the Reagan Era Report
(updated Nov. 2000)
By Michael Hodges - email
- a chapter of the Grandfather Economic Reports -
FACTS - - - Government in the 'REAGAN ERA' in PERSPECTIVE
(this page is a part of the Grandfather Economic Report series, a review of economic trends revealing threats facing young families and youth, compared to prior generations - displaying hard data evidence from reliable sources in color graphic form on subjects such as debt, government, family incomes, social security, international trade, regulations, inflation, productivity, voter turnout, trust, healthcare, national security, defense, energy and education. A table of contents is on the home page. The page you are now visiting explores the Reagan Era)
Many talk about the 1980's" (referring to it as the 'Reagan Era'). There appears to be much misinformation regarding certain economic and security indicators during this period, for various reasons - - political and otherwise. This report looks at certain hard data, from reliable sources. What are some facts?
Some call the era a 'revolution'. Was it?
- First a short summary and a conclusion - - followed by the meat -
SUMMARY of Reagan Era
The 'REAGAN ERA' was revolutionary, AND an instructive pointer for the future
The first era in 50 years that the private sector share of the economy was not reduced by government expanding its share of the economic pie faster than economic growth. In fact, government's share was reduced for the first time.
Federal social spending ratios stopped rising, and fell, for the first time in over 3 decades.
The early 1980s was the first interruption in the rapid up-swing of federal regulatory activity spending in 2 decades. In fact, during the 1980s, said spending declined in real terms - - only to resume its fast upward pace in the 1990s.
Taxes were reduced by large amounts, and the economy expanded together with a new climate of competition and regulatory burden reductions.
A decade of declining real median family income was reversed to the upside.
Double digit inflation and interest rates were eliminated.
Debt increased due to lack of congressional spending cuts following tax cut approval, but debt ratios were higher 9 years later.
International terrorism was faced head-on, and hostage-taking of U.S. citizens was eliminated.
The Evil Empire was brought to its knees, without increasing the defense spending ratio, ending a 40-year cold war.
A 2-decade slide in voter turnout and citizen trust in government was reversed, only to collapse to new lows in the 1990s.
SUMMARY OF AUTHOR'S CONCLUSIONS FROM THE DATA EVIDENCE
I believe many readers of the evidence to follow later in this report will reach a similar conclusion, which is summarized by two apparent core principals:
1. "Government is too big." President Reagan and his advisors, in his first term and at the peak of his physical health, purposefully and successfully implemented core policies to rein-in government growth as a share of the U.S. economy, by stopping the run-away growth of social spending ratios and regulatory costs, and to reduce the potential dependence of citizens on big government - - to improve the economic and competitive health of the pure private sector - - aimed toward more economic freedom and living standards for average citizens. And, he would accomplish this turning by the only viable means politically open to him - - by a significant reduction in taxes - - to force down spending, and if not immediately successful, such would force down future spending under the threat of budget deficits.
2. "Evil Empire Tear Down the Wall." President Reagan was determined that no nation or tyrant would 'push around' America - - and that the power, intimidation threats and bluffs of the Soviet Union and terrorists would be brought to a halt. America, in his view, would 'stand tall in the saddle.' His favorite phrase about many things was 'Trust but verify.'
Whether such a core philosophy is agreeable or not to the reader, most must agree that the following evidence points toward the above 2 items - and that, as intended, the Reagan Era legacy has left a clear mark on U.S. & world history for a long time - which will continue for years to come - - such a philosophy can be expressed by 'the least government is best' (as often expressed by Thomas Jefferson, and by Alexander Hamilton in the Federalist Papers), and 'socialism is dead.'
BACKGROUND
The 1980's began against very dangerous back-drops: Government spending was rising faster than growth of the economy, growing from 12% of the economy to 43% by 1980, especially social spending ratios climbing 10 times faster than the economy; the share of the economy left to the free-market private sector had been significantly compressed - - primarily due to social spending ratios exploding upwards 1,400% over 35 years; debt ratios which had fallen for decades stopped falling in the early 1970s and started up; top personal tax rates had previously increased to a stifling 70% level; productivity was down; real median family incomes had stopped growing in 1970, stagnated and were falling as the 1980s approached; rates of inflation and interest were at near historic highs as government airport controllers went on strike; regulatory cost burdens on the productive part of the economy had zoomed; the international value of the U.S. dollar had declined 50% during the prior decade; America's balance of trade was moving steadily negative. America was not feeling good about itself.
