During the
1980s,
America was still caught up in fear of the
Soviet machine. Disappointed with the
Carter presidency, America elected
Republican Ronald Reagan to the
presidency. He promised to combat the "
Red Menace" and repair the
economy. During the late
1970s America's
inflation rate had risen to double digits and the economy was in serious trouble. Reagan stepped in with an ambitious plan that he hoped would revitalize the faltering economy. The plan, dubbed "Reaganomics" by its detractors, was an anti-inflationary and
investment promoting system which would stimulate
business and give every American more money to go around. The nation eagerly anticipated a successful
decade.
The fundamental idea behind Reaganomics ran contrary to orthodox economic thinking. It has been generally accepted that an increase in demand will produce an increase in supply to meet the needs of the public. Reagan's administration turned this theory on its head, saying that if a supply were created, demand would follow. If industries were to produce more, the public would discover a need for the product. The plan included tax cuts for big business, allowing them to increase production. By cutting income taxes and giving Americans more money to spend, the plan would promote industry and revitalize the economy. The wealthy of America would benefit the most from income tax cuts and would spend their money, creating new jobs which would, in turn, aid the lower class. Defense spending would also promote industrial growth and create more jobs. This was the famed "trickle down" portion of Reagan's plan.
An important aspect of the Reagan administration was a commitment to fight the spread of the Soviet Union's communist ideals. This would be accomplished by large increases in military spending. Programs like the B-1 bomber, the MX missile, and a complete refit of the Navy were instituted under Reagan. Secretary of Defense Caspar W. Weinberger planned to increase defense spending by 7% annually. Budget Director David Stockman relates that the "none-too-subtle implication was that anyone proposing to even nick his budget wanted to keep us behind the Russians (sic)." Obviously, the need to confront the Soviets was in the forefront of the Reagan administration's plans. The prevalent theory was that the furtherance of capitalism would be useless if it were threatened by communism. The downfall of the Soviet Union at the end of the decade would take everyone by surprise. Whether the true economic situation of the USSR was known to the Reagan administration is hard to say. Intelligence sources reported myriad dangers and security threats, because they tend to err on the side of caution. Indicators of the economic peril of the Soviets were ignored because everyone was so caught up in the perceived threat. One way or the other, the leviathan defense budget went ahead.
The chief problem Reaganomics faced, and the reason it failed to meet its overall goals was that it was internally inconsistent. Reagan's administration professed a desire for a seriously pared down federal government, but never lived up to the promise. This undermined their economic plans. In order to avoid a budget deficit, government spending had to be decreased in conjunction with taxes. The Reagan administration was singularly unable to achieve this. Whatever advances it made in lowering government spending were made up for by increases in other areas. While Education and regional development took major cuts, Medicare and Commerce grew by leaps and bounds. The greatest increase in spending, however, came from defense. Military spending grew by 63.3% from 1981 to 1989. Under Reagan the economy never took in as much as it spent. Reagan was able to achieve some of his ends. He was able to increase the rate of growth of the Gross Domestic Product to 3.9% from its rate of 0.5% under Carter. Family income rose and unemployment decreased. However, during his presidency the trade deficit rose from $15 billion to $129 billion and the budget deficit went from $74 billion to $155 billion. Most staggeringly, the national debt increased from a hefty $730 billion to a gargantuan $2.1 trillion. During the 1980s, many of the premier economic thinkers held that deficit spending was not a cause for concern. The government was not expected to behave like a corporation and could get by without paying its debts. However, upon witnessing the effects of a $2.1 trillion debt, most changed their tune. Without decreasing government spending along with taxes, Reagan was unable to achieve all of his economic goals and the nation was plunged into a deficit.
Another flaw within Reaganomics was the reliance on supply side economics. The intent of Reagan's plan was to rebuild America's military to combat inflation and redistribute income to the major corporations. Had America's economic troubles been the result of unused capacity as it was after WWII and Korea, Reagan's plan would have been very successful. The unsatisfied demand would have been fulfilled. Unfortunately, when no such demand existed, the extra production went to waste. Furthermore, in the 1980s American businesses were forced to compete with foreign products. What little demand existed was already taken care of.
Reagan's administration was unable to reconcile their desire to restore the quasi-mythical laissez faire American economy with their desire to out-price the Soviets in the arms race. It is a matter of heated debate whether Reagan meant to drive the Soviet economy into the ground by increasing defense spending. Many hold that the Soviet economy was already well along the way towards its own economic demise and Reagan's aggressive defense spending, the Strategic Defense Initiative, was merely incidental. Intentional or not, the wanton defense spending of the 1980s had lasting economic effects that would leave the economy in dismal shape by the end of the decade and the beginning of the 1990s. Fortunately, the economy has since largely recovered thanks to the efforts of Congress and the Clinton administration in balancing the budget. The government of the 1990s learned an important lesson from the problems faced in the 1980s. Reagan's plan would have been far more successful had he found a single goal and stuck to it. Defense and other forms of government spending stood in the way of his economic plans.
Sources:
Martin Carnoy, Derek Shearer, Russell Rumberger A New Social Contract : The Economy and Government After Reagan (Harper Trade, 1983)
Seyom Brown The Faces of Power (New York: Columbia University Press, 1994)
Anthony S. Campagna The Economy in the Reagan Years : The Economic Consequences of the Reagan Administration, Vol. 150 (Greenwood Publishing Group, Inc., 1994)
Murray Weidenbaum Reaganomics - Its Remarkable Results (The Christian Science Monitor, Dec. 18, 1997)
Mike Noble Where Reagan Went Wrong [online] "http://oasis.bellevue.k12.wa.us/sammamish/ sstudies.dir/hist_docs.dir/reaganomics.mn.html" (Mike Noble, 1995)