This is a research paper that I wrote for my US History class, but I think that it is somewhat relevant to what is going on right now. Conservatives still tout Reagan as being "God-like," and the need still exists to tell them, "no." Tell me what you think.
Ronald Wilson Reagan is, at once, a deity to conservatives and Satan to liberals. He was the fortieth President of the United States and is arguably the most divisive modern political figure. Conservatives tout his accomplishments as leading to a new “Pax Americana”—they point to what they see as the ending of the Cold War due to Reagan’s diplomacy, and believe that Reagan’s fiscal and economic policies led to a renewed American economy. According to conservatives, Reaganomics—which represent a sharp turn from the government’s fiscal policies of the previous forty years before Reagan—is probably the best economic program in American history. They contend that these policies improved living conditions for all Americans and brought the economy out of the stagflation and recession of the 1970s and early 1980s. Upon thorough examination, however, it is clear that Reaganomics was actually detrimental to the United States, and even ultimately led to the severe late 2000s recession.
The hallmark of Reagan’s fiscal programs that the average American was supposed to rally around was tax cuts. Reagan in many ways tried to forge a “war on taxes,” which he believed would stimulate the American economy. The first part of his tax cut program was the Economic Recovery Tax Act of 1981. President Reagan signed it into law on August 12, 1981, amid a “grayish-brown California haze” from the waves of the Pacific Ocean crashing onto the coast of Reagan’s estate. By signing the bill at his ranch, Reagan tried to create an image of himself as an ordinary American who felt the pains of ordinary Americans. Unfortunately, however, most ordinary Americans did not feel the tax cuts.
The cuts reduced taxes by 25% in all income brackets. This meant that income tax rates for the top bracket went from 70% to 50%. The working class tax bracket saw a much less significant reduction, from 14% to 11%. Despite what looked like a rate cut, those who could have actually benefited from a tax cut really saw their own taxes increase due to bracket creep. As inflation increased salaries, many were forced into a higher tax bracket that did not deserve to be, because their real purchasing power had actually remained the same as the price of goods also went up due to inflation.
Meanwhile, the only people benefiting from the tax cuts were the wealthy, as their tax rates were slashed by the Act. Corporations and other special interests also greatly enjoyed the 1981 tax cuts to the tune of billions of dollars. As Will Bunch wrote, “Reagan may have signed the law [the Economic Recovery Tax Act of 1981] as if he were auditioning for a role in High Noon, but the benefits accumulated for the gray-flannel-suited urban cowboys of Wall Street and high finance.”
Conservatives claim that the Economic Recovery Tax Act of 1981 led directly to the end of 1970s and early 1980s stagflation, a period of economic stagnation coupled with inflation. They cite the soaring Dow Jones as evidence, as though the Act was the “transformative act that caused [this] to happen.” In reality, immediately after the Act was signed, America went into a deep economic recession that included a 10.8% unemployment rate by December of 1982. Eventually, however, the economy did recover, but this had little do with Reagan. Instead, the recovery was precipitated by a decline in oil prices and natural turnaround from the poor 1970s and early 1980s economy. Reagan simply could not control those factors.
It quickly became clear that the tax cuts for the wealthy went too far. This is why, less than one year after the Economic Recovery Tax Act of 1981 was signed into law, Congress passed a tax increase—the Tax Equity and Fiscal Responsibility Act of 1982, which Reagan signed. Reagan also signed tax increases in 1983, 1984, and 1986.
Even with the incremental increases (although, overall, taxes still decreased—the small increases did not make up for the big decrease), the government budget deficit soared during the Reagan years. This is because as Reagan lowered taxes, government spending increased. Despite campaigning on a platform of “smaller government,” defense spending was dramatically increased at Reagan’s behest. A new cabinet agency, the Department of Veterans Affairs, was also created. By the end of Reagan’s presidency, the national debt had increased from $700 million in the beginning to $3 trillion dollars.
The other major part of Reaganomics was deregulation. Deregulation, Reagan believed, would lead to freer markets, which was a positive American value. However, deregulation of markets had in the past had a bad effect on consumers. Instead of increasing competition, the 1978 deregulation of the airline industry led to increased monopolization of the industry. Consumers felt the crunch for profits as major airlines abandoned routes that involved smaller airports in favor of streamlining schedules. Overall, the airline deregulation before Reagan turned out to be a debacle.
President Reagan could have learned from the mistake of airline deregulation. Instead, he embarked on an even more dangerous trek of deregulation: this time, the target was the financial industry. On October 15th, 1982, he signed a law that deregulated the savings-and-loan industry. He hailed the new law as a “jackpot.” This led to new industry standards for the S&Ls, including bigger mortgages. High-risk commercial real estate was a common investment made by the savings-and-loans. It was a recipe for disaster.
