Reaganomics (; a portmanteau of Ronald Reagan and economics attributed to Paul Harvey) refers to the economics policies promoted by U.S. President Ronald Reagan during the 1980s. These policies are commonly associated with supply-side economics, referred to as trickle-down economics or voodoo economics by political opponents, and free-market economics by political advocates.
The four pillars of Reagan's economic policy were to reduce the growth of government spending, reduce the federal income tax and capital gains tax, reduce government regulation, and tighten the money supply in order to reduce inflation. During Reagan's presidency, the national debt almost tripled and the U.S. went from being the world's largest creditor nation to the world's largest debtor in under eight years.
In stating that his intention was to lower taxes, Reagan's approach was a departure from his immediate predecessors. Reagan enacted lower marginal tax rates as well as simplified income tax codes and continued deregulation. During Reagan's presidency, the annual deficits averaged 4.2% of GDP after inheriting an annual deficit of 2.7% of GDP in 1980 under president Carter. The real (inflation adjusted) rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan. GDP per working-age adult, which had increased at only a 1.15% annual rate during the Carter administration, increased at a 1.8% rate during the Reagan administration. The increase in productivity growth was even higher: output per hour in the business sector, which had been roughly constant in the Carter years, increased at a 1.4% rate in the Reagan years. However, Federal net outlays as percent of Gross Domestic Product was higher under Ronald Reagan than under Jimmy Carter
During the Nixon and Ford Administrations, before Reagan's election, a combined supply and demand side policy was considered unconventional by the moderate wing of the Republican Party. While running against Reagan for the Presidential nomination in 1980, George H. W. Bush had derided Reaganomics as "voodoo economics". Similarly, in 1976, Gerald Ford had severely criticized Reagan's proposal to turn back a large part of the Federal budget to the states.
The contention of the proponents, that the tax rate cuts would more than cover any increases in federal debt, was influenced by a theoretical taxation model based on the elasticity of tax rates, known as the Laffer curve. Arthur Laffer's model predicts that excessive tax rates actually reduce potential tax revenues, by lowering the incentive to produce; the model also predicts that insufficient tax rates (rates below the optimum level for a given economy) lead directly to a reduction in tax revenues.
With the Tax Reform Act of 1986, Reagan and Congress sought to simplify the tax system by eliminating many deductions, reducing the highest marginal rates, and reducing the number of tax brackets.
The primary effect of the tax changes over the course of Reagan's term in office was a change in the composition of federal receipts, towards more payroll taxes and new investment taxes, and away from higher earners and capital gains on existing investments. Federal revenue share of GDP fell from 19.6% in fiscal 1981 to 17.3% in 1984, before rising back to 18.4% by fiscal year 1989. Personal income tax revenues fell during this period relative to GDP, while payroll tax revenues rose relative to GDP. Reagan's 1981 cut in the top regular tax rate on unearned income reduced the maximum capital gains rate to only 20% – its lowest level since the Hoover administration. The 1986 act set tax rates on capital gains at the same level as the rates on ordinary income like salaries and wages, with both topping out at 28%.
Reagan significantly increased public expenditures, primarily the Department of Defense, which rose (in constant 2000 dollars) from $267.1 billion in 1980 (4.9% of GDP and 22.7% of public expenditure) to $393.1 billion in 1988 (5.8% of GDP and 27.3% of public expenditure); most of those years military spending was about 6% of GDP, exceeding this number in 4 different years. All these numbers had not been seen since the end of U.S. involvement in the Vietnam War in 1973. Historical tables, Budget of the United States Government , 2013, table 6.1. In 1981, Reagan significantly reduced the maximum tax rate, which affected the highest income earners, and lowered the top marginal tax rate from 70% to 50%; in 1986 he further reduced the rate to 28%. The federal deficit under Reagan peaked at 6% of GDP in 1983, falling to 3.2% of GDP in 1987 and to 3.1% of GDP in his final budget. The inflation-adjusted rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan; however, federal deficit as percent of GDP was up throughout the Reagan presidency from 2.7% at the end of (and throughout) the Carter administration. As a short-run strategy to reduce inflation and lower nominal interest rates, the U.S. borrowed both domestically and abroad to cover the Federal budget deficits, raising the national debt from $997 billion to $2.85 trillion. This led to the U.S. moving from the world's largest international creditor to the world's largest debtor nation. Reagan described the new debt as the "greatest disappointment" of his presidency.Cannon, Lou (2001) p. 128
According to William A. Niskanen, one of the architects of Reaganomics, "Reagan delivered on each of his four major policy objectives, although not to the extent that he and his supporters had hoped", and notes that the most substantial change was in the tax code, where the top marginal individual income tax rate fell from 70.1% to 28.4%, and there was a "major reversal in the tax treatment of business income", with effect of "reducing the tax bias among types of investment but increasing the average effective tax rate on new investment". Roger Porter, another architect of the program, acknowledges that the program was weakened by the many hands that changed the President's calculus, such as Congress.Niskanen continues: "It is not clear whether this measure reduce was a net improvement in the tax code." President Reagan raised taxes eleven times over the course of his presidency, all in the name of fiscal responsibility, but the overall tax burden went down during his presidency. Office of Management and Budget, Budget of the United States Government, Fiscal Year 1990, p. 4-4 According to Paul Krugman, "Over all, the 1982 tax increase undid about a third of the 1981 cut; as a share of GDP, the increase was substantially larger than Mr. Clinton's 1993 tax increase." According to historian and domestic policy adviser Bruce Bartlett, Reagan's tax increases over the course of his presidency took back half of the 1981 tax cut. Though since the Reagan tax reductions, top marginal tax rates have remained lower than at any point in US history since 1931, when the top marginal rate was raised from 25% to 63%.