Coupling these negative economic issues of great magnitude and trend, our national security was threatened. The 'tooth-less tiger' was being challenged in all corners. Minor terrorists held citizens without challenge, as grammar school-like rescue missions failed. The Soviet Union was in another expansion mode of threat with missile power from submarines, plus its new Latin American strategy from the Falklands to Central America, as some made excuses. Further, Europe was caving and playing 'better Red than Dead' by not standing firm against Russia, not only disallowing our use of bases and over-flights to wipe out terrorists, but calling for removal of our European-based Pershing missiles. Americans were nervous. The world was nervous.
Enter the REAGAN ERA - - 1980-88. Dramatic results were realized as major negative trends were slowed or reversed. This was good news for some, and bad news for others. Good for family incomes and the productive private sector, but bad for pro-big government knows-best people and social planners. This was good news for citizens concerning their security and national pride, but bad news for those who would bury us - - from minor terrorists, to terrorist nations (Iran, Libya) to major nuclear threats with a Latin America flank plan underway from our south (Soviet Union).
SOME SIGNIFICANT ITEMS IN THE 80's
Private Sector Share of Economy - up: Due the slowdown and reduction of government spending ratios, for the first time in 4 decades, the Private Sector's share of the national economy was not reduced - - in fact it climbed - - only to fall back after Reagan. See Government Spending Report and the Private Sector Report.
Government Growth ratios - down: From post WW II until Reagan took office, the total government spending (federal + state/local) ratio had moved straight up, more than doubling, consuming more and more of the economy - from a 22% ratio in 1947 to 44.3% of national income by 1982. The Reagan Era was the first time in 40 years that government did not expand its share of the economy - - in fact, the combined government spending share of the economy was decreased by 4 points - - to 40.5% of national income. Since then government growth resumed reaching today's 44% share. See Government Spending Report. ITEM: after Reagan, in the 1990's, there was an attempt to further expand government dominance of the economy an extra 14 points to 58% of the economy, via the failed national health plan - - so, the propensity to expand government faster than the economy was alive and well - - despite the Reagan slowdown. It is quite possible that had there not been a Reagan Era, which clearly interrupted the past fast expansion of government's share of the economy, that 1993 health plan might have been successful. Today, 44% of the economy's national income is dependent on and controlled by federal and state/local government. ( Private Sector Report) What would our founding fore-fathers say about that?
More on spending ratios: The Reagan era was a major hit to government spending psychology. It is interesting that the Reagan era was able to fight and win the cold war while both reducing federal spending ratios and cutting taxes. On the other side of the coin since that time, ratios resumed their upward climb, together with the two largest tax increases in history coupled with the aforementioned health plan attempt which would have increased the federal government's share of the economy to a 58% ratio.
Family Incomes - up: After 2 ½ decades of solid growth, by 1970 real median family incomes peaked at $36,900 (in 1993 dollars), and stagnated for the next decade. In 1981 they were down to $35,900 (1993 dollars). The Reagan Era saw a smart halt to this slide, and family incomes leaped upward to $39,900 by 1988-89- a 11% real increase covering multiple years. Since then, real incomes have fallen again - 1994 was $37,700 (1993 dollars). The Reagan Era was able, with tax cuts, to increase family incomes. Since then, with 2 historic tax increases, family incomes ceased the rise started under Reagan, and fell, instead. See Family Income Report
Social Spending - down: For 3-decades prior to Reagan, social spending as a percent of national income had jumped from 1% of the economy size up to 14% of same. Not only did this ratio finally stop rising in the Reagan Era, but it actually dropped 2 points - - to a 12% ratio. Since then it has jumped up to 15% of the economy - - as it as resumed its old 'love of eating off defense ratio reductions', as if that is a free lunch that can last forever, without security implications. See chart #2 at Federal Spending Report. Had the national health plan of the 1990's succeeded, the social spending ratio would now be about 29% - - instead of its already historic high 15% ratio.
