Reaganomics

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Reaganomics (a portmanteau of "Reagan" and "economics," coined by radio broadcaster Paul Harvey) is a term that has been used to both describe and decry the free market advocacy economic policies of U.S. President Ronald Reagan, who served from 1981 to 1989. It is comparable to Thatcherism, the economic philosophy of British Prime Minister Margaret Thatcher (1979–1990), who was Reagan's contemporary.

Reagan assumed office during a period of high inflation and unemployment, which had largely abated by the time he left office. It continues to be a matter of contentious political debate to what extent this was caused by Reagan's fiscal policies (especially tax cuts) and to what extent it was due to other factors, such as the inflation-fighting monetary policies of the Federal Reserve under Paul Volcker and a large decline in oil prices caused by the resolution of supply shocks in the Middle East.

1 Policies
2 Theoretical justification
3 Support for Reaganomics
4 Criticism of Reaganomics
5 Humor
6 See also
7 External links

[edit] Policies

Reaganomics had its roots in two of Reagan's campaign promises: lower taxes and a smaller government. Reagan reduced income tax rates, with the largest rate reductions on the highest incomes; the top tax bracket rate dropped from 70% to 50% in his first tax legislation, and would fall to 28% by the end of his presidency. He proposed reduction in federal civilian programs, although political forces prevented him from obtaining the large reductions he sought. He scaled back federal regulation, starting with the elimination of federal oil price control, and left more discretion to the private sector. However, Reagan had also promised a military buildup to counter the Soviet Union, and this included a dramatic increase in government contracts. During a time of battling inflation combined with broken promises from the democrat controlled congress to cut spending- raised deficit spending to its highest level (relative to GDP) since World War II. As a result, there has been endless debate on whether the economic trends of the Reagan years actually came from the free market, or the kind of government stimulus advocated by Keynesian theorists.

With the Tax Reform Act of 1986, Reagan and Congress sought to broaden the tax base and reduce perceived tax favoritism. 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. Economists of most affiliations favor cleaning up the tax code, since tax preferences and exceptions "distort" economic decisions.

The historical experience of Reaganomics is of a leveling off of non-defense spending after decades of increasing non-defense spending prior, increased defense spending, and large federal deficits. Nobel 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). [1] 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, H.W. Bush, Clinton, and others.

But the question of how much of the overall trend of de-regulation 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 (we might 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." (In their book Saving Capitalism from the Capitalists p. 268.) Economist William 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] and that Reagan "failed to sustain the momentum for deregulation initiated in the 1970s." The apparent contradiction with Friedman's data may be resolved by seeing Niskanen as referring to statutory deregulation and Friedman to administrative deregulation. 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." (In American Economic Policy in the 1980s, ed. Martin Feldstein, NBER 1994, pp. 371-72.)

[edit] 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 belief by some proponents of Reaganomics that the tax rate cuts would more than pay for themselves was influenced by the Laffer curve, a theoretical taxation model that was particularly in vogue among some American conservatives during the 1970s. Arthur Laffer's model predicts that excessive tax rates actually reduce potential tax revenues, by lowering the incentive to produce. But while Federal Government tax revenues did increase significantly following the tax cuts of the Reagan years, that was mostly because of already scheduled increases in the Social Security Payroll Tax -- while in contradiction to the Laffer Curve, revenues from the individual and corporate income tax fell substantially as a percentage of GDP. The dramatic increase in spending produced the budget deficits of that era.

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"[3]. 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.

[edit] Support for Reaganomics

According to a study from the Cato Institute, "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." (source)

According to Louis Johnston and Samuel Williamson, Laffer and Reagan were vindicated by the results of the Reagan tax cuts. Real per capita GDP increased at an annual rate of 2.6% from 1981 to 1989, after languishing at a 1.6% rate during the Carter years of 1977 to 1981.^[1]

[edit] Criticism of Reaganomics

Much of the deregulation of industry (including telecoms, break up of AT&T, air travel etc.) that many claim helped to reinvigorate the American economy was initiated in the 1970s under President Carter and received broad bipartisan support. For example, deregulation of the airlines was initiated under the leadership of Alfred Kahn in 1978. It can also be argued that liberalization has increased the amount of insecurity suffered by the average citizen, while encouraging wage cuts, the decline of unionization, the rise of profits, and the like.

