Jon’s Blog

The article I read summarizes a study by William A. Niskanen and Stephen Moore which attempted to gauge the success of supply-side Reaganomics during the 1980’s. The study was conducted in response to increased discussion of Reaganomics during Bob Dole’s run at the presidency and his proposed 15% tax cut. The proposed cut was similar to Reagan’s, which was a large part of his economic plan during the 80’s. Reaganomics consisted of four key elements to reverse the high-inflation, slow-growth economic record of the 1970s:
- (1) a restrictive monetary policy designed to stabilize the value of the dollar and end runaway inflation
- (2) a 25 percent across-the-board tax cut enacted (The Economic Recovery Tax Act of 1981) designed to spur savings, investment, work, and economic efficiency
- (3) a promise to balance the budget through domestic spending restraint
- (4) an agenda to roll back government regulation.
There has been a longstanding debate as to the actual success of these policies. Republicans thought the era brought great prosperity, while Democrats thought it widened the income gap, brought about high interest rates, and cause a large budget deficit. This study served to provide an unbiased view based only on the “facts”.

The study examined the state of the economy in the Ford/Carter years, the Reagan years, and the Bush/Clinton years up until 1995 using ten different economic indicators. The indicators were; Economic growth, economic growth per working age adult, median household incomes, employment, hours worked, unemployment rate, inflation, interest rates, prosperity, and savings. The data was collected from credible sources such as the Bureau of the Census, the Economic Report of the President, and Historical Tables, Budget of the U.S. Government. There was question as to when to start and end the Reagan years, and the best method proved to be using a one year lag from when he came into office (to allow for his policies to be enacted) until the time he left office. The three eras were; Pre-Reagan (74-81), Reagan (81-89), and Post-Reagan (89-95).

The results of the study showed that 8 out of the 10 variables proved to be better off during the Reagan years, with the exceptions being productivity and savings. Savings was higher both before and after Reagan, while productivity was higher before but lower after Reagan. There are two reasons savings may have been so low in during Reaganomics; the baby boomers were hitting their peak spending years and some of the data does not account for real gain in wealth. However, the fiscal record of Reagan was not nearly as good as his economic record. The budget deficit was higher in real dollars than after World War II. It started at 2.7 percent of GDP and peaked at 6.3 percent. Secondly, the national debt doubled in real dollars from 81 to 89.

The paper also looked at 12 “fables” of the Reagan era. They are summarized as follows:
1. Going in supply siders said the tax cuts would pay for themselves, but during the administration this idea was not held.
2. The fable is that Reaganomics directly caused the huge budget deficit. There were two primary explanations on what else could have caused it: (1) a large and sustained defense build-up; and (2) the unexpected rapid decline in inflation and the recession in the early 1980s.
3.Fable- Reganomics actually helped continue the fall in inflation started by Paul Volcker. There was no massive jump in inflation like some opponents of Reagan said.
4. Reagan actually played a part in ending the energy crisis and OPEC.
5. The article disputes that Clinton did not outperform Reagan using growth rates, which Clinton’s was a half percent lower. This only goes through 95 and predictions for the rest of the decade were the only thing available, so I wonder what the growth rate ended up being throughout the full time of Clinton’s two terms.
6. The 80s weren’t a “classic Keynesian recovery”, as demand should have grown rapidly and it didn’t.
7. Fable- the increase in growth was only because the economy sucked so bad in the first two years of the decade. However, the 92 straight months of expansion (2nd longest in history behind JFKs) hint this isn’t true.
8. Bush and Clinton did’t inherit such a large deficit as people think.
9. Workers had to work more to earn less in 80s. Not necc. true because benefits were becoming a larger part of peoples incomes, and most studies only looked at wages.
10. Fable- rich got richer while poor got poorer. Rich did get a bigger piece of the pie, but not at the expense of the poor. Every quintile benefited, so the pie just grew. Income mobility also supports this.
11. Fable- poor and minorities lost ground in the 80s.
12. Fable- rich saw their tax bills go down, while the poor’s went up.

The article concluded that the 1980’s was an era of prosperity and economic success, outperforming both the eras before and after it. However, I would like to see one thing. The data for the post-Reagan era grouped Bush and Clinton together. Also, the study was conducted in 1995, so not all of Clinton’s data is included. Most of the graphs show an obvious upward slope towards the end of their range showing Clinton’s policies were beginning to take hold and have success. I am interested in seeing a study done on just the Regan era vs. the full Clinton era to try to prove if Reagan did indeed outperform Clinton was the study states.