Reaganomics

REAGANOMICS

Inflation

As the 1980 presidential campaign began, the U.S. economy was in a shambles. The inflationary trend that began in the late 1960s, as Lyndon Johnson tried to fund both the Vietnam War and his Great Society social programs, had continued unabated through the 1970s. The inflation rate hit double-digit levels by 1975 and stayed high. Real wages had peaked in 1973. Then inflation began taking a heavy toll, and they declined 18 percent between the early 1970s and the early 1980s. In 1979 a temporary stop in the flow of Iranian oil, coupled with an OPEC price hike, caused a major oil shortage. That year gasoline prices went up 52 percent; heating oil prices increased by 73 percent; and there were long lines at gas stations. The price increases added to inflationary pressures in the United States and most western countries. They also contributed to higher balance-of-payments deficits for the United States, as did growing imports of automobiles and electronics, especially from Japan and West Germany. To fight the escalating inflation rate, the Federal Reserve Board, headed by Paul Volcker, instituted a tight-money policy in October 1979 and continued it through 1982.

Low-End Jobs

The economy was restructuring itself. High-wage, high-skill manufacturing jobs were disappearing. The auto industry alone lost 250,000 jobs between 1979 and 1982. These jobs were being replaced with low-wage, low-skill service jobs. From 1963 to 1973, 40 percent of all new jobs in the United States were high paying, and only 20 percent were at the bottom of the scale. From 1979 to 1985 low-paying jobs accounted for 40 percent of the job growth, with high-paying jobs constituting only 10 percent.

Government Spending

Moreover, the government was absorbing a larger and larger percentage of the country's financial resources. In 1980 government spending was 35 percent of the gross national product (GNP) whereas it had been only 24 percent in 1950 and 29 percent in 1960.

Stagflation

Unemployment reached double-digit percentages by the late 1970s and continued at that level into the early 1980s. According to classical economic theory, it was impossible to have both high inflation and high unemployment; yet it was occurring in the United States. Economic growth came to a halt, and the American standard of living dropped to fifth in the world. The combination of economic stagnation, high unemployment, and high inflation was called stagflation.

Reagan's Economic Proposals

Throughout the 1980 presidential campaign, Republican candidate Ronald Reagan attacked the incumbent, Jimmy Carter, for the performance of the economy. He railed against the $40 billion deficit the Carter administration was running and promised to balance the budget if elected. Reagan blamed government red tape and overregulation for stifling economic growth and promised deregulation. His views were a loose amalgam of some features of economic libertarianism, supply-side economics, and tax theory pro-pounded by William Laffer. Supply-siders considered the conventional prescription of stimulating the economy by increasing government spending to be potentially wasteful. Instead, they said, taxes should be cut and incentives created to encourage savings and investment. To this view Reagan added an adaptation of Laffer's theory that economic growth resulting from such a tax policy would generate new revenues, which would offset those lost through tax reduction.

"Voodoo Economics."

Even some conservative Republicans were skeptical of the mixture of theoretical perspectives that were the basis of Reagan's ideas on economics. George Bush, his opponent for the Republican nomination and eventual running mate, referred to Reagan's economic plan as "voodoo economics." Many supply-siders did not accept Laffer's views either. The public was less interested in theoretical fine points and wanted changes in economic policy. Reagan's message of cutting taxes, balancing the budget, reducing government spending, cutting bureaucracy, and deregulation appealed to many constituencies and helped lead to his election.

Stockman

Reagan chose David Stockman as director of the Office of Management and Budget (OMB). As a member of the House of Representatives, Stockman had been an ally of Jack Kemp in the losing 1978 fight over the Kemp-Roth tax bill, which had proposed a substantial 30 percent tax cut. While in Congress, he had developed a reputation for his expertise in fiscal matters. At the OMB Stockman put together a package that combined proposals for $64 billion in budget cuts and the 30 percent tax-cut plan from Kemp-Roth. The budget cuts in the plan Reagan introduced in February 1981 targeted social programs. The tax cuts Stockman had in mind could be made only by cutting Social Security benefits for early retirees and reducing the rates of automatic cost-of-living adjustments for those receiving Social Security.