Defense Spending - flat: Prior to Reagan, defense spending as a percent of GDP had been steadily declining since WW II, reaching 7% GDP in 1981. During Reagan, this ratio jumped upward 1 point at mid-term to 8% ratio - - as he took final actions to complete the defeat of the Soviet Union. But that ratio turned south again during the latter part of his term - - ending where it had started - - at 7% ratio. So, despite the temporary defense build-up to finish off the cold war, Reagan was able to 'pay' for that bubble by reducing social spending ratios, as he victoriously won the 4-decade cold war. Chart #2 at Federal Spending Report
Inflation - down, dramatically: Prior to Reagan, inflation rates had been jumping upward for many years, with the CPI annual rate rising from 1% annually to 13%. During the Reagan era the increase was stopped cold, and CPI rates dropped 70% - - down to annual rates of 2-3%. Today, it is at about 3%. So, little measurable progress has been made since Reagan, to regain a more desirable target of 1% CPI. See Inflation Report.
Debt - up - but what about since then: After many years of a falling debt % GDP ratio, said ratio stopped falling in early 1970s - - and oscillated at about 34% GDP. Under Reagan's tax cut (which was not coupled with a sufficient spending cut by Congress), the debt ratio jumped to 54% GDP by the time he left office. Since then, despite two massive tax increases and no wars (hot or cold) to finance, the debt ratio has soared to 71% GDP - - the highest in 4 decades. By 1996, it is clear that nearly 50% of the total $5.3 Trillion outstanding debt was created in the 1990's. In nominal terms, the National Debt at the time Reagan took office was $0.9 Trillion. When he left it was $2.6 Trillion - - a $1.7 Trillion increase in those 8 years. In the following 8 years (1989-1996), the national debt jumped to $5.3 Trillion - - a $2.7 Trillion increase in this 8-year period - - or 60% larger increase in dollar terms, than occurred under Reagan. See the Debt Report.
Debt owed to Foreign interests: Chart #2 in the Federal Debt Report shows that at the end of the Reagan Era foreign interests owned 16% of all treasury debt sold to the public - - this ratio thereafter rocketed upward, reaching 42% foreign ownership by 2000.
Exchange Rates - moderated: Prior to Reagan, the international value of the dollar had been falling dramatically for a decade. Under Reagan, the dollar made a major comeback in the middle part of his term, including a 61% gain in the dollar vs. the German Mark - - only to fall back again, as evidently international markets lost confidence in the ability of America to follow through with additional tax cuts and supporting spending cuts. After Reagan, the dollar continued to slide to lower levels. See Foreign Exchange Report.
Regulation Cost Impacts - down: The early 1980s was the first interruption in the rapid up-swing of federal regulatory activity spending in 2 decades, which had previously increased many, many times faster than general growth of the economy - at double digit real compounded rates of increase per year. In fact, during the 1980s, said spending declined in real terms - - only to resume its fast upward pace in the 1990s. Price & energy control cost impacts dropped from $390 billion in 1979 to $244 billion in 1988 - - a 37% reduction. We know that he was a proponent of reduced government-mandated regulatory cost burdens on the private sector. Such costs are a form of government spending that does not show up in government spending data, as the costs must be absorbed by the private sector, thereby reducing its effective share of the economy. The Regulation Report shows at the end of the Reagan Era regulatory costs per capita were about $2,800 per person in 1988 - - which by 1995 had risen 18% to $3,300 per capita. It was clear to most observers that the Reagan era was aimed at making the U.S. economy more productive, and less restrained by regulatory burdens and unions.
Interest Rates - down, dramatically: The Reagan Era inherited some of the highest interest rates in history. These were reduced by huge amounts.
