Reaganomics

Immediate action

• Control government spending, reduce government involvement and cut taxes

• Influenced by ‘supply side’ economic theories 

  • The theory suggested the economy wasn’t driven by consumer demand but by keeping up production and encouraging saving and investment

  • Believe in restraints on production (government regulation, high taxes and strong unions) should be removed

  • The better-off would benefit and benefits would ‘trickle down’ to the poor

• Sacked many White House staff members and put a federal government hiring freeze in place

• Told all departments there was a freeze on office furnishing and equipment and that they had to cut their travel expenses by 15%

• Used a series of executive orders to set up advisory groups, reporting directly to him, on how to cut down on ‘big government’

• Made him look very active, but financial savings were small

The plan for reform

• Reagan wanted to present his whole budget policy through to 1984 as a single bill when he met Congress on 18 February, and present a tax bill in the same session

• His Council of Economic Advisers (CEA) had no time to follow the usual procedure for budget planning

• This meant that Congress had to vote on the whole package of spending cuts, so the administration would have approval for all its measures and control over the timetable up to 1984

Reaganomics

• Cutting the federal deficit

  • Accompanied by a budget bill and a proposal for cuts on domestic spending

  • Budget bill aimed to reduce the federal deficit from 22% of the GNP in 1981 to 19% in 1986

  • Put together so hastily that it had many errors and a footnote that admitted that the plan included ‘as yet identified’ cuts of $76 billion, to be decided later

• Personal and business tax reductions

  • Accompanied by the Economic Recovery Tax Act of 1981

• Deregulation

  • Removing federal control in industry, state and local government

• Planned control of the money supply

  • To keep inflation down while expanding the economy

• The suggested cuts in domestic spending came almost entirely from federal grants for specific projects set up under Johnson’s ‘Great Society’ reforms

  • Grants to state and local government bodies for slum clearance and highway repair

  • Local initiatives in education, housing and the provision of various services, such as the Aid to Families with Dependent Children (AFDC) programme

Getting the legislation passed

• Easy to pass the budget

  • For the first time in decades there was a Republican majority in Senate and almost a Republican majority in the House of Representatives

  • Only 26 Democrat votes were needed in the House

  • Became law in August as the Omnibus Reconciliation Act of 1981 (ORA)

•   Tax legislation battle

  • The Senate passed it with one change (cut tax reduction for personal tax from 30 to 25%)

  • The Democrats felt they had been manipulated over the budget and saw the tax bill as a fight over control of the House and made significant changes

  • The White House offered tax concessions to some Democrats to swing the vote, while the Democrats counter-offered incentives in areas they controlled

• Reshaped bill passed in August as the Economic Recovery Tax Act 1981 (ERTA)

  • Cut marginal income tax by 23% over 3 years and linked tax bands to inflation; those paying the higher tax benefited the most

  • The highest income tax band rate fell from 70 to 50%; the lowest fell from 14 to 11%

  • All working taxpayers were allowed to set up untaxed IRAs (Independent Retirement Accounts)

  • Business tax rates were cut and businesses could revise their depreciation costs; these were usually calculated years in advance so suffered from inflation

  • Business tax breaks were offered, skewed to favour small, innovative businesses

Economic legislation and  other measures

• 1981 Executive Order setting up the President’s Economic Advisory Board

  • Sets up EAB with economics experts from outside the government advising directly to the president, as well as the CEA

• 1981 Executive Order setting up the President’s Commission on Housing

  • Set up to investigate all aspects of housing, including how it should be financed, but mainly to find ways of saving money on federal low-cost housing schemes

• 1981 Economic Recovery Tax Act (ERTA)

  • Cut marginal income tax by 23% over 3 years, links tax bands to inflation and offers other incentives

• 1981 Omnibus Budget Reconciliation Act (ORA)

  • Proposes a variety of tax cuts that will take $35 billion out of federal spending; the initial bill had proposed $45 billion worth of cuts

• 1982 Tax Equity and Financial Responsibility Act (TERFA)

  • Makes changes to the budget in response to the economic situation, tightening up tax rules, especially for businesses

  • Temporarily raises taxes on cigarettes and the telephone service

• 1986 Consolidated Omnibus Reconciliation Act (COBRA)

  • Revises the budget in many minor ways to save the federal government money and to move costs to state or private bodies

  • The most significant change shifts the responsibility for many healthcare payments from the federal government to the employer

• 1986 Tax Reform Act

  • Revises the tax codes, reducing the number of tax brackets

  • Supposed to close a lot of tax evasion loopholes and ease the pressure on poorer families 

Stopping inflation and unemployment:

• While ORA and AERTA were going through Congress, Reagan put pressure on the Federal Reserve Board (FRB) to put tighter restrictions on the money supply and it did

• Unlike previous administrations, Reagan didn't ask the FRB to lift these restrictions once unemployment rose

• The money supply restriction led to a sharp rise in interest rates. 

