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President Ronald Reagan:

The Economy: The Boom

from the website: godblessronaldreagan.com

"We who live in free market societies believe that growth, prosperity and ultimately human fulfillment, are created from the bottom up, not the government down. Only when the human spirit is allowed to invent and create, only when individuals are given a personal stake in deciding economic policies and benefiting from their success - only then can societies remain economically alive, dynamic, progressive, and free. Trust the people."
-Ronald Reagan

Introduction:

When President Reagan entered office, Keynesians were declaring that America would be forced to settle with less. We had reached an "age of limits". The Phillips Curve had failed to model the economic occurrences of the 70's; both massive inflation and high unemployment plagued the nation. Additionally, interest rates were soaring while national confidence was declining. Liberals couldn't explain this stagflation, so they devised the ridiculous explanation that the industrial world had reached the peak of its expansion.

While the liberals were busy devising untenable explanations for the economic calamity caused by their flawed theory, conservatives were debating between whether to tighten the money supply or cut taxes. When Reagan took office, he proposed doing both and secured the largest tax cut in US history. While initial recession set in (not caused by the tax cut), the nation soon returned to prosperity which has lasted 16 years with only a brief interruption during two fiscal quarters in 1991. The first part of this expansion was the strongest peace time expansion and the latter part was the longest peace time expansion in US history.

The Expansion:

The Reagan expansion began on the heels of the worse recession since the 1930's. It began in 1983 and when it came to an end in 1990, it was the longest peacetime expansion in US history. While it was followed by a very minor recession that was caused more by international economic changes than any domestic policy,¹ America quickly returned to prosperity (well before Bill Clinton disgraced America). America now has been expanding for 16 years with less than two years of recession, including the recession Reagan brought us out of. The Reagan expansion between 1983-1989 grew at the rate of 3.8% while the GDP tripled in real terms². During the expansion, the stock market rose from the modest value of 777 to 3,000 even after the stock market crash in 1987³. During this expansion, a third industrial revolution began (which has fueled much of the current expansion and rise in the stock market). The computer and electronic industries were able to expand and thrive thanks to Reagan's reduction in government regulation, decrease in taxes, and more open markets. Several Silicon Valley entrepreneurs agree with this assessment, including Michael Dell and Cypress Semiconductors CEO, T.J. Rodgers⁴. Despite these economic advances, the liberals⁵ didn't let the facts get in the way of their charges that economic disaster would occur due to Reagan's policies. As is obvious from the fact that only a minor recession succeeded the expansion, the continued low inflation, and the subsequent expansion, Reagan's economic policy hardly caused any economic meltdown. Additionally, the Reagan expansion was not a Keynesian expansion propelled by large deficits because:

A) Nominal demand decreased⁶
B) Inflation fell and remained low throughout the decade⁷
C) The almost equally high deficits of the early 90's did nothing to stimulate the economy, as growth was far more anemic during that period than during the Reagan boom.

Finally, this was the first post-New Deal expansion in which the government did not take over a larger part of the economy, thus being the first presidency since Hoover that helped preserve the free market⁸.

Inflation:

One of the most extraordinary factors of the Reagan expansion was that both unemployment and inflation fell. According to Keynesian theory (and past post war expansions), economic growth also yielded high inflation. Just the opposite occurred in the 1980's; Inflation fell as displayed below:

Critics of President Reagan have a difficult time refuting the fact that double digit inflation evaporated during his administration. Therefore, they have charged that it was not Reagan but external effects that caused the decline in inflation. Thus, they claim, Reagan merely was the beneficiary of good luck. The president's critics claim the breakup of the OPEC cartel and the change in Fed policy is responsible for the decline in inflation. They are correct, however, they seem to forget what caused these changes. Ronald Reagan's first act as president was to end price controls on US oil. This allowed US companies to better compete against the foreign OPEC. This new competition was a major factor (if not the only one) in causing the collapse of the cartel. Additionally, the change in Fed policy was not only the work of Federal Reserve Chairman, Paul Volcker, instead, it was a Reagan initiated policy. When Reagan took office there were two competing conservative ideas on how to restore the economy, the monetarist plan of "tight money" and the Supply Side idea of tax reduction. There were few economists on either side that believed implementing both would make practical policy. Reagan did and because of his leadership, taxes were cut and the Fed was encouraged to pursue a tighter monetary policy, causing low inflation and a robust economy. Also of note, the change in Fed policy caused interest rates to decrease. When Reagan took office the prime Treasury Bill rate was 14%, when Reagan left office it was 7%⁹.

