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| '''Reaganomics''' and '''voodoo economics''' are names for or derivatives of ], a flawed, politically motivated ] doctrine embraced by ]. This doctrine is fundamentally flawed, its application particularly during the presidency of Ronald Reagan created large federal ]s, which, along with other problems caused by Reaganomics, have caused harm to the economy of the ], even up to the present day. Supply-side economics was created by no great minds, it involved no ] or ], instead it is composed of the half-baked ideas of ] ], ], and rejected ]. Among academics, it is rejected. Renowned economic mind ] declared "Or, to put it another way, the supply-siders are cranks", "they are wrong", "So the group that Bartley assembled and promoted was something stranger and wilder than a mere collection of conservative economists; more like a cult or a sect than a simple school of thought." Author and economics professor ] declared that supply-side economics was "a quite deliberate redirection of income and wealth from the poor to the rich" and declared "That program is as implausible in its economic assumptions as it is inequitable in its impact." Former supply-sider Michael K. Evans stated plainly that "the underlying dynamics ... doomed the Reagan program to failure." | |||
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| ==Economic Thought During and before Regan's Presidency== | |||
| The term '''''Reaganomics''''', a ] of ''Reagan'' and ''economics'', has been used to describe, and decry, the ] policies of ] ] during the ]. Reagan assumed office during a period of high ] and ], which had largely abated by the time he left office. It continues to be a matter of contentious political debate to what extent this was caused by Reagan's fiscal policies and to what extent it was due to external factors. | |||
| To begin to discuss Reaganomics, one must first have a clear idea of mainstream economic thought prior to the presidency of Mr. Reagan. | |||
| ===Keynesianism=== | |||
| Its comprehension begins with a single man, John Maynard Keynes. Keynes, a British economic theorist, lived between 1883 and 1946 during which time he devised theories that would revolutionize world economic thought and policy. His career in the public eye began during the ], when he worked for the British treasury arranging foreign loans and acquiring foreign ], the area in which he made his reputation. In 1919, Keynes, then a very high ranking treasury official, was sent to ] as Britain's financial representative due to his "unique combination of the guts of a burglar and the intellect of a first-class economist" However, he was quickly discouraged by the process and resigned from his position in the treasury and published an attack on the settlement entitled '']''. The book was, in large part poorly received because of its attacks on prominent political figures, however, its true purpose was to show that the ] imposed on ] were "utterly unrealistic" because of the weak German economy and the low likelihood of high Germany being able to ] large amounts of goods and that they would harm the global economy. Next, in 1926, Keynes published ''The End of Laissez-Faire'' questioning the economic situation in the ], and, in large part, large ]. | |||
| Then, in 1936, came '']'', it was " a difficult, technical treatise". but can be simplified into a few simple concepts, that the world at the time(during the depression) did not have a problem with the ], or potential supply, neither did it lack for demand for products. Simply put "Producers were eager to produce, consumers were eager to consume." Therefore, Keynes proposed that the problem was a general lack of money. To restart the economy, he proposed government intervention, low ] and government spending to employ workers in public works projects. This, however entailed ], an activity despised by economic minds of the time. | |||
| ===An Explanation of Reaganomics=== | |||
| In a ], ] ] Briefing for Members of the Deficit Reduction Coalition, Ronald Reagan said of Reaganomics: "America astonished the world. ], ], call it what you will — I noticed that it was even known as Reaganomics at one point until it started working — all of it is fast becoming orthodoxy. It’s not just that ] or ] or ] have won ]s; other younger names, unheard of a few years ago, are now also celebrated." | |||
| Keynes continued to work in economics until his death. In the end, ], the combination of all of Keynes' economic thought, is simple. When individuals and businesses try to hold onto more cash, due to economic uncertainty and loss of confidence as well as other factors, they do so by minimizing spending. However, if multiple groups decide to spend less at the same time, everyone's ] falls. So, no one actually accumulates any more money, and due to fallen income, confidence declines and the whole process starts anew. This cycle will, of course, create a recession. However, identifying the cause of recessions is less than half the battle, so, Keynes proposed a solution. In the words of Paul Krugman, "So the usual and basic Keynesian answer to recessions is a ]." However, Keynes stated that sometimes monetary expansion would prove ineffective, in which case he proposed that the government spend on ] projects to restart the economy(as discussed in the previous paragraph). | |||
| Reaganomics, free market economics and, specifically, supply-side economics have become highly politicized terms. Most will agree that Reaganomics is based on his fundamental belief in the free market, with two key ideas being the subject of much of the "Reaganomics" debate: Reagan's desire to lower taxes and to have a smaller government. Some opponents and supporters of Reagan's economic policies quote Reagan's comment that "government is the problem" as one way to appreciate this general view. On the other hand critics of Reaganomics as policy rather than articulated ideology will emphasize the fact that in fact the role of government in the economy expanded because of the significant increase in defense spending under Reagan and a significant increase in protectionism (the most significant innovation being the forcing of Voluntary Export Restraints upon the Japanese auto industry). | |||
| ===Challenges to Keynesianism=== | |||
| Free market, or classically liberal (before the 1960s "classical liberal economics" was synonymous with "free" trade economics) economists, based on the tradition from ], stress the importance of free trade based on voluntary work specialization, while the role of government in national and international policy should be focused on removing barriers to open trade. The opponents of this view go back to the opponents of Adam Smith and his followers. Smith's free market principles, put forth in the ] in 1776 were attacked most famously by Karl Marx, throughout his numerous works, perhaps most notably ] co-authored with Frederich Engels. In the 20th century, most Western economics scholars have preferred to criticize Adam Smith's tradition with the works of ] who argued that free market economics does not offer solutions to address rapidly changing market forces in what they refer to as cycles of boom and bust. | |||
| Keynesian economics played a major role in policy until the Presidency of Reagan, however, it faced critics from the beginning from the far left, but primarily from ]s because of John M. Keynes's personal life (he was ]) and because of his theories advocating government intervention in the economy. Therefore, conservatives sought to destroy and replace Keynesianism. | |||
