Reaganopmcs

REAGANOPMCS

Rejecting Keynes

When Ronald Reagan ran for president in 1980 he rejected the prevailing economic theory that had dominated American economic policy since World War II. Reagan affirmed his belief in free markets and rejected the idea that the federal government should influence the business cycles with its fiscal policies. Indeed, one of the favored targets for Reagan's wrath was the deficit spending that Keynesian economists called for, and the ensuing debt. Upon election, Reagan inherited, as he put it, a runaway deficit of nearly $80 billion in 1981, leading Reagan to proclaim that the federal budget was out of control. Reagan promised to balance the budget and to bring a new type of economics to Washington.

Supply-Side Economics

Reagan desired to change the nation's economic path. During the 1980 presidential primaries Republican presidential hopeful George Bush labeled Reagan's plan as "voodoo economics/' although after the election Bush upheld Reagan's economic policies both as his vice president and after his own election to the presidency in 1988. At the heart of supply-side economics was Reagan's belief in incentives. Proclaiming that government was the problem, not the solution, Reagan argued that across-the-board cuts in the personal tax rates would provide enough economic stimulation so that lower tax rates would deliver higher tax revenues. Reagan believed that lower tax rates, with lower government spending, would in fact balance the federal budget, not increase deficit spending. Reagan and his budget director, David Stockman, spoke of reducing federal spending by $67 billion. However, Reagan had also promised to restore America's military might after a losing effort in the Vietnam War and a failed attempt to rescue hostages held by Iran. Fulfilling this promise resulted in the largest increase in peacetime military spending in the history of the United States. Reagan found it politically difficult to counter Democratic opposition to cutting popular nondefense programs. In 1981 Congress overwhemingly passed the Kemp-Roth tax cuts to put Reagan theory into practice. Congress cut the projected federal spending by $35.1 billion, as opposed to the $67 billion that Reagan first proposed, in 1982 and approved a three-year, 25 percent reduction in personal and business income taxes. Following the 1978 capital gains tax cut and the new 1981 tax rates, the combined federal income taxes paid by the top 1 percent of the population on earned income dropped from 50 percent in 1981 to 37.5 percent in 1983. The tax cuts were combined with Democrat-forced modest cuts in nondefense spending and a massive increase in military spending. Americans enjoyed both continued government spending and lower tax rates. According to Reagan's original plan, such policies would produce a balanced budget by 1984.

Debt

Deficit spending was a key issue in presidential politics in the late 1970s. While campaigning for the presidency, Reagan promised to balance the budget by 1983. Deficit spending is the gap between what the federal government takes in as income (mostly but not exclusively from taxes) and what it spends. To make up the difference between expenditures and income, the federal government borrows money from the private sector or from other governments, sometimes in the form of bonds. Therefore, every year that the government runs a deficit it adds to the national debt. Some economists believe that deficit spending can be good in that it will stimulate the economy, as was the case when spending on World War II ended the Great Depression, but others believe that long-term deficit spending makes it harder for people in the private sector to borrow money. When those people borrow money to buy a house or start a business, they end up competing with the government for the available capital. From 1981 to 1987 the federal deficit ranged from a low of $128 billion in 1982 to a high of $221 billion in 1986. The accumulated debt of the six years of deficit spending was more than $1.1 trillion. When Reagan left office in 1988 the national debt was $2.6 trillion, compared with the $914 billion debt he inherited from Carter. In 1986 the United States became a debtor nation, the largest in the world.

INFLATION RATES UNDER REAGANOMICS

1980	13.5 percent (Carter)
1981	10.4%
1982	6.1%
1983	3.2%
1984	4.3%
1985	3.6%

Sources:

Lou Cannon, President Reagan: The Role of a Lifetime (New York: Simon & Schuster, 1991);

Benjamin M. Friedman, Day of Reckoning: The Consequences of American Economic Policy Under Reagan and After (New York: Random House, 1988);

Kevin Phillips, The Politics of Rich and Poor: Wealth and the American Electorate in the Reagan Aftermath (New York: Harper & Row Perennial Library, 1990).