The fundamental idea behind Reaganomics ran opposite to traditional economic thinking. It has been generally agreed upon that an increase in
demand will produce an increase in supply to meet the needs of the public.
Reagan's administration turned this theory on its head, saying that if a supply
were created, demand would follow. If industries were to produce more, the
public would discover a need for the product. The plan included tax cuts for
big business, allowing them to increase production. By cutting income taxes and
giving Americans more money to spend, the plan would promote industry and
revitalize the economy. The wealthy of America would benefit the most from
income tax cuts and would spend their money, creating new jobs which would, in
turn, aid the lower class. Defense spending would also promote industrial
growth and create more jobs. This was the famed "trickle down"
portion of Reagan's plan.
An important aspect of the Reagan administration was a
commitment to fight the spread of the Soviet Union's communist ideals. This
would be accomplished by large increases in military spending. Programs like
the B-1 bomber, the MX missile, and a complete refit of the Navy were
instituted under Reagan. Secretary of Defense Caspar W. Weinberger planned to
increase defense spending by 7% annually. Budget Director David Stockman
relates that the "none-too-subtle implication was that anyone proposing to
even nick his budget wanted to keep us behind the Russians (sic)."
Obviously, the need to confront the Soviets was in the forefront of the Reagan
administration's plans. The prevalent theory was that the furtherance of
capitalism would be useless if it were threatened by communism. The downfall of
the Soviet Union at the end of the decade would take everyone by surprise.
Whether the true economic situation of the USSR was known to the Reagan administration
is hard to say. Intelligence sources reported myriad dangers and security
threats, because they tend to err on the side of caution. Indicators of the
economic peril of the Soviets were ignored because everyone was so caught up in
the perceived threat. One way or the other, the leviathan defense budget went
ahead.
The chief problem Reaganomics faced, and the reason it
failed to meet its overall goals was that it was internally inconsistent.
Reagan's administration professed a desire for a seriously pared down federal
government, but never lived up to the promise. This undermined their economic
plans. In order to avoid a budget deficit, government spending had to be
decreased in conjunction with taxes. The Reagan administration was singularly
unable to achieve this. Whatever advances it made in lowering government
spending were made up for by increases in other areas. While Education and
regional development took major cuts, Medicare and Commerce grew by leaps and
bounds. The greatest increase in spending, however, came from defense. Military
spending grew by 63.3% from 1981 to 1989. Under Reagan the economy never took
in as much as it spent. Reagan was able to achieve some of his ends. He was
able to increase the rate of growth of the Gross Domestic Product to 3.9% from
its rate of 0.5% under Carter. Family income rose and unemployment decreased.
However, during his presidency the trade deficit rose from $15 billion to $129
billion and the budget deficit went from $74 billion to $155 billion. Most staggeringly,
the national debt increased from a hefty $730 billion to a $2.1
trillion. During the 1980s, many of the premier economic thinkers held that
deficit spending was not a cause for concern. The government was not expected
to behave like a corporation and could get by without paying its debts.
However, upon witnessing the effects of a $2.1 trillion debt, most changed
their tune. Without decreasing government spending along with taxes, Reagan was
unable to achieve all of his economic goals and the nation was plunged into a
deficit.
Another flaw within Reaganomics was the reliance on supply
side economics. The intent of Reagan's plan was to rebuild America's military
to combat inflation and redistribute income to the major corporations. Had America's
economic troubles been the result of unused capacity as it was after WWII and
Korea, Reagan's plan would have been very successful. The unsatisfied demand
would have been fulfilled. Unfortunately, when no such demand existed, the
extra production went to waste. Furthermore, in the 1980s American businesses
were forced to compete with foreign products. What little demand existed was
already taken care of.
Reagan's administration was unable to reconcile their desire
to restore the quasi-mythical laissez faire American economy with their desire
to out-price the Soviets in the arms race. It is a matter of heated debate
whether Reagan meant to drive the Soviet economy into the ground by increasing
defense spending. Many hold that the Soviet economy was already well along the
way towards its own economic demise and Reagan's aggressive defense spending,
the Strategic Defense Initiative, was merely incidental. Intentional or not,
the wanton defense spending of the 1980s had lasting economic effects that would
leave the economy in dismal shape by the end of the decade and the beginning of
the 1990s. Fortunately, the economy has since largely recovered thanks to the
efforts of Congress and the Clinton administration in balancing the budget. The
government of the 1990s learned an important lesson from the problems faced in
the 1980s. Reagan's plan would have been far more successful had he found a
single goal and stuck to it. Defense and other forms of government spending
stood in the way of his economic plans.
The long-term effect of Reaganomics is a hotly debated issue in
history. Many Republicans who once rejected Reagan's ideas now hold them as a
party standard, pointing to the incredible growth of the 1990's as proof that
Reaganomics were effective. Opponents, however, blame the deregulation espoused
by Reagan's supporters as being responsible for the crashes during the term of
George W. Bush giving credit to the growth in the 1990's to George H.W. Bush and
Bill Clinton.
Whatever your particular political leanings, it cannot be denied
that Reaganomics has had a strong effect on the conversation of economics in
America. The growth numbers during Reagan's time in office cannot be denied,
even if the larger effects beyond his term may never be fully explained. Ronald
Reagan remains a powerful figure in the minds of Democrats and Republicans
alike. It is likely that his economic policies will continue to affect politics
for years to come.
Anthony S. Campagna The Economy in the Reagan Years : The Economic Consequences of the Reagan Administration, Vol. 150 (Greenwood Publishing Group, Inc., 1994)
Murray Weidenbaum Reaganomics - Its Remarkable Results (The Christian Science Monitor, Dec. 18, 1997)
Mike Noble Where Reagan Went Wrong [online] "http://oasis.bellevue.k12.wa.us/sammamish/ sstudies.dir/hist_docs.dir/reaganomics.mn.html" (Mike Noble, 1995)
Murray Weidenbaum Reaganomics - Its Remarkable Results (The Christian Science Monitor, Dec. 18, 1997)
Mike Noble Where Reagan Went Wrong [online] "http://oasis.bellevue.k12.wa.us/sammamish/ sstudies.dir/hist_docs.dir/reaganomics.mn.html" (Mike Noble, 1995)
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