Republicans keep talking about Reagan like he is the correct model for Federal Government economics. In my opinion, he did our country much harm by legitmizing "borrowing and spending". To paraphrase Dick Cheney, Reagan proved Deficits don't matter.
This document attempts to show there is no free lunch.e t
Today, most Americans believe in the myth, the Federal Government has always run deficits. This is incorrect. In the past, we mainly borrowed money to fight wars. After the wars, we paid off the debt. We borrowed money to fight the Revolutionary War, the Louisiana Purchase (not a war..), War of 1812, Mexican-American War (and purchase of territory from Mexico), Civil War, World War I, the Depression and World War II ("Day of Reckoning" Freidman pg 38,39).
Most of the last century, the Federal Government was in surplus. All of the 1920’s, the Federal Government was in surplus paying off a much of the debt accrued during World War I. After the Depression and World War II, the government debt was $1.02 for every dollar of GDP. For the next 30 years, we paid down the debt. By 1960, the country had paid off the entire World War II debt relative to income ($.46 for every dollar of GDP). By the end of 1980, the debt to income ratio was down to $.26 for every dollar of GDP) ("Day of Reckoning" Freidman pg 112).
Reagan changed this philosophy – we borrowed money rather than collect taxes. For the first time in peacetime history, we no longer paid for what government does. There was no National Emergency throughout the Reagan Presidency to warrant massive deficit spending. From "tax and spend" to "tax and borrow". The ratio grew during the Reagan administration from $.26 to $.44 for every dollar of GDP ("Day of Reckoning" Freidman pg 112).
Prior to the 1980 election, Reagan was a classic fiscal conservative economically. He denounced deficits and was for a balanced budget. (There is no free lunch.) When he took office in January, 1981 he said the "runaway deficit of nearly $80 billion" was evidence that "the federal budget is out of control".
Unfortunately for us, he was converted to the suppler sider cult by Jack Kemp of the "Kemp-Roth tax cut of 1981".
Supply side economics – restated by Arthur Laffer in the 1970’s:
• Supply can never outrun demand since demand is based on infinite human appetites.
• Give producers capital through lower taxes, faster depreciation, and less regulation.
• Tax cuts would pay for themselves by promoting savings to form new capital, investment and growth. Cutting taxes would stimulate individuals and businesses to be more productive delivering higher tax revenues.
• Regular people will work harder because they get to keep more of their money. (More tax revenues.)
• Why not give more to the poor, because they don’t work efficiently – they just barely work to self-sufficiency.
• Tax cuts would restore the economy without any pain.
In 1980 when he came to office Reagan through his OMB Director David Stockman proposed a Budget which raised Defense spending and lowered taxes. Unfortunately, the Budget did not include lowering other spending so they had to contrive numbers to make the Budget appear to be balanced. As a matter of fact there was an ‘*’ line item in the budget for "unidentified savings". (Laurence Barrett Gambling with History: Ronald Reagan in the White House).
Some have suggested a darker reason increasing the debit. The Reagan administration knew the budget didn’t add up. They wanted to increase the National Debit so there would be fewer funds available for social programs. Republicans still believe the myth that higher taxes lead to more government spending
1982 10.2 % unemployment worst since 1940 – greatest bank failures since 1940. The massive tax cuts probably kept the interest rates higher. Paul Volcker, chairman of the Federal Reserve said as much to Congress in 1985.
One persistent myth is Reagan had nothing to do with the huge Budget Deficit. Ignoring the fact the Republicans controlled the Senate from 1981 – 1986, Reagan never proposed a balanced budget. As a matter of fact, if you take all Reagan’s Budget proposals from 1982 – 1987 excluding the interest on the debt, the Congress only increased spending by $90 billion in total (In 1984 & 1985 Congress spent less than Reagan proposed). That’s an average increase of just $15 billion a year ("Day of Reckoning" Freidman pg 276) The National debt increased by $1.1 trillion dollars. ("Day of Reckoning" Freidman pg 19).
When Reagan took over in 1981, the interest payment on the National Debit was $79 billion. The "average" payment for 1982 – 1987 was $184 Billion. The total debt was $914 billion in 1981. By 1987, the total debt was $2.6 trillion.
(Today the National Debit is $9.24 trillion of which $4.09 trillion ($2.2 Trillion is Social Security) is Intragovernmental Holdings are Government Account Series securities held by Government trust funds (read Social Security. Government and Military Retirement, etc.), revolving funds, and special funds; and Federal Financing Bank securities.)
Using 1986 as an example, the net reduction of tax revenues for Kemp-Roth was $140 billion boosting the deficit from $81 to $221 billion dollars. Reagan said through his proposed budgets the Federal Government would run a surplus in 1985. He was only 15 years off. It took years to erase the structural deficit caused by the Kemp-Roth tax cut.
Now George W. Bush used the same failed policy to shift from surplus to a structural, unending deficit.
Suggested readings:
"Day of Reckoning" Benjamin M. Friedman
"The Triumph of Politics Why the Reagan Revolution failed" David A. Stockman
"The Reagan Record" John L. Palmer & Isabel V. Sawhill
Trust Fund Analysis including Social Security http://www.ssa.gov/...
Mon Nov 10, 2014 at 7:36 AM PT: Added Budget information 1982 - 1989