Wordgems - Deception: Politics: President Reagan: Deficit

"We don't have a trillion-dollar debt because we haven't taxed enough; we have a trillion-dollar debt because we spend too much."
-Ronald Reagan

Since this has become the key element of the assault on Reagan's economic policies, I have decided to break it down into three sections. Each section provides one counter-argument to the deficit fallacies of the left:

The Reagan era was an extraordinary time. The economy was recovering from stagflation and nearly a decade of decline. Reagan and America were challenging the Soviet Union in a manner not before pursued . Additionally, while Reagan was providing our nation with new leadership, there was still a resentful and hostile House of Representatives which the White House had to contend with.

Firstly, it is hardly unusual for any nation, regardless of the leader, to incur a deficit during a military expansion. This expansion was vital to the collapse of the Evil Empire.

Secondly, Reagan didn't have FDR's (who also garnered a sizeable debt) luxury of a friendly Congress. It is an amazing testament of leadership that Reagan was able to forge a deal, allowing two sweeping tax cuts (reducing the top marginal rate from 70% to 28% by the time he left office!), with that Congress. However, despite a modest reduction in domestic spending, under his first tax proposal, Reagan was never successful in convincing this liberal Congress in reducing spending much further. Reagan chose tax cuts, which he (correctly) assumed would do more good in restoring the fledging economy.

Lastly, while this was not a direct intention of Reagan, the deficit did have a positive effect, in regard to Congressional spending. Congress has never had a problem spending every last dime it is given. This is why it is far easier to cut taxes than spending. If Congress is deprived revenue it is forced to reaccomadate for the smaller influx of funds. Unfortunately, for budget hawks, the more productive economy, spurred by the Reagan tax cuts caused an increase in revenues.

While liberals love to point to these deficits as definitive proof of the economic shortcomings of the Reagan administration, their memories seem to lapse in recalling the role of the House of Representatives (controlled by the liberal Democrats.)

Sources:
Budget Message of the President, FY's 81 to 89
Budget of the United States, FY 1993, Part 5, Table 1.3, page 5-18.
Proposed outlays for 1981 from 1981 FY 1982 Budget Revisions
Fiscal Year	Proposed	Actual	% Difference
1982	695.3	745.8	7.3
1983	773.3	808.4	4.5
1984	862.5	851.8	-1.2
1985	940.3	946.4	0.7
1986	973.7	990.3	1.7
1987	994.0	1003.9	1.0
1988	1024.3	1064.1	3.9
1989	1094.2	1144.2	4.6
Totals	7,357.6	7,554.9	Avg 2.8

As one can see from the chart, Reagan's budget (proposed) was substantially less than Congress' (actual) every year, save 1984. Even with Reagan's massive defense buildup, the liberals were still able to outspend him! Had the actual budget equaled the proposed budget every year (including the one year Reagan's budget just barely exceeded the Congressional one), the debt would have been far less than the multi-trillion figure that was incurred. It was the Democratic House that was responsible for this debt not Reagan. In fact, the Democrats, in an effort to secure tax increases, promised to cut three dollars in spending for every dollar Reagan agreed to raise in tax hikes. Reagan did agree to raise ONLY excise and corporate taxes; We are still waiting for the Democratic spending cut.¹.

Contrary to conventional knowledge (liberal revision) the deficits caused by the actual budgets throughout the Reagan presidency were a result of increases in defense spending and the 1981-82 recession NOT tax cuts. Defense spending increased $779 billion dollars between the years 1981-1989 or $156 Billion adjusted for inflation. This is compared with $73 billion increase in the deficit.² These defense spending increases were key to Reagan's foreign policy which was successful due to these defense increases. Furthermore, it was was the decrease in the defense budget (made possible by the collapse of the USSR) that was the main contributing factor in the decline of the budget deficit³. Additionally, the reduction in inflation helped proliferate the deficit. The sharp decline in inflation reduced nominal revenues, however, the spending increases already agreed to were based on assumptions of higher inflation. The abrupt reduction in inflation created an estimated $300-$400 billion spending windfall for defense and domestic programs⁴. For more evidence that the tax cuts were not the pivotal reason for the deficits of th 80's, refer to the tax page to see that tax revenues actually INCREASED under Reagan.

Source: Congressional Budget Office (www.cbo.gov); In constant dollars
Fiscal Year	Deficit (% of GNP)	Debt (in Billions $)
1981	2.6	785
1982	4.0	920
1983	6.1	1132
1984	4.9	1300
1985	5.2	1500
1986	5.1	1737
1987	3.2	1889
1988	3.1	2051
1989	2.8	2190

As this chart displays, despite the fact that the deficit rose to a high of 6.1% of GNP, by the end of the Reagan administration it was roughly 3% of the GNP almost exactly what it was when Reagan took office. Additionally, this shows the real number public debt did not quadruple as liberals claim. In fact, the real debt didn't even triple during the Reagan administration. The large interest on the debt actually had a hidden benefit. Since it composed a large part of the budget, Congress had to be more prudent in its spending. Thus, the interest from the debt was one of the only effective ways of restraining Congressional spending.

The Democrats and liberals also claim that it was necessary for Bush and later Clinton to raise taxes in order to counter the "Reagan" deficits. The following chart displays the difference between the CBO's prediction (without tax increases) and the actual deficits (with the Bush-Clinton tax increases):

Despite the dire warnings of the Keynesian hacks, the large deficits did not inhibit economic growth or cause massive inflation . In fact with only a brief interruption , the economy has been expanding since 1983. Of course, the truth about the deficits is hardly as bad as the Reagan Revisionists try to portray it as. While a balanced budget was certainly a goal of President Reagan, he learned the liberal Democrats were unwilling to cut spending. He knew the defense budget and tax cuts were more important to national security and economic prosperity. The Soviet Union has collapsed and the economy continues to boom while we are now experiencing surpluses.

1 p.103, Ronald Reagan: How an Ordinary Man Became an Extraordinary, Dinesh D'Souza.
2 Information from Historical Tables, Budget of the US Government, Fiscal Year 1997 (www.cbo.gov).
3 CATO Institute and Historical Tables, Congressional Budget Office (www.cbo.gov)
4 Direct quote from CATO Policy Analysis No. 261, Original Source: Paul Craig Roberts, The Supply Side Revolution (Cambridge, Mass: Harvard University Press, 1984)