Reagan's tax policies were accused of pushing both the international transactions current account and the federal budget into deficit and led to a significant increase in public debt. Advocates of the Laffer Curve contend that the tax cuts did lead to a near doubling of tax receipts ($517 billion in 1980 to $1,032 billion in 1990), so that the deficits were actually caused by an increase in government spending. However, an analysis from the Center on Budget and Policy Priorities states "history shows that the large reductions in income tax rates in 1981 were followed by abnormally slow growth in income tax receipts, while the increases in income-tax rates enacted in 1990 and 1993 were followed by sizeable growth in income-tax receipts". Specifically, the analysis calculated that the average annual growth rate of real income-tax receipts per working-age person was 0.2% from 1981 to 1990 and a much higher 3.1% from 1990 to 2001.

In addition, Keynesian economics has argued for many decades that any fiscal stimulus helps "pay for itself" by increasing aggregate demand and gross domestic product and lowering unemployment. These forces automatically raise tax revenues and lowers transfer payments such as unemployment insurance. No supply-side effects are needed to understand this story. David Stockman, a key player in selling the Reagan administration's supply-side "pay for itself" claims to Congress, admitted in a 1981 Atlantic Monthly article in that the 1981 tax cut "was always a Trojan horse to bring down the top [tax] rate" for the wealthy.

The disinflation had been initiated by Fed chairman Volcker before Reagan assumed office. An anti-inflation monetary policy program had been begun by Fed Chair Volcker in the latter days of the Carter administration, but it took awhile to take hold, so that inflation was still near a historical peak around the time of the 1980 elections. In fact, instead of helping restore prosperity, Reagan's budget deficits threatened Volcker's monetary policy by encouraging concerns that the U.S. government might decide to inflate away America's rapidly growing debt, and made it more difficult for the Federal Reserve to earn confidence in the sustainability of its low-inflation policies.

A recession occurred in 1982, his second year in office. This was central to Volcker's campaign against inflation: applying either the Phillips Curve or the NAIRU theory, high unemployment (almost 10 % of the labor force in both 1982 and 1983) undercuts inflation. Reagan benefited from the fact that Volcker relented (shifting to more expansionary monetary policy) after inflation had largely been beaten. Further, the sudden fall in oil prices around 1986 helped the economy attain demand growth without inflation in the late 1980s.

The job growth under the Reagan administration was an average of 2.1% per year, which is in the middle of the pack of twentieth-century Presidents.

[edit] Humor

Reagan himself made light of the term "Reaganomics." In a July 10, 1987 White House Briefing for Members of the Deficit Reduction Coalition, he said, "America astonished the world. Chicago school economics, supply-side economics, call it what you will — I noticed that it was even known as Reaganomics at one point until it started working [laughter] — all of it is fast becoming orthodoxy. It’s not just that Milton Friedman or Friedrich von Hayek or George Stigler have won Nobel Prizes; other younger names, unheard of a few years ago, are now also celebrated."

The impressionist Rich Little recorded the 1980's comedy skit "Reaganomics", in which he, as reporter David Brinkley, interviews Ronald Reagan about his economic policy. The President proceeds to deliver a convoluted explanation, which at the end prompts Brinkley to exclaim, 'Mr. President, that would be a mess!' Reagan responds, 'That's right!'

Jay-Z raps on Young Jeezy's "Go Crazy (Remix)", "See I'm an 80's baby, mastered Reaganomics, school of hard knocks, every day's college."

There is a Dead Kennedys song called "Dear Abby" that involves a "Reaganomics victim."

In the Television Series "The Boondocks", Uncle Ruckus has a dream that he is in "white heaven" with Ronald Reagan. Reagan states that he hates black people and did everything he could to make their lives miserable, this includes: crack, AIDS, and Reaganomics.

On an episode of The Simpsons Montgomery Burns mentions that he survived "the depression, two world wars, and McKinleynomics" a joking reference to his advanced age and having been in business since at least the McKinley administration.