Reagan’s Economic Legacy
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RAY SUAREZ: Now, the lasting impact of Ronald Reagan’s economic policies. From the very beginnings of his presidential campaign to the end of his second term, the former president’s economic agenda, widely called Reaganomics, drew both praise and criticism. The principles were simple, and he laid them out in a speech before Congress in April 1981. Here’s an excerpt.
RONALD REAGAN: High taxes and excess spending growth created our present economic mess. More of the same will not cure the hardship, anxiety, and discouragement it has imposed on the American people.
Let us cut through the fog for a moment. The answer to a government that’s too big is to stop feeding its growth. Government spending has been growing faster than the economy itself. The massive national debt which we accumulated is the result of the government’s high spending diet. Well, it’s time to change the diet, and to change it in the right way.
RAY SUAREZ: This week, as the public remembrance of President Reagan continues, so too does the debate over his economic legacy.
RAY SUAREZ: We get two views now: Robert Reich was secretary of labor during the Clinton administration. He is the author of the book, “Reason: Why Liberals Will Win the Battle for America.” And Stephen Moore is president of the Club for Growth. In 1987, he was research director for then-President Reagan’s Commission on Government Privatization.
Mr. Moore, what were the main pillars of Ronald Reagan’s economic policies?
STEPHEN MOORE: Well, Ronald Reagan came to the White House, you’re right, with some simple ideas but they weren’t simple-minded ideas. These were ideas to cut tax rates. At that time in the United States we had a 70 percent top tax rate. That was really discouraging economic growth. The second big problem that we had in the economy was raging inflation. You know, when Reagan entered office the inflation rate was 14 percent. I think that more than anything probably cost Jimmy Carter the election. And the third thing was Reagan promised to rebuild the military to fight the evil empire and to try to bring the Cold War to an end victoriously.
I think what made Ronald Reagan such a great president, in my opinion, was that he came in with these three objectives and he was able to accomplish them all in eight years. Eight years after President Reagan had been elected the Berlin Wall had just about come down, and I think it was pushed down by Reaganomics and Reagan’s military policies. The inflation rate had come down very dramatically and taxes had.
And so Reagan was able to ask Americans twice, are you better off today than you were four years ago? And both times Americans resoundingly said, yes, we’re a lot better off.
RAY SUAREZ: Professor Reich, you just heard Stephen Moore lay out both the policies and his view that they worked. Did they?
ROBERT REICH: Ray, look, I don’t want to be disrespectful to the memory of a beloved president. Many things that Ronald Reagan did were very important for this country, but Reaganomics had some major problems. For one thing, it created a huge deficit. In 1981 at the start of the Reagan administration the deficit was about 2.5 percent of the national economy. By the end it was about 5 percent of the national economy. Interest payments just on that debt went from $69 billion in 1981 to $169 billion at the end of the Reagan administration.
With that kind of deficit, eventually you’ve got to pay the piper. There is a day of reckoning, and the day of reckoning came with a huge recession in 1990 and 1991.
RAY SUAREZ: Well, Stephen Moore in our excerpt you heard Ronald Reagan talk about putting the beast of government on a different diet. Did he do that part and is part of the mixed legacy of Reaganomics now all these years later in part stemming from the fact that the diet didn’t change that much?
STEPHEN MOORE: One of my favorite Reagan quotes was when he said that a government that’s big enough to give you everything you want is also a government big enough to take everything you’ve got.
And Reagan did, I think, make an effort to cut programs, mostly social programs, which had grown out of control. But on this debt issue, I think the important thing to remember is that Reagan really had two higher priorities than balancing the budget. One was to put America back to work again. I mean people forget that in the late 1970s and early 1980s we were in a mini-depression. The unemployment rate was 8 percent. I mentioned the high inflation. Most Americans really felt that there was something fundamentally wrong with America. Jimmy Carter had given a speech in August of 1980 where he said that America was in a decline and that we couldn’t get out of this problem of joblessness and high inflation.
Reagan really restored the faith in the private sector economy to grow. So I think that the price we paid for those high deficits was to win the Cold War and to rebuild our economy with 15 million new jobs that were created in the 1980s and certainly Robert Reich as labor secretary under Clinton respects that kind of job growth.
RAY SUAREZ: Well, do you?
ROBERT REICH: Undoubtedly I respect job growth. In the 1990s when Bill Clinton became president, I was with him. We faced a huge mountain of debt. The only way we could get job growth restored in the 1990s — and by the way under the Clinton administration 22 million net new jobs were added to the economy — but the only way to actually get that going was to get out from under that mountain of debt and reduce the deficit which is what we spent most of our time doing at least in the first few years of the Clinton administration.