Some economists have stated that Reagan's policies were an important part of bringing about the second longest peacetime economic expansion in U.S. history. During the Reagan administration, the American economy went from a GDP growth of -0.3% in 1980 to 4.1% in 1988 (in constant 2005 dollars), averaging 3.4% annual growth in constant dollars. This reduced the unemployment rate by 1.6%, from 7.1% in 1980 to 5.5% in 1988. A net job increase of about 21 million also occurred through mid-1990. Reagan's administration is the only one not to have raised the minimum wage. The inflation rate, 13.5% in 1980, fell to 4.1% in 1988, which was achieved by applying high interest rates by the Federal Reserve (peaking at 20% in June 1981). The latter contributed to a relatively brief recession in late 1981 and early 1982 where unemployment rose to 9.7% and GDP fell by 1.9%. Additionally, income growth slowed for middle- and lower-class (2.4% to 1.8%) and rose for the upper-class (2.2% to 4.83%) during Reagan's trickle-down policies. http://www.taxhistory.org/www/features.nsf/Articles/2BEBD14445F182F1852579F10058AA9F?OpenDocument
The misery index, defined as the inflation rate added to the unemployment rate, shrank from 19.33 when he began his administration to 9.72 when he left, the greatest improvement record for a President since Harry S. Truman left office.http://www.miseryindex.us/indexbyPresident.aspx In terms of American households, the percentage of total households making less than $10,000 a year (in real 2007 dollars) shrank from 8.8% in 1980 to 8.3% in 1988 while the percentage of households making over $75,000 went from 20.2% to 25.7% during that period, both signs of progress."Income, Poverty, and Health Insurance Coverage in the United States: 2007" (Table A-1 on p. 27)
The job growth (measured for non-farm payrolls) under the Reagan administration averaged 167,000 per month, versus 209,000 for Carter, 50,000 for H.W. Bush, and 236,000 for Clinton. Measuring the number of jobs created per month is limited for longer time periods as the population grows. To address this, we can measure annual job growth percentages, comparing the beginning and ending number of jobs during their time in office to determine an annual growth rate. Jobs grew by 2.0% annually under Reagan, versus 2.9% under Carter, 0.5% under H.W. Bush, and 2.3% under Clinton. Federal Reserve Data-Total Nonfarm Payrolls-Retrieved October 2016
The unemployment rate averaged 7.5%. The unemployment averaged 6.4% under Jimmy Carter and 7.8% under Gerald Ford. The National Unemployment Rate, The Bureau of Labor Statistics, bls.gov Towards the end of his second term, however, the unemployment rate dropped to 5.4%.
The effect of Reagan's 1981 tax cuts (reduced revenue relative to a baseline without the cuts) were at least partially offset by phased in Social Security payroll tax increases that had been enacted by President Jimmy Carter and the 95th Congress in 1977, and further increases by Reagan in 1983Agresti, James D. and Stephen F. Cardone (January 27, 2011). Social Security Facts. Retrieved March 22, 2011. and following years, also to counter tax elusion. An accounting indicated nominal tax receipts increased from $599 billion in 1981 to $1.032 trillion in 1990, an increase of 72% in current dollars. In 2005 dollars, the tax receipts in 1990 were $1.5 trillion, an increase of 20% above inflation. From 1991 to 2000, receipts increased by 90% in current dollars, or 60% in 2005 dollars. An analysis from the Center on Budget and Policy Priorities calculated that the average annual growth rate of real income-tax receipts per working-age person eventually rose over the two decades from 0.2% (1981–90) to 3.1% (1990–2001).Richard Kogan: Will the Tax Cuts Ultimately Pay for Themselves? March 3, 2003
Economist Stephen Moore stated in the Cato analysis, "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 argued that Reagan's tax cuts, combined with an emphasis on federal monetary policy, deregulation, and expansion of free trade created a sustained economic expansion, the greatest American 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." The Real Free Lunch: Markets and Private Property 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." Reaganomics and Conservatism's Future: Two Lectures in China
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.http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets/Ferrara, Peter (May 5, 2011). Reaganomics Vs. Obamanomics: Facts And Figures. Forbes 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 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. NYT-Paul Krugman-Reagan was a Keynesian-June 2012
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 had 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 Reagan who is seen as one of their saviors."Saving Capitalism from the Capitalists p. 268. Economists Paul Joskow and Roger Noll made a similar contention. American Economic Policy in the 1980s, ed. Martin Feldstein, NBER 1994, pp. 371–72.
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).