Standard of Living:

While the rate of growth, the length of expansion, and the rate of inflation are important factors in measuring the strength of the economy, most American give more heed to the benefits that they incur during economic prosperity. The Reagan expansion did not look good merely on paper, it also improved the lives of countless Americans. One result of the expansion was an increase in wages and employment. In order for the real wages to increase, productivity must do the same:

As the chart depicts, after a sharp decline in private sector productivity, productivity significantly increased during the Reagan era. It is therefore little wonder that after virtually being unchanged for eight years, median household income rose by $4,000 (and after the Bush and Clinton tax increases, incomes fell by $1,348)¹⁰. Even more significant is the social mobility (change in social class) that occurred during the 1980's:

A large number of Americans, especially the poor, made real economic progress. In fact those in the richest quintiles were the ones that saw the greatest economic backslide during the 1980's (so much for the rich getting richer and the poor getting poorer). It is also charged that under Reagan's watch the middle class shrunk. Reagan's critics were correct in terms of the explicit statement, however, the implication that those in the middle class fell to a lower class is erroneous. In fact, the reason why the middle class shrunk is because they became more affluent and rose to a higher class!¹² Additionally, when Reagan took office the unemployment rate was 7.6%, when he left 17 million jobs had been created at an average of 1.7 million per year during his administration (versus 1.2 between 1990-95) and the unemployment rate was at 5.5%¹¹. While many critics of the Reagan era like to pretend that the poor faced great hardship, the fact is the poverty rate (after increasing from 11.4% in 1978 to 14% in 1981) fell from 15.2% at the height of the '82 recession to 12.8% by the time Reagan left office¹³. In fact, the lowest economic quintile's average income increased from $6,494 in 1980 to $6,994 in 1989¹⁴. While this isn't an incredible increase, it certainly proves that the poor didn't lose ground during the Reagan expansion and in fact, many were able to escape poverty. On the top of the class structure, the number of millionaires and billionaires increased. In 1980 only 5,000 individuals had incomes of $1 million or more and there were only a handful of billionaires; When Reagan left office there were over 35,000 millionaires and over 50 billionaires¹⁵. However, with this new wealth there can be an appearance of greed. While there certainly were some excesses in the 80's there is little proof that it was exclusive to the 1980's. There have, with little doubt, been selfish people in any era. In fact, during the 1980's charitable contributions increased by 57%, from $65 billion in 1980 to $100 million by 1989. Also, many Americans began volunteering their time for charitable and civic purposes¹⁶. Of those that were greedy, many were the so-called yuppies. These were young selfish individuals who tended to be rather immoral (pro choice, made use of recreational narcotics, etc.) and were hardly condoned by President Reagan. Reagan can hardly be held responsible for these ex-hippies turned capitalists. They were reckless and selfish due to the fact they were newly wealthy. Many people who aquire wealth for the first time tend to behave in this manner. Also, the liberals tended to consider people who made $60k or more as being rich. Most people who make this annual salary probably would not consider this to be the case. Also of interest, this upturn in wealth was not racist, despite liberal charges:

Blacks, in fact, experienced a greater increase in real household income during the 80's. Finally, during the 80's more people acquired new property including real estate, televisions, computers, other electronics, stocks, and bonds than had ever before¹⁷. This accounts for much of the decrease in savings during the 1980's, especially since investments aren't considered savings.

Comparing the Presidents and the Decades:

The idea of measuring "misery" was that of Jimmy Carter when he was running against Gerald Ford. He used this to depict the hardships Americans were facing during the Nixon-Ford administration by combining inflation and unemployment into one (misery=inflation+unemployment). Little did Carter know, his administration would have one of the worst rankings of all post war presidents. Later, economists used this to measure each presidential administration. Reagan's first term ranks the highest of any post-war presidential term. His second term is the second highest. Also of note, the poor showing for first term employment is due to the recession during the early 80's that Reagan was not responsible for but took place under his presidency. The second ranking includes interest rates and GNP (misery II=misery+interest rate+GNP-3%). Reagan once again rates better than any other president with both a first and second place ranking.
 

80's vs. 50's

While the 1950's is often remembered as a prosperous era in American history, it was, in fact, not as prosperous as the 80's were. For one thing there were very high taxes still in place with the top marginal rate at 90%! Furthermore, there were two recessions in the 50's¹⁸, separating two rather modest periods of growth. The first expansion in the 50's was 39 months and the second expansion lasted 24 months versus the Reagan expansion that lasted 92 months¹⁹.
 

