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Reaganomics: Ineffectivness At Its Best


The national debt is as old as the nation itself. Alexander
Hamilton, Treasury secretary in
the George Washington administration, started running the
country on borrowed money partly
because he thought it was desirable for the government to
owe money to the wealthy. However,
Hamilton did not want the government to borrow money for
the sheer thrill of being in debt. 

When Hamilton ran the Treasury, the ink was just dry on the
Constitution, and Hamilton did
not know whether the new government would last two years or
two centuries. So Hamilton
thought it wise to give the wealthy a reason to root for
the longevity of a new government. 

If the government owed the wealthy money, Hamilton figured
they would want the government to
thrive and last long enough to pay them back.1 Similar to
Hamilton, Ronald Reagan, president
of the United States from 1981-1989, had a fiscal plan that
significantly involved the use
of the national debt. Reagan's economic plan, which is most
often called Reaganomics, was
tested, and in effect, throughout his two terms in office
during the 1980s. At the time the
economic plan was being used many felt that it was
generating great affluence across the
nation. However, the effects of Reaganomics, namely the
national debt, are what prove its
ineffectiveness. Reaganomics has caused much more harm to
the present day economy than it
did to that of the 1980s economy. Moreover, few goals of
Reaganomics were accomplished. 

The purpose of this paper is to prove that Reaganomics was
an ineffective economic plan for
the country. In order to understand how Reaganomics led to
such severe economic issues, one
must first understand the basic premise of Reaganomics,
also called supply-side economics. 

The overall assumption of Reaganomics was that taxes could
be cut-even if slashing the
government's income sent the budget deeply into
deficit-because the tax cuts would stimulate
so much economic growth that they would pay for themselves
and bring the debt back down.
This, unfortunately, did not happen.2 Moreover, many of
these tax cuts were to be given to
the wealthy, and most often to corporations. This was done
under the basis that if the
corporations had more money, from paying less to the
government in taxes, they would
eventually "trickle down" some of this excess capital to
those under them. Once again, this
is not what transpired. There were many factors that led to
the use of Reaganomics, and in
some ways these factors played a role in the overall
implementation of Reaganomics. When
Reagan campaigned against Jimmy Carter in the 1980
presidential election, Reagan posed the
question to the American public, "Are you better off than
you were four years ago?" Soon,
newspaper polls began to report a surge of support for
Reagan, which led to a Reagan
landslide one week later. Evidently, this question struck a
cord with many in the country,
which suggests that events prior to his administration
effected how Reagan's fiscal plan
would soon come to evolve. Reagan was right in the debate
with Carter: the 1970s were tough
by comparison with the 1960s. He was also right in
observing that lower productivity growth
and higher federal-benefit growth during the 1970s
"squeezed out" defense spending in favor
of privately earned spending on consumption. What looks
quite significant in retrospect,
however, is that at least the squeezing did take place. Few
Americans watching the debate in
1980 ever imagined that over the coming decade we would
just decide to ignore the law that
limits consumption to production.3 Ronald Reagan, however,
was not one individual solely
bent on the destruction of the economy. Many of his
contemporaries believed that his plan
would work, and more importantly so did a large portion of
the American people. For
instance Reagan's Office of Management and Budget predicted
that the economy would grow a
robust 4.4 percent annually and produce a federal budget
surplus of $28 billion by 1986. The
application of Reaganomics, as shown with actual results,
will eventually help to show why
the effects of Reaganomics were so severe. One part of the
overall plan of Reaganomics was
to cut government spending. However, contrary to an early
Reagan pledge, federal spending
actually rose during his presidency. But the portion
devoted to productive assets such as
highways and schools declined.4 Furthermore, the most
crucial part of the plan, tax-cuts,
were not applied effectively. Most of the 1981 tax cut was
simply an across-the-board cut in
personal income-tax rates and thus did little to alter the
relative tax burden on savings
versus consumption. In any case, what is truly inexcusable
is the expectation that we could
come out ahead simply by cutting the overall level of
taxation while still allowing federal
spending to grow. When tax cuts go unmatched by spending
cuts, they must be accompanied by
additional public borrowing from households and firms--thus
by a dollar-for-dollar reduction
in otherwise investable private savings. Therefore, in a
near-full-employment economy only a
tiny fraction of the cut is likely to show up as additional
private savings. If families and
firms treat the tax cut just as they treat other income,
the savings might be six or seven
cents on the dollar--a tiny margin that can disappear
entirely if there is a negative shift
in the private sector's overall inclination to save.5 In
other words, because the tax cuts
were applied outright to personal income-tax rates, what to
the government was a macroscopic
venture, was basically a small amount of extra capital to
the average person. Furthermore,
from 1979 to 1986 the total annual increase in workers'
production amounted to about $100
billion (in 1986 dollars). The comparable total for
increases in personal consumption plus
government purchases was about $300 billion. That leaves a
difference of a bit more than
$200 billion--just slightly more than the increase in
annual federal deficits over the past
six years.6 Basically, we were funding our nation with
money that we did not have. 

