| Love him or hate him, the 40th President of the United States left his imprint on Wall Street and the economy, for better or for worse. As the nation mourns and the stock markets close today out of respect for the Great Communicator, it’s fitting to reflect on where we were then and now.
Ronald Wilson Reagan inherited a terrible economy when he defeated incumbent President Jimmy Carter in the 1980 election. Inflation was running at a 13 percent annual rate. Interest rates were even higher, and the economy was spiraling downward into a recession. There’s no doubt that things turned around during Reagan’s presidency, but how it happened remains the topic for debate.
No other President lent his name to an economic theory. Reaganomics – as supply side economics is known today – is the theory that lower taxes would jump-start the economy, produce more revenues and pay for themselves without incurring huge deficits. A majority of economists question the validity of these assertions, but most supply-siders insist that their way is the right way. During the 1980 campaign, Reagan proposed a 30 percent across the board tax rate cut. He convinced Congress to cut the highest tax rate to 28 percent from 70 percent. In an attempt to balance the equation, he cut non-defense programs: As a share of GDP from 1980 to 1986, spending on annually funded domestic programs fell 29 percent while defense spending rose 27 percent. Tax revenue fell 17 percent while interest on the national debt rose 61 percent. The net effect was a ballooning budget deficit to what was then considered a record level of imbalance. Also during his administration, Congress approved a plan to reform Social Security, cutting future benefits and gradually raising the retirement age.
Deregulation was a cornerstone of the Reagan administration. On taking office, Reagan tried to reduce government rules because he believed that business could function better without unnecessary restraint from government intervention. On his watch we saw cutbacks in funding for the Securities and Exchange Commission and the Environmental Protection Agency. He ended the Carter administration-imposed regulations designed to control gasoline prices, and changed the way gasoline was distributed throughout the country. And he carried through the deregulation of the airline industry, setting in motion a cycle of price wars that has yet to ease.
We also saw the deregulation of the banking industry, which ultimately gave us the savings & loan crisis. The Reagan program phased out federal requirements that set maximum interest rates on saving accounts, eliminating the advantage held by saving banks. All banks, not just commercial entities, could offer checking accounts, and any depository institution could borrow from the Federal Reserve Bank. In short, deregulation eliminated the distinction between commercial and savings banks, causing a rapid growth of S&Ls that made all sorts of non home-related loans. S&L banks became huge profit centers, issuing credit cards and making highly speculative investments, and loaning more money than was prudent. When the real estate market crashed, S&Ls took it on the chin. They were stuck with properties that weren’t worth the mortgage amount. Many S&Ls went bankrupt. The S&L crisis cost the U.S, about $600 billion dollars in bailouts or about $1500 for every man, woman and child.
Reagan also presided over the demise of PATCO, the Professional Air Traffic Controllers Union, and changed forever the clout wielded by unions across the nation. By firing the controllers after they went on strike, Reagan, the only union man ever to be President -- he led the Screen Actors Guild in the 1950s -- effectively destroyed a union.
His admirers point to the air traffic moment as a defining episode of the Reagan presidency because it notified foreign leaders – including the doddering greybeards leading the Soviet Union -- that Reagan backed up his words with actions. In the view of Reaganites, that determination convinced Soviet leaders of his conviction and led them to back down, open their nation and ultimately end Communism and usher in the free market polices adopted by much of Europe, Asia and Latin America.
Finally, the Reagan years saw a turnaround on Wall Street. In August 1982, the Dow Jones Industrial Average started on a surge of growth that continued for continued for several years. In 1985 he became the only sitting president to visit the trading floor of the New York Stock Exchange, endearing him in the mind of Wall Street. Reagan believed that he turned the bull loose by restraining government spending and simplifying taxes, although some critics would argue that much of the credit should go to Federal Reserve Chairman Paul Volcker, who tamed the rampant inflation of the late 1970s.
Regardless of who deserves the credit, there’s no question that the Reagan era was the time when much of the groundwork was laid not only for the markets bull run in the ‘80s but also the technology-led surge of the ‘90s.
During the Reagan years, the United States experienced the longest period of economic growth in peace-time history. From 1982 to 1989, GDP grew at an annual rate of 3.5 percent. But during that same period, U.S. government debt rose from $1.2 trillion to nearly $5.7 trillion. In 1985 the U.S. became a net debtor nation for the first time since before World War I. And years of deficits can hamper economic growth in the long run – when the government has to borrow a lot of money, interest rates stay higher than they otherwise would.
So it’s a mixed economic legacy in many ways: Optimism about growth and a philosophy of letting business thrive with less red tape, but perhaps also a lost opportunity for future generations, destined to struggle with huge budget deficits that are embraced by politicians to this day.
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