Ronald Reagan

... Republicans claim that we had this great Golden Age in the 1980s, that there was a boom in the 1990s, and that everything was going well during the George W. Bush era until some mysterious comet came in from deep space and caused a meltdown in 2008. My argument is that this was mostly a phony prosperity built on massive additions to public and private debt. That so-called prosperity came from the printing press in the Eccles Building run by Alan Greenspan and Ben Bernanke. The "prosperity" didn't come from tax cuts made by Republican policy makers.

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[Reagan's] defense build-up was unnecessary -- most of it went into a vast conventional armada of ships, planes, and tanks that could be used to invade places such as Iraq and Afghanistan and had nothing to do with the so-called Soviet threat. I would give him terrible marks for being so stubborn and insistent in that defense build-up.

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He had a vision of trying to shrink government, but every time some real tough choices came along, he walked away from them because the political heat was so great.

The military budget got out of control, and the tax cuts went to special interests as much as they did to the broad public.

On being elected in November, 1980, Reagan inherited an economy that was gingerly emerging from a slump: taking the year as a whole, the economy contracted by 0.2 per cent. Like any good Keynesian, the new President's response was to promise a substantial stimulus package. This was duly delivered in the form of a substantial military buildup and broad tax cuts, the latter constituting the central feature of the Economic Recovery Tax Act of 1981.

Of course, Reagan and his backers portrayed the tax cuts not as a traditional Keynesian remedy but as part of a supply-side revolution. Many of them, doubtless, believed this description. But the economically literate members of the Administration, such as Murray Weidenbaum and David Stockman, were well aware that the most immediate impact of the tax cuts would be to boost the level of demand in the economy and to raise the budget deficit. To be sure, some Keynesians would argue that boosting government spending is a more effective way of raising demand than cutting taxes, but that is nitpicking. From John F. Kennedy to Barack Obama, Democratic Keynesian Presidents have also used tax cuts to revive the economy.

In the Reagan Administration, some true believers were convinced that the rise in the budget deficit would be short-lived: lower tax rates would stimulate so much growth that tax revenues would eventually rise well above their pre-tax-cut levels: this was the "Laffer curve" theory. The realists, such as Stockman, hoped that the deficits would force Congress to cut spending: this was the "starve the beast" theory.

Unfortunately, for the Reaganites, neither theory panned out. To begin with, they hadn't reckoned with Paul Volcker, the imperious chairman of the Fed, whose crusade to eliminate inflation involved raising interest rates to twenty per cent. This monetary shock overwhelmed Reagan's fiscal stimulus and plunged the economy into another recession, which began in July, 1981, and lasted until the end of 1982. As the budget deficit soared, the orthodox (and anti-Keynesian) move would have been to embrace austerity policies and slash spending. But Reagan's heart wasn't in it. Under pressure from Republicans in Congress who were worried about the midterms, he agreed, in 1982, to let over-all spending (not just spending on the military) rise considerably.

This trimming enraged some of his conservative supporters. A few of the early enthusiasts of Reaganomics, including Weidenbaum, left the Administration. Others, such as Stockman, stayed on to fight a losing fight. Government outlays continued to rise. In 1979, the year before Reagan was elected, over-all government spending came to 19.6 per cent of G.D.P. In 1989, the year after Reagan left office, spending was 20.5 per cent of G.D.P.

Reagan and Deregulation

Reagan was applauded for continuing to eliminate the Nixon-era price controls. These were blamed for constraining the free-market equilibrium that would have prevented inflation. Reagan further removed controls on oil and gas, cable television and long-distance phone service, as well as interstate bus service and ocean shipping.

Bank regulations were eased. In 1982, the Garn-St. Germain Depository Institutions Act was passed, which removed restrictions on loan-to-value ratios for Savings and Loan banks. Reagan's budget cut also reduced regulatory staff at the Federal Home Loan Bank Board. As a result, banks invested in risky real estate ventures (sound familiar ?). Reagan's deregulation and budget cutting contributed to the Savings and Loan Crisis of 1989.

Import barriers were actually increased, as Reagan doubled the number of items that were subject to trade restraint from 12% in 1980 to 23% in 1988. Little was done in other regulations affecting health, safety, and the environment. In fact, although Reagan reduced regulations, it was at a slower pace than under Carter. (Source: William A. Niskanen, Reaganomics, The Concise Encyclopedia of Economics)

Did Reagan Reduce Government Spending ?

Despite campaigning on a reduced role for government, Reagan wasn't as successful as he was at tax cuts. During his first year, he cut domestic programs by $39 billion. However, he increased defense spending to achieve "peace through strength" in his opposition to Communism and the Soviet Union. He was successful in ending the Cold War, with the famous quote "Mr. Gorbachev, tear down this wall." However, to accomplish these goals, Reagan wound up increasing the defense budget by 35%.

Reagan did not reduce other government programs. He expanded Medicare, and increased the payroll tax to insure the solvency of Social Security. Under Reagan, government spending increased 2.5% annually. By the end of Reagan's two terms, the national debt had more than doubled.