Reaganomics Review and Analysis

Introduction
When Ronald Reagan was sworn in as the 40th President, he spent his two terms enacting a series of economic policies that were known as Reaganomics. The policies were a response to challenging economic conditions of the time, a strong mandate from voters, and a desire to test certain conservative economic ideas on a large scale. This paper will examine what these policies were, and whether or not they achieved their objectives.
The Backdrop
The post-war decades of the 50s and 60s saw steady economic gains, but this run was disrupted in the 1970s, in particular by shocks to oil prices. For an economy built on cheap oil, these price shocks created significant turmoil in all aspects of the economy. When Reagan was sworn in in 1981, the country was suffering through what was known as stagflation, a condition where inflation rates were high, accompanied by persistent high unemployment (Investopedia, 2017). After such a long run of low inflation and low unemployment, stagflation was not only unfamiliar to Americans but was also unacceptable. Reagan was swept into power over incumbent Gerald Ford, and this decisive election victory combined with the poor economic conditions he inherited gave Reagan the mandate to make significant changes to fiscal policy.
The Core Elements of Reaganomics
Reaganomics contained several key elements that were on the to-do list of conservative politicians and economists. Years of stagflation were essentially the shock needed to bring in this doctrine, as the American voters were apparently willing to test these theories out and break the apparently cycle of negativity. Poor outlooks on jobs and inflation made investing difficult, and if companies weren't investing, then they weren't creating jobs either.
Lower Taxes
The first element of Reaganomics was to lower taxes. The general philosophy behind lowering taxes was that this would create more incentive to invest; that the rich and corporations were being held back from investing because tax rates were too high. Lowering taxes was also thought to help lower unemployment if it helped increase business investment, and sparking growth would help reduce the rate of inflation (Blanchard, 1987). Lowering taxes became known as "trickle down" because in theory creating opportunities for the wealthy to invest more would mobilize more capital. Corporations and the wealthy would eventually spark economic growth because an uptick in investment would create jobs. Those jobs would lead to an increase in consumer spending, and that would create more jobs. In part, the doctrine of lowering taxes to spark economic growth was something conservatives had wanted for a long time, but in part it was a means of breaking the economic cycle that lead to stagflation. Just encouraging people to invest would in theory be enough to break the cycle.
At the time, most economists were against this plan. Samuelson (1984) instructs that the Laffer Curve shows us that tax receipts are near zero both when tax rates are near zero, and when they are near 100%. The general view behind Reaganomics was that tax rates were so high as to diminish tax revenue; lower rates would increase revenue. There was no evidence for this contention, and this ended up being the prevailing wisdom within the Reagan regime regardless of the lack of evidentiary support for lower taxes either before or after those rates were lowered.
Reduced Regulation
Regulation was seen as another barrier to investment, and one of the core ideas of Reaganomics was not even really fiscal policy, but a reduction of regulations that governed business. This is a fairly straightforward principle because regulations typically lead to higher costs on business, which will reduce both investment and profit. Reducing regulations, it was believed, would help spur economic growth that would counter the reduction in taxes. Combining different things that would spur growth would mean that the tax cuts would be accounted for by a much higher economic growth rate – the rate would be lower, but profits would be higher, and the tax cuts would ultimately pay for themselves. Regulations were reduced on a number of different fronts, including financial and environmental. In both 1982 and 1984, there were reductions in regulations surrounding mergers, reducing the power of the Clayton Act, in an attempt to spur more merger and acquisition activity. This was part of a greater vision of bringing the US economy into a more streamlined, efficient state going forward, something that was not intended so much for the short run as for the long run good of the American economy (Adams & Brock, 1988).
Government Spending
To go along with reduced regulations, there were also cuts to government spending. Whether these were ever going to be sufficient to actually impact the economy, they were at least intended to signal that the Reagan government was committed to making it easier for American companies to do business Underlying this tenet is the idea that government spending is economically inefficient. More money in the hands of corporations and the wealthy would lead to more spending and investment, whereas more money spent by government would not have the same economic benefits.
It is worth noting that during Reagan's time, government spending actually increased, largely due to increases in military spending, showing that the rhetoric of wasteful government spending was ignored when the spending on was on the Department of Defense; it was not government spending being wasteful that was the issue, merely a shift in the priorities in government spending. With declining tax revenues, these military outlays and the borrowing that was required to pay for them ended up being the catalyst that pulled the economy out of recession (Peterson, 1988). It is worth considering this: Reagan increased military spending, but reduced government spending is part of Reaganomics. So Reagan did not strictly adhere to his own doctrine, and in failing to do so ended up helping the US economy where strict adherence to that doctrine was causing the economy harm.
Money Supply
Reagan wanted to tighten the money supply in order to reduce inflation. Instead, the government borrowed heavily, shifting from a creditor nation to a debtor nation, in order to pay for the rest of the Reaganomics plan, as the tax cuts did not in fact pay for themselves. This element of Reaganomics is interesting because inflation did decline even though the money supply increased, and increasing the money supply indeed was something that should have sparked some economic growth and reversed the course of the tightening that occurred prior to Reagan taking office.
As noted above, Reagan actually increased the money supply, contrary to what was actually a part of Reaganomics. It has been said that Reagan regretted the increase in the debt, but it is actually what helped pull the US out of recession; the tax cuts were not getting the job done. The increased military spending was the result of Cold War hawks seeking to strengthen against the USSR, not a recognition that increasing government spending could pull an economy out of recognition, as that latter point would run directly counter to Reaganomics or any other supply-side economics of the time.
