In the mid-1970s, the United States was dragged into the first large-scale economic recession since World War II due to the oil crisis and structural problems within the country’s economy. What made that recession more difficult to address than others was “stagflation,” namely, the closing of enterprises and the increasing unemployment accompanied by high inflation.
Americans responded to the crisis by voting Jimmy Carter, who seemed to be at his wit’s end, out of office and turning to Ronald Reagan, a former Hollywood celebrity who not only defeated Carter in the 1980 presidential election but also helped land more than half of the seats in the Senate for his Republican Party, which laid a sound foundation for his later reform.
A former Democrat who supported Roosevelt’s New Deal, Reagan converted to the Republican Party in 1962 and got himself elected as the governor of the State of California in 1966. Those who have a similar experience converting to another political ideology often turn out to be staunch advocates for their new convictions.
Reagan abandoned the Keynesian approach which the U.S. government had been practicing since the Great Depression and introduced supply-side economics. The resulting reduction of taxes, deregulation, and the tightening of the country’s money supply dealt a further blow to the U.S economy, which was already in great trouble, and the new policy received much public criticism. But Reagan did not back down or compromise.
After nearly two years of economic recession, the U.S. climbed out of its economic quagmire and started an all-around recovery in the beginning of 1983. Its GDP grew by a staggering 6.5 percent that year, with 3.5 million new jobs created. Meanwhile, the inflation rate decreased significantly from 12.4 percent in 1980 to 5.1 percent in 1982.
The economic recovery won over those who had previously been suspicious of Reagan’s methods, and he won a landslide victory in his second-term election.
When Reagan left office in 1988, he was hailed as one of the United States’ most outstanding presidents ever. But history, like an oil painting, needs to be examined from some distance.
More and more people have begun to reflect on what exactly created the economic boom of the 1980s: Was it really achieved by the three measures at the core of Reagan’s supply-side economics, or “Reaganomics”?
People tend to believe that Reagan did not practice what he preached, and that the boom in the 1980s was in fact largely due to another round of Keynesian policies that Reagan purportedly opposed. Unlike Roosevelt, the Reagan administration did not invest much in infrastructure and people’s welfare, but rather in the military and the arms race. It was actually the federal government’s large-scale budget deficit that contributed to economic development and created jobs.
The U.S. Congress passed a tax reform plan proposed by the Reagan administration in 1981, which reduced income tax three times over the span of three years, adding up to a 23 percent total decrease. Reagan also signed an amended tax law, the Tax Reform Act, in 1986, reducing taxes again. Thus, the disposable income of every American family increased by around US$600 to US$900 over the course of seven years. But in the views of Reagan’s critics, tax reduction is like robbing the poor to feed the rich. It created a larger wealth gap and did not bring the large increase in tax revenue which supply-side economics predicted it would. Also, since Reagan did not cut any government spending and arms expenditures rapidly expanded during his tenure, the fiscal deficit grew tremendously in these years.
To address the deficit, the Reagan administration issued a large amount of national debt, which climbed from 26 percent of GDP in 1980 to 41 percent in 1989. The U.S. changed from the world’s largest creditor to the world’s largest borrower.
The loosening of government regulations is another pillar of Reaganomics. The 1960s and 1970s were the peak period of government regulation in the U.S. – the number of people working in regulating agencies grew from 28,000 in 1970 to 81,000 in 1979. When Reagan said in his 1981 inaugural speech that “Government is not the solution to our problem; government is the problem,” he received a standing ovation. But according to the monograph “Cambridge Economic History of the United States: The Twentieth Century,” the staff of U.S. federal regulating agencies increased to 107,000 during Reagan’s second term, while the budget for these agencies increased by 18 percent.
Now let’s turn to China. Reaganomics has won more supporters in China than in the U.S., and some economists have prescribed tax reduction as the medicine which can cure China’s ills.