Reaganomics Debate
Did Reaganomics improve the Economy? 


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Did Reaganomics improve the Economy?



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With the advice from former president Richard Nixon, Reagan concentrated on economic issues his first six months in office. Reaganomics was the name given to the supply-side economic theory which Reagan based his economic plans. It operated on the belief that the economy was struggling in large part because of excessive taxation. With more money going to taxes, individuals and corporations were unable to invest capital to stimulate growth. The plan called for massive tax cuts in order to stimulate investments. The economic growth would then `trickle down` to the workers. Supply-side economics also called for budget cuts to counteract the loss of revenue from the tax cuts. Reagan followed this model in creating his budget plan in 1981. Reagan put together legislation that cut government expenditures by $40 billion and created a three year tax cut plan for individual and corporate income taxes. The tax cut was the largest in history and was expected to jump start the economy. However, after the bills passed in the summer of 1981, the country fell into the worst recession since the Great Depression.



Inflation averaged 12.5 percent when Reagan entered office, was reduced to 4.4 percent when he left.



Interest rates fell six points.



Eight million new jobs were created as unemployment fell.



An eight percent growth in private wealth.


CON 4.1

According to the Statistical Abstract of the United States for 1996, the number of people (white, black, and Hispanic) below the poverty level increased in almost every year between 1981 (31.8 million) and 1992 (39.3 million).



We were $994 billion in debt in fiscal 1981, when Carter left off, and $2,867 billion when Reagan leaves office in fiscal 1989. The rough number is 2.85 times as much in 1989 as in 1981. No, it's not quite tripled, but very close. Okay, so the republicans have an argument for this: it didn't really double or triple when you take it as a percentage of either GDP or GNP. Okay, if we go with that, then it can indeed be agreed that Reagan didn't really double the debt as a percentage of either of these figures. But that doesn't really make Reagan look any better. As a historical look at the debt since before the United States entered World War II  will show, the debt as a percentage of GDP never went up meaningfully for any extended period of time except for two periods: during the War itself, and starting during the Reagan years. At least President Roosevelt had the need to borrow money hand and fist to fight the Axis powers. What's Reagan's excuse? We needed to borrow money to give a tax break to the wealthy?


PRO 5.1

The primary reason the deficit grew during the Reagan years was the Cold War military buildup.


PRO 5.2

In no year following the tax cuts did revenues decline.  They increased in fact in almost a straight progression from pre-Reagan years. The Cold War budgets did increase, and of course the happy fact was that this led to the end of the Cold War itself, as the Soviet Union recognized it could not outspend the U.S. But those military budgets were not significantly larger than during the 70s, and were smaller than in the Kennedy and Johnson years.  No, it was domestic spending, and particularly entitlement spending, that grew enormously under the Democrat congress. 



The trade deficit quadrupled.



Between 1978 and 1981 the top capital gains rate was cut from 35 percent to 20 percent and revenues soared by 90 percent in real terms between 1978 and 1985.After Congress lifted the rate to 28 percent in 1986, capital gains revenues declined by 20 percent by 1990.


CON 7.1

There are two reasons for these numbers. One is they start with a recession, the change in the economy is responsible for most of these changes. The second reason is a short term effect.  During 1981 when there was talk of a Capital Gains Tax cut people held off selling their assets until the tax cut. Then people rushed to sell assets before the 1986 tax raise happened.


CON 7.2

The 1986 Tax Reform Act is widely considered to be the best piece of American tax legislation since the adoption of the income tax. It is the opposite of Reaganomics. Over its first five years, it closed more than $500 billion in loopholes and tax shelters. As a result:

Allied in support of the 1986 reforms were a vast array of public interest groups, labor unions and citizens groups around the country. The act was also highly praised by most economists, because it leveled the playing field for businesses and investments, and made our economy more efficient and productive. Unsuccessfully opposing the 1986 Tax Reform Act were low- and no-tax corporations, recalcitrant supply-siders and tax-shelter promoters. (Opponents included, for example, Newt Gingrich, Bill Archer and billionaire Donald Trump, who continues to criticize the act for cracking down on abusive real-estate tax shelters.)


The average annual growth rate of real gross domestic product (GDP) from 1981 to 1989 was 3.2 percent per year, compared with 2.8 percent from 1974 to 1981 and 2.1 percent from 1989 to 1995. The 3.2 percent growth rate for the Reagan years includes the recession of the early 1980s, which was a side effect of reversing Carter's high-inflation policies, and the seven expansion years, 1983-89. During the economic expansion alone, the economy grew by a robust annual rate of 3.8 percent. By the end of the Reagan years, the American economy was almost one-third larger than it was when they began.


CON 8.1

To avoid being misled by the business cycle, one must look at underlying economic growth rates. The following table accomplishes this result in two ways. First, it measures economic growth and other data from one business cycle peak to the next, rather than from a recession to a later peak. Second, it uses CBO calculations of "potential" economic growth that is, CBO's (Congressional Budget Office) estimate of the size of the economy in any year if unemployment were at normal levels, rather than abnormally high or low levels. In effect, CBO directly calculates the size of the underlying economy, ignoring the business cycle. Both approaches give the same answer: economic growth rates have slowed from decade to decade; if income tax rates have made any difference to economic growth, that difference has been too small to be obvious. Specifically, the CBO data show that the underlying rate of annual economic growth was lower in the 1980s than the 1970s. It averaged 3.4 percent from 1969 to 1980, then slipped to 2.7 percent in the 1980s (not the 3.8 percent that comes from measuring from the depths of the recession in 1982), and is now projected at 2.1 percent. It is plausible that the underlying annual growth rate might have been slightly less than 2.7 percent in the 1980s were it not for the 1981 tax cut, but surely only slightly.



When Reagan took office in 1981, the unemployment rate was 7.6 percent. In the recession of 1981-82, that rate peaked at 9.7 percent, but it fell continuously for the next seven years. When Reagan left office, the unemployment rate was 5.5 percent.


PRO 10

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.


CON 10.1

The savings rate did not rise in the 1980s, as supply-side advocates had predicted. In fact, in the 1980s the personal savings rate fell from 8 percent to 6.5 percent. If the median family was better off why did their savings go down?


CON 11

In 1993 Clinton raised the taxes on the rich, the opposite of Reaganomics, opponents argued that this would stop the growing economy. That did not happen.


PRO 11.1

It is entirely disingenuous of the "cons" to suggest that the fact that the tax increase of the first Clinton budget (after he had promised, you will recall, a tax cut) did not harm the economy proves that the Reagan tax increase was a mistake.  Not factored into any liberal equation is that at the time Clinton took office (in fact, long before the election) the economy was growing briskly again, the brief Bush recession having ended in March 1992.  Moreover, the end of the Cold War led to massive cuts in military and Defense Department budgets, a reduction in the size of government that Clinton and Gore now have the audacity to claim as their achievements.


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