The Good & Bad of Reaganomics

A former co-worker who blogs on politics from a left-wing perspective wrote a post titled “Slings And Arrows” which had some choice comments for Reaganomics, calling it “a shell game of crony capitalism” where middle- and bottom-income earners were “casualties.”

Reaganomics is what first triggered my interest in public policy years ago. While I’m no longer a Reagan idolator (and likely consider him the most overrated Republican president ever thanks to the collateral damage that trickled down from his drug war policies), the debate over his economic policies still peaks my interest.

Reagan has one of the most eloquent defenses of the free market I’ve read, when he stated:

We who live in free market societies believe that growth, prosperity and ultimately human fulfillment, are created from the bottom up, not the government down. Only when the human spirit is allowed to invent and create, only when individuals are given a personal stake in deciding economic policies and benefiting from their success — only then can societies remain economically alive, dynamic, progressive, and free. Trust the people. This is the one irrefutable lesson of the entire postwar period contradicting the notion that rigid government controls are essential to economic development.

So did his policies live up to the rhetoric?

The heart of his fiscal agenda was the across-the-board cut in income tax rates, with the top marginal rate falling from 70% to 28%. Capital gains taxes and corporate taxes were initially cut, although those were partially rescinded. To handle mounting deficits, instead of seriously tackling spending, a series of tax increases were implemented.

Maybe even more important than the fiscal agenda was the monetary policy of the time, as Reagan gave his support to Paul Volcker’s anti-inflationary measures. Without Reagan’s support, it’s highly unlikely the Fed could have operated as it did.

What impact did these policies have? The economy’s standing at the end of Reagan’s presidency (unless a hyperlink is included, the numbers come from this Cato report):

-17 million new jobs

-Growth in real-median income by $4000.00

-A 3.2% growth rate in GDP

-An unemployment rate of 5.5%. During the peak of Volcker’s anti-inflationary measures, the rate peaked at 9.7%.

-A productivity rate of 1.5%.

-A CPI of 4.1%, compared to 13.5% in 1980.

-Overall government spending as a percent of GDP at 22.1%, compared to 22.9% at the start.

Rising incomes for each income quintile (the smallest gain coming to the lowest income) and, more importantly, income mobility in which the poor and middle class were able to move up the ladder.

Per the late William Niskanen, the rate of deregulation started by the Carter administration continued at a slower rate.

-Assuming he’s not fudging numbers, Paul Krugman notes the tax rates middle-class Americans paid on their income went up slightly due to payroll tax increases.

There’s quite a bit of good from this. The Reagan years show incentives matter. If an entrepreneur can enjoy a greater portion of the fruits his/her labor produces, the end result is more work, more entrepreneurship, and greater prosperity for the economy as a whole. Even in the case of Krugman’s stat about middle America, a case can be made that happened because of Americans moving up the income ladder.

Equally important is the need for sound money. Inflation robs us of our standard of living and worsens our living conditions. Sound monetary policy fosters security in what we possess and encourages capital formation, as there is real value to investments that pay off. Taming inflation is arguably the biggest accomplishment of the Reagan years.

But not everything was peachy. As Milton Friedman stated, government spending is the true burden on the economy, because what is not paid by tax revenue is paid either through inflation or borrowing. Borrowing gets paid back (with interest) in the form of future tax increases. And borrowing is apparently what happened with the 1980s, as debt went from 27% of GDP to 42% by the end of Reagan’s presidency. While spending as a percent of GDP went down ever so slightly, it averaged 22.4% during his term, which is a good bit higher President Clinton’s time in office. If you feel the deficit spending paid for the end of the Cold War, than it’s probably justified. Even so, entitlement reform was kicked down the road, and the massive overhauls needed to really make the Reagan “revolution” a sustaining one never materialized.

While I strongly disagree with Mr. Kroeger’s assessment that lower- and middle-income workers were “casualties,” there may be something to the accusation of “crony capitalism” at play. As Sheldon Richman documented years ago, Reagan was arguably the most protectionist president since Herbert Hoover, supporting a host of tariffs, import quotas, and anti-dumping measures meant to protect domestic industries. These protections came at the expense of the American consumer, which paid the equivalent of a 66% income tax surcharge via higher prices. But even these protectionist policies hurt domestic companies, as the report cites American steel-using firms shed 52,000 jobs thanks to tariffs on specialty steel.

Overall, the good was really good, the bad was fairly bad, but not bad enough to overwhelm the good. It’s unfortunate the country didn’t go further with the Reagan economic “revolution” as maybe the doldrums of the last 5 years could have been avoided.


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4 Responses to “The Good & Bad of Reaganomics”

  1. Tax Attorney Of The United States Says:

    He was a rising star as long as he was only a theory. As soon as he appeared in public, exposed to the nation, he looked more like a missing member of the Addams Family. The guy is creepy. Even if he were as smart and talented as once claimed he would lose because of his creepiness.

  2. The Way Things Ought To Be by Rush Limbaugh | The Blog For Truth, Justice, & The Josh Way Says:

    […] In a previous post, I mentioned how the debate over Reaganomics is what triggered my interest in public policy. That interest in Reaganomics came from Rush Limbaugh’s first book, The Way Things Ought To Be. So thank him for this blog you’re reading. […]

  3. The End Of Prosperity by Laffer, Moore, and Tanous | The Blog For Truth, Justice, & The Josh Way Says:

    […] Reagan lent his support to actions that broke inflation. The results of these policies were more positive than negative. But their claim that Reagan was a “free-trader par excellence” is laughable. And while […]

  4. Recarving Rushmore by Ivan Eland | The Blog For Truth, Justice, & The Josh Way Says:

    […] Reagan: Ranked 36. Even though I’ve stated Reaganomics did more good than harm, I also contend Reagan is the most overrated Republican president in history. Eland supplies good […]

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