Reaganomics (a portmanteau of Reagan and economics attributed to Paul Harvey[1]) refers to the economic policies promoted by the U.S. President Ronald Reagan during the 1980s. The four pillars of Reagan's economic policy were to:[2]
- Reduce government spending,
- Reduce income and capital gains marginal tax rates,
- Reduce government regulation,
- Control the money supply to reduce inflation.
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Historical context
Taxes
President Reagan lifted remaining domestic petroleum price and allocation controls on January 28, 1981[5] and lowered the oil windfall profits tax in August 1981, helping to end the 1979 energy crisis. He ended the oil windfall profits tax in 1988 during the 1980s oil glut.[citation needed]With the Tax Reform Act of 1986, Reagan and Congress sought to broaden the tax base and reduce perceived tax favoritism, for which he was sharply criticized. 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.
Deregulation
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 (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."[6] Economist William A. 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[2] 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, and others.[7]
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). 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.[8]
Economic record
Reagan very significantly increased public expenditure, 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.[14] 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%.[15] As a result of all this, the budget deficit and federal debt increased considerably: debt grew from 33.3% of GDP in 1980 to 51.9% at the end of 1988 [16] and the deficit increased from 2.7% in 1980 to more than double in 1983, when it reached 6%; in 1984, 1985 and 1986 it was around 5%.[17] In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $997 billion to $2.85 trillion,[18] and the United States moved from being the world's largest international creditor to the world's largest debtor nation.[19] Reagan described the new debt as the "greatest disappointment" of his presidency.[20]
The number of Americans below the poverty level increased from 29.272 million in 1980 to 31.745 million in 1988, which means that, as a percentage of the total population, it remained almost stationary, from 12.95% in 1980 to 13% in 1988.[21] The poverty level for people under the age of 18 increased from 11.543 million in 1980 (18.3% of all child population) to 12.455 (19.5%) in 1988.[22] In addition, the situation of low income groups was affected by the reduction of social spending. Inequality also increased. The share of total income going to the 5% highest-income households grew from 16.5% in 1980 to 18.3% in 1988 and the share of the highest fifth increased from 44.1% to 46.3% in same years. In contrast, the share of total income of the lowest fifth fell from 4.2% in 1980 to 3.8% in 1988 and the second poorest fifth from 10.2% to 9.6%.[23]
Political opponents chided his policies as "Trickle-down economics", due to the significant cuts in the upper tax brackets.[24]
Donald Regan, the President's former Secretary of the Treasury, and later Chief of Staff, criticized Reagan for his lack of attention to 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.”[25] Reagan's chief economic adviser, Martin Feldstein, stated: "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."[26]
Reagan himself claimed to be influenced by "classical economists" such as Frédéric Bastiat, Ludwig von Mises, Friedrich Hayek, and Henry Hazlitt.[27] Upon Reagan's death, a memo released by Jude Wanniski, economics advisor to Reagan during his 1980 campaign, highlights Reagan's firm grasp of economic concepts and his knack for conveying them so a layperson could understand.[28]
Tax receipts
During the Reagan administration, federal receipts grew at an average rate of 8.2% (2.5% attributed to higher Social Security receipts), and federal outlays grew at an annual rate of 7.1%.[29][30]According to a United States Department of the Treasury economic study,[31] the major tax bills enacted under Reagan, in the short term, reduced (~-1% of GDP) government tax receipts. Separated out, however, it is clear that the Economic Recovery Tax Act of 1981 was a large (~-3% of GDP) decrease in revenues (the largest tax cuts ever enacted),[32] while other tax bills had neutral or, in the case of the Tax Equity and Fiscal Responsibility Act of 1982, significant (~+1% of GDP) government revenue-enhancing effects. It should be however noted that the study did not examine the longer-term impact of Reagan tax policy, including sunset clauses and "the long-run, fully-phased-in effect of the tax bills".[31] The table below represents only a 4-year average:
Number of years after enactment | ||||||
Tax bill | 1 | 2 | 3 | 4 | First 2-yr avg | 4-yr avg |
---|---|---|---|---|---|---|
Economic Recovery Tax Act of 1981 | -1.21 | -2.60 | -3.58 | -4.15 | -1.91 | -2.89 |
Tax Equity and Fiscal Responsibility Act of 1982 | 0.53 | 1.07 | 1.08 | 1.23 | 0.80 | 0.98 |
Highway Revenue Act of 1982 | 0.05 | 0.11 | 0.10 | 0.09 | 0.08 | 0.09 |
Social Security Amendments of 1983 | 0.17 | 0.22 | 0.22 | 0.24 | 0.20 | 0.21 |
Interest and Dividend Tax Compliance Act of 1983 | -0.07 | -0.06 | -0.05 | -0.04 | -0.07 | -0.05 |
Deficit Reduction Act of 1984 | 0.24 | 0.37 | 0.47 | 0.49 | 0.30 | 0.39 |
Omnibus Budget Reconciliation Act of 1985 | 0.02 | 0.06 | 0.06 | 0.06 | 0.04 | 0.05 |
Tax Reform Act of 1986[33] | 0.41 | 0.02 | -0.23 | -0.16 | 0.22 | 0.01 |
Omnibus Budget Reconciliation Act of 1987 | 0.19 | 0.28 | 0.30 | 0.27 | 0.24 | 0.26 |
Total | 0.33 | -0.53 | -1.63 | -1.97 | -0.10 | -0.95 |
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 Laffer curve posits that there is a revenue-maximizing tax rate beyond which revenue falls, so if the tax rate is above this level, cutting taxes paradoxically increases revenue.
