Reaganomics

Inflation and crude oil price, 1969-1989 (pre-Reagan years highlighted in yellow)

Prior to the Reagan administration, the United States economy experienced a decade of high unemployment and persistently high inflation (known as stagflation). Attacks on Keynesian economic orthodoxy as well as empirical economic models such as the Phillips Curve grew. Political pressure favored stimulus resulting in an expansion of the money supply. President Richard Nixon's wage and price controls were phased out.[11] The federal oil reserves were created to ease any future short term shocks. President Jimmy Carter had begun phasing out price controls on petroleum while he created the Department of Energy. Much of the credit for the resolution of the stagflation is given to two causes: renewed focus on increasing productivity[12] and a three-year contraction of the money supply by the Federal Reserve Board under Paul Volcker.[13]

In stating that his intention was to lower taxes, Reagan's approach was a departure from his immediate predecessors. Reagan enacted lower marginal tax rates as well as simplified income tax codes and continued deregulation. During Reagan's eight year presidency, the annual deficits averaged 4.0% of GDP, compared to a 2.2% average during the preceding eight years.[14] The real (inflation adjusted) average rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan.[15][16] GDP per employed person increased at an average 1.5% rate during the Reagan administration, compared to an average 0.6% during the preceding eight years.[17] Private sector productivity growth, measured as real output per hour of all persons, increased at an average rate of 1.9% during Reagan's eight years, compared to an average 1.3% during the preceding eight years.[18] Federal net outlays as a percent of GDP averaged 21.4% under Reagan, compared to 19.1% during the preceding eight years.[19]

During the Nixon and Ford Administrations, before Reagan's election, a combined supply and demand side policy was considered unconventional by the moderate wing of the Republican Party. While running against Reagan for the Presidential nomination in 1980, George H. W. Bush had derided Reaganomics as "voodoo economics".[20] Similarly, in 1976, Gerald Ford had severely criticized Reagan's proposal to turn back a large part of the Federal budget to the states.

In his 1980 campaign speeches, Reagan presented his economic proposals as a return to the free enterprise principles, free market economy that had been in favor before the Great Depression and FDR's New Deal policies. At the same time he attracted a following from the supply-side economics movement, which 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 contention of the proponents, that the tax rate cuts would more than cover any increases in federal debt, was influenced by a theoretical taxation model based on the elasticity of tax rates, known as the Laffer curve. Arthur Laffer's model predicts that excessive tax rates actually reduce potential tax revenues, by lowering the incentive to produce; the model also predicts that insufficient tax rates (rates below the optimum level for a given economy) lead directly to a reduction in tax revenues.

Ronald Reagan also cited the 14th-century Arab scholar Ibn Khaldun as an influence on his supply-side economic policies, in 1981. Reagan paraphrased Ibn Khaldun, who said that "In the beginning of the dynasty, great tax revenues were gained from small assessments," and that "at the end of the dynasty, small tax revenues were gained from large assessments." Reagan said his goal is "trying to get down to the small assessments and the great revenues."[21]

Reagan lifted remaining domestic petroleum price and allocation controls on January 28, 1981,[22] and lowered the oil windfall profits tax in August 1981. He ended the oil windfall profits tax in 1988.[23] During the first year of Reagan's presidency, federal income tax rates were lowered significantly with the signing of the Economic Recovery Tax Act of 1981,[24] which lowered the top marginal tax bracket from 70% to 50% and the lowest bracket from 14% to 11%. This act slashed estate taxes and trimmed taxes paid by business corporations by $150 billion over a five-year period. In 1982 Reagan agreed to a rollback of corporate tax cuts and a smaller rollback of individual income tax cuts. The 1982 tax increase undid a third of the initial tax cut. In 1983 Reagan instituted a payroll tax increase on Social Security and Medicare hospital insurance.[25] In 1984 another bill was introduced that closed tax loopholes. According to tax historian Joseph Thorndike, the bills of 1982 and 1984 "constituted the biggest tax increase ever enacted during peacetime".[26]

