www.econlib.org/LIBRARY/Enc/Reaganomics.html
Reaganomics by William A Niskanen "Reaganomics" was the most serious attempt to change the course of US economic policy of any administration since the New Deal. "Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy." Reagan's 1981 Program for Economic Recovery had four major policy objectives: reduce the growth of government spending, reduce the marginal tax rates on income from both labor and capital, reduce regulation, and reduce inflation by controlling the growth of the money supply. These major policy changes, in turn, were expected to increase saving and investment, increase economic growth, balance the budget, restore healthy financial markets, and reduce inflation and interest rates. Any evaluation of the Reagan economic program should thus address two general questions: How much of the proposed policy changes were approved? And how much of the expected economic effects were realized? For those who do not view Reaganomics through an ideological lens, however, one's evaluation of this major change in economic policy will depend on the balance of the realized economic effects. President Reagan delivered on each of his four major policy objectives, although not to the extent that he and his supporters had hoped. The annual increase in real (inflation-adjusted) federal spending declined from 40 percent during the Carter administration to 25 percent during the Reagan administration, despite a record peacetime increase in real defense spending. This part of Reagan's fiscal record, however, reflected only a moderation, not a reversal, of prior fiscal trends. Reagan made no significant changes to the major transfer payment programs (such as Social Security and Medicare), and he proposed no substantial reductions in other domestic programs after his first budget. Moreover, the growth of defense spending during his first term was higher than Reagan had proposed during the 1980 campaign, and since economic growth was somewhat slower than expected, Reagan did not achieve a significant reduction in federal spending as a percent of national output. This part of the Reagan record was probably the greatest disappointment to his supporters. The changes to the federal tax code were much more substantial. The top marginal tax rate on individual income was reduced from 70 percent to 28 percent. The corporate income tax rate was reduced from 48 percent to 34 percent. And most of the poor were exempted from the individual income tax. These measures were somewhat offset by several tax increases. An increase in Social Security tax rates legislated in 1977 but scheduled for the eighties was accelerated slightly. Some excise tax rates were increased, and some deductions were reduced or eliminated. More important, there was a major reversal in the tax treatment of business income. A complex package of investment incentives was approved in 1981 only to be gradually reduced in each subsequent year through 1985. And in 1986 the base for the taxation of business income was substantially broadened, reducing the tax bias among types of investment but increasing the average effective tax rate on new investment. It is not clear whether this measure was a net improvement in the tax code. The reduction in economic regulation that started in the Carter administration continued, but at a slower rate. Reagan eased or eliminated price controls on oil and natural gas, cable TV, long-distance telephone service, interstate bus service, and ocean shipping. Banks were allowed to invest in a somewhat broader set of assets, and the scope of the antitrust laws was reduced. The major exception to this pattern was a substantial increase in import barriers. The Reagan administration did not propose changes in the legislation affecting health, safety, and the environment, but it reduced the number of new regulations under the existing laws. Deregulation was clearly the lowest priority among the major elements of the Reagan economic program. Monetary policy was somewhat erratic but, on net, quite successful. Reagan endorsed the reduction in money growth initiated by the Federal Reserve in late 1979, a policy that led to both the severe 1982 recession and a large reduction in inflation and interest rates. The administration reversed its position on one dimension of monetary policy: during the first term, the administration did not intervene in the markets for foreign exchange but, beginning in 1985, occasionally intervened with the objective to reduce and then stabilize the foreign-exchange value of the dollar. Most of the effects of these policies were favorable, even if somewhat disappointing compared to what the administration predicted. Economic growth increased from a 28 percent annual rate in the Carter administration, but this is misleading because the growth of the working-age population was much slower in the Reagan years. Real GDP per working-age adult, which had increased at only a 08 annual rate during the Carter administration, increased at a 18 percent 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 14 percent rate in the Reagan years. Productivity in the manufacturing sector increased at a 38 percent annual rate, a record for peacetime. The unemployment rate declined from 70 percent in 1980 to 54 percent in 1988.
The rate of new business formation increased sharply, but the rate of bank failures was the highest since the thirties. Real interest rates increased sharply, but inflation-adjusted prices of common stocks more than doubled. The US economy experienced substantial turbulence during the Reagan years despite favorable general economic conditions. This was the "creative destruction" that is characteristic of a healthy economy. At the end of the Reagan administration, the US economy had experienced the longest peacetime expansion ever. The "stagflation" and "malaise" that plagued the US economy from 1973 through 1980 were transformed by the Reagan economic program into a sustained period of higher growth and lower inflation. In retrospect the major achievements of Reaganomics were the sharp reductions in marginal tax rates and in inflation. Moreover, these changes were achieved at a much lower cost than was previously expected. Despite the large decline in marginal tax rates, for example, the federal revenue share of GDP declined only slightly. Similarly, the large reduction in the inflation rate was achieved without any long-term effect on the unemployment rate. One reason for these achievements was the broad bipartisan support for these measures beginning in the later years of the Carter administration. Reagan's first tax proposal, for example, had previously been endorsed by the Democratic Congress beginning in 1978, and the general structure of the Tax Reform Act of 1986 was first proposed by two junior Democratic members of Congress in 1982. Similarly, the "monetarist experiment" to control inflation was initiated in October 1979, following Carter's appointment of Paul Volcker as chairman of the Federal Reserve Board. The bipartisan support of these policies permitted Reagan to implement more radical changes than in other areas of economic policy. Reagan failed to achieve some of the initial goals of his initial program. The federal budget was substantially reallocated--from discretionary domestic spending to defense, entitlements, and interest payments--but the federal budget share of national output declined only slightly. Both the administration and Congress were responsible for this outcome. Reagan supported the large increase in defense spending and was unwilling to reform the basic entitlement programs, and Congress was unwilling to make further cuts in the discretionary domestic programs. Similarly, neither the administration nor Congress was willing to sustain the momentum for deregulation or to reform the regulation of health, safety, and the environment. Reagan left three major adverse legacies at the end of his second term. Second, the failur...
|
http://csua.com/feed/