| Who then would become the leader of a conservative economic movement? ], who created the economic doctrine of ]. Friedman's argument was that active monetary policy did more harm than good. He substantiated this claim by showing that the time frame for the effect of monetary policy changes is extremely variable. Instead of an active monetary policy, Friedman advocated a steady rate of monetary expansion of three or four percent each year. After the attacks of Friedman and others, Keynesianism had been essentially destroyed by 1980. | |||
| Others note that Adam Smith himself introduced so many qualifications of the basic principles of free market economics that, according to Mark Blaug, author of ] these qualifications would be grist for many "socialist orations." To take one example, when Smith used the term "]" in the Wealth of Nations, the context was that he was describing businesses deciding to prefer domestic investment to foreign investment -- a rather mercantilist result of the "natural" workings of the market. ("By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an 'invisible hand' to promote an end which was no part of his intention." -- Note in this context, that "end" is the promotion of ] over ] industry... (source: ], U. of Chicago Press, 1976, Book IV, Ch. 2, p. 477) A perfect 10 for 10 inspection of Principles of Economics Textbooks finds that the words "preferring the support of domestic to that of foreign industry..." are left out and only the part about seeking to "produce the greatest value" is left in to the elucidation of the "invisible hand" concept.) | |||
| In the resulting confused intellectual economic environment, supply-siders had the potential to rise to power, but they still needed one thing, an economic crisis to give them an opportunity to present their theories to the public. That came too, in the ]. In 1973 and 1974 the country entered a recession, the economy recovered, but productivity ceased to rise as rapidly as before. According to Paul Krugman, US productivity between 1945 and 1973 grew 2.8% each year, however between 1973 and 1994 productivity grew at a rate of less than 1% a year. | |||
| During the Great Depression, ] saw the vast numbers of unemployed workers and suggested that the government should "prime the pump" through government borrowing for job creation programs. During the ], the ] and other programs put this theory into action. Keynesian economists justified this government spending, by claiming through the multiplier effect -- one employed worker's salary will benefit 5 other workers etc. Critics argued that government, being a political entity, is an inept distributor of economic resources. | |||
| Although few would have the gall to suggest that the US faced no economic problems after 1970, economists differ widely on why. A strict monetarist would blame ] caused by excessive monetary expansion on the part of the ]. Robert Lekachaman blames ] for not raising taxes in January 1966 thus creating inflation, ] for raising oil prices increasing that inflation, environmental damage caused by decades of lacking ], and unsafe working environments. Paul Krugman blames lack of technological innovation, and the entry of the ] into the workforce. However, the important fact is that growth slowed, and that unlike Krugman and Lekachaman, the general public blamed something else: ] and business regulation. | |||
| The most significant "proof" of the validity of Keynes' remedies for a depression (high government spending) was in Hitler's Germany where the depression ended in 1935 even before Germany re-armed. The huge public works program including the building of the Autobahns led to the end of high unemployment. When Keynes' ] was published in German in 1936, Keynes wrote a preface in which he explicitly pointed to the building of those Autobahns as demonstration of the validity of his approach. | |||
| ==Birth of Supply-Side Economics== | |||
| One school of critics, the ], argued that government can better stimulate the economy by manipulating the money supply. When the economy is weak, the monetarists argued that the government should lower interest rates and increase the money supply. This additional money will seek businesses and start-ups to invest in, via banks and other non-governmental means. The negative effect of an increased money supply is inflation. | |||
| Now, with the circumstances that gave rise to the growth of the supply-siders in mind, in it is time to see who they were, where they came from, and what they thought. First of all, it is important to know that the supply-side movement was not an ] movement. Second, supply-side economics is not a strengthened form of monetarism. Third, supply-siders were and are" a small group that has never found respectability even within mainstream conservatism". | |||
| ===Journalist Supply Siders=== | |||
| The supply-siders were, instead of academics, ]s, ]s, and employees of ]s or consulting firms. The group who were probably the most influential were, the journalists, particularly ] and ] at the '']''. Bartley, who assumed control of the Journal's editorial pages in 1972, used them as a way to spread the ideas of supply-side economics all over the world with the aid of Wanniski. Another important supply-sider was ] of '']''. Certainly, these three men alone could not have created an economic theory, even a flawed one, that seized control of a nation, and yes there were others, including two with academic backgrounds, ] and ]. | |||
| ===Arthur Laffer=== | |||
| After the ] of the 1970s, a new economic phenomenon took hold: ]. Stagflation combined unacceptably high unemployment with significant inflation. Previously, the economy experienced either high unemployment and low inflation =- or even sometimes deflation, or low unemployment and rising inflation. The economy had not experienced both unacceptably high unemployment and unacceptably high and rising inflation at the same time. Stagflation meant that if one followed the Keynesian model to stimulate the economy, the government must intervene via new spending programs. The new spending is to be financed either by new taxes or borrowing. On the other hand, if one followed the monetarists, the government had to choose either to raise interest rates to tame inflation and cause further unemployment, or lower interest rates to stimulate the economy and cause further inflation. | |||
| Arthur Laffer earned a Ph.D. from the ], the home of Friedman and other monetarists, and became a professor at the ], however according to Paul Krugman, he "has always had a penchant for playing to the crowds" and he "has never tried to break into the world of conventional academic research ". Laffer has made many equations, curves, etc. but all of them are oversimplified and meaningless. He was brought into the public eye when he developed an equation that he claimed could predict the output of the nation. He became acquainted with Bartley from his writings about currency devaluation between 1971 and 1973. Then he famously created his "silly ]" or perhaps more accurately laffable curve(see figure 1). To make a long story short, Laffer published mainly articles in newspapers instead of professional journals, and spent his time devising overly simplistic, flawed economic devices. | |||
