Ronald Reagan's Legacy
His destructive economic policies
do not deserve the press's praise.
by John Miller
Dollars and Sense magazine, July
/ August 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
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.
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. Voicker'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 Reaganomics
(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 non-defense 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.
John Miller teaches economics at Wheaton
College and is a member of the Dollars & Sense collective.