Congressional Reaction

At first the House and the Senate appeared ready to accept both aspects of Reagan's plan, but as the legislative process wore on the plan was weakened. Budget cuts did not go as far as Stockman wanted. In fact, no cuts in Social Security benefits survived congressional consideration. Substantial progress was made in reducing the tax rates, however. When the tax reform process was through, taxes for those in the highest income brackets—those paying 50 percent on earned income (wages and salaries) and 70 percent on unearned income (from sources such as investments) under the old tax plan—were reduced to 37.5 percent on all income by 1983, a substantial flattening of the rate of progression in tax rates. Those in lower brackets saw smaller reductions. Critics pointed out that the new tax bill included substantial loopholes, creating inequities and new tax breaks for special interests.

Contradictory Policies

At the same time the Reagan administration was cutting taxes to stimulate economic growth, the Federal Reserve Board was continuing its tight-money policy. The two policies contradicted one another, and the GNP declined in 1982. The inflation rate was beginning to slow, but unemployment increased substantially. The economy continued sliding into a recession, which bottomed out in December 1982. As a result the tax reductions did not generate the growth needed to keep revenues up, and the size of the deficit grew. Reagan's 1982 deficit was about three times the size of the $40 billion Carter deficit he had criticized during the campaign.

UNION BUSTING

In June t1981 the Professional Air Traffic Controller's Organization (PATCO) rejected an offer of a new three-year contract with $105 million in raises to be paid in 11.4 percent increases over the next three years, a raise more than twice that being given to other federal employees. Because of their frustrating and highly stressful working conditions, however, the air traffic controllers also wanted shorter workweeks and earlier retirement.

On 3 August 1981, after Secretary of Transportation Drew Lewis and PATC O president Robert Poli were unable to reach a compromise, PATCO members walked off their jobs, even though strikes by federal employees were and are illegal. PATCO was banking on the perception that its members were indispensable to the safe operation of the air transportation system and that air travel would be severely crippled by their strike. PATCO also expected support from other unions and the public, neither of which was forthcoming.

The Reagan administration was determined to maintain the traditional position of all past administrations, regardless of party, that strikes by federal employees would not be tolerated. They also wished to demonstrate to other federal employees' unions that the administration was capable of standing tough in negotiations. After PATCO disobeyed a federal court injunction ordering the air traffic controllers to end the strike and return to work, union leaders were fined and jailed for contempt of court. President Reagan then issued an ultimatum demanding that the strikers be back on the job within forty-eight hours or be fired with no possibility of an amnesty. He further stated that negotiations on a contract would not resume until the strikers were working again.

The administration miscalculated the strikers' resolve. Most defied the ultimatum, and two days later Reagan ordered their dismissal, while prohibiting the Federal Aviation Administration from ever rehiring them. More than twelve thousand PATCO members lost their jobs, and attempts to regain them through the courts proved futile. Furthermore, PATCO was decertified as the legal bargaining agent for federal air traffic controllers.

A Gallup poll showed that 57 percent of Americans applauded President Reagan's decisiveness and toughness, but prounion groups deplored the demonstration of a general antiunion ethic in this strong message to other public employees' unions that the administration would not tolerate strikes.

Source:

"Who Controls the Air?," Newsweek, 98 (17 August 1981): 18-24.

Defense Spending

While Stockman preached cuts in social programs, the Reagan administration unveiled a plan in 1982 to increase defense spending by $1.2 trillion over the next five years. Without growth in revenue, this level of military spending was projected to increase the deficit substantially. Concerned over the deficit, Senators Robert Dole (R-Kan.) and Jesse Helms (R-N.C.) helped to persuade the president to accept changes in tax reform that eliminated some of the concessions. They also convinced him to support increases in gasoline taxes and Social Security taxes in 1982. These increases in taxes rendered the earlier tax reforms somewhat illusory because they offset the aggregate effect of reducing tax rates.

Increasing the Deficit

By 1983 the inflation rate had been brought down to 6 percent, and the GNP had grown by 4 percent. Unemployment was still high, at 11 percent. Even though the economy started to grow again, revenues lagged behind estimates. With cuts in social spending and the reduction in costs that occurred as the rate of inflation slowed, Reagan's policies managed to reduce the rate of government spending, which had been increasing by 15-17 percent from 1979 to 1981. Over the three years from 1981 to 1984, the rate of increase slowed to 10 percent, 8 percent, and 5 percent. Despite this reduction the deficit continued to grow—running around $200 billion a year from 1983 to 1985—because revenues were not coming in at the expected rate. By the time the deficit reached $277 billion in 1986, the United States had become a debtor nation.