Analysis of Reaganomics
One of the interesting elements of Reaganomics is that the tax cuts he enacted are largely still in existence. Hartmann (2014) argued that they need to be rolled back, that those tax cuts represent an effort by the wealthiest in society to gut the economic strength of the middle class, so by leaving in place reduced tax rates on the rich, and indeed today we see a continuation of this false narrative that the US is overly taxed, that the expected outcomes of those taxes still persist – an increasing wealth gap and economic stagnation for the middle class (Hartmann, 2014). George HW Bush is believed to have suffered the fallout from the Reagan tax cuts – as the deficit exploded he raised taxes, and many believe this cost him a second term (Ungar, 2012).
One of the other issues with the Reagan tax policy is that the fundamental principle is unusual. The premise that increased risk-taking and entrepreneurship would spark economic growth works a bit backwards. Economic growth sparks risk-taking and entrepreneurship. Otherwise, money sits on the sidelines waiting for the right opportunity. Who invests in a market going nowhere? And if the Reagan tax cuts did eventually, in combination with the other moves, succeed in creating economic growth, there is still the fact that the debt was created by these tax cuts, and the US has never recovered from the creation of that debt.
Reduced regulation had a similar fundamental principle – lower the cost of doing business and there will be an increase in risk-taking. This is certainly true in that there were junk bonds, leveraged buyouts and other such things in the 1980s that represented new ways to increase wealth, but these were not economically sustainable means of doing so. In the long run, acquisitions that reduced consumer choice and increased risk of monopolistic behavior are anticapitalist – capitalism depends on a balance between encouraging risk-taking and discouraging abuse.
The apparent successes also should be examined. One of the issues Reagan faced at the outset of his term was high unemployment, and another was high inflation. These two issues, more than any others, were what got Reagan elected. Indeed, when he was re-elected, it was when these two things stared to be under control, and the public viewed his economic performance favorably. As noted, economists typically view the success in terms of inflation on borrowing rather than tightening the money supply and the same goes for economic growth. It should be noted, however, that this is the narrative consistent with Keynesian views, and thus is supported most strongly by Keynesian economists. The neoclassical economists that were more in line with Reagan's way of thinking did not trumpet increased military spending and rising deficits as the causes of economic success under his regime.
Trade Deficits
One of the outcomes of Reaganomics was increased trade deficits, and this was something that wasn't really part of the Reaganomics platform. If anything, Reaganomics was in favor of increasing the American trade surplus, but what occurred was the opposite. Bergsten (1981) noted in 1981 that Reagan's policies were likely to keep interest rates high over the medium-term, and that would in turn increase the value of the US dollar, making US exports less competitive. The result of that, of course, was turning a trade surplus into a trade deficit. The US would continue to have a trade deficit since that period. These deficits were predicted to "retard US economic growth" and over time lead to a fall in the dollar that would "propel the interest rate upward." Moffitt (1987) would later argue that this was the beginning of the end of American economic hegemony, though arguably the end of the Soviet Union shifted the world back to that; but the implication was really that the US would no longer have a trade surplus.
Long-Run Impacts
The short-run impacts of Reaganomics are generally derided as failures. While it is true that stagflation was broken, there is significant dissent in terms of giving credit to Reagan's tax cuts and deregulation; rather it is generally viewed that massive deficit spending on the military was responsible for pulling the US out of the recession. Furthermore by pursuing contrary objectives of expansionary fiscal policy and contractionary monetary policy was doomed to failure. The reality is that monetary policy ended up being expansionary as well. The benefits of the tax cuts certainly created certain booms, but they also ushered in an era where middle class wages stopped growing, manufacturing jobs were lost permanently, and the US became a trade deficit nation in perpetuity.
Indeed, one of the lingering issues with Reaganomics wasn't so much that it didn't work; it's that its tenets became a fixture in conservative economic discourse. George HW Bush was punished for bringing in new taxes after saying he wouldn't do so, and tax rates today still bear Reagan's legacy. Trickle down didn't work then, but still remains in the political rhetoric. That is one of the biggest legacies of Reagan's economic policies, on politics rather than on economics.
But under his tenure, the US was also reshaped from a manufacturing nation with a surplus to a nation with a trade deficit. There were mitigating factors of course – rapid adoption of technology in manufacturing, the fall of the Soviet Union, a new era of trade deals starting with the free trade deal with Canada, and the opening of China. Why Reagan's trade deficits and fiscal debt have continued is not entirely due to his policies by any means, but those policies gave the US a weaker starting position than it otherwise would have had.
But the flip side to this is what would have happened had Reagan not taken power, and stagflation continued. It should be supposed that eventually some stimulus would have come, maybe not in the form of military spending, but somewhere, and that spending could potentially have shaken the US economy out of its doldrums. But there is no particular evidence to say when or how that might have happened - President Carter if re-elected seemed to lack a plan so any idea that the alterative was better is surely speculative.
Still, building up of debt left a legacy for future generations that is still being paid; millennials are bearing the cost of Reagan's attempts to stoke the economy for baby boomers. But this was known long before the end of the Reagan era (Agnew, 1991). What the US lost, however, other countries gained. During this period, it was Japan and other Asian economies that began to grow rapidly, beneficiaries of the trade deficit. Mexico would soon become another beneficiary, when NAFTA came into effect. But it was Reagan who established this world order of the US as a debtor nation, one ceding some of its power in the world to other nations, but in effect helping them rise.