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".[34] 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.
Evaluation
Praise
According to a 1996 study[35] 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 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.
- The productivity rate was higher in the pre-Reagan years but much lower in the post-Reagan years.
Criticism
Another recent critique of Reagan's policies stem from Tax Reform Act of 1986 and its impact on the Alternative Minimum Tax (AMT). The tax reform would ostensibly reduce or eliminate tax deductions. This legislation expanded the AMT from a law for untaxed rich investors to one refocused on middle class Americans who had children, owned a home, or lived in high tax states.[42] This parallel tax system hit middle class Americans the hardest by reducing their deductions and effectively raising their taxes. Meanwhile, the highest income earners (with incomes exceeding $1,000,000) were proportionately less affected, thereby shifting the tax burden away from the richest 0.5% to poorer Americans.[43] In 2006, the IRS's National Taxpayer Advocate's report highlighted the AMT as the single most serious problem with the tax code.[44] As of 2007, the AMT brought in more tax revenue than the regular tax which has made it difficult for Congress to reform.[43]
Keynesian interpretation
The following Keynesian interpretation of Reaganomics is given by Paul Krugman:[45]- The secret of the long climb after 1982 was the economic plunge that preceded it. By the end of 1982 the U.S. economy was deeply depressed, with the worst unemployment rate since the Great Depression. So there was plenty of room to grow before the economy returned to anything like full employment.
Krugman argues that there is nothing unusual about the economy under Reagan – because unemployment was reducing from a high peak, it is entirely consistent with Keynesian economics for the economy to grow as employment increases while inflation remains low – the expansion was a cyclical recovery, but did not feature an increase in the structural rate of growth as its supply-side proponents argued.
See also
Footnotes
- ^ Holley, Joe (March 1, 2009). "Broadcaster Delivered 'The Rest of the Story'". washingtonpost.com. http://www.washingtonpost.com/wp-dyn/content/article/2009/02/28/AR2009022802096_2.html. Retrieved March 1, 2009.
- ^ a b c Niskanen, William A.. "Reaganomics". The Concise Encyclopedia of Economics. http://www.econlib.org/library/Enc/Reaganomics.html. Retrieved 2007-05-22.
- ^ Niskanen continues: "It is not clear whether this measure [reduce bias, increase effective tax rate on new investment] was a net improvement in the tax code."
- ^ a b Greenspan, Alan (2007), The Age of Turbulence, Penguin Press
- ^ "Executive Order 12287 -- Decontrol of Crude Oil and Refined Petroleum Products". January 28, 1981. http://www.reagan.utexas.edu/archives/speeches/1981/12881a.htm.
- ^ Saving Capitalism from the Capitalists p. 268.
- ^ Friedman, Milton (2004-06-11). "Freedom's Friend". Wall Street Journal. http://www.hoover.org/publications/digest/3020261.html. Retrieved 2006-12-30.
- ^ American Economic Policy in the 1980s, ed. Martin Feldstein, NBER 1994, pp. 371-72.
- ^ Roberts, Paul Craig (June 10, 2004). The Real Reagan Record (August 31, 1992). National Review. Retrieved on February 27, 2010.
- ^ Gross Domestic Product, Bureau of Economic Analysis, May 31, 2007
- ^ Employment status of the civilian non-institutional population, 1940 to date, United States Bureau of Labor Statistics.
- ^ U.S. History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 - 2009, Department of Labor, retrieved 27 December 2009.
- ^ Consumer Price Index, 1913 to date, United States Bureau of Labor Statistics.
- ^ Historical tables, Budget of the United States Government, 2006, table 6.1.
- ^ "Effective Federal Tax Rates: 1979-2001". Bureau of Economic Analysis. July 10, 2007. http://www.cbo.gov/ftpdoc.cfm?index=5324&type=0&sequence=0.
- ^ Historical tables, Budget of the United States Government, 2006, table 7.1.
- ^ Historical tables, Budget of the United States Government, 2006, table 1.2.
- ^ "Historical Debt Outstanding". U.S. Treasury Department. http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm. Retrieved 8 September 2010.