| A new school of thought gradually arose. It argued that the competitive nature of ] (free of government regulation) made markets the best means to distribute economic resources. Businesses have to be innovative and create wealth to survive. This anti-government view saw businesses as the "goose that lays the golden eggs" and government regulation and taxes as "strangling the goose". Reagan partially agreed with this anti-government view and sought to stimulate the economy by lowering income taxes and targeting some of the tax cuts towards income from capital. Though paying lip service to reducing government spending, because of the Reagan Administration's commitment to raising defense spending, the combination of tax reductions and spending shifts within the federal government meant that much of the changes were to be financed by borrowing. Reagan argued that lowering taxes would revive the economy. When the economy revived, the increased tax revenues would be used to help reduce the deficit. Excluding ], he argued for broad cuts in government spending, which he viewed as a drain on the economy. Reagan raised military spending, however, as he saw the nation's defense as an integral government function, especially in regard to the ]. | |||
| ===Robert Mundell=== | |||
| The disagreement between "Reaganomics" and ] (a modern economic theory which emphasizes that free markets self-regulate most efficiently and optimally) becomes clear with understanding Reagan's exceptional military spending. While taxes were cut and thus endorsing that element of neoclassical theory, massive military spending in the Reagan era resulted in a massive budget deficit. The 1983 deficit reached $207.8 billion, equivalent to 6 % of the economy, the highest level since the World War II era. This emphatic deficit spending violates what some people believe is neoclassical economic theory's emphasis on a balanced budget -- though in fact, most proponents of conservative economics (James Buchanan, Milton Friedman for example) emphasized balanced budgets as a means to an end -- the end being restraining government spending. Friedman in particular is quoted as saying he would rather have a $200 billion government budget financed by deficits than a $400 billion government budget fully balanced. | |||
| Robert Mundell, however, would appear different, an economist with a reputation based on his work dealing with the relationship between the Canadian and the US dollar. Mundell also served as a professor at the University of Chicago, and Columbia, however, after 1970 "Mundell veered off from conventionality". It was, of course, after 1970 that Mundell became associated with supply-side economics and became the theory's "intellectual mascot", but he did not play a role in molding the ideas of supply-side economics. | |||
| ===Other Supply-Siders=== | |||
| Absent budget balance, private actors will rationally expect, as explained by the ], for taxes to increase sometime in the future to offset this deficit, and will end up saving enough to offset any increase in consumption resulting from government spending. This argument leads many to argue that deficits represent TAX LAG. Furthermore, deficit spending is problematic under neoclassical theory because even if the ] lowers the ] to keep interest rates low and combat this "]" effect, the rational public will see the lack of credibility with this merely fiscal-policy-reactionary monetary policy. | |||
| There were, also a few other supply-siders, ], who played quarterback for the ] for thirteen years then was elected to ], and his aide, ]. In addition, ] was a supply-sider. Gilder, an author and journalist, wrote a book, ''Wealth and Poverty'', in which he argued that ] were made by God to stay at home, and men were intended to work, from this, he drew the conclusion that one of the major causes of poverty was women who worked, the other was that ] encouraged ] not to work. | |||
| ===Principles of Supply-Side Economics=== | |||
| The historical experience of Reaganomics is of a leveling off of non-defense spending after decades of increasing non-defense spending prior, increased defense spending, and large federal deficits. Nobel economist, ], has pointed to the number of pages added to the ] each year as evidence of Reagan's anti-regulation presidency (the Register records the rules and regulations that federal agencies issue per year). The number of pages added to the Register each year declined sharply at the start of the Ronald Reagan presidency breaking a steady and sharp increase since 1960. The increase in the number of pages added per year resumed an upward, though less steep, trend after Reagan left office. In contrast, the number of pages being added each year increased under Ford, Carter, H.W. Bush, Clinton, and others. | |||
| What then were the beliefs of the supply-siders? "First, demand-side policies, especially monetary policies, are completely ineffective. Second, the incentives of reduced taxation are very large". From these basics principles emerged most of their beliefs, that supply would create its own demand, and that money didn't really matter. But, there strongest belief was that tax increases inflict terrible harm on the economy, and that tax cuts do enormous good. How then would supply-siders explain historical economic phenomena such as the ]? According to the supply-siders one single tax bill is responsible, the ]. Apparently this single from which "the effective tax increase was only about 2.5 percent." caused the Great Depression, which was responsible for 25% unemployment, billions of dollars lost, and a tremendous stock market crash. Seems pretty presposterous doesn't it? Well, essentially all economists, including Robert Mundell, agree that the supply-side analysis of the depression is utterly ridiculous. | |||
| However, the supply-siders made even more incredible claims, particularly that the application of their theories (namely drastically cutting taxes) would not cause budget deficits, because the resulting economic boom would drive productivity up enough that revenue from taxes would rise. They also claimed that in the event that deficits were created they would have no negative effects. | |||
| ===History=== | |||
| The large, across the board tax cuts initiated by Reagan at the start of his administration were based on principles from ] or the ]. This was contrary to the ] of traditional ], which tries to bring the economy to its existing full capacity by means of increasing demand, primarily through ]. In the ], many on the right became critical of Keynesianism, which they claimed brought higher inflation without any gains in employment. However, true Keynesianism, which called for deficit spending during recessions and surplus saving during periods of prosperity, was rarely implemented in its totality in American politics, usually because political considerations overshadowed fiscal policy. | |||
| ==Reagan's Election== | |||
| The early Reagan tax cuts of August 1981 embodied Reagan's supply-side economics. Economist Robert J. Gordon writes in his textbook ''Macroeconomics'' (9th ed. 2003, p. 392) that this was "the most dramatic shift in ] of the postwar era not related to the financing of wars." | |||
| With the election of Ronald Reagan in 1980, the supply-siders finally got an opportunity to put their theories in to practice. During the campaign Reagan said that through supply-side economics, he would be able to increase spending on defense while cutting taxes, but still retain a balanced budget. This was nonsense as Ravi Batra declared, "Anyone with a semblance of common sense knew that it was impossible to do what Reagan promised." Thus George Bush deemed the ideas of Reagan to be "voodoo economics" | |||
| However, despite the fact that his ideas on economics were nonsense, Reagan won the 1980 election, according to Robert Lekachaman because of his famous comment "Ask yourself if you are better off than you were four years ago." Then, on ], ], Reagan was inaugurated, and the worst eight years ever of American economic policy began. However, supply-side policies had been polluting America before that, since 1978 and the attempt to pass the ](a proposed massive tax cut that luckily died in a conference committee). | |||
