Reaganomics - Analysis

Analysis

According to a 1996 study by William A. Niskanen and Stephen Moore: On 8 of the 10 key economic variables examined, the American economy performed better during the Reagan years than during the pre- and post-Reagan years. 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. Interest rates, inflation, and unemployment fell faster under Reagan than they did immediately before or after his presidency. The only economic variable that was worse in the Reagan period than in both the pre- and post-Reagan years was the savings rate, which fell rapidly in the 1980s. The productivity rate was higher in the pre-Reagan years but lower in the post-Reagan years.

Stephen Moore stated, "No act in the last quarter century had a more profound impact on the U.S. economy of the eighties and nineties than the Reagan tax cut of 1981." He claims that Reagan's tax cuts, combined with an emphasis on federal monetary policy, deregulation, and expansion of free trade created a sustained economic expansion creating America's greatest sustained wave of prosperity ever. He also claims that the American economy grew by more than a third in size, producing a $15 trillion increase in American wealth. Consumer and investor confidence soared. Cutting federal income taxes, cutting the U.S. government spending budget, cutting useless programs, scaling down the government work force, maintaining low interest rates, and keeping a watchful inflation hedge on the monetary supply was Ronald Reagan's formula for a successful economic turnaround.

Milton Friedman stated, "Reaganomics had four simple principles: Lower marginal tax rates, less regulation, restrained government spending, noninflationary monetary policy. Though Reagan did not achieve all of his goals, he made good progress." Entrepreneurs flourished as a result of Reaganomics: Lower tax rates and inflation coupled with less regulation favored improved environments for market-based funding, risk-taking, access to labor (leading to greater employment), and a more level playing field between these entrepreneurs and large corporations. Further, the Heritage Foundation stated, "the U.S. government must allow the entrepreneur to enjoy the rewards of success. If taxes take away most profit, then the entrepreneur will have less incentive to take a risk. If there are great restrictions on how the entrepreneur can use his profit, then there is little reason for the entrepreneur to take a risk. The entrepreneur's courage to take a risk is what leads to new American discoveries and what drives the U.S. economy forward. Reaganomics knows this. It is one of the reasons why Ronald Reagan has reduced American taxes dramatically."

The Tax Reform Act of 1986 and its impact on the Alternative Minimum Tax (AMT) reduced nominal rates on the wealthy and eliminated tax deductions, while raising tax rates on lower-income individuals. The across the board tax system reduced marginal rates and further reduced bracket creep from inflation. The highest income earners (with incomes exceeding $1,000,000) received a tax break, restoring a flatter the tax system. In 2006, the IRS's National Taxpayer Advocate's report characterized the effective rise in the AMT for individuals as a problem with the tax code. Through 2007, the revised AMT had brought in more tax revenue than the former tax code, which has made it difficult for Congress to reform.

Economist Paul Krugman argued the economic expansion during the Reagan administration was primarily the result of the business cycle and the monetary policy by Paul Volcker. Krugman argues that there was nothing unusual about the economy under Reagan because unemployment was reducing from a high peak and that it is consistent with Keynesian economics for the economy to grow as employment increases if inflation remains low.

The CBO Historical Tables indicate that federal spending during Reagan's two terms (FY 1981–88) averaged 22.4% GDP, well above the 20.6% GDP average from 1971 to 2009. In addition, the public debt rose from 26.1% GDP in 1980 to 41.0% GDP by 1988. In dollar terms, the public debt rose from $712 billion in 1980 to $2,052 billion in 1988, a three-fold increase. Krugman argued in June 2012 that Reagan's policies were consistent with Keynesian stimulus theories, pointing to the significant increase in per capita spending under Reagan.

William Niskanen noted that during the Reagan years privately held federal debt increased from 22% to 38% of GDP, despite a long peacetime expansion. Second, the savings and loan problem led to an additional debt of about $125 billion. Third, greater enforcement of U.S. trade laws increased the share of U.S. imports subjected to trade restrictions from 12% in 1980 to 23% in 1988.

Economists Raghuram Rajan and Luigi Zingales pointed out that many deregulation efforts had either taken place or begun before Reagan (note the deregulation of airlines and trucking under Carter, and the beginning of deregulatory reform in railroads, telephones, natural gas, and banking). They stated, "The move toward markets preceded the leader who is seen as one of their saviors." Economists Paul Joskow and Roger Noll made a similar contention.

Economist William A. Niskanen, a member of Reagan's Council of Economic Advisers wrote that deregulation had the "lowest priority" of the items on the Reagan agenda given that Reagan "failed to sustain the momentum for deregulation initiated in the 1970s" and that he "added more trade barriers than any administration since Hoover." By contrast, 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). 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, George H. W. Bush, Clinton, and others. The number of pages in Federal Register is however criticized as an extremely crude measure of regulatory activity, because it can be easily manipulated (e.g. font sizes have been changed to keep page count low). The apparent contradiction between Niskanen's statements and Friedman's data may be resolved by seeing Niskanen as referring to statutory deregulation (laws passed by Congress) and Friedman to administrative deregulation (rules and regulations implemented by federal agencies).