- ^ "Reagan Policies Gave Green Light to Red Ink". The Washington Post. 2004-06-09. http://www.washingtonpost.com/wp-dyn/articles/A26402-2004Jun8.html. Retrieved 2007-05-25.
- ^ Cannon, Lou (2001) p. 128
- ^ U.S. Census Bureau, Historical Poverty Tables, table 7.
- ^ U.S. Census Bureau, Historical Poverty Tables, table 3.
- ^ U.S. Census Bureau, Historical Income Tables, table H-2.
- ^ Etebari, Mehrun (July 17, 2003). "Trickle-Down Economics: Four Reasons why it Just Doesn't Work". faireconomy.org. http://www.faireconomy.org/research/TrickleDown.html. Retrieved 2007-03-31.
- ^ Regan, Donald T. (1988), p. 142
- ^ Lee, Susan (1996). Hands Off: Why the Government is a Menace to Economic Health. New York: Simon & Schuster. p. 223. ISBN 0684814420..
- ^ "Inside Ronald Reagan". Reason Magazine. July 1975. http://www.reason.com/news/show/29318.html. Retrieved 2009-03-08.
- ^ "Memo To: American Historians". Jude Wanniski. 2004-06-04. http://hnn.us/articles/5661.html. Retrieved 2009-03-08.
- ^ http://www.presidency.ucsb.edu/data/budget.php
- ^ http://www.socialsecurity.gov/history/pdf/4a.pdf
- ^ a b c Office of Tax Analysis (2003, rev. September 2006) (PDF). Revenue Effects of Major Tax Bills. United States Department of the Treasury. Working Paper 81, Table 2. http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/ota81.pdf. Retrieved 2011-02-05.
- ^ Thorndike, Joseph J (14 June 2004). "Historical Perspective: The Reagan Legacy". Taxhistory.org. http://www.taxhistory.org/thp/readings.nsf/cf7c9c870b600b9585256df80075b9dd/3df8b954567e6c8c85256eb300588d4b?OpenDocument. Retrieved 2007-11-28.
- ^ Note that this table does not include the impact of changes to the Alternative Minimum Tax from 1995 onward.
- ^ Reagonomics or 'voodoo economics'?
- ^ Supply-Side Tax Cuts and the Truth about the Reagan Economic Record, by William A. Niskanen and Stephen Moore
- ^ CBO’s Baseline and Estimate of the President’s Budget
- ^ "Historical Amount of Revenue by Source". Tax Policy Center. http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=203. Retrieved 2010-12-23.
- ^ Richard Kogan: WILL THE TAX CUTS ULTIMATELY PAY FOR THEMSELVES? March 3, 2003
- ^ "Table 1.3—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (−) IN CURRENT DOLLARS, CONSTANT (FY 2005) DOLLARS, AND AS PERCENTAGES OF GDP: 1940–2015" (xls). Office of Management and Budget. http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/hist01z3.xls. Retrieved 2010-10-12.
- ^ Center for American Progress, Take a Walk on the Supply Side
- ^ What's Happening with Real Wages
- ^ Hulse, Carl; Lee, Suevon (2008). "Alternative Minimum Tax". New York Times. http://topics.nytimes.com/top/reference/timestopics/subjects/a/alternative_minimum_tax/index.html. Retrieved 2008-07-29.
- ^ a b Leiserson, Greg (2008). "The Individual Alternative Minimum Tax: Historical Data and Projections" (PDF). Brookings Institution & Urban Institute. http://www.taxpolicycenter.org/UploadedPDF/411703_individual_amt.pdf. Retrieved 2008-07-29.
- ^ "National Taxpayer Advocate 2006 Annual Report to Congress-Executive Summary" (PDF). Internal Revenue Service. http://www.irs.gov/pub/irs-utl/arc-exec_summary-2006.pdf. Retrieved 2008-07-29.
- ^ (Krugman 2004)
References
- 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.
- Boskin Michael J. (1987) Reagan and the US Economy. The Successes, Failures, and Unfinished Agenda, ICEG.
- Niskanen, William A. (1988) Reaganomics: An Insider's Account of the Policies and the People, Oxford University Press, Oxford.
- Krugman, Paul (2004-06-11). "An Economic Legend". The New York Times. ISSN 0362-4331. http://www.nytimes.com/2004/06/11/opinion/11KRUG.html. Retrieved 2010-03-25.[dead link]
Further reading
- Meeropol, Michael (2000) "Surrender: How the Clinton Administration Completed the Reagan Revolution." (Ann Arbor: University of Michigan Press, 2000 pbk edition) ISBN 0-472-08676-6
- Sill, Igor (2009) "Looking at Reaganomics, Yet One More Time" (Topix)
- Bartlett, Bruce R. (1981) "Reaganomics: supply side economics in action." ISBN 0-87000-505-7