| The ], which had broad bipartisan support, partly implemented the principles of supply-side economics in a more moderate way. It simplified the tax code and eliminated tax loopholes. | |||
| Unfortunately Kemp-Roth's death did not prevent Reagan from passing his own tax cuts which "mostly benefitted very high income families". Simply put, the Reagan tax cuts were a disaster for America. Paul Krugman puts it very simply, "Reagan cut taxes for the rich and increased military spending... He promised the economy would grow so much the deficit wouldn't increase, but he was wrong." As a result, social spending was cut, harming the poor, the "the victims of brutal social policy" as Robert Lekachaman calls them. | |||
| The belief by some proponents of Reaganomics that the tax rate cuts would more than pay for themselves was influenced by the ], a theoretical taxation model that was particularly in vogue among some American conservatives during the 1970s. ] model predicts that excessive tax rates actually reduce potential tax revenues, by lowering the incentive to produce. Federal Government tax revenues did increase significantly following the tax cuts of the Reagan years; it was the dramatic increase in spending that produced the budget deficits of that era. | |||
| ==Effects of Reaganomics== | |||
| Before Reagan's election, Reaganomics was considered extreme by the moderate wing of the ]. While running against Reagan for the Presidential nomination in ], ] had derided Reaganomics as "voodoo economics". Similarly, in ], ] had severely criticized Reagan's proposal to turn back a large part of the Federal budget to the states. After the Reagan election, however, most Republicans endorsed Reaganomics, including Bush, who became Reagan's Vice President. | |||
| How could Reagan possible justify this "undeclared war against blacks and Hispanics, welfare clients, women, children, and blue-collar workers"? Growth. | |||
| ===Savings and Growth=== | |||
| He claimed that low taxes on the ] would benefit everyone by encouraging "savings, investment, and economic growth." This claim is a lie, a deceitful, politically motivated lie. First of all saving is not increased by lower taxes on the wealthy. To prove this, consider the following information, in 1980 the top-bracket income tax rate was 70%, and the personal savings rate was 8.2%.In 1985, the income tax rate on that same group was 50%, but saving was less, 6.9%. Furthermore, in 1988 the top-bracket was taxed at a measly 28%, but saving declined again to 5.2%! In addition, lower taxes on the wealthy certainly do not encourage increase ], as evidenced by figure 2. | |||
| Well, what about growth? This is aptly summed up by Paul Krugman "Growth in the ] was slower than in the ] as a whole .... By no stretch can the growth performance in the 1980s be called exceptional, or even satisfactory." So, low taxes on the rich neither encourage savings, promote investment, or lead to growth. | |||
| ===Support for Reaganomics=== | |||
| A study from the ] (a ] ], which supports many of the premises that lie behind Reaganomics) said: | |||
| ===Justification=== | |||
| *Real economic growth averaged 3.2 % during the Reagan years versus 2.8 % during the Ford-Carter years and 2.1 % during the Bush-Clinton years. | |||
| Certainly, then, Reaganomics did not help the ] or ], but his theories did aid the rich, though at a cost to the other two groups. The presidency of Reagan, resulted in "the rich becoming far richer, the poor a lot poorer, and the middle class going nowhere in particular." The rich did indeed get far richer, however, even within the rich, the richer a person was to begin with, the he or she became. Did this bother conservatives? Not at all, they felt no qualms about substantially cutting taxes on the ultra-wealthy whose income was drastically rising, while the poor suffered. Indeed, I suppose they misguidedly believed that it was God's will. ], declared, "Material wealth is God's way of blessing people who put Him first." So in the end, I suppose that, society cannot complain, after all conservatives just hold a different value system, so those of who are not blessed by God with a seven figure income should just pray harder. | |||
| ===Deficits=== | |||
| *Real median family income grew by $4,000 during the Reagan period after experiencing no growth in the pre-Reagan years; it experienced a loss of almost $1,500 in the post-Reagan years. () | |||
| However, cutting taxes on the wealthy did do something to harm everyone, even God's chosen few, it created ]s. A deficit is simple, it is the result of the government spending more money than it takes in. Deficits, are the most damaging, and long lasting effect of Ronald Reagan. Of course, Reagan was not the first President to run a deficit, most have, but Reagan's deficits were far larger, in 1982, the first year with a Reagan budget, the deficit increased more than $49,004,000,000, a 62.1% increase from the previous year. Now of course, supply-siders claimed that before too long, the increase in growth generated by their policies would eliminate the deficit, however, in 1989(the last Reagan budget year), the deficit was $161,196,000,000, $82,560,000,000 more than 1981(104.6%). All in all, Reagan deficits amounted to $1,420,728,000,000 more than 47 times as much money as was lost in the ]! | |||
| How did supply-siders justify the deficit? They claimed that increased ]s and investment would finance the deficit; however, we have already determined that savings and investment fell during the Reagan years. In other words, the deficit was a BIG problem. Because investment did not rise so, money to finance the deficit was money that otherwise could have been invested in new factories, homes, and equipment, money that would have led to ]. Hobart Rowen declared the deficit to be more "deep, corrosive, and enduring" than any other of America's "self-inflicted wounds" from Johnson onward. | |||
| Laffer and Reagan were vindicated by the results of the Reagan tax cuts. Real per capita GDP increased at an annual rate of 2.6% from 1981 to 1989, after languishing at a 1.6% rate during the Carter years of 1977 to 1981. Citation: Louis Johnston and Samuel H. Williamson, "The Annual Real and Nominal GDP for the United States, 1789 - Present." Economic History Services, March 2004, URL : http://www.eh.net/hmit/gdp/ | |||
| However, the $1.4 ] deficit of Reagan was not the only economic harm he caused, in addition, the government postponed necessary long-range spending estimated by Paul Krugman at $100 billion, as well as various liabilities accumulated because of Social Security and Medicare estimated by Paul Krugman to be about $300 billion. In addition to these, there is the money lost due to the Savings and Loan crisis. | |||
| Reagan's supply-side model changed the paradigm of government involvement in the economy. Keynesian economists were at a loss to explain why the aggregate demand increases of the 1970's did not result in improved national economic performance. Likewise, they could not explain how to reverse the shift in the ]. The Reagan-Laffer-Volcker-] model of improving economic performance by reducing government involvement in the economy has since gained wide currency. President Clinton ran as a "New Democrat": fiscally conservative and trade-friendly. Estonia, Latvia, Slovakia, Serbia, Romania, Georgia, Ukraine, as well as Russia and Iraq have variations of the flat tax. Governor ] of ] cut personal income taxes in 2003 "to spur growth and investment". | |||