Whatever could not be paid, the deficit, would have to be
rolled over into the national
debt. Essentially Reagan was looking for economic action at
a price we could not pay. This
is why Democrats generally disparage the economic
performance of the middle '80s as credit
card prosperity.7 In addition, in the 1980s economic growth
as compared to wages behaved
differently, and to a large degree unfairly, than it had in
past years. Poverty rates in
the U.S. fell very little from 15 percent of the population
to 12.8 percent, during the
seven-year economic expansion of the 1980s. After all, a
comparable burst of growth during
the 1960s slashed poverty from 21 percent to 12.1 percent.
Wage growth during the 1980s
simply exempted the poorest 10 percent of workers. In the
1960s, every 1 percent increase
in the gross national product added $2.18 to the weekly
wages of the working poor. By the
1980s, however, a 1 percent increase in GNP actually
reduced their wages by about 30 cents,
though their total income rose slightly because they worked
longer hours. For the top 20
percent of workers, wages actually rose more in the 1980s
than in the 1960s.8 Budget
deficits and the national debt are the most compelling
pieces of Reaganomics. Each year
that the government brought in less money from a loss in
tax revenue, the government would
end up spending more than it had, and as a result have a
huge budget deficit. These
deficits were complied into the mounting national debt.
Whatever the effects of cuts in
taxation and shifts in spending, they were more than offset
by skyrocketing budget deficits.
Overall, the governments borrowing caused net national
savings to collapse from 7 percent
of the gross national product in the 1970s, to 3.5 percent
in the 1980s. This resulted in a
drop in net national investment from 7.1 percent to 5.2
percent.9 As a result of bad
planning, poor implementation, and miscalculated
statistics, Reaganomics resulted in many
striking results. The fiscal policy in the 1980s
accomplished exactly the opposite of
almost every key economic promise made by Ronald Reagan
early in his presidency. Federal
spending, which was supposed to shrink, grew from 21.1
percent of gross national product in
the 1970s to 23.4 percent in the 1980s. Investment in
factories and machines, which was
supposed to blossom, contracted from 3.5 percent of
national output to 3 percent. And the
federal budget deficit, instead of being reduced as the
Reagan administration promised,
swelled from 1.8 percent of national output to 3.6
Loss of revenue to the federal government due to decreased
tax rates led to many problems. 

Overall, the Treasury Department lost $644 billion in
forgone revenues, the federal debt
doubled in size and there was no special burst in worker
productivity. When Congress
approved the sweeping reduction of income tax rates in
1981, it also enacted additional tax
breaks, such as those for capital-gains, generous
write-offs for business investment and
expansive rules for individual retirement accounts. Despite
the extra money in the system,
there was no large stimulation of the economy. However, tax
revenues fell steadily as a
share of gross domestic product, and in 1986 alone the
Treasury collected $171 billion less
than Reagan administrators had forecast. Federal spending
continued to grow, however, and
the federal deficit soared to an unprecedented $221 billion
in 1986. The theory that
cutting taxes could increase government revenues seems to
have been widely discredited.11 

Washington's deficits passed record levels, while
public-sector credit demands smothered
the promised gains in private-sector activity. Saving by
individuals fell from about 5
percent of income in 1981 to 2.5 percent by the mid-1980s.
Net business investment in new
equipment and buildings also declined from 3.2 percent of
the gross national product in
1981 to 1.9 percent in 1986. And though the massive tax
cuts probably prolonged the
economic expansion of the 1980s, overall growth averaged
2.8 percent annually, far below
the promised spurt.12 It can further be seen that tax-cuts
effected different segments of
the population differently. Perhaps the most dramatic of
which was the shift in the burden
of taxation. Families in the top fifth of the income
distribution saw their prevailing
federal tax rates fall from 29 percent in 1980 to 26
percent in 1985, while families in the
bottom fifth saw their tax rates rise from 8 percent to 10
percent. In addition, in an
attempt to cut government spending, Washington cut grants
to state and local governments. 

This led at least 26 states to raise their own income and
sales taxes to make ends meet. 