Gramm-Rudman

In August 1985 senators Phil Gramm (R-Texas) and Warren Rudman (R-N.H.) introduced legislation requiring that the federal deficit be cut by specific amounts over a several-year period or that across-the-board cuts be made in all programs. The proposal got the support of most Republicans and enough key Democrats to pass in December. While the bill was well intentioned, it exempted spending for Social Security, interest on the national debt, and existing government contracts (purchases of equipment, buildings, military equipment) from cuts, thereby removing a substantial proportion of annual federal expenditures from its provisions. In 1986 the Gramm-Rudman Act was further weakened when the Supreme Court found some of its provisions unconstitutional. Nevertheless, Congress made an attempt to live up to its provisions in 1986 and 1987. Reagan's ambitious military-spending program—especially the controversial Star Wars program—came under the knife, making the 1987 defense-budget in-crease the smallest since 1981.

Tax Reform

As soon as the 1981 tax-reform bill passed, Democrats in Congress began to call for reforms to eliminate some of the inequities produced by that bill. In spring 1982 Sen. Bill Bradley (D-N.J.) and Congressman Richard Gephardt (D-Mo.) sponsored a tax-reform proposal designed to eliminate most preferences and deductions. Their bill was set up to cut rates slightly but to keep revenues the same and to ease the tax burden of the urban poor. The Reagan administration slowly backed parts of the proposal. Eventually, in December 1984, Secretary of the Treasury Donald Regan announced a new administration plan that incorporated many features of the Bradley plan but was more generous to corporations. Regan's successor, James Baker, expanded on this plan during spring 1985, and the president introduced the new tax proposal on television in May 1985. Congress passed it in September 1986. This tax-reform bill reduced the top tax rate to 25 percent for personal income and eliminated many personal deductions. It kept revenues from personal income taxes at roughly the same level, but it reduced the corporate share of the income-tax structure substantially—a provision that added still more fuel to the deficit.

Deregulation

While campaigning in 1980, Reagan had not only called for reductions in taxes and government spending, he had also charged that government regulations were a disincentive to innovation and a drag on the economy. He thus pledged to eliminate or simplify federal regulations. Within two days of his inauguration, he appointed a committee, chaired by Vice President George Bush, to find ways of reducing economic and social regulation. In February 1981 the president issued an executive order requiring that all proposed regulations had to be reviewed by the OMB and subjected to cost-benefit analysis before they could be approved and implemented. By 1983 the new regulations proposed each year were down by one-third from previous numbers.

Airline Deregulation

Deregulation had begun during the Carter administration. The Reagan administration carried out the Air Transportation Act of 1978, first deregulating route allocations and fare setting. In 1984 it implemented the final stage of the act by eliminating the Civil Aeronautics Board (CAB), which had been responsible for routes and fares.

Deregulating the Regulators

President Reagan also used his appointment power to name to regulatory boards individuals who shared his views on government regulation and who tended to be sympathetic toward the groups and industries being regulated. For example, Anne Gorsuch Burford, whom he made head of the Environmental Protection Agency (EPA), personally opposed many environmental regulations and actively ensured that implementation of regulations was delayed and enforcement curtailed. By 1983 EPA enforcement actions had been reduced by 84 percent, and suits against persistent violators had decreased by 78 percent. Burford resigned in March 1983, during an inquiry into her mismanagement of environmental-cleanup funds. Secretary of the Interior James Watt was also controversial. His role in the giveaway of mineral rights on public lands to mining interests, his opposition to increased fees for the use of public lands for grazing, and his anticonservation stance brought him criticism from conservation and environmental groups. Watt resigned under pressure in October 1983, after his public use of ethnic slurs further swelled the ranks of his critics.