Taxes - major cuts: The Reagan era discovered that the only viable means of stopping the increasing dependence on government by its control of larger and larger shares of the national income was to shrink the incoming revenue projections - - meaning tax cuts. The Tax Report showed the increasing load on citizens by their feeding government more and more of their earnings. It was clearly understood that social and big government forces held the upper hand to resist spending cuts, by 'screaming' that every nickel cut would send thousands of old people and sick children to the streets. But, many citizens agreed with Nobel laureate Milton Friedman: "We know full well that Congress will spend every penny - - and more - - that is yielded by taxes. A cut in taxes will mean a cut in spending. And, there is no other way to get a cut in spending. That is why the big spenders and the big inflationists of the past have suddenly been converted to fiscal conservatism and to preaching the virtues of fighting inflation. They know that a multi-year tax cut will force multi-year spending reductions. They hope that a one-year cut will quite public agitation and allow them to revert the next year to their high-spending ways."
Large tax cuts were proposed and approved. and considering the economic status of America at that time, Congress had to approve same. In 1981 the top personal rate was cut from 70% to 50%. Again tax rates were cut in 1986 to a 28% top rate. Some hated tax cuts, claiming only the rich benefit - which is but a smoke screen for reality - - "Most studies find the share of tax income generated by the highest-income Americans rose after both the 1981 and 1986 tax cuts." (The Economist, pg. 75, 1/24/98). As the economy began to improve they dug in their heels should further tax cuts be proposed, and accelerated spending late in the Reagan Era, under the cover of pressure of 'illegal activities' concerning such things as Star Wars costs too much, or Iran-Contra'. It must have been recognized that priorities had to be toward the Soviet challenge, and that the pro-big government forces would eventually be defeated by the deficits and debt they would thereafter create. Since the Reagan Era, 'deficit reduction' is the click phrase many love to use, although lip service and smoke and mirrors are at work to cover. The wisdom of Milton Friedman is correct. Tax cuts are necessary, if America really wants to meet the intent of its founding fore-fathers - - small and limited government. After the Reagan Era pro-government forces pushed to reverse the tax cuts - by imposing in 1991 and again in 1993 huge increases which returned the top tax rate to near 40% (39.6%), more than canceling-out the 1986 tax cut. Yet, studies show these huge increases resulted in 'the non-rich (not the rich) paying a larger share of the total.' (above Economist article). Despite tax hikes in the 1990's, such created more debt and higher debt ratios than any peace-time event in our history - - and, without having to pay for a cold war - - and the main impact was more taxes paid by average citizens.
Hostage-taking and a 40-year Cold War - eliminated: Dramatically improved results were realized with regard to the humiliating hostage-taking and the dangerous cold war. Prior to the Reagan Era, America was the laughing stock of the world and at home we were embarrassed, as minor terrorists held citizens as hostages - - and we appeared timid and without bite to our bark. Reagan took firm action, ended those events, and gained the respect of citizens the world over. Prior to the Reagan Era, America had engaged in a 40-year cold war with Russia, that appeared to all to be getting colder and potentially more dangerous over time. Reagan fully engaged, upping military options and the PR of Star Wars, etc. - - supported England in the Falklands and placed the Soviet military in a 'we see every thing you are doing and have it fully covered', stopping cold the Soviet flanking movement from the South. The Reagan era fully engaged the Soviets on every front, "Evil Empire' plus Star Wars (birth of the space shuttle) threats. The Reagan era threatened Europe to not only leave its missiles alone, but it must take more Pershings, or face the Soviets alone and without America. This strategy of bite with bark undermined the creditability of internal Soviet military leaders, which allowed a Gorbechev to emerge with strength - - and, the Cold War was over - - except for the mopping up and demise of the former Soviet Union. The Reagan era leaders had to fight their battles on two fronts at once: the obvious one abroad, and the subversive one at home out to under-mine arrows in his quiver such as Star War games, central American threats, Russia's buildup of Iraq, etc. The Reagan Era caused a complete reversal of escalating terrorist and Soviet threats - - and the world breathed easier.
Voter Turn-Out - first up-tick in 2 ½ decades: Voter participation rates in elections is one measure of the public's confidence in presidential leadership and belief that one's vote does count. 63% of voting-age citizens went to the polls in 1960. For the next 20 years the participation rate dropped each election cycle, reaching 53% in 1980. The 1984 election produced the first up-tick of this ratio in two decades. In contrast, the 1996 election produced a 36-year low in voter participation, as shown by a graphic in the Voter Turn-out Report, despite massive campaign spending and voter registration drives. In the opinion of this author, fixing the political climate to increase voter participation in future elections must be a national priority - or we continue to become less and less a true representative democracy.