80's vs. 60's

The 60's unlike the 50's did out perform the 80's in terms of the length and strength of the economic expansion. From 1961-1969 the economy expanded for 106 months at 4.9% versus 92 months at 3.8% between 1983-1990. This, however, is not surprising. First of all, this expansion occurred during a wartime period not during a peacetime period as had been true for the Reagan expansion. Secondly, Kennedy proposed and Johnson was able to enact a large 30% across-the-board tax cut, which also brought the top marginal rate down from 90% to 70%²⁰. This is very similar to the Reagan tax cut. Unfortunately, the next decade was plagued by several recessions and stagflation. The same is not true for the 1990's. While there was a moderate recession, the economy continued to grow while inflation and unemployment remained low.
 

80's vs. 90's

The 90's is ostensibly a mere continuation of the 80's. It has already been established that there was less than a year of recession separating both expansions. Additionally, until 1995, the second expansion was only growing at a rate of 2.7%²¹. In fact, most of the growth of recent year that makes the expansion look more impressive is due to the 1995 Republican tax reform bill that reduced capital gains taxes. This encouraged growth in the technology market that has been driving the economy. Even most of the growth in the stock market occurred after the Republicans took charge of Congress and thus took charge of the fiscal policy of this nation. They forced President Clinton to agree to both welfare reform and a balanced budget. Clinton's greatest success is also his greatest failure. If his national health care policy has been enacted, chances are the economy would hardly be a robust as it is today. It is the failure of this policy to be enacted that has prevented a larger portion of the economy coming under federal control. Additionally, the reduction in the deficit is due to decreases in the defense budget and increased tax revenues. In fact, the only reason why Clinton could reduce the defense budget is because Reagan was able to defeat the Soviet Union. Much of the savings in spending could have been found by eliminating wasteful social spending, anyway. In fact, it is Reagan who built an economy that is providing much of today's revenue that has allowed for budget surpluses. Also, despite Bush's and later Clinton's tax increases, the top marginal rate (now 39.5%) remains far lower than that of the 70% and 50% rates that Reagan eliminated. The economic successes of the 1990's are Reagan's and Reaganism's not President Clinton's²¹.

Conclusion:

When Reagan took office, America's economy was in ruin, yet he never lost faith in the American people. Despite an early recession, Reagan did not retreat from his ideals. "Stay the course" was his motto, and he did so very well. Despite the attacks from the left and the media, Reagan trusted the tax cuts and reduction in government would restore the American economy. He was right. America has experienced two decades of nearly uninterrupted growth. Our national economy has become the envy of the world. While others believed only more power to the government would rectify the economic woes of the nation, Reagan believed in the American people. President Reagan knew the expansion, in truth, was not the government's or his, "it was the American people that made it possible." Reagan believed in America and our great nation proved exactly what he stated in his inaugural address, "Government is not the solution to the problem, government is the problem."
 
 
 
 

1-Almanac of US History, pp.640-641
2-Cato Institute: Cato Policy Analysis No.261; Statistical Abstract of the United States.
3-D'Souza, Ronald Reagan;Robert Bartley, The Seven Fat Years: And How to Do It Again
4-D'Souza, Ronald Reagan p.125
5-42 economists predicted massive future inflation due to Reagan's policies in Reagan, the Man, the President. Additionally, Business Week made a similar claim.
6-Economic Report of the President, 1996.
7-If the expansion was caused by a rise in demand instead of from the supply-side, then inflation would have risen. This is why the predictions of massive inflation fell flat.
8-For more information on how Reagan expansion preserved the free market while prior presidencies helped socialize the economy, visit The Grandfather Economic Report- The Reagan Era
9-Economic Report of the President, 1996.
10-Commerce Department, Burueau of the Census.
11-Cato Institute Analysis No.261; Economic Report of the President, 1996.
12-Those earning between $15-50k (1990 dollars) decreased from 53.9% to 49.2%; those earning more than $50k rose from 30.9 to 35.9: US Bureau of the Census, Statistical Abstract of the US, Washington DC, 1995, p.474.
13-US Bureau of the Census, Statistical Abstract of the United States, Washington DC, 1995, p.474.
14-D'Souza, Ronald Reagan; Original Source: Rubenstein, Right Data, p.146.
15-D'Souza, Ronald Reagan, p.113
16-"The Demographics of Giving," American Enterprise (Sep-Oct '91):101
17-US Bureau of the Census, Statistical Abstract of the United States, 1990, pp.571, 759, 764.
18-Alan Brinkley, American History: A Survey, p.795.
19-National Bureau of Economic Research, 1996.
20-Cato Institue: Cato Policy Analysis No.261.
21-Cato Institue: Cato Policy Analysis No.261; Economic Report of the President, 1996.21-Visit the Joint Economic Committee Study on the roots of the current expansion.

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