With the Tax Reform Act of 1986, Reagan and Congress sought to simplify the tax system by eliminating many deductions, reducing the highest marginal rates, and reducing the number of tax brackets.[27][28][29][30] In 1983, Democrats Bill Bradley and Dick Gephardt had offered a proposal; in 1984 Reagan had the Treasury Department produce its own plan. The 1986 act aimed to be revenue-neutral: while it reduced the top marginal rate, it also cleaned up the tax base by removing certain tax write-offs, preferences, and exceptions, thus raising the effective tax on activities previously specially favored by the code. Ultimately, the combination of the decrease in deductions and decrease in rates raised revenue equal to about 4% of existing tax revenue.[31]

President Ronald Reagan signs the Economic Recovery Tax Act of 1981 at his California ranch.

Federal revenue share of GDP fell from 19.6% in fiscal 1981 to 17.3% in 1984, before rising back to 18.4% by fiscal year 1989. Personal income tax revenues fell during this period relative to GDP, while payroll tax revenues rose relative to GDP.[32] Reagan's 1981 cut in the top regular tax rate on unearned income reduced the maximum capital gains rate to only 20% – its lowest level since the Hoover administration.[33] The 1986 act set tax rates on capital gains at the same level as the rates on ordinary income like salaries and wages, with both topping out at 28%.[34]

Reagan significantly increased public expenditures, primarily the Department of Defense, which rose (in constant 2000 dollars) from $267.1 billion in 1980 (4.9% of GDP and 22.7% of public expenditure) to $393.1 billion in 1988 (5.8% of GDP and 27.3% of public expenditure); most of those years military spending was about 6% of GDP, exceeding this number in 4 different years. All these numbers had not been seen since the end of U.S. involvement in the Vietnam War in 1973.[35] In 1981, Reagan significantly reduced the maximum tax rate, which affected the highest income earners, and lowered the top marginal tax rate from 70% to 50%; in 1986 he further reduced the rate to 28%.[36] The federal deficit under Reagan peaked at 6% of GDP in 1983, falling to 3.2% of GDP in 1987[37] and to 3.1% of GDP in his final budget.[38] The inflation-adjusted rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan. This was the slowest rate of growth in inflation adjusted spending since Eisenhower. However, federal deficit as percent of GDP was up throughout the Reagan presidency from 2.7% at the end of (and throughout) the Carter administration.[15][38][39] As a short-run strategy to reduce inflation and lower nominal interest rates, the U.S. borrowed both domestically and abroad to cover the Federal budget deficits, raising the national debt from $997 billion to $2.85 trillion.[40] This led to the U.S. moving from the world's largest international creditor to the world's largest debtor nation.[9] Reagan described the new debt as the "greatest disappointment" of his presidency.[41]

According to William A. Niskanen, one of the architects of Reaganomics, "Reagan delivered on each of his four major policy objectives, although not to the extent that he and his supporters had hoped", and notes that the most substantial change was in the tax code, where the top marginal individual income tax rate fell from 70.1% to 28.4%, and there was a "major reversal in the tax treatment of business income", with effect of "reducing the tax bias among types of investment but increasing the average effective tax rate on new investment". Roger Porter, another architect of the program, acknowledges that the program was weakened by the many hands that changed the President's calculus, such as Congress.[6][42]

Job growth by U.S. President, measured as cumulative percentage change from month after inauguration to end of term. Reagan was second only to Clinton post-1980.[97]

U.S. cumulative real (inflation-adjusted) GDP growth by President.[98]

According to a 1996 study[99] by the Cato Institute, a libertarian think tank, 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. The study asserted that real median family income grew by $4,000 during the eight Reagan years and 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 lower during period than in both the pre- and post-Reagan years was the savings rate, which fell rapidly in the 1980s. The productivity rate was higher in the pre-Reagan years but lower in the post-Reagan years.[99] The Cato study was dismissive of any positive effects of tightening, and subsequent loosening, of Federal Reserve monetary policy under "inflation hawk" Paul Volcker, whom President Carter had appointed in 1979 to halt the persistent inflation of the 1970s.

