U.S. Economy in the 1980s: Reagan, Supply-Side Policy & Data

Introduction: The Decade in Context

The 1980s is often called "the decade of greed" — the era of Ronald Reagan when, as conventional wisdom holds, the rich got richer and the poor got poorer. Despite that common perception, 1980 started off auspiciously. On May 8, 1980, the World Health Organization hailed "one of the century's greatest medical accomplishments": the final and total eradication of smallpox (Dickson 247). Yet how quickly times change — barely a quarter century had passed before that same disease was making headlines once again.

Attitudes change as well. While many observers would still agree that the 1980s was a selfish period in American history, a sea change has occurred in the rhetoric issuing from Washington, D.C. In a very fundamental way, party politics has been thrust aside as concerns for homeland security take precedence over petty partisanship. Michael Barone notes this in his analysis of a speech made by Democrat Richard Gephardt in the summer of 2002: "For many years, especially in the 1970s and the 1980s, most Democrats' and most Republicans' views of the world were very different. . . . Now they see the world in pretty much the same way: a world in which the United States is at war with evil terrorists and must win." The economic analysis of the period from 1980 to 1989 that follows will highlight just how far partisanship has come since the days of Reagan.

In order to evaluate this period effectively, a thorough analysis of the relevant economic data is necessary. From this data foundation one can more readily assess the credibility of the various commentators who have written about the decade. The following types of data will be examined: Gross Domestic Product (GDP), GDP growth rate, unemployment, inflation, fiscal policy (federal budget figures including receipts, outlays, and deficit), monetary policy (money supply and discount rate), and exchange rates. These figures will be considered both individually and in combination in order to construct as accurate a picture as possible of the decade's economic character.

The Data: State of the Economy

GDP figures for the 1980s tell a story of decent overall growth. Between 1900 and 1990, the U.S. economy grew at an average rate of 3.1% per year (Case and Fair 603). The average for the 1980s was 3.0% — very close to that long-run average. If the recession years of 1980 and 1982 are excluded (when GDP growth was −0.2% and −2.0%, respectively), the average growth rate for the decade rises to 4.0% in current-dollar terms.

Regarding the 1980–1983 recession, two additional sets of figures provide further context. The annual unemployment rate rose to a high of 9.9% in both 1982 and 1983 before gradually declining to a low of 5.2% by decade's end (Civilian Unemployment). Similarly, the inflation rate as measured by the GDP Chain-Weight Deflator rose to a high of 5.32% in 1982 before falling to 1.63% in 1986 (Gross Domestic). The corresponding CPI figures tell a similar story (Consumer Price). The December-to-December percentage change in the CPI was 12.5% in 1980, followed by a still historically elevated 8.9% in 1981. By 1986, however, the rate had fallen as low as 1.1%.

The Data: Monetary and Fiscal Measures

The figures above outline the state of the economy during the 1980s. Monetary and fiscal policy data tell the other side of the story, representing the government's response to economic conditions during this period. Consider first the money supply as represented by M3 (Money Stock). Measured in billions of dollars, M3 increased from $1,992.2 billion to $4,065.5 billion between 1980 and 1989 — more than doubling the money stock in nine years. The first large increase occurred in response to the early 1980s recession, with M3 growing 10.3% in 1980 and 12.5% in 1981.

Another dimension of monetary policy was the movement of the discount rate. This rate began 1980 at 13%, dipped to 10% by the end of July, then moved back up to a high of 14% in May 1981 (Historical Changes). From that peak it made a steady descent, reaching a low of 5.5% in August 1986 before rising somewhat by decade's end. The Federal Funds rate followed a similar path, starting at 14% at the beginning of 1980, dipping to the range of 8.5–9.5% in June of that year, then climbing until it reached a pinnacle of 20% in late May 1981. From there it marched fairly steadily downward to a low of 5⅞% in August 1986 before also edging upward as the decade closed.

The federal budget and deficit figures serve as the proxy for fiscal policy, and the story they tell is clear: receipts were not increasing as fast as outlays. Specifically, federal receipts from 1981 to 1989 increased by $474.1 billion, while outlays increased over that same period by $552.8 billion (Federal Receipts). The result was a mushrooming deficit — from $73.8 billion at the start of the decade to as high as $221.2 billion by 1986, before declining somewhat to $152.5 billion by 1989. Viewed as a percentage of GDP, however, the impact of this indebtedness appears more moderate (Federal Budget). In 1980, the deficit as a percentage of GDP stood at 2.7%. Within three years it had climbed above 6%, but it then returned to approximately 2.8% of GDP — a figure not dramatically different from where the decade began. In this light, the deficit does not look quite so alarming.

One final piece of data is the exchange rate of the U.S. dollar. Although this value is not a direct monetary or fiscal policy instrument, it can certainly be affected by such policies and is therefore relevant here. For the purposes of this paper, the rate was calculated by reference to a basket of currencies including Canada, France, Italy, Germany, Japan, and Belgium (Foreign Exchange) — the countries included in the Council of Economic Advisers' Economic Report of the President (Feb. 1997). The pattern is clear: almost without exception, these currencies showed their greatest weakness against the dollar in 1981, then began a slow but inexorable climb, reaching their peak in 1986. From that point they steadily lost value against the dollar through the end of the decade.

Conclusion

The stagflation of the 1970s confounded orthodox economists of all stripes, and they failed to offer any clear-cut solution to the problems facing the country. The field was then open for supply-side economists to try their hand. Their approach was fresh and different, and the country was willing to consider that Keynesian demand-side economics might have its limits.

Did supply-side economics work? This is a complex question, and the answer will vary depending on where one sits politically. Clearly the experiment bore some fruit — the then-current president, George Bush, proposed a Reagan-like tax cut soon after taking office. However, the extent of opposition to that tax cut demonstrated that the country had not firmly embraced the supply-side paradigm. If nothing else, supply-side economics is one additional tool in the economist's arsenal, ready to be applied when political conditions allow.

References

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