Reaganomics

Although the Carter administration undertook a number of reforms aimed at freeing markets from excessive regulation, it was Republican Ronald Reagan, first elected in 1980, who attempted to alter the basic ideological thrust of the postwar era. Reagan put it simply in his inaugural address: “Government is not the solution to our problems; government is the problem.” His economic policy, often referred to as “Reaganomics,” had several elements. One was the reduction in taxes, particularly the reduction of marginal rates (the rates applied to additional income). The Reagan administration claimed that such cuts were necessary to create incentives to work and invest. Its critics complained that such cuts were a giveaway to the rich.

Reagan, moreover, wanted to alter budget priorities radically, increasing defense expenditures and reducing civilian expenditures. He had little trouble increasing defense spending. Between 1980 and 1983, defense expenditures rose from $134 billion to $210 billion, but spending cuts on the civilian side were harder to get through Congress, although some were made. Between 1980 and 1983, all spending other than national defense increased from $457 billion to $598 billion. Prices were rising over the same period (the rise in civilian expenditures was 27 percent, while the rise in the GNP deflator was 19 percent), and certain areas of the civilian budget were cut in nominal terms (the budget category of “education, training, employment, and social services” fell from $32 billion to $27 billion). On the whole, however, it was extremely difficult to make cuts, particularly after Reagan’s initial “honeymoon” with Congress ended. Reagan’s budget director, David Stockman, was in charge of proposing the cuts to be made and selling them to Congress. His book, The Triumph of Politics (1986), describes in case after case how difficult it was to cut programs, even those having little justification, once the affected interests and their allies in Congress and the government bureaucracy were alerted for battle.

The 1988 election of George H. W. Bush promised a slowdown of the Reagan policies, especially on the regulatory front. Bush did say, in his speech accepting the Republican nomination, “Read my lips: no new taxes,” thus laying claim to the most popular part of the Reagan legacy. Two years later, however, under intense pressure to do something about the mounting federal deficit, Bush accepted some tax increases. The resulting loss of political capital from breaking a clear and dramatic promise were devastating.

In 1992, Democrat Bill Clinton was elected president after promising to reverse the Reagan-Bush approach by raising taxes on the wealthy, spending more on the poor and on urban areas, spending less on defense, and increasing the federal government’s role in health care. After his health initiative failed to get through Congress and a conservative Congress was elected in 1994, however, he retreated from attempts to expand the welfare state. In 1996, he became the first Democrat since Franklin Roosevelt to win reelection, but in the course of the campaign, he supported legislation that limited welfare and that in some cases terminated benefits, a far cry from his initial goal of preserving and extending the New Deal. In 2000, George W. Bush, a conservative Republican, won a narrow and controversial election. His first legislative victory, a substantial tax cut, showed that the conservative tide had not yet run its course.

In 2008, however, Barack Obama, a liberal Democrat, was elected president. Placed in a strong position to push a liberal agenda by the financial crisis of 2008, Obama was able to win approval for the American Recovery and Reinvestment Act of 2009 (a major spending bill).