Conclusion
When Ronald Regan came into power, he inherited an economy plagued by stagflation, a condition characterized by high inflation and high unemployment, both persistent. After decades of economic stability, oil price shocks had led to struggles in the US economy as it sought to reposition itself somewhat for a world with higher oil prices. Reagan swept into power with a mandate to remake the US economy. Rather than drawing on Keynesian principles as his predecessors had, he drew primarily on neoclassical visions of deregulation and supply-side economics.
At its heart, supply-side economics relies on the principle that government is less effective at stimulating economic growth than private enterprise. The latter is believed to be more capable of making economically efficient decisions. Thus, Reagan sought to divert spending from government, freeing up mostly the wealthy and corporations to invest. He did this through extensive tax cuts. The tax cuts were believed in the supply side model to pay for themselves, because they would stimulate economic growth. Taxes at a lower rate on a higher level of economic activity were believed in the neoclassical model to be roughly revenue neutral. But just in case, Reagan's plan added deregulation for stimulatory effect, and cuts to government spending to bring down the cost of 'inefficient' government.
What occurred in practice was that yes, there was a shock to the economy that would ultimately end stagflation, and there were booms in some economic activity such as mergers and acquisitions, but there were more problems created, many of which persist today because of the change in political discourse brought about by the Reagan era. But perhaps more important, many economists, maybe not supply-siders but others, have determined that substantial increases in military expenditures were more responsible for reviving the American economy than anything else. These proved to be more of a textbook Keynesian deficit spending program in that way.
The long-run impacts were fairly significant, however. Under Reagan, the US shifted from having a trade surplus to having a trade deficit, and the national debt rose substantially. Neither of these things has ever recovered from the damage done during this era. In part, that is because the tax cuts were largely baked into the US tax system. There were some increases under George HW Bush and again under Clinton, but these were not sufficient to restore lost revenues, in part because of the shift in trade and the overvaluation in the US dollar that also contributed to the shift in trade.
The US did undergo an economic expansion during the mid to late 80s and again in the 1990s, and certainly there are proponents of Reaganomics that trumpet these booms as relating to his economic policies. Others would point to technological and geopolitical changes that served to bring about these booms.
At its core, Reaganomics is viewed as a failure of economic policy, rooted in misguided understanding of economics, and proving over its course to fail to deliver on its promises, in particular the idea that massive tax cuts could pay for themselves in increased revenue. There are two interesting issues today that arise from this era. One is that Americans are still paying the cost for these policies. The debt has only increased, as has the deficit. The middle class has been gutted since 1980, and the wealth gap has increased substantially.
Yet political discourse continues to see these ideas popular – they are popular today among conservatives. That they proved unsuccessful is insufficient evidence, apparently. So the issue is really not that Reaganomics failed to meet its lofty objectives, and instead created a whole host of negative outcomes, but that none of that evidence seems to matter, and we are doomed to repeat the past if not enough of us are familiar with it. It is important to understand that policies like massive tax cuts on the wealthy have already been tried, and they failed; that promises of revenue neutrality and strong economic gain are indeed false, and should be treated as such.