Trust in Government - after 2 decades of decline, an explosive increase in citizen trust: The Trust in Government Report shows public trust in the federal government dropped from 61% in the early 1960s all the way down to 27% by 1980 - - a 55% change to the negative. Reagan often said, 'Trust but verify.' By 1986 in Reagan's term as president, trust had improved 74% over 1980's ratio). Ronald Reagan's patriotic anti-communism and his stand-down/defeat of the Soviet Union, his resolution of the hostage situation, lowering of severe interest and inflation rates, as well as the tax-cutting tonic applied to the economy, caused trust in government had zoomed straight up - reaching a 47% ratio by 1996 (a 74% improvement over 1980's trust ratio). However, by 1994 the trust ratio had plummeted to a record low of 25%.
Historical Perspective - for a brief view of how the Reagan Era fit into national economic trends for the past 65 years, see the Summary Report
[author comment: Methodology can play a part. Here spending should not be viewed only in absolute terms. It is here viewed in terms of spending as a percentage of the economy to properly compare with prior and later eras. Family incomes are inflation adjusted, etc. Trying to be very careful with starting and ending dates, the author allowed just a one year lag for government spending data, trying to give some small form of reality to the fact there is a lag in results following implementation of actions. Example: 1981 might be used as a start, instead of 1980. Some might prefer a shorter or longer lag, but the main thrust of this report is looking for major changes of direction compared to pre-Reagan and post-Reagan periods, rather than being hung-up on minor points.]
SOME SIGNIFICANT IMPACTS IN THE 90's
At the end of the 1980s the Soviet Union collapsed, largely due to the policies of the Reagan Era, resulting not only in increased security for U.S. citizens but leading the way to a dramatic end of the cold war, and an end to the need for continuing such huge levels of defense spending associated with same for the prior 4 decades.
In the the 1990s the unified budget deficit simply disappeared and the is now in surplus. Why did this occur? One reason is what columnist James Glassman terms "the Reagan boom."
The Reagan tax cut fueled an era of economic expansion that began around 1983 and has, with a few hiccups, continued through the 1990s. Economic growth also helped to provide much of the venture capital for the technological revolution that itself accelerated the pace of economic growth, creating an upward spiral that has raised the Dow Jones average from 800 in 1982 to over 11,000 today. This explosion of wealth has generated a windfall in tax revenue for the treasury. The second reason for the disappearance of the deficit is huge defense savings since the end of the Cold War. Mr. Reagan's policies contributed to the demise of the regime he called an "evil empire," and as a consequence America is now spending $150 billion less every year than before the Berlin Wall fell. These savings, which are likely to continue indefinitely into the future, would not have been possible without Mr. Reagan's determination to win the Cold War. These facts give rise to a tremendous irony: the very man who was blamed for the deficits of the 1980s, Ronald Reagan, is largely responsible for the budget surpluses of today. Mr. Reagan is fading into the sunset, but his legacy endures. There is little doubt that history will recognize the magnitude of his achievement. (note - portions of above paragraph taken from Dinesh D'Souza, a John M. Olin scholar at the American Enterprise Institute and author of "Ronald Reagan: How an Ordinary Man Became an Extraordinary Leader.")
REDUCING TAXES AND DEBT AMORTIZATION
THE MOST POLITICALLY-POSSIBLE MEANS OF REDUCING SPENDING RATIOS AND DEBT PRINCIPAL
We have seen in the Government Size Report, and in the Federal Government Spending Report, that total government spending has grown 4 times faster than the economy's growth, and the federal government sector alone has grown 10 times faster than the economy. Additionally, we have seen in the Debt Report that federal debt per capita is over $20,000 per man, woman and child - - the highest in history - - going straight up. Nobel laureate Milton Friedman views about the effectiveness of government spending were that it is the high level of total government spending that is the problem. I, concur with his 'its the high level of total (meaning federal + state/local) government spending that is the problem'. Friedman also said, 'I am convinced in all my studies that governments will continue to spend all revenues they receive (plus some more), and am further convinced the only solution to reducing spending is to reduce revenue (taxes).' And, as this Reagan era report shows, when one reduces taxes the spending may not be reduced at first, but such revenue loss definitely produces deficit scare-pressures, which in turn causes political pressures which in turn forces a spending slowdown (restraint) below what would occur without tax cuts. (had Bush & Clinton, in the 1990s, not reversed that course by their record tax increases, the Reagan action could have resulted in earlier spending cuts than occurred - and, less resulting debt).
