinesh D'Souza and E. J. Dionne
Proponent Think Tank Papers:

★ The Historical Lessons of Lower Tax Rates by Heritage Foundation

★ Great Myths of the Great Depression by Mackinac Center

★ Supply Tax Cuts and the Truth About the Reagan Economic Record by Cato Institute
Opponent Papers by Economists:

★ Economist Nouriel Roubini

★ Economist Paul Krugman

★ Economist John Miller from Dollars & Sense Magazine

★ Economist Ellen Frank from Dollars & Sense Magazine
Mixed Assessment

★ Article argues against claims that the supply-side effects of the 1981 tax cut caused the 1983 expansion or were self-funding; praises 1986 tax reform.
The President Reagan Information Page

★ The President Reagan Information Page-featuring the economic history of the Reagan Presidency
PBS Commanding Heights: The Battle for the World Economy

★ The History of Government Economic Policy in Britain, USA & the World, including Maynard Keynes and Friedrich von Hayek ideas.
Encyclopedia articles from the ''Concise Encyclopedia of Economics'' on Econlib:

★ Keynesian Economics

★ Monetarism Economics

★ Supply Side Economics

★ Reaganomics