By 1988, the states share of the national tax burden had
risen to 27 percent, up from just
24 percent in 1980.13 Once again, the most damaging effect
of Reaganomics is the national
debt. In the years since Reaganomics has been in effect,
the national debt has grown to
record levels. In 1985, the debt reached an all time record
of almost $2 trillion. Since
then this figure has more than doubled. Many blame
decisions made early in the Reagan
administration for current problems. Reaganomics has had
many long-lasting and far
reaching consequences, that extend well beyond the 1980s.
In present day America, the task
of paying off our national debt has been long and arduous.
In many cases this is because
not only did Reaganomics leave a legacy of indebtedness,
but it also effected our
potential, and thus has limited our economy today. For
example, because of huge deficits,
the US has lost over 2.5 percent to even 3.5 percent of
potential gross national product.14
This may not seem to be a very large number, but when
contrasted to the billions of
dollars in goods and services that we produce, one can see
that in fact this percentage is
staggering. Furthermore, a critical segment, the nation's
productive capital, has also
declined. This was an important target of supply-side
economics. Because of declining
investments in new assets, the nation's net capital stock
in 1990 was 7 percent below what
it would have been without Reaganomics. Even worse, when
business investment in new
factories slows down, so does industry's ability to bring
new and innovative technologies
to market. It has been predicted that the economy will
continue to underperform without a
reduction in the budget deficit, and increase in
investment. All told, the national output
will be fully 5 percent below what it might have been
without Reaganomics.16 Today, both
President Clinton and Congress are attempting to fix the
errors made by Reagan and his
administration. It is estimated that spending cuts will
have to be truncated to the sum of
over 700 billion dollars over the next five years. This
will be a huge task, since
Congress and the President have already trimmed off more
than $247 billion in spending cuts
in1993. All of these cuts in spending are being made in
hopes to reduce, or even balance,
the deficit.16 However, the deficit only comprises what we
cannot pay for each individual
year, the national debt is made up of what we currently owe
for every year that our budget
has not been balanced. We pay the deficit mainly with
treasury bonds, and loans. What is
discouraging, is that Treasury bonds do not have an
automatic debt-retiring feature built
in. So the monthly payments to the holders of Treasury
bonds pay the interest only. The
full principal remains. When the bond matures, the
government owes the bondholder the
original face value. But no money is budgeted to pay the
bondholder off. So the
government must sell a new bond to raise the money to pay
off the old bond. So even if the
budget was balanced, the debt would not go down. For the
debt to actually decline, the
budget would have to go beyond balanced and into surplus.17
With the huge debt, and large
deficits, this is not very practical. Reaganomics was a
severely ineffectual economic plan.
When Reaganomics was tested in the 1980s, taxes dropped,
but there was no extremely
effective boom in the economy to pay for the tax-cuts.
Moreover, the tax-cuts not only did
not help most Americans, but in many ways they actually
hurt Americans. To a large extent
Reaganomics led to the poor getting poorer and the rich
getting richer. Most importantly,
Reaganomics sacrificed long term economic prosperity, which
can be seen by the nations
current national debt of $5,088,829,415,488.70.18
Reaganomics was a severely poor economic
plan, which did not accomplish any of its key concepts. 
End Notes
1. Eric Black. "Forever Indebted." STAR TRIBUNE. August 23,
2. Black.
3. Peter G. Peterson. "The Morning After." THE ATLANTIC.
October 1987.
4. David Hage. "Dropping of the Charts." U.S. NEWS AND
WORLD REPORTS. June 29, 1992. p.
41. 5. Peterson. 6. Peterson. 7. Black. 8. David Hage. "Why
poor workers lost ground in
the 1980s." U.S. NEWS AND WORLD REPORTS. June 1, 1993. p.
46. 9. Hage. "Dropping of the
Charts." p. 41 10. Hage. 11. David Hage. Robert F. Black.
"The repackaging of
Reaganomics." U.S. NEWS AND WORLD REPORTS. December 12,
1994. p. 50. 12. Hage. Black. 13. 

Hage. Black. 14. Hage. "Dropping of the Charts." p. 41 15.
Hage. 16. Hage. Black 17. 

Black. 18. The Department of Treasury "The Public Debt"
Works Cited
Hage, David. "Why poor workers lost ground in the 1980s."
U.S. News & World Reports 1 June.
1992: 46-47 Hage, David, and Robert F. Black. "The
repackaging of
Reaganomics." U.S. News & World Reports 12 Dec. 1994: 50
Hage, David. "Dropping off the
charts" U.S. News & World Reports 29 June 1992: 41 Black,
Eric. "Forever Indebted." Star
Tribune 22 Aug. 1993 Peterson, Peter. "The Morning After."
The Atlantic October 1987.
United States. Department of the Treasury. The Public Debt
9 May 1996



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