Reduced Enforcement Levels

The Reagan administration also crippled the enforcement ability of agencies by cutting budgets and personnel. The Interstate Commerce Commission (ICC) had its budget cut by 25 percent, and the Federal Trade Commission (FTC) suffered a cut of 5 percent, with a 9 percent cut in staff. Agencies adjusted by reducing enforcement levels. The Occupational Safety and Health Administration (OSHA), charged with protecting workers on the job, decreased the number of citations it issued by 90 percent. Agencies also moved away from long-established positions. The National Highway Traffic Safety Administration (NHTSA) gave up its campaign for automobile airbags, which were favored by the insurance industry, and instead promoted seatbelts, which were favored by the automobile industry. The Food and Drug Administration (FDA) stopped advocating a no-risk policy regarding traces of carcinogens in foods and adopted one that espoused minimum risk.

Good News/Bad News

The GNP increased by a robust 7 percent in 1984, and unemployment declined rapidly. At 11 percent in early 1983, it was at 7.55 percent in 1984 and 5 percent in 1988. Real personal income, which had declined in the 1970s, was rising again by the late 1980s. Toward the end of the decade, however, interest rates began to rise, slowing the rate of economic growth. In 1987 the Federal Reserve Board and major banks raised the prime interest rate from 7.5 percent to 8.75 percent in six months. By December 1988 the prime rate was up to 10.55 percent, making borrowing more expensive and cooling economic growth. The stock market had a major jolt on 19 October 1987, when there was a drop of 508 points on the New York Stock Exchange. At 23 percent in a single day, this drop was the largest in history, exceeding that of the stock-market crash of 1929 that ushered in the Great Depression. Analysts blamed the sharp decline on investors' worries over trade imbalances and the Reagan administration's deficits.

The Bush Administration

While the economy slowed a little in 1988 and 1989, there was a general return to prosperity that helped George Bush's campaign to succeed Ronald Reagan as president. In April 1989 Bush and the Democratic Congress surprised many commentators by reaching an accord on budget priorities and deficit reduction measures. A new budget had yet to pass, however, by the end of the fiscal year on 30 September. When no agreement was reached by 15 October, the automatic budget-reduction provisions of the Gramm-Rudman Act went into effect. The budget passed on 22 November kept spending at the Gramm-Rudman level until 1 February 1990, when the regular budget became operative. By spending at reduced levels and delaying new spending for four months, the government reduced the deficit by some $14.7 billion. The new budget cut military spending, especially the Star Wars program, which had 25 percent cut from the funding initially proposed in Bush's first budget message.

Reforms

As the decade ended, economists and sociologists pointed to the strengths and weaknesses of the economy and society of the Reagan years. Reagan's policies had been partially responsible for a reduction in the rate of government spending. The rise in inflation that began in the late 1960s and continued through the 1970s had been eliminated (though much of the credit for this improvement can be traced to the tight-money policies of Paul Volcker and the Federal Reserve Board). Substantial reform had been made in the income-tax structure, reducing the highest tax rates and theoretically freeing up money for savings and investment.

Deficit

Economists worried as the public debt rose during the Reagan years. By the time he had finished his two terms as president, an additional $1.7 trillion had been added to the $907 billion federal deficit that had existed in 1981. Reagan's addition to the national debt was 2.5 times greater than the total accumulated debts of all previous presidents. As a result deficit reduction became a major theme in political debate. Economists also worried about the trade deficits the United States was incurring annually.

Economic Restructuring

At the end of the decade economists and sociologists were also expressing concern about the restructuring of the American economy. Highpay, high-skill manufacturing jobs continued to be replaced by low-paying service jobs, and the income structure of the United States was changing accordingly. For most of the post-World War II period, the United States had a robust middle class whose disposable income rose substantially in the 1960s. As the 1980s ended, observers pointed to a shrinking size of the middle class and an increasingly large percentage of the population under the poverty level. Economists and sociologists were worried by the implications of a future class and income structure that looked more like the America of the 1920s than that of the 1950s and 1960s.

Sources:

Michael Barone, Our Country: The Shaping of America from Roosevelt to Reagan (New York: Free Press, 1990);

William H. Chafe, The Unfinished Journey: America Since World War II, second edition (New York: Oxford University Press, 1991);

Wilbur Edel, The Reagan Presidency: An Actor's Finest Performance (New York: Hippocrene Books, 1992);

Larry N. Gerston, Cynthia Fraleigh, and Robert Schwab, The Deregulated Society (Pacific Grove, Cal.: Brooks/Cole Publishing, 1988);

Garry Wills, Reagan's America: Innocents at Home (Garden City, N.Y.: Doubleday, 1987).