Global View: Reaganomics

By IAN CAMPBELL  |  June 11, 2004 at 5:19 PM
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TEQUISQUIAPAN, Mexico, June 11 (UPI) -- "I knew the program was succeeeding when they stopped calling it Reaganomics. (Laughter.) Today the American expansion is in its 34th consecutive month, and across the country we've seen the creation of more than 8 million new jobs."

The above is an extract from a speech by President Ronald Reagan in Cincinnati, Ohio in October 1985. Reaganomics was the at first derided economic policy he came up with -- not economics, but a Reagan notion of the science -- but which in the end had to be taken seriously even if it remains today with fans and detractors. President George W. Bush is clearly a fan, and has drawn on Reagan for inspiration. But should he?

The answer, as usual with economics, and especially when it meets with politics, is not straightforward. "The truth is rarely pure and never simple," said Oscar Wilde.

What was Reaganomics about? According to William A. Niskanen, chairman of Reagan's Council of Economic Advisers for four years in the first half of the 1980s, Reaganomics "was the most serious attempt to change the course of U.S. economic policy of any administration since the New Deal. 'Only by reducing the growth of government,' said Ronald Reagan, 'can we increase the growth of the economy.'"

Niskanen writes that Reagan's 1981 Program for Economic Recovery had four major policy objectives: reduce the growth of government spending, reduce marginal tax rates, reduce regulation, and reduce inflation by controlling the growth of the money supply. From all this reduction would come expansion: growth and jobs. The parallels with the policy statements of the current president are clear.

Did Reaganomics succeed? Yes, at least to some degree, the policy worked. The U.S. economy enjoyed growth in the 1980s and jobs were created. The unemployment rate fell from 7.0 percent in 1980 to 5.4 percent in 1988. The annual inflation rate dropped from over 10 percent in 1980 to just over 4 percent in 1988.

As the availability of jobs (and therefore income) matters to ordinary people more than any other aspect of the economy, Reagan's economic policy might also be judged a popular success. He won re-election and a Republican, George Bush senior, succeeded him in the White House.

But, and here our truth begins to become less simple, the growth Reagan achieved was bought in part with spending that had to be paid for later; and the policies of small government Reagan promised were not those he implemented.

By the time Reagan left office the government deficit -- and he had promised to eliminate President Carter's (much smaller) deficit -- had risen to an all-time record, in absolute terms and as a share of GDP. It was left to President George Bush senior to raise the tax burden (surreptitiously), reduce the fiscal deficit and the trade one that was linked to it, lead America through an unhappy recession and plant the seeds of sustainable growth.

President Bill Clinton reaped that happy harvest. In the making of successful and unsuccessful politicians luck plays a huge role.

Reagan bequeathed a huge government deficit because in reality he did not implement the core of Reaganomics: he did little to reduce the size of "big government." Niskanen writes in The Concise Encyclopedia of Economics that "Federal spending was 22.9 percent of GDP in fiscal 1981, increased somewhat during the middle years of his (Reagan's) administration, and declined to 22.1 percent of GDP in fiscal 1989. This part of the Reagan record was probably the greatest disappointment to his supporters."

Questions of equity also arise when Reaganomics are considered. To stimulate growth Reagan cut tax rates, with the top marginal rate of individual income tax dropping from 70 percent -- which seems far too high -- to just 28 percent, which seems too low. For the wealthy the windfall was huge. Was this the best way to stimulate growth?

A similar criticism may be made of Bush's tax cuts. This year, Warren Buffett, the investor who is thought to be America's second-richest citizen, complained that "Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets."

Reagan's legacy is nonetheless a big one, but more because of what he said than what he did. He had clarity of vision. He firmly believed that the larger government becomes the more likely it is to waste money and to obstruct growth rather than support it. That is an important truth and the fact that Reagan (and Britain's Mrs. Thatcher) expressed it so clearly helped to shift thinking about economic policy.

He also thought, like the economist, Milton Friedman, that the bigger government becomes the less free people are. He rightly saw communism as utter tryanny, a wrong that should be condemned and fought. He outspokenly condemned a system he saw as being evil. Yet to say, as some do, that he 'won the Cold War' seems false, for the Soviet Union collapsed from within, under the weight of its own economic and political failure and its people's dissatisfaction.

In 2000 George W. Bush's campaign drew on Reagan. Cut taxes, Bush said, to give the people their money back, and be optimistic about America, as Reagan was. But now that the government is hugely in deficit whose money is Bush giving Americans? It is their children's. Like Reagan, Bush has not cut big government, he has merely cut taxes, and has run up $1.4 trillion in debt in three years, an increase in the public debt of a quarter, and a monumental tab that he is simply passing on, for the future to pay.

Keynesian deficit spending has generally been rejected as a failed economic policy of the 1960s and 1970s. Yet both Reaganomics (in practise, not theory) and Dubbyanomics, if we invent a term, are examples of it.

No one likes paying taxes. But people like government services, too. Something for nothing: what sort of 'nomics' should we call that? (Perhaps readers have some suggestions.)


Global View is a freelance column, published every two weeks, which reflects on issues of importance for the global economy. Comments to

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