Ronald Reagan's Legacy
His destructive economic policies do not deserve the press's praise.
This article is from the July/August 2004 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org/archives/2004/0704miller.html
This article is from the July/August 2004 issue of Dollars & Sense magazine.
at a discount.
"The Reagan Restoration"
Mr. Reagan's … agenda of tax cuts and deregulation ignited the boom that restored U.S. confidence. … [His] economic policies get less credit than they deserve because of the budget deficits and the 1982 recession.
Mr. Reagan's unique contribution was to stick to his economic program, and to support Federal Reserve Chairman Paul Volcker, in the face of enormous political pressure to turn tail on both. Growth resumed as he expected, and tax revenues actually increased faster than GDP from the low point in 1983 through 1989. As for the deficits, they did finally vanish once defense spending fell after the Cold War ended and a GOP Congress slowed the growth in other spending for at least a couple of years in the mid-1990s.
In the broader historical sweep, the Reagan tax cuts saved America from following Western Europe into welfare-state decline. In addition to igniting growth, his tax cuts put a brake on the expansion of government that had seemed unstoppable.
When Mr. Reagan took office, the top marginal U.S. tax rate was 70%. When he left the top rate was 28%; it is now 35%, and even John Kerry has conceded with his proposal to cut some corporate taxes that the marginal rate of tax matters. Today Americans may disagree about what tax cuts are needed, how deep they should go, and what they ought to target. But the debate itself reflects Mr. Reagan's central premise: that people respond to incentives, and that high taxes interfere with natural human creativity and drive.
—The Wall Street Journal, June 7, 2004
Two days after his death, the Wall Street Journal ran a lengthy editorial tribute to Ronald Reagan, in the editors' estimation the most important president since FDR. In their paean to the fortieth president, Reagan gets credit for everything from winning the Cold War to renewing a sense of optimism at home. Oh, and he gets extra kudos for doing it all with that famously sunny disposition.
On economic policy, as the Journal tells the story, by tying the hands of meddlesome government bureaucrats and cutting taxes, Reaganomics ignited an episode of miraculous economic growth that restored prosperity to the U.S. economy. But like much of what Reagan had to say while he was president, what the Journal offers is just so much happy talk that masks a mean-spirited, economically unsound, and socially destructive policy agenda.
First off, claims that Reagan's economic agenda restored prosperity are overblown. The so-called Reagan boom was in fact a rather middling episode of economic growth. Shorter than either the 1960s and 1990s expansions, the 1980s economic expansion was still the third longest on record. But it was hardly robust. The economy grew much more slowly in the 1980s than during the 1960s, more slowly than the postwar average of 3.6% annual growth, and no faster than in the 1970s or the 1990s. Nor did Reagan administration regulatory rollbacks unleash a productivity boom. Productivity gains in the 1980s failed to match those in the decades before and after, and couldn't hold a candle to the productivity gains of the 1960s boom. (See "Economic Indicators by Decade.")
|Average Annual Change||1960s||1970s||1980s||1990s|
|S&P 500: Real Returns||6.6%||Ð0.5%||12.9%||15.9%|
|Real Weekly Wages||1.45%||Ð0.27%||Ð0.72%||0.28%|
|Real Median Family income||3.21%||0.76%||1.01%||0.95%|
|Average Level of Inflation||2.3%||7.1%||5.6%||3.0%|
|Average Level of Unemployment||4.8%||6.2%||7.3%||5.8%|
|Note: S&P 500 refers to inflation-adjusted total returns. Real median family income is calculated from annual data; the remaining figures are calculated from quarterly data.
Sources: Cletus C. Coughlin and Daniel L. Thornton, "Yes, the '90s Were Unusual: But Not Because of Economic Growth," Business Week, April 24, 2000; Census Bureau; Economic Report of the President.
The Reagan years showed mixed results on a number of other economic measures. The "great American jobs machine," missing in action since George W. Bush took office, was up and running during the Reagan administration. The rate of job growth was higher in the 1980s than in the 1990s—but lower than in either the 1960s or the 1970s. In addition, unemployment rates remained quite high throughout the decade: 5.2% at the boom's end in 1989, well above the 3.5% and 4.1% rates achieved at the end of the 1960s and 1990s booms. The 1980s economy did more to improve the purchasing power of the median family than the 1990s boom. But again, those gains were extremely modest compared to what the 1960s boom did for that representative family.
None of this speaks to the lopsided distribution of the benefits of Reagan-era economic growth. Investors made out during the 1980s, while workers lost out. After seeing their investments lose value during the 1970s, shareholders enjoyed real returns (i.e., adjusted for inflation) in the 1980s that rivaled those of the next decade's stock market bubble and far outdistanced the returns of the 1960s. Real weekly wages for nonsupervisory workers, on the other hand, took a beating, declining even more quickly than they had during the 1970s. Today, the average real earnings of nonsupervisory workers remain far below those of 30 years ago, despite healthy wage gains in the second half of the 1990s expansion, when unemployment rates dropped toward 4%.
