Economy

An Alternative Vision
Something different was exactly what Ronald Reagan promised to provide. Reagan argued that half a century of misguided liberal policies had sapped the free market of much of its natural vitality by burdening it with too many government taxes, too much government spending, and too heavy government regulation. Reagan promised to restore prosperity by getting "the government off the backs of the American people" by cutting taxes, slashing spending, and deregulating the economy.[|18] While Reagan was ultimately able to implement those policies only imperfectly, his broad vision nonetheless proved quite compelling. Reagan's deep faith in his free-market principles proved to be almost contagious, helping to restore confidence in the future of the American economy even through a trying recession that lasted well into 1982. And after 1982, Reagan's faith was rewarded with a long and strong economic boom, driven by the [|greatest bull market] seen on Wall Street since the 1920s. The Reagan Era, which began in such dire circumstances, would end up being remembered as a period of great prosperity.

Reaganomics in Principle and Practice
Uneven distribution of wealth notwithstanding, the performance of the economy in general—and the stock market in particular—was strong enough under Reagan's watch to convince most Americans that the president's basic economic outlook was correct. It was that free-market outlook—a set of clear and powerful ideals—that probably ought to be considered Ronald Reagan's most enduring legacy to modern American society.

Reagan was not called "The Great Communicator" for nothing. He was as adept as any politician in American history at distilling complex political issues down to simple ideological principles: Economic freedom and political freedom are inseparable. Capitalism //is// democracy. Heavy government intervention into the market, through taxes or regulation, limits economic growth and threatens individual freedom; tax cuts and deregulation create economic growth and liberate individual initiative. These ideas—which a majority of the American people did //not// share for most of the twentieth century—were the core tenets of Reagan's conservative economic worldview; Reagan was so successful at selling them that they have since become accepted as conventional wisdom (if not indeed scientific truth), shaping the policies of all subsequent American governments, [|Republican] and [|Democratic] alike.

Reagan's undeniable success as a prophet of faith in free markets may obscure, however, his administration's more ambiguous record when it came to actually implementing policy. Reagan had a clear and compelling set of core economic principles, but they didn't necessarily translate automatically into specific government programs or policies. Reaganism in practice only partially fulfilled the ideological vision of Reaganism in principle.

Arthur Laffer and the Reagan Tax Cuts
Tax cuts lay at the heart of the Reagan Revolution. Reagan believed that high taxes threatened individual freedom, suppressed overall economic growth, and encouraged wasteful government spending. Thus the [|tax reform bill] passed in July 1981 was the single most important piece of legislation to emerge from Reagan's first term. That sweeping tax cut slashed federal income tax rates, for taxpayers in every income bracket, by 25% over a three-year period.

Even while he pursued his substantial tax cut, Reagan continued to insist that he favored a balanced federal budget. He bridged the seeming discrepancy by seizing on the unorthodox theories of an economist named Arthur Laffer to insist that lowering tax rates would actually //increase// the government's overall tax revenue. [|Laffer's premise]: At a certain point, taxes could become so high that many people would decide it simply wasn't worth it to do any more work, since the government was taking such a large portion of the proceeds. (Reagan had witnessed this phenomenon at work back in his Hollywood days, observing that many big studio stars found it wasn't worth their while to make more than one film a year.) Lower tax rates would encourage those people to engage in economic activity, which—when multiplied by millions of people—would lead to growth throughout the national economy, generating higher tax revenues for the government, even as it charged a lower tax rate.

According to a friendly journalist who sat in on the first meeting between Reagan and Laffer, the economist's theory "set off a symphony" in Reagan's ears. The future president—still just a candidate at the time of that 1980 meeting—believed "instantly that it was true and would never have a doubt thereafter."[|24] The premise that tax cuts could increase tax revenues was irresistible to Reagan because it enabled him to promise voters he could give them something for nothing—they could have their tax cut without having to pay the price of cutbacks to popular government programs.

"Voodoo Economics"
Reagan's political rivals—including many conservatives—remained skeptical. [|George Bush], who opposed Reagan in the 1980 Republican primary before serving as Reagan's vice president and then as president in his own right, infamously derided Reagan's tax scheme as "voodoo economics." Bush's judgment proved to be more apt than Reagan's; the president got his tax cut in 1981 but Laffer's promised voodoo never really worked. Government tax revenues remained stagnant from 1981 through 1984. Revenues did increase later in the 1980s, but this occurred only after Reagan realized that Laffer's program wasn't working and agreed to a series of small tax hikes in an attempt to address soaring budget deficits. These increases offset many of the gains individual taxpayers reaped from Reagan's initial 1981 tax cut. Individual tax savings were further eroded by Reagan's 1982 Social Security reform package, which increased payroll taxes to fund the national retirement system. And yet another hit to taxpayers' savings came from widespread increases in state and municipal taxes across the country, levied as local governments sought to make up for funds lost when Reagan's budgets slashed federal payments to the states.

Tax Cuts or Tax Redistribution?
When all was said and done, the total tax burden imposed on the American people from all sources—state and local taxes, federal income and capital gains taxes, and payroll taxes—[|remained basically unchanged] throughout the 1980s. In the end, Reagan's reputation as a tax-cutter far outran his actual performance.