Savings-and-loans collapsed. By 1989, hundreds of S&Ls failed due to poor management and loan practices, and a lack of good government oversight to prevent problems. Ultimately, the taxpayers were forced to pay the price, as the government bailed out the industry for one hundred and fifty billion dollars. The crisis also caused the housing market to decline, resulting in the lowest number of new homes constructed since World War II in 1991. Overall, it was clear that the deregulation hurt.
The tax changes, coupled with the budget deficits, and deregulation led to a massive economic demographic shift. The number of millionaires in the United States took a huge jump during the Reagan years, but at the expense of the middle class, as their wages “barely kept pace with inflation.” Wages for those who earned between twenty thousand dollars and fifty thousand dollars during the 1980s increased by 44%--although this figure is not adjusted for inflation, meaning a “real” increase much lower than 44%. Simultaneously, incomes for the very wealthiest increased by an amazing 2,184%! The fact was, the income gap was sharply widening.
After these disasters, the American people seemed to reach a conclusion: Reagan’s economic programs had failed. By the time George Bush left the presidency in 1993, and most of the last vestiges of the Reagan administration had left office—with the notable exception of Federal Reserve Chairman Alan Greenspan—America appeared to be done with Reaganomics.
In 1992, Americans elected Bill Clinton to be President. Clinton attempted to actually mimic Reagan’s “smaller government” ideas, except in a way that actually worked and were real. He began to take down Reagan’s failed economic plans. By the end of the 1990s, Clinton’s government managed to do what seemed impossible: balance the federal budget. In fact, in 2000, there was a budget surplus of $236 billion.
Americans were, according to Will Bunch, “…eager, even excited, about paying down the debts accumulated under Reagan.” Despite this, Republican George W. Bush ran for President in 2000 on a platform of tax cuts. He lost to Al Gore, but in a stunning act of anti-democracy, became President, in essence appointed to the post by the Supreme Court. Now President, Bush attempted to imitate Ronald Reagan.
Bush could not have done it without Alan Greenspan, who remained Chairman of the Federal Reserve, having been appointed by Reagan in 1986. In 2001, Greenspan gave his blessing for a huge $1.85 trillion tax cut. Immediately, the ill effects of Reagan’s tax cuts were felt once again. The majority of the tax cuts were for the very wealthiest: this time, the top 1% received an astonishing 52% of the tax cuts! From 2001 to 2005, the earnings of the average worker fell by 3.2%. Income inequality was on the rise once again. The policies that failed under President Reagan were in full swing all over again.
Deficits were on the rise again as well. Debt accumulated. In the first six years of the Bush administration, public debt grew by $3.33 trillion. Bush cut taxes even during war; he took Reagan’s tax policies to the extreme. He cut more taxes in 2003, with the Jobs and Growth Tax Relief Reconciliation Act. Bush never seemed to want to stop cutting taxes, and the economy suffered. The dollar lost one third of its value. Despite all of this, the desire to cut more just continued.
Reagan’s policy of decreasing regulation also arose again. Throughout the 2000s, Alan Greenspan was warned of a housing bubble but declined to regulate the market. Federal regulators continued to allow exceptions to the Glass-Steagall Act of 1933, which prevented companies from being both commercial and investment banks. Credit flowed easily through deregulated real estate mortgage markets. Subprime loans allowed people to buy houses that they perhaps could not really afford. The economy was poised for disaster.
Indeed, in 2008, the bottom fell out. Banks failed. Unemployment skyrocketed. The American economy was significantly weakened due to a financial unwinding caused by neglecting to regulate financial markets. Greenspan, in a 2008 hearing, even admitted that deregulation had a significant impact on causing the financial crisis, saying that he had been at least somewhat wrong on the issue. It was a sharp rebuke of a key element of Reaganomics.
The failure in 2008 highlighted an underlying issue: a return to the fiscal policies of Ronald Reagan. Lowering taxes failed in the 1980s, and it failed again in the 2000s, significantly increasing debt, deficits, and the gap between the rich and the poor. Deregulation was the key element that ultimately led to the late 2000s recession. The late 1980s failure of the savings-and-loan industry was a preview of what was to come later due to the same disastrous policies. Reaganomics clearly decimated the American economy.
Bibliography
Bunch, Will. Tear Down This Myth: The Right Wing Distortion of the Reagan Legacy. New York: Free Press, 2010.
Cannon, Lou. “Actor, Governor, President, Icon,” Washington Post 6 June 2004: A1.
Coates, David. Answering Back: Liberal Responses to Conservative Arguments. New York: Continuum International Publishing Group, 2010.
Ivins, Molly. “Deregulation: High Prices, Bad Service.” Miami Herald 31 August 2001, 9B.
Jackson, Brooks. “During the Clinton administration was the federal budget balanced? Was the federal deficit erased?” Factcheck.org. http://factcheck.org/... (15 March 2010).
Kuttner, Robert. “The Bubble Economy.” The American Prospect 24 September 2007.