Nor did Reagan era growth do much to alleviate poverty. The poverty rate in 1989 at the end of Reagan's two terms was still 12.8%. That was just one percentage point lower than at beginning of his administration. In contrast, the 1990s boom knocked three percentage points off the nation's poverty rate, while the 1960s boom nearly cut it in half.
Reagan administration economic policies did not result in a 1960s-style prosperity, when workers' real wages went up in tandem with the value of stock holdings—just the opposite. Since 1980, the gains from U.S. economic growth have gone overwhelmingly to the well-to-do, and economic inequality has steadily worsened. By 2000, the ratio of the family income of the top 5% to that of the bottom 20% stood at 19.1, a dramatic rise over the 1979 ratio of 11.4. Reagan's economic policies ushered in the return of levels of inequality unseen since the eve of the Great Depression.
In one area the 1980s boom did post genuinely outstanding numbers: reducing inflation. But Federal Reserve Board chair Paul Volcker, not the Reagan administration, administered the fight against inflation. Volcker's tight monetary policy induced the 1982 recession and helped keep a lid on wage growth. Thus the credit for breaking inflation goes more properly to the workers who endured a decade of declining purchasing power administered in the name of price stability.
But what about the particulars of Reaganonomics (or supply-side economics), which in practice meant large tax cuts targeted at the rich, a military buildup, and slashing social spending? That too is a disturbing story.
The tax cuts came in 1981, Reagan's first year in office. The administration's plan slashed corporate and individual income tax rates, with the biggest cut in the top rate. The Reagan team promised that their tax cuts would jolt the economy back to life because, as the Wall Street Journal's editors put it, "high taxes interfere with natural human creativity and drive." And the true believers went so far as to suggest that the economy would grow fast enough that tax revenues would actually rise, making the tax cuts painless.
The results never came close to measuring up to the supply-side rhetoric. For starters, the tax cuts busted the federal budget. The federal deficit ballooned from 2.7% of GDP in 1980 to 6% of GDP in 1983, the largest peacetime deficit in history, and was still 5% of GDP in 1986. Tax revenues did pick up, especially after the 1983 payroll tax increase kicked in, reducing the deficit somewhat. Still, tax revenues grew far more slowly over than the 1980s business cycle (2.5% from 1979 to 1989) than they did in the 1990s business cycle (4.1% from 1989 to 2000).
Nor did the claim that tax cuts would encourage work effort, savings, and investment, the central premise of Reaganomics, hold up. When mainstream economists, such as Barry Bosworth and Gary Burtless of the Brookings Institution, checked out the effects of the 1981 tax cut, they found that something quite different had happened. After the tax cut, men didn't work much more at all; although women did work longer hours, their earnings failed to improve. And relative to the size of the economy, net investment declined and savings plummeted. The Economic Policy Institute, a labor-funded think tank, reports that the annual increase in real investment in the 1980s business cycle (2.5% per year) was less than half of that during the 1990s business cycle (5.9% per year).
Worse yet, most low-income taxpayers missed out on the Reagan tax cuts. The bottom 40% of households paid out more of their income in federal taxes in 1988 than they had in 1980. Increases in the payroll taxes that finance Social Security and Medicare, which made up a far higher portion of their federal tax bill than income taxes, swamped what little benefit these taxpayers received from lower income tax rates. For the richest 1%, on the other hand, the Reagan tax cuts were pure elixir. This group saw their effective federal tax rate drop from 34.6% to 29.7%, according to a recent study conducted by the Congressional Budget Office. As these numbers suggest, Reagan left a far less progressive federal tax code than he found.
While the Reagan military buildup kept overall government spending from shrinking, Reagan's budgets slashed social spending. Domestic discretionary spending, which includes just about all nondefense spending outside of Social Security, Medicare, and Medicaid, was the special target of Reagan's budget cutting. Relative to the size of the economy, one-third of domestic discretionary spending disappeared: it fell from 4.7% of GDP in 1980 to 3.1% in 1988. Hardest hit were programs for low-income Americans, which in real terms suffered a withering 54% cut in federal spending from 1981 to 1988. After correcting for inflation, subsidized housing lost 80.7% of its support, training and employment services 68.3%, and housing assistance for the elderly 47.1%. These programs have never returned to their pre-Reagan spending levels. In fact, under the Clinton administration spending on domestic discretionary programs continued to decline relative to the size of the economy.
Reagan's economic legacy endures. Government continues to turn its back on social spending for the poor in favor of ineffectual tax giveaways for the rich, at same time that it finds unlimited monies for military adventures. Lopsided economic growth showers benefits on stock investors while doing precious little for workers or—not an entirely separate group—the poor. And today's Depression-level inequality is not mitigated as much as it once was by the tax code
Ronald Reagan did profoundly alter the economic policy agenda of our nation. But the Reagan legacy ought to be condemned, not celebrated. And we continue to do battle with its crippling effects. Whether under a Clinton presidency, a Bush presidency, or now perhaps a Kerry presidency, it is up to us to restore all that has been lost since Reagan came to power nearly a generation ago.