Tax cuts as an effective means of reducing government, as articulated by Milton Friedman, were put into practice and proven in the Reagan era. And, there can be little doubt that this action put pressure on the deficit side which thereby restrained future spending. Never before in history has there been so much talk about debt and deficits, than after the tax cuts of the Reagan era - - thereby placing a continued restraint on the future growth of government for years to come.
Taking this a step further, if one now calls for a significant reduction of debt principal (not just deficit reduction), then politicians should be required to have debt principal payments in each budget - - not just the interest. If reduced spending is a goal then all approaches to accomplish same are viable - by tax cuts and/or debt principal reduction. Of course whenever one calls for tax cuts, then those for big government spending know tax cuts will force multi-year spending cuts, eventually - - and they use as a turf-protecting defense that all tax cuts are 'for the rich' to de-rail said efforts. If the budget includes debt principal amortization, then again spending cuts must occur to accommodate said payments - - but in this case pro-social spenders cannot claim 'for the rich' as their defense. From this, I conclude that those against reducing debt principal, taxes and spending are in fact in the camp of those for big government.
I am for debt reduction AND tax cuts as a means of realizing lower spending ratios, AND lower debt, as a beneficial bequest to the next generation. The REAGAN ERA was a proving ground for the effectiveness of this objective. What did not happen, was a follow-through by the next two administrations, as they sought to reverse his course via massive tax increases and social agendas. However, the power of the Reagan initiative is still alive and well - - potentially impacting America's economic future in a very positive manner - - as our nation approaches an important Cross-Road in its history.
It is clear economic policies in place 1988-1994 have not supported an acceptable level of economic growth, and government at all levels is thereby exposed to the necessity of spending cuts at the federal and state/local levels. That is, provided it is a desired national policy to improve real median family incomes, including full-time employed male worker incomes, and living standards long-term. Such can more likely occur if the share of the economy devoted to the private sector is increased significantly - -provided it is the intent of the American people to believe in and honor the wisdom of our founding fore-fathers - - Thomas Jefferson said, 'government is best that governs least' and that 'public debt as the greatest of the dangers to be feared.' And, The Federalist Papers of Alexander Hamilton and other thinkers who created our constitution called for small, limited government - - consistent with 4 principal functions (national defense, internal security, trade between states, trade between nations), where debt was to be paid-off. They said nothing about social spending or 'cradle to grave entitlements' as a function of government, and would turn in their graves if they knew by 1997 44% of the economy of America is government-spending dependent, and that our debt was not only the highest in peace-time history but was heavily and increasingly owed to foreign interests.
ACTION: We must reduce both spending and debt ratios, without threatening the number 1 priority of government - its national defense. Ideally, we would like to first cut social spending and debt, and only provide tax cuts after this is done. But, historically politicians have not cut spending, as they are selfishly fearing for their jobs - - and believe they cannot survive without support from big-government-spending special interest groups with the greatest special interest in that $2.6 trillion in federal, state and local government spending.. Therefore, we must cut taxes first in order to place the pressure on the spending and debt sides - - the same formula employed by President Reagan. Opponents will fight tax cuts that cause spending cuts, using 'for the rich' as their defense. Therefore, tax cuts must be perceived as also benefiting families, to counter that false defense. At the same time, we should push into the budget a debt principal amortization plan, including rapid elimination of all debt to the social security and federal employee pension trust funds which was created to paper-over the siphoning-off of all trust surpluses which wer spent on other things (siphon report).
For a plan format of spending and debt targets, see the 'Bite the Bullet Plan'
home.att.net |