References

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Agnew, S. (1991). The US trade and budget deficits in global perspective: An essay in geopolitical economy. Environment and Planning. Vol. 9 (1)

Bergsten, F. (1981) The cost of Reaganomics. Foreign Policy. Vol. 44, (Autumn 1981) 24-36.

Blanchard, O. (1987). Reaganomics. Economic Policy Vol 2 (5) 15-56.

Hartmann, T. (2014) Reaganomics killed America's middle class. Salon. Retrieved October 23, 2017 from https://www.salon.com/2014/04/19/reaganomics_killed_americas_middle_class_partner/

Investopedia (2017). Reaganomics. Investopedia. Retrieved October 23, 2017 from http://www.investopedia.com/terms/r/reaganomics.asp

Moffit, M. (1987) Shocks, deadlocks and scorched earth: Reaganomics and the decline of US hegemony. World Policy Journal. Vol. 4 (4) 553-582.

Peterson, W. (1988) The macroeconomic legacy of Reaganomics. Journal of Economic Issues. Vol. 22 (1) 1-16.

Samuelson, P. (1984) Evaluating Reagonomics. Challenge. Vol 27 (5) 4-11.

Ungar, R, (2012). The numbers don't lie – why lowering taxes for the rich no longer works to grow the economy. Forbes. Retrieved October 23, 2017 from https://www.forbes.com/sites/rickungar/2012/09/16/the-numbers-dont-lie-why-lowering-taxes-for-the-rich-no-longer-works-to-grow-the-economy/#734b61444bf4