| ===Savings and Loan Crisis=== | |||
| The President Reagan Information Page details numerous economic statisics from the Reagan era. Highlights include the reduction of inflation, poverty and unemployment; the increase in jobs, incomes and real wealth; increase in individual income tax receipts and overall federal receipts and an analysis of the Reagan spending proposals on the federal deficit. | |||
| Starting during the 1970s, ]s began to have to pay very high interest rates on deposits, without being able to increase interest dramatically on their investments(]). The Reagan administration then ] the industry. Savings and Loans then began to pay far higher interest rates than before, many S&Ls then became ], but were not shut down because the ] did not have sufficient funds to shut them down. At the same time, S&Ls began to use creative accounting practices(similar to the ones made famous by ] in today's world) to inflate their assets and profits. Then, on ], ], S&Ls were allowed to sell ] which generated partially tax-free interest, this policy aided the wealthy, but it also allowed S&Ls to continue on, although it did more harm than good. Other policies, such as NOW accounts allowed the doomed S&L industry to carry on. However, by 1989 the industry collapsed costing the government an extra $100 billion that can reasonably be blamed on Regan and deregulation. In addition, other problems in the financial system caused by Reagan may cost the government, according to Paul Krugman, up to another $100 billion. | |||
| ==Long Range Impact== | |||
| ===Replies to this Defense=== | |||
| Reagan, a genius responsible for prosperity, a disciple of a flawed economic theory, or a vindictive man determined to steal from everyone but the fantastically wealthy for the advantage of the privileged few? Certainly not the first. He created enormous federal deficits probably around $2 trillion if you include the S&L crisis, etc. He contributed to a greater disparity in income distribution among the American people. Finally, he set back US economic growth from 3.4% to 2.1%. Perhaps, he thought his policies were for the greater good of America, but they certainly weren't. His election caused no 'morning in America"The flawed theories to which he adhered devastated the American economy. Their general effect was an unconditional war on poverty, but instead of attacking that problem, his policies attacked those people who were in poverty | |||
| The arguments quoted above from a show the importance of not drawing conclusions from a cursory analysis of a small subset of the available data. The study calculates the average real GDP growth during a pre-Reagan period (1974-81), Reagan period (1981-89), and post-Reagan period (1989-95). The averages from the are 2.8, 3.2, and 2.1 %, respectively. Updating them from , the averages are 2.97, 3.55, and 2.37 %, respectively. In looking at all of the data, however, it appears that the economy has been following a 10-year cycle during the past several decades. There were recessions in 2001, 1990-91, 1980-82 (a double-dip recession), 1974-75, 1969-70, and 1960-61. Hence, except for the recession in the mid 70s, the recessions have come at the beginning of each and every decade. For this reason, it makes more sense to measure the average growth in GDP over 10-year periods since 1960. Doing this gives average GDP growths of 4.21 % (1960-70), 3.23 % (1970-80), 3.28 % (1980-90), and 3.29 % (1990-2000). Hence, this measure suggests that GDP growth was stronger during the 60s but was about the same in the 70s, 80s, and 90s. While not perfect, these periods more closely measure the growth during full economic cycles than those used by the Cato study. | |||
| ==References== | |||
| An even more surprising result comes from looking more closely at real median family income. The Cato study states that it experienced no growth during the pre-Reagan period, grew by $4,000 (1994 dollars) during the Reagan period, and shrunk by almost $1,500 dollars during the post-Reagan period. Looking at , real median family income did grow a mere $55 (2003 dollars) from 1973 to 1981, grew $5,740 from 1981 to 1989, and shrank $335 from 1989 to 1995. However, Figure 2 in the Cato report shows the reason for this. During the Reagan period, the author is measuring very nearly from a trough to a peak in family earnings. This means that the pre-Reagan period is measuring TO a trough and the post-Reagan period is measuring FROM a peak. In fact, real median family income has been reaching a peak about every ten years since about 1969. It reached peaks in 2000, 1989, 1979, and 1969. Measuring the growth every ten years since 1969 gives growths of $5,426 (1969-79), $3,025 (1979-89) and $4,887 (1989-99). Incidentally, the growth from 1959 to 1969 was $11,539. Hence, over the four decades since 1959, this measure gives the growth of real median family income during the Reagan decade to have been the lowest, not the highest. | |||
| *Batra, Ravi. The Great American Deception. John Wiley & Sons, Inc., 1996 | |||
| *Evans, Michael K. The Truth About Supply-side Economics. New York: Basic Books, 1983 | |||
| Much of the ] (telecoms, break up of AT&T, air travel etc.) that many claim helped to reinvigorate the American economy was initiated in the ] under President ] and received broad bipartisan support. For example, ] of the airlines was initiated under the leadership of ] in ]. It can also be argued that liberalization has increased the amount of insecurity suffered by the average citizen, while encouraging wage cuts, the decline of unionization, the rise of profits, and the like. | |||
| *Lekachaman ,Robert . Greed is not Enough: Reaganomics. New York: Pantheon Books, 1982 | |||
| *Lekachaman, Robert. The Age of Keynes. New York: Random House, 1966 | |||
| Reagan's ] policies were accused of pushing both the international transactions current account and the federal ] into ] and led to a significant increase in ]. Advocates of the Laffer Curve contend that the tax cuts did lead to a near doubling of tax receipts ($517 billion in 1980 to $1,032 billion in 1990), so that the deficits were actually caused by an increase in government spending. However, shows that revenues had likewise doubled (or better) during every decade since the Great Depression. They went up 506% during the 40's, 135% during the 50's, 108% during the 60's, and 168% during the 70's. At 96 %, they nearly doubled in the 90s as well. Furthermore, according to , the receipts from individual income taxes (the only receipts directly affected by the tax cuts) went up just 91 % during the 80's. Meanwhile, receipts from Social Insurance, which is directly affected by the FICA tax rate, went up 141 %. This larger increase was largely due to the fact that the FICA tax rate went up 25% from 6.13 to 7.65 % of payroll. Reagan also signed into law six other tax increases from 1982 through 1987, (The Tax Equity and Fiscal Responsibility Act (TEFRA), The Highway Revenue Act, the Deficit Reduction Act of 1984, the Consolidated Omnibus Budget Reconciliation Act of 1985, The Tax Reform Act of 1986, and the Omnibus Budget Reconciliation Act of 1987). Hence, the increase in revenues in the 80s was no larger than other recent decades and a portion of that increase was arguably due to tax ''increases'' enacted during the Reagan administration, not from stimulus provided by supply-side cuts. | |||
| *Krugman, Paul R. Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations. New York: W.W. Worton, 1994 | |||
| *Rowen, Hobart. Self Inflicted Wounds. New York: Random House Inc., 1994 | |||