  • This hurt industries that had to buy supplies on credit (e.g. the car industry, farming) or had loans with a long pay-back period (e.g. construction)

  • Many businesses were badly hit

• Reagan came to power in the middle of a recession; then it deepened

  • Unemployment rates went from 7.1% of the population available for work in 1980 to a high of 9.6% in 1983

  • By 1988, the rate had gone down to 5.5%

  • The percentages of people in part-time or temporary work had risen; not earning at their full capacity

  • Businesses were reorganising to pay out as little as possible; temporary or part-time employees were not paid on yearly salary rates and the insurance and other extra payments made for them were lower or non-existent

  • The number of people not included in unemployment figures (as they were considered unemployable, such as through drug use, or chose not to register for work) was 34.5% of the population in 1988

• Inflation, which had been 11.3% in 1979 and 13.5% in 1980, began to fall. 

  • In 1982, it was down to 6.2%

  • Although it moved up and down after this, by 1996 it had never reached double figures again and spent most of its time under 5%

Increasing personal wealth

• Everyone agrees that tax cuts made many people richer; in that sense they worked

• Some historians say the rich became richer and the poor did not; the cut in tax bracket for the rich was the deepest and therefore they benefited the most

• Others argue that tax cuts hurt the rich most and poor least, and tax payments of the rich helped the revival of the economy

Increasing productivity

Output per worker per hour

• Lowest: 1982 (-1)

• Highest: 1983 (4.5)
  

Gross National Product (GNP) growth

• Lowest: 1982 (-2%)

• Highest: 1984 (7.25%)

Encouraging people to save and invest

• As the economy came out of the recession, towards the end of 1982, and businesses began doing well again, more people began to save and invest

• However, policies to cut down ‘big government’ led to deregulation in the financial sector

• Increased competition led to problems, as financial organisations took increasingly dangerous risks to win more customers

• The personal savings and investments that the policies had been designed to encourage took place in a financial environment that was increasingly unsafe

• This came to a head in the late 1980s, with people losing both savings and investments during a crisis in the savings and loans industry (that only government intervention stopped) and the stock market crash of 1987

• Recovery from this was far more rapid than the recovery from the 1929 Wall Street Crash

  • The FRB stepped in, encouraging banks to lend to each other and business and individual investors not to panic

  • A significant number of individuals and businesses suffered, but not on the scale of the Great Depression

Reducing the deficit

• One of Reagan’s most notable failures

  • In 1980, it was $59 billion; paying it off cost 9% of federal spending

  • In 1983, it was $208 billion; paying it off cost 14% of federal spending

• Loan interest payments were increasingly funded by borrowing from abroad. For the first time, the USA became a significant borrowing nation, not a lending nation

• Failure was partly because of Reagn’s determination to cut taxes, despite the fact that it soon became clear that supply-side arguments didn’t work

• Federal departments resisted cuts, while Congress toned down many welfare cuts planned by the administration

• Reagan reversed the pattern of the late 1960s and 1970s of cutting defence spending and increasing spending on human resources

  • In 1980, human resources took 28% of federal spending; by 1987, it was 22%

  • In 1980, defence spending took 23% of federal spending; by 1987, it was 28%

After Reagan

George H. W. Bush

• Promised to continue Reagan’s policies

  • However, these policies were increasingly less popular as their long-term effects and limitations became clear

  • Bush had only just won the presidential election; political, media and public support were lukewarm

• The Democrats were back in control of both houses of Congress, making it harder for his administration 

• Bush was often forced to back down on promises - the most famous being when he raised taxes, despite promising in his campaign that he wouldn’t
  

Bill Clinton

• Democrat elected in 1992

• Did not swing back to old Democratic policies

  • While Reagan’s economic policies had produced problems, most voters strongly supported low taxes - a return to high taxation was not an option

• Clinton was a ‘New Democrat’. His campaign was economy-focused: 

  • Low inflation

  • High employment

  • A reduced deficit

  • No tariffs to regulate business and trade

• His nod to older Democrats was in increasing welfare and medical care and ‘investing in people’