Let me, if I may, just make one other comment. That is that undoubtedly the economy was very bad in the late 1970s, but inflation was the major culprit. Inflation was out of control. Ronald Reagan should get some credit, but Paul Volcker heading the Federal Reserve Board actually gets most of the credit. He broke the back of inflation by increasing interest rates substantially. In fact some would say that he ended the Carter administration because we were plunged into a recession with those huge interest rate increases, but we got out from under inflation.
RAY SUAREZ: But, Stephen Moore, did Ronald Reagan change the terms of the debate regardless of the legacy of the policies? Is it just hard to do certain things in Washington today? Are certain proposals just hard to make because of the fact that this man was president and did what he did economically during the time he was?
STEPHEN MOORE: I think he did shortchange the terms of the debate. A perfect example of that was when Bill Clinton, a Democrat, said in I think 1995 that the era of big government is over. I mean that’s a Reagan philosophy if there ever was one.
If you want to see other evidence of Reagan’s lasting legacy, I think what’s really interesting is you look at what’s happening around the globe today. Look at what’s happening in Russia and China where those countries which 25 years ago were our adversaries and threats to world peace now are moving very aggressively towards Reaganomics with privatization, with lower taxes, with private property rights. Russia just adopted a 13 percent flat tax so I think that’s the ultimate accolade to Reaganomics is that it’s bursting out all over the world.
RAY SUAREZ: And, Professor Reich, do you see the legacy, the after-effects, the shadow of Reaganomics in that same benign way?
ROBERT REICH: Not quite as benign a way, Ray. Undoubtedly privatization and deregulation were the hallmarks of Reaganomics that lasted and have spread around the world.
But we also have noted that trickle-down economics — that’s what we called supply- side economics in those days — trickle down economics didn’t work very well. Very little trickled down to the poor. The gap between the rich and the poor began to widen during the Reagan administration and has continued to widen since then. We also saw that deregulation did not always work. We had a savings and loan crisis partly because of the deregulated financial markets. So, yes, privatization and deregulation are good up to a point but let’s remember that there are other objectives in our economy as well.
RAY SUAREZ: Robert Reich, is the jury still out on supply-side? Did it work that government revenue would increase if you cut tax revenues and cut taxes to taxpayers?
ROBERT REICH: No, Ray. The jury is not out on this. It’s very clear that government revenues did not compensate for the cut in taxes. That’s why we ended the 1980s with a huge deficit. That’s why we started the ’90s with a gigantic debt.
We are seeing right now that supply-side economics tried for another time under the second Bush administration, the Bush, Jr. administration, is not working. We have a $400-some-odd billion deficit and to parody or to use the phrase of David Stockman, as far as the eye can see. We are going to have to pay the piper at some point. There is going to be a day of reckoning for that deficit particularly as baby boomers mature and have to eventually collect Social Security and Medicare.
RAY SUAREZ: Are you as convinced Robert Reich, Stephen Moore, that the supply side idea didn’t work that the stimulus that putting more money in people’s own pockets would eventually increase government revenue? Are you sure that it’s — it may still be with a going idea?
STEPHEN MOORE: Just taking the 1980s, for example, I think Robert Reich is wrong on this. If you look at what happened to the federal revenues, when Reagan entered office we had $500 billion in tax revenues; by 1990, the year after he left office we had a trillion dollars in revenue so the revenue stream doubled over that period.
You know, it’s interesting because I don’t think that any even liberal Democrats today or even economists like Robert Reich who oftentimes I disagree with would want to go back to the days of those very high tax rates that we had in the 1970s when you had 80 percent tax rates when you combined federal and state taxes.
So I think the lesson we learned is that when taxes get too high they stifle private creativity and wealth creation, and I see the real evidence of this all over the world where countries really are moving towards Reaganomics by lowering their taxes and there’s no question that George W. Bush is using that model too. And the economy is doing pretty well right now with that.
RAY SUAREZ: Well, I was a pretty young worker then, Stephen Moore, so the idea that I would get up into those brackets and pay 70 percent taxes seemed pretty remote. Did many taxpayers pay those kinds of rates? When people talk about marginal rates that used to be yea high or yea high, were there a lot of people actually paying them?
STEPHEN MOORE: Well what was happening in the 1970s was you had something called inflationary bracket creep. And it’s something that really destroyed the Carter presidency because you had high tax rates exacerbated by these high inflation rates. So Americans were being pushed even middle class Americans like you and me were being pushed into these higher tax brackets. That’s what caused the middle class tax revolt of the late 1970s.
RAY SUAREZ: Any quick final word, Robert Reich?
ROBERT REICH: Only that a lot of Americans in the 1980s began paying more in payroll taxes, in Social Security taxes as a result of a very important reform that Ronald Reagan and Alan Greenspan put through, but those increases in payroll taxes have actually for most Americans more than compensated for, more than took away any tax reduction they had in income taxes, and that legacy lives on to this day.
RAY SUAREZ: Professor Reich, Stephen Moore, thank you both.
STEPHEN MOORE: Thank you.
ROBERT REICH: Thanks very much, Ray.