As candidate and president, Ronald Reagan promoted the most serious attempt to change the direction of U.S. economic policy since the New Deal. The unifying and distinctive theme of the Reagan program was that “only by reducing the role of government can we increase the growth of the economy.” The four key elements of his program for economic recovery were reductions in each of the following: the growth of federal spending, tax rates, regulation, and the growth of the money supply. Reagan promised that this program would also reverse the “stagflation” of the late 1970s by reducing both unemployment and inflation.
For the most part, Reagan delivered on his promises–by more than the establishment media are prepared to acknowledge, though by less than his supporters had hoped.
Let us review the record. A rocky first two years–due to the monetary restraint necessary to reduce inflation–was followed by a record-length peacetime recovery.
Federal non-interest outlays in FY 1989 were a slightly smaller percentage of GDP than in FY 1979, the prior cyclical peak, despite a record peacetime increase in defense outlays. Federal revenues were a slightly higher percentage of GDP in FY 1989 than in FY 1979 despite a reduction in the top marginal income-tax rate from 70 to 28 percent. (The increase in the deficit share was thus not due to an expenditures boom or an erosion of the federal-revenue base but to the increase in interest outlays from the intervening deficits, primarily reflecting the cost of reducing inflation.)
Productivity increased at a 1.5 percent annual rate during the Reagan years, compared to 0.1 percent during the Carter years.
The unemployment rate declined from 7.1 percent in 1980 to 5.5 percent in 1988. And contrary to the prevailing view that unemployment could be reduced only by an increase in inflation, the inflation rate also declined from 10.3 percent in 1980 to 4.3 percent in 1988.
The economic record of the Reagan administration was unusually good, but not unblemished. The federal debt increased sharply. The savings-and-loan crisis was badly managed. Trade restraints increased. The private saving rate declined. And some economic conditions, such as the average real wage and the poverty wage, proved stubbornly resistant to change. Overall, however, the Reagan record compares favorably to that of any administration in the past 30 years.
In what way and to what extent was Reagan responsible for this record? The Reagan economic program, like the Reagan constituency, reflected a range of views on economic policies. The major disagreement was between the traditional Republican focus on spending restraint and the new supply-side focus on lower tax rates. The administration’s proposed positions on regulation and monetary policy reflected a broader consensus but a somewhat weaker commitment. Reagan may have been the only one comfortable with all of these positions.
Reagan’s strongest economic convictions concerned the importance of low marginal tax rates and a low inflation rate. As a young actor, he had faced a marginal tax rate of over 90 percent, and he often generalized from his own experience about the effects of high taxes. (It is probably not a coincidence that Jack Kemp and Bill Bradley, two other leading advocates of tax reform, also faced high marginal tax rates as young men, in their cases as professional athletes.) Reagan also attributed all sorts of problems to inflation, emphasizing the unfairness of the resulting distribution of gains and losses, and on this issue his judgment was wiser than that of most economists.
In contrast with President Carter, who pulled Federal Reserve chairman Paul Volcker’s chain after six months of monetary restraint, Reagan sustained support of the Fed during the recession of 1981-2. As it turned out, the inflation rate was the only economic condition that was more favorable than the initial forecasts. It is not an accident that the reductions in tax rates and inflation were the two most successful aspects of the Reagan economic program.
In a few cases, Reagan’s convictions changed or were not very strong. In 1981, for example, he proposed a reduction in the effective tax rates on business investment, a position that was reversed by his 1985 tax-reform plan. Similarly, he initially supported a flexible-exchange-rate system but in 1986 asked Treasury Secretary Baker for a proposal to stabilize exchange rates. Reagan was an articulate supporter of free trade, but he learned to rationalize the numerous trade restraints approved by the administration as tactical retreats designed to deter even more protectionist actions by Congress.
The primary problem of advising Reagan was his attractive but incurable optimism: He believed that many problems would go away without any change in policy. In many cases this was a healthy attitude–all too many politicians overreact to the perceived problems of the moment or promote solutions in search of a problem. One important consequence of Reagan’s optimism, however, was the impossibility of preparing realistic economic and budget forecasts. He resisted trade-offs. He was clearly uncomfortable with advice that the monetary restraint necessary to reduce inflation might lead to a recession, or that the reduction in tax rates necessary to increase economic growth might increase the deficit.
Minor shortcomings aside, however, Reagan deserves credit for resolving some of the major economic problems of the time. He revived the case for limited constitutional government. He articulated an expansive vision of America as a land of opportunity. He was an admirable man, and no doubt one of the most important presidents of the last century.
–William Niskanen is chairman of the Cato Institute.