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Reaganomics

In his first inaugural address (January 1981), President Reagan said,

We suffer from the longest and one of the worst sustained inflations in our national history. It distorts our economic decisions, penalizes thrift, and crushes the struggling young and the fixed-income elderly alike. It threatens to shatter the lives of millions of our people.

Reagan kept as Chairman of the Federal Reserve Board the man Carter had appointed: Paul Volcker. And Volcker used interest rates to squeeze inflation out of the economy. In June (1981), interest rates reached 20 percent. People had trouble borrowing money for homes or cars, and many business people could not borrow money to invest in growth. Automobile sales declined, and the economy went into recession.

Reagan weathered the storm. In 1982 business failures were triple what they had been in 1979, and the economy declined 2.2 percent. By the end of 1982, unemployment was at 10.8 percent, its highest since the 1930s. In January 1983, Reagan's approval rating was down to 35 percent, with 56 percent disapproving – as the economy was beginning to recover.

Interest rates fell from over 20 percent down to 10 percent, and in the first three months of 1983 the economy grew at an annual rate of 2.6 percent. In the second three months of the year the economy grew at a rate of 10.9 percent. In 1983, inflation was down to an annual rate of only 3.2 percent — down from 10.3 percent in 1981. And for last half of 1983 and into 1984 the economy's growth rate hovered between 5 and 7.4 percent. The medicine that so many had disliked had worked. Joy had spread to Wall Street. The Dow Jones Industrial Average had bottomed at 784 in March 1982, and, anticipating recovery, it had climbed to a new high of 1,200 in April 1983. On election day in early November 1984 unemployment was down to 7.2 percent, and Reagan that month won his re-election: 58.8 percent of the vote against 40.6 percent for the Democratic Party's nominee, Walter Mondale. Mondale won only in his home state, Minnesota.

Budget Deficits

Reagan's program for economic recovery included lowering the federal income and capital gains taxes and eliminating a lot of government regulations. And big in this was his desire for reduced government spending. He wanted to end deficit spending. He wanted balanced budgets, while he vowed to maintain a "safety net" for the poor, the disabled and the elderly, and he vowed not to cut Social Security. Reagan's Director of the Office of Management and Budget, David Stockman, was with Reagan in what he, Stockman, called "the bloated American welfare state."

But Stockman had a problem with Reagan's calculations. Stockman didn't agree that Reagan's tax cuts were stimulating an economic growth and resulting revenues that would be enough to balance the budget. According to Stockman the only way to reduce projected deficits was "by cutting more spending or raising some new revenue." "That," he said, "is the strategic choice we face." (Stockman, p 274)

The budget issue was not to be resolved during Reagan's presidency. Reagan had inherited a budget deficit that was 2.5 percent of the economy, with an interest payment rate on the national debt at $69 billion. When Reagan left office in January 1989 the budget deficit had increased to 5 percent of the economy. Budget deficits had contributed to a larger national debt. The national debt had been at 32.5 percent of GDP when he took office – the lowest since World War II. It was at 43.8 percent when he left office. In an interview with the writer Lou Cannon in 2001, Reagan would say it was the "greatest disappointment" of his presidency.


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