Economic analyst Stephen Moore stated in the Cato analysis, "No act in the last quarter century had a more profound impact on the U.S. economy of the eighties and nineties than the Reagan tax cut of 1981." He argued that Reagan's tax cuts, combined with an emphasis on federal monetary policy, deregulation, and expansion of free trade created a sustained economic expansion, the greatest American sustained wave of prosperity ever. He also claims that the American economy grew by more than a third in size, producing a $15 trillion increase in American wealth. Consumer and investor confidence soared. Cutting federal income taxes, cutting the U.S. government spending budget, cutting useless programs, scaling down the government work force, maintaining low interest rates, and keeping a watchful inflation hedge on the monetary supply was Ronald Reagan's formula for a successful economic turnaround.[99]

Milton Friedman stated, "Reaganomics had four simple principles: Lower marginal tax rates, less regulation, restrained government spending, noninflationary monetary policy. Though Reagan did not achieve all of his goals, he made good progress."[100]

The Tax Reform Act of 1986 and its impact on the alternative minimum tax (AMT) reduced nominal rates on the wealthy and eliminated tax deductions, while raising tax rates on lower-income individuals.[100][101][102][103] The across the board tax system reduced marginal rates and further reduced bracket creep from inflation. The highest income earners (with incomes exceeding $1,000,000) received a tax break, restoring a flatter tax system.[104] In 2006, the IRS's National Taxpayer Advocate's report characterized the effective rise in the AMT for individuals as a problem with the tax code.[105] Through 2007, the revised AMT had brought in more tax revenue than the former tax code, which has made it difficult for Congress to reform.[104][106]

Economist Paul Krugman argued the economic expansion during the Reagan administration was primarily the result of the business cycle and the monetary policy by Paul Volcker.[107] Krugman argues that there was nothing unusual about the economy under Reagan because unemployment was reducing from a high peak and that it is consistent with Keynesian economics for the economy to grow as employment increases if inflation remains low.[108] Krugman has also criticized Reaganomics from the standpoint of wealth and income inequality. He argues that the Reagan era tax cuts ended the post-World War II "Great Compression" of wealth held by the rich.[109]

The CBO Historical Tables indicate that federal spending during Reagan's two terms (FY 1981–88) averaged 22.4% GDP, well above the 20.6% GDP average from 1971 to 2009. In addition, the public debt rose from 26.1% GDP in 1980 to 41.0% GDP by 1988. In dollar terms, the public debt rose from $712 billion in 1980 to $2,052 billion in 1988, a three-fold increase.[32] Krugman argued in June 2012 that Reagan's policies were consistent with Keynesian stimulus theories, pointing to the significant increase in per-capita spending under Reagan.[110]

William Niskanen noted that during the Reagan years, privately held federal debt increased from 22% to 38% of GDP, despite a long peacetime expansion. Second, the savings and loan problem led to an additional debt of about $125 billion. Third, greater enforcement of U.S. trade laws increased the share of U.S. imports subjected to trade restrictions from 12% in 1980 to 23% in 1988.[6]

Economists Raghuram Rajan and Luigi Zingales pointed out that many deregulation efforts had either taken place or had begun before Reagan (note the deregulation of airlines and trucking under Carter, and the beginning of deregulatory reform in railroads, telephones, natural gas, and banking). They stated, "The move toward markets preceded the leader [Reagan] who is seen as one of their saviors."[111] Economists Paul Joskow and Roger Noll made a similar contention.[112]

Economist William A. Niskanen, a member of Reagan's Council of Economic Advisers wrote that deregulation had the "lowest priority" of the items on the Reagan agenda[6] given that Reagan "failed to sustain the momentum for deregulation initiated in the 1970s" and that he "added more trade barriers than any administration since Hoover." By contrast, 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, George W. Bush, and Obama.[113] The number of pages in Federal Register is however criticized as an extremely crude measure of regulatory activity, because it can be easily manipulated (e.g. font sizes have been changed to keep page count low).[114] The apparent contradiction between Niskanen's statements and Friedman's data may be resolved by seeing Niskanen as referring to statutory deregulation (laws passed by Congress) and Friedman to administrative deregulation (rules and regulations implemented by federal agencies). A 2016 study by the Congressional Research Service found that Reagan's average annual number of final federal regulatory rules published in the Federal Register was higher than during the Clinton, George W. Bush or Obama's administrations, even though the Reagan economy was considerably smaller than during those later presidents.[115] Another study by the QuantGov project of the libertarian Mercatus Center found that the Reagan administration added restrictive regulations — containing such terms as "shall," "prohibited" or "may not" — at a faster average annual rate than did Clinton, Bush or Obama.[116]