Reagan's tax policies did, however, redistribute the tax burden significantly, even if they failed to reduce it overall. By cutting income taxes, which are paid at a higher rate by the wealthy, while increasing payroll taxes, which are paid at a higher rate by the working poor and middle class, Reagan shifted the tax burden down the income scale. During the 1980s, the total effective federal taxation rate for the poorest one-fifth of American families actually increased by more than 16%. By contrast, the effective taxation rate for the wealthiest one-fifth of families fell by 5.5%, and the richest one percent of Americans saved even more: their tax rate fell by 14.4%.[|25]

Small-Government Values vs. Big Government Spending
Reagan's failure to truly reduce taxes for most Americans was mirrored by a failure to restrain government spending. Reagan ran for office in 1980 as a harsh critic of "tax and spend" liberalism, vowing as president to shrink the size of the government by slashing federal spending. Once in office, however, Reagan found it impossible to deliver on his promises. The largest chunk of the federal budget went to pay for [|Social Security] and [|Medicare], which provide retirement income and health care for the elderly, and which are the two most popular government social programs in American history. While Reagan had long criticized both, he found it politically impossible to dismantle them.

After Social Security and Medicare, the next largest government expense was the military—and Reagan, a staunch Cold Warrior, never considered cutting defense spending and instead increased it substantially. "Defense is not a budget item," he told planners at the Pentagon. "You spend what you need."[|26] With Social Security, Medicare, and defense all off the table, there just wasn't much left to cut; those three programs, combined with unavoidable payments on the national debt, accounted for fully 85% of the federal budget during Reagan's presidency. Congressional Democrats had little interest in slashing away at the remaining 15% (which included many liberal social programs instituted by [|Franklin Roosevelt]'s New Deal and [|Lyndon Johnson]'s [|Great Society]), and Reagan never really went to the mat politically to try to force them to do so. As a result, total [|government spending continued to rise].

"Mortgaging Our Future and Our Children's Future"
Reagan's presidency produced huge annual federal budget deficits of more than $100 billion —the equivalent of about $200 billion today. It was an ironic result for a man who had spent his entire political career criticizing deficit spending by the government. "For decades we have piled deficit upon deficit," he said in his first inaugural address, "mortgaging our future and our children's future for the temporary convenience of the present. To continue this long trend is to guarantee tremendous social, cultural, political, and economic upheavals."[|27]

Yet the national debt tripled under Reagan's watch, reaching a staggering $2.7 trillion by the time he left office. Ironically, the government's gargantuan deficit spending during the 1980s ended up providing exactly the same kind of Keynesian stimulus to the national economy that Franklin Roosevelt's New Deal had provided during the [|Great Depression].

Deregulation: Getting Government "Off the Backs of the People"
While Reagan struggled to make his ideological vision real in the realms of taxes and spending, he found more success in the field of deregulation. Reagan's premise was that government regulation of private enterprise boiled down to meddlesome interference that burdened businesses with unnecessary "red tape" and thus suppressed the economy at large. There was more than a grain of truth to Reagan's critique; a full century of federal regulatory action had, by the 1980s, indeed created many convoluted limitations on business freedoms. Reagan promised to "get the government off the backs of the people" by dismantling the federal regulatory apparatus. In some cases, Reagan pursued //de facto// deregulation by appointing [|anti-government activists] to key government positions, where they could block agencies under their control from exercising their regulatory powers. In other cases, Reagan pursued changes to the law, lifting decades-old restrictions against certain types of economic activity. The net result was a significant relaxation of the rules that bound the conduct of business in America.

The results of Reagan's deregulatory push were mixed. On the one hand, poorly designed deregulatory efforts could lead to disaster. To cite the most notorious example, the [|careless dismantling of the rules that had long governed the American savings and loan industry] led to the collapse of hundreds of the savings institutions, ultimately requiring a taxpayer bailout costing nearly $150 billion.

On the other hand, smart deregulation could lead to substantial benefits for consumers, investors, and society at large. The breakup of AT&T's regulated monopoly over America's telephone communications, for example, led to ferocious competition in the long-distance market, producing both lower rates for customers and significant new investments in the fiber-optic technologies that helped make possible the internet revolution of the 1990s. And financial deregulation allowed for the creation of more sophisticated financial instruments that made it much easier for entrepreneurs to attract capital and played a huge role in fueling the booming stock market. If the price of deregulation was somewhat greater instability and occasional outbreaks of fraud, the benefits included accelerated growth and higher returns on investment. Most Americans thought that was a decent trade-off.

The question of deregulation has re-emerged as a major matter of major political controversy in recent days, in response to the 2008 collapse of the subprime mortgage industry and subsequent financial meltdown on Wall Street. Some observers have blamed the current crisis on insufficient regulation of the financial industry; if this sentiment becomes widespread, leading the government to impose a robust new regulatory regime on Wall Street, then perhaps the Reagan Era will have truly come to its end. Either way, the powerful arguments Reagan made in favor of deregulation dominated American thinking on the issue for at least three decades.

Reaganomics in Context
Politics is a messy business. When it came to deregulation, like taxation and spending, Ronald Reagan's clear and simple ideological principles could be translated only imperfectly into concrete administration policies. Those policies, imperfect as they were, augmented a normal upswing in the business cycle to help restore confidence in the economy among the American people, generating a prolonged economic expansion that lasted, nearly unbroken, from 1982 through 1999. And while that expansion had its flaws—uneven wealth distribution foremost among them—there is little question that it represented a dramatic improvement over the dark days of stagflation in the 1970s.