| In addition, old-fashioned ] economics has argued for many decades that any ] helps "pay for itself" by increasing ] and ] and lowering ]. These forces automatically raise ] revenues and lowers transfer payments such as unemployment insurance. No supply-side effects are needed to understand this story. David Stockman, a key player in selling the Reagan administration's supply-side "pay for itself" claims to Congress, admitted in a 1981 Atlantic Monthly article in that the 1981 tax cut "was always a Trojan horse to bring down the top rate" for the wealthy. | |||
| *US Bureau of the Budget. The United States Budget in Brief Fiscal Year 1990. Washington DC: US Government Printing Office, 1990 | |||
| *"A Laffer Curve." 25 Feb 2004 <http://www.econ.rochester.edu/eco108/ch8/micro08/sld116.htm> | |||
| The ] had been initiated by ] chairman ] before Reagan assumed office. An anti-inflation ] program had been begun by Fed Chair Volcker in the latter days of the Carter administration, but it took awhile to take hold, so that inflation was still near a historical peak around the time of the ]. In fact, instead of helping restore prosperity, Reagan's budget deficits threatened Volcker's monetary policy by encouraging concerns that the U.S. government might decide to inflate away America's rapidly growing debt, and made it more difficult for the Federal Reserve to earn confidence in the sustainability of its low-inflation policies. | |||
| A ] occurred in ], his second year in office. Almost no one blames this on the Reagan administration. Instead, it was central to Volcker's campaign against ]: applying either the ] or the ] theory, high ] (almost 10 % of the labor force in both 1982 and 1983) undercuts inflation. Reagan benefited from the fact that Volcker relented (shifting to more expansionary ]) after inflation had largely been beaten. Further, the sudden fall in oil prices around 1986 helped the economy attain demand growth without inflation in the late 1980s. | |||
| The under the Reagan administration was an average of 2.1% per year, which is in the middle of the pack of twentieth-century Presidents. | |||
| == External links == | |||
| Proponent Think Tank Papers: | |||
| * | |||
| * | |||
| The President Reagan Information Page | |||
| * | |||
| PBS Commanding Heights: The Battle for the World Economy | |||
| * | |||
| Topics From WWW.EconLib.Org: | |||
| * | |||
| * | |||
| * | |||
| * | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
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Revision as of 00:03, 8 May 2006
Reaganomics and voodoo economics are names for or derivatives of supply-side economics, a flawed, politically motivated economic doctrine embraced by Ronald Reagan. This doctrine is fundamentally flawed, its application particularly during the presidency of Ronald Reagan created large federal deficits, which, along with other problems caused by Reaganomics, have caused harm to the economy of the United States, even up to the present day. Supply-side economics was created by no great minds, it involved no Adam Smith or John Maynard Keynes, instead it is composed of the half-baked ideas of reactionary politicians, journalists, and rejected economists. Among academics, it is rejected. Renowned economic mind Paul Krugman declared "Or, to put it another way, the supply-siders are cranks", "they are wrong", "So the group that Bartley assembled and promoted was something stranger and wilder than a mere collection of conservative economists; more like a cult or a sect than a simple school of thought." Author and economics professor Robert Lekachaman declared that supply-side economics was "a quite deliberate redirection of income and wealth from the poor to the rich" and declared "That program is as implausible in its economic assumptions as it is inequitable in its impact." Former supply-sider Michael K. Evans stated plainly that "the underlying dynamics ... doomed the Reagan program to failure."
Economic Thought During and before Regan's Presidency
To begin to discuss Reaganomics, one must first have a clear idea of mainstream economic thought prior to the presidency of Mr. Reagan.
Keynesianism
Its comprehension begins with a single man, John Maynard Keynes. Keynes, a British economic theorist, lived between 1883 and 1946 during which time he devised theories that would revolutionize world economic thought and policy. His career in the public eye began during the first world war, when he worked for the British treasury arranging foreign loans and acquiring foreign currencies, the area in which he made his reputation. In 1919, Keynes, then a very high ranking treasury official, was sent to Versailles as Britain's financial representative due to his "unique combination of the guts of a burglar and the intellect of a first-class economist" However, he was quickly discouraged by the process and resigned from his position in the treasury and published an attack on the settlement entitled Economic Consequences of Peace. The book was, in large part poorly received because of its attacks on prominent political figures, however, its true purpose was to show that the reparations imposed on Germany were "utterly unrealistic" because of the weak German economy and the low likelihood of high Germany being able to export large amounts of goods and that they would harm the global economy. Next, in 1926, Keynes published The End of Laissez-Faire questioning the economic situation in the 1920s, and, in large part, large corporations.
Then, in 1936, came The General Theory of Employment, Interest, and Money, it was " a difficult, technical treatise". but can be simplified into a few simple concepts, that the world at the time(during the depression) did not have a problem with the labor supply, or potential supply, neither did it lack for demand for products. Simply put "Producers were eager to produce, consumers were eager to consume." Therefore, Keynes proposed that the problem was a general lack of money. To restart the economy, he proposed government intervention, low interest rates and government spending to employ workers in public works projects. This, however entailed deficit spending, an activity despised by economic minds of the time.
Keynes continued to work in economics until his death. In the end, Keynesian economics, the combination of all of Keynes' economic thought, is simple. When individuals and businesses try to hold onto more cash, due to economic uncertainty and loss of confidence as well as other factors, they do so by minimizing spending. However, if multiple groups decide to spend less at the same time, everyone's income falls. So, no one actually accumulates any more money, and due to fallen income, confidence declines and the whole process starts anew. This cycle will, of course, create a recession. However, identifying the cause of recessions is less than half the battle, so, Keynes proposed a solution. In the words of Paul Krugman, "So the usual and basic Keynesian answer to recessions is a monetary expansion." However, Keynes stated that sometimes monetary expansion would prove ineffective, in which case he proposed that the government spend on public works projects to restart the economy(as discussed in the previous paragraph).
Challenges to Keynesianism
Keynesian economics played a major role in policy until the Presidency of Reagan, however, it faced critics from the beginning from the far left, but primarily from conservatives because of John M. Keynes's personal life (he was homosexual) and because of his theories advocating government intervention in the economy. Therefore, conservatives sought to destroy and replace Keynesianism.