Greg Mankiw, a conservative Republican economist who served as chairman of the Council of Economic Advisors under President George W. Bush, wrote in 2007:

I used the phrase "charlatans and cranks" in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't ... My other work has remained consistent with this view. In a paper on dynamic scoring, written while I was working at the White House, Matthew Weinzierl and I estimated that a broad-based income tax cut (applying to both capital and labor income) would recoup only about a quarter of the lost revenue through supply-side growth effects. For a cut in capital income taxes, the feedback is larger — about 50 percent — but still well under 100 percent. A chapter on dynamic scoring in the 2004 Economic Report of the President says about the same thing.[117]

Glenn Hubbard, who preceded Mankiw as Bush's CEA chair, also disputed the assertion that tax cuts increase tax revenues, writing in his 2003 Economic Report of the President: "Although the economy grows in response to tax reductions (because of higher consumption in the short run and improved incentives in the long run), it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity."[118]

In 1986, Martin Feldstein — a self-described "traditional supply sider" who served as Reagan's chairman of the Council of Economic Advisors from 1982 to 1984 — characterized the "new supply siders" who emerged circa 1980:

What distinguished the new supply siders from the traditional supply siders as the 1980s began was not the policies they advocated but the claims that they made for those policies ... The "new" supply siders were much more extravagant in their claims. They projected rapid growth, dramatic increases in tax revenue, a sharp rise in saving, and a relatively painless reduction in inflation. The height of supply side hyperbole was the "Laffer curve" proposition that the tax cut would actually increase tax revenue because it would unleash an enormously depressed supply of effort. Another remarkable proposition was the claim that even if the tax cuts did lead to an increased budget deficit, that would not reduce the funds available for investment in plant and equipment because tax changes would raise the saving rate by enough to finance the increased deficit ... Nevertheless, I have no doubt that the loose talk of the supply side extremists gave fundamentally good policies a bad name and led to quantitative mistakes that not only contributed to subsequent budget deficits but that also made it more difficult to modify policy when those deficits became apparent.[119]

• Abenomics
• Clintonomics
• Mellonomics
• Monetarism
• Mont Pelerin Society
• Economic liberalism
• Fiscal conservatism
• Neoliberalism
• Orbanomics
• Phillips curve
• Rogernomics
• Thatcherism

• Marable Manning. (1981) Reaganism, Racism, and Reaction: Black Political Realignment in the 1980s, Taylor & Francis, Ltd.
• Bowser, Benjamin. (1985) Race Relations in the 1980s: The Case of the United States, Sage Publications Incorporated.

• Jonathan Chait, The Big Con: Crackpot Economics and the Fleecing of America, 2008, Mariner Books (Re-print edition), ISBN 0547085702
• Brian Domitrovic, Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity (Culture of Enterprise Series), 2009, Intercollegiate Studies Institute, ISBN 193519125X
• Michael Lind, Up From Conservatism: Why the Right is Wrong for America, 1996, Free Press, ISBN 0684827611
• Lawrence B. Lindsey, The Growth Experiment: How the New Tax Policy is Transforming the U.S. Economy, 1990, Basic Books, New York, ISBN 978-0465050703

• Laffer, Arthur. "The four pillars of Reaganomics". The Heritage Foundation.
• "Reaganomics". University of Houston. Archived from the original on July 23, 2010.
• Greider, William. "The Education of David Stockman," The Atlantic, December 1981.
• ‘Reaganomics: A Watershed Moment on the Road to Trumpism.’The Economists’ Voice | Volume 16: Issue 1.<ref>Reaganomics: A Watershed Moment on the Road to Trumpism <ref>