Who then would become the leader of a conservative economic movement? Milton Friedman, who created the economic doctrine of monetarism. Friedman's argument was that active monetary policy did more harm than good. He substantiated this claim by showing that the time frame for the effect of monetary policy changes is extremely variable. Instead of an active monetary policy, Friedman advocated a steady rate of monetary expansion of three or four percent each year. After the attacks of Friedman and others, Keynesianism had been essentially destroyed by 1980.
In the resulting confused intellectual economic environment, supply-siders had the potential to rise to power, but they still needed one thing, an economic crisis to give them an opportunity to present their theories to the public. That came too, in the 1970s. In 1973 and 1974 the country entered a recession, the economy recovered, but productivity ceased to rise as rapidly as before. According to Paul Krugman, US productivity between 1945 and 1973 grew 2.8% each year, however between 1973 and 1994 productivity grew at a rate of less than 1% a year.
Although few would have the gall to suggest that the US faced no economic problems after 1970, economists differ widely on why. A strict monetarist would blame inflation caused by excessive monetary expansion on the part of the Federal Reserve. Robert Lekachaman blames Lyndon Johnson for not raising taxes in January 1966 thus creating inflation, OPEC for raising oil prices increasing that inflation, environmental damage caused by decades of lacking regulation, and unsafe working environments. Paul Krugman blames lack of technological innovation, and the entry of the baby boomers into the workforce. However, the important fact is that growth slowed, and that unlike Krugman and Lekachaman, the general public blamed something else: taxes and business regulation.
Birth of Supply-Side Economics
Now, with the circumstances that gave rise to the growth of the supply-siders in mind, in it is time to see who they were, where they came from, and what they thought. First of all, it is important to know that the supply-side movement was not an academic movement. Second, supply-side economics is not a strengthened form of monetarism. Third, supply-siders were and are" a small group that has never found respectability even within mainstream conservatism".
Journalist Supply Siders
The supply-siders were, instead of academics, journalists, congressional staffers, and employees of think tanks or consulting firms. The group who were probably the most influential were, the journalists, particularly Robert Bartley and Jude Wanniski at the Wall Street Journal. Bartley, who assumed control of the Journal's editorial pages in 1972, used them as a way to spread the ideas of supply-side economics all over the world with the aid of Wanniski. Another important supply-sider was Irving Kristol of The Public Interest. Certainly, these three men alone could not have created an economic theory, even a flawed one, that seized control of a nation, and yes there were others, including two with academic backgrounds, Arthur Laffer and Robert Mundell.
Arthur Laffer
Arthur Laffer earned a Ph.D. from the University of Chicago, the home of Friedman and other monetarists, and became a professor at the University of Southern California, however according to Paul Krugman, he "has always had a penchant for playing to the crowds" and he "has never tried to break into the world of conventional academic research ". Laffer has made many equations, curves, etc. but all of them are oversimplified and meaningless. He was brought into the public eye when he developed an equation that he claimed could predict the output of the nation. He became acquainted with Bartley from his writings about currency devaluation between 1971 and 1973. Then he famously created his "silly Laffer curve" or perhaps more accurately laffable curve(see figure 1). To make a long story short, Laffer published mainly articles in newspapers instead of professional journals, and spent his time devising overly simplistic, flawed economic devices.
Robert Mundell
Robert Mundell, however, would appear different, an economist with a reputation based on his work dealing with the relationship between the Canadian and the US dollar. Mundell also served as a professor at the University of Chicago, and Columbia, however, after 1970 "Mundell veered off from conventionality". It was, of course, after 1970 that Mundell became associated with supply-side economics and became the theory's "intellectual mascot", but he did not play a role in molding the ideas of supply-side economics.
Other Supply-Siders
There were, also a few other supply-siders, Jack Kemp, who played quarterback for the Buffalo Bills for thirteen years then was elected to Congress, and his aide, Paul Craig Roberts. In addition, George Gilder was a supply-sider. Gilder, an author and journalist, wrote a book, Wealth and Poverty, in which he argued that women were made by God to stay at home, and men were intended to work, from this, he drew the conclusion that one of the major causes of poverty was women who worked, the other was that Welfare encouraged black men not to work.
Principles of Supply-Side Economics
What then were the beliefs of the supply-siders? "First, demand-side policies, especially monetary policies, are completely ineffective. Second, the incentives of reduced taxation are very large". From these basics principles emerged most of their beliefs, that supply would create its own demand, and that money didn't really matter. But, there strongest belief was that tax increases inflict terrible harm on the economy, and that tax cuts do enormous good. How then would supply-siders explain historical economic phenomena such as the Great Depression? According to the supply-siders one single tax bill is responsible, the Smoot-Hawley tariff. Apparently this single from which "the effective tax increase was only about 2.5 percent." caused the Great Depression, which was responsible for 25% unemployment, billions of dollars lost, and a tremendous stock market crash. Seems pretty presposterous doesn't it? Well, essentially all economists, including Robert Mundell, agree that the supply-side analysis of the depression is utterly ridiculous.
However, the supply-siders made even more incredible claims, particularly that the application of their theories (namely drastically cutting taxes) would not cause budget deficits, because the resulting economic boom would drive productivity up enough that revenue from taxes would rise. They also claimed that in the event that deficits were created they would have no negative effects.
Reagan's Election
With the election of Ronald Reagan in 1980, the supply-siders finally got an opportunity to put their theories in to practice. During the campaign Reagan said that through supply-side economics, he would be able to increase spending on defense while cutting taxes, but still retain a balanced budget. This was nonsense as Ravi Batra declared, "Anyone with a semblance of common sense knew that it was impossible to do what Reagan promised." Thus George Bush deemed the ideas of Reagan to be "voodoo economics"
However, despite the fact that his ideas on economics were nonsense, Reagan won the 1980 election, according to Robert Lekachaman because of his famous comment "Ask yourself if you are better off than you were four years ago." Then, on January 20, 1981, Reagan was inaugurated, and the worst eight years ever of American economic policy began. However, supply-side policies had been polluting America before that, since 1978 and the attempt to pass the Kemp-Roth bill(a proposed massive tax cut that luckily died in a conference committee).
Unfortunately Kemp-Roth's death did not prevent Reagan from passing his own tax cuts which "mostly benefitted very high income families". Simply put, the Reagan tax cuts were a disaster for America. Paul Krugman puts it very simply, "Reagan cut taxes for the rich and increased military spending... He promised the economy would grow so much the deficit wouldn't increase, but he was wrong." As a result, social spending was cut, harming the poor, the "the victims of brutal social policy" as Robert Lekachaman calls them.
Effects of Reaganomics
How could Reagan possible justify this "undeclared war against blacks and Hispanics, welfare clients, women, children, and blue-collar workers"? Growth.
Savings and Growth
He claimed that low taxes on the wealthy would benefit everyone by encouraging "savings, investment, and economic growth." This claim is a lie, a deceitful, politically motivated lie. First of all saving is not increased by lower taxes on the wealthy. To prove this, consider the following information, in 1980 the top-bracket income tax rate was 70%, and the personal savings rate was 8.2%.In 1985, the income tax rate on that same group was 50%, but saving was less, 6.9%. Furthermore, in 1988 the top-bracket was taxed at a measly 28%, but saving declined again to 5.2%! In addition, lower taxes on the wealthy certainly do not encourage increase investment, as evidenced by figure 2.
Well, what about growth? This is aptly summed up by Paul Krugman "Growth in the 1980s was slower than in the 1970s as a whole .... By no stretch can the growth performance in the 1980s be called exceptional, or even satisfactory." So, low taxes on the rich neither encourage savings, promote investment, or lead to growth.
Justification
Certainly, then, Reaganomics did not help the poor or middle class, but his theories did aid the rich, though at a cost to the other two groups. The presidency of Reagan, resulted in "the rich becoming far richer, the poor a lot poorer, and the middle class going nowhere in particular." The rich did indeed get far richer, however, even within the rich, the richer a person was to begin with, the he or she became. Did this bother conservatives? Not at all, they felt no qualms about substantially cutting taxes on the ultra-wealthy whose income was drastically rising, while the poor suffered. Indeed, I suppose they misguidedly believed that it was God's will. Jerry Falwell, declared, "Material wealth is God's way of blessing people who put Him first." So in the end, I suppose that, society cannot complain, after all conservatives just hold a different value system, so those of who are not blessed by God with a seven figure income should just pray harder.
Deficits
However, cutting taxes on the wealthy did do something to harm everyone, even God's chosen few, it created budget deficits. A deficit is simple, it is the result of the government spending more money than it takes in. Deficits, are the most damaging, and long lasting effect of Ronald Reagan. Of course, Reagan was not the first President to run a deficit, most have, but Reagan's deficits were far larger, in 1982, the first year with a Reagan budget, the deficit increased more than $49,004,000,000, a 62.1% increase from the previous year. Now of course, supply-siders claimed that before too long, the increase in growth generated by their policies would eliminate the deficit, however, in 1989(the last Reagan budget year), the deficit was $161,196,000,000, $82,560,000,000 more than 1981(104.6%). All in all, Reagan deficits amounted to $1,420,728,000,000 more than 47 times as much money as was lost in the Great Depression!
How did supply-siders justify the deficit? They claimed that increased private savings and investment would finance the deficit; however, we have already determined that savings and investment fell during the Reagan years. In other words, the deficit was a BIG problem. Because investment did not rise so, money to finance the deficit was money that otherwise could have been invested in new factories, homes, and equipment, money that would have led to economic growth. Hobart Rowen declared the deficit to be more "deep, corrosive, and enduring" than any other of America's "self-inflicted wounds" from Johnson onward.
However, the $1.4 trillion deficit of Reagan was not the only economic harm he caused, in addition, the government postponed necessary long-range spending estimated by Paul Krugman at $100 billion, as well as various liabilities accumulated because of Social Security and Medicare estimated by Paul Krugman to be about $300 billion. In addition to these, there is the money lost due to the Savings and Loan crisis.
Savings and Loan Crisis
Starting during the 1970s, S&Ls began to have to pay very high interest rates on deposits, without being able to increase interest dramatically on their investments(mortgages). The Reagan administration then deregulated the industry. Savings and Loans then began to pay far higher interest rates than before, many S&Ls then became insolvent, but were not shut down because the Federal Savings and Loan Insurance Corporation did not have sufficient funds to shut them down. At the same time, S&Ls began to use creative accounting practices(similar to the ones made famous by Enron in today's world) to inflate their assets and profits. Then, on October 1, 1981, S&Ls were allowed to sell All-Saver Certificates which generated partially tax-free interest, this policy aided the wealthy, but it also allowed S&Ls to continue on, although it did more harm than good. Other policies, such as NOW accounts allowed the doomed S&L industry to carry on. However, by 1989 the industry collapsed costing the government an extra $100 billion that can reasonably be blamed on Regan and deregulation. In addition, other problems in the financial system caused by Reagan may cost the government, according to Paul Krugman, up to another $100 billion.
Long Range Impact
Reagan, a genius responsible for prosperity, a disciple of a flawed economic theory, or a vindictive man determined to steal from everyone but the fantastically wealthy for the advantage of the privileged few? Certainly not the first. He created enormous federal deficits probably around $2 trillion if you include the S&L crisis, etc. He contributed to a greater disparity in income distribution among the American people. Finally, he set back US economic growth from 3.4% to 2.1%. Perhaps, he thought his policies were for the greater good of America, but they certainly weren't. His election caused no 'morning in America"The flawed theories to which he adhered devastated the American economy. Their general effect was an unconditional war on poverty, but instead of attacking that problem, his policies attacked those people who were in poverty
References
- Batra, Ravi. The Great American Deception. John Wiley & Sons, Inc., 1996
- Evans, Michael K. The Truth About Supply-side Economics. New York: Basic Books, 1983
- Lekachaman ,Robert . Greed is not Enough: Reaganomics. New York: Pantheon Books, 1982
- Lekachaman, Robert. The Age of Keynes. New York: Random House, 1966
- Krugman, Paul R. Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations. New York: W.W. Worton, 1994
- Rowen, Hobart. Self Inflicted Wounds. New York: Random House Inc., 1994
- US Bureau of the Budget. The United States Budget in Brief Fiscal Year 1990. Washington DC: US Government Printing Office, 1990
- "A Laffer Curve." 25 Feb 2004 <http://www.econ.rochester.edu/eco108/ch8/micro08/sld116.htm>