Reaganomics: The Real StoryWhat Reagan Faced: The Economic ProblemsWhat Reagan Faced: Defense IssuesReagan’s FY1982 Budget ProposalResults (1)Results (2)Results (3)Results (4)Results (5)Results (6)Reaganomics: The Real StoryBackground, Budgets, and ResultsSteven R. CunninghamFor Macroeconomics ClassesUniversity of ConnecticutWhat Reagan Faced:The Economic ProblemsThe inflation creep of the 1970s had resulted in an enormous increase in tax burden through “bracket creep”.Social security tax and Medicare had also increased the personal tax burden.According to Boston College economist Barry Bluestone, 31 million jobs had been destroyed between 1978 and 1982.Fully one-third of all private sector jobs that existed in 1978 had disappeared by 1982.What Reagan Faced:Defense IssuesDefense spending had declined from 9.6% of GNP in FY1962 to 5.5% of GNP in FY1981, a decline of 43%.More of the defense spending in 1981 was directed toward salaries and pensions than in 1962.CIA reports showed that defense expenditures in the Soviet Union were twice as high (as a percent of output) than U.S. defense expenditures, implying that the U.S.S.R. was spending 45% more on defense than the U.S.In 1979, the Soviet Union invaded Afghanistan and the U.S. embassy in Iran was seized.The questions everyone was asking was “Can we defend ourselves? Are we ready?”Reagan’s FY1982 Budget ProposalReagan’s Proposal ERTA (What He Got)1 30% cut in personal taxes 25% cut in personal marginal tax rates2 Accelerated depreciation for capital in businessGot it!3 9% increase in defense spending per year for 5 yearsGot it!4 $50 billion cut in non-defense spending in 1982, growing to $100 billion in 1986No!5 Additional cuts of $30 billion in 1983, $40 billion in each of the next 3 yearsNo!6 Indexing of personal exemptions and brackets, starting in 19857 Elimination of the “marriage penalty”Results (1)Despite the tax cuts of 1981, federal tax revenues nearly doubled in the Reagan years. (Washington Times, 8/25/1992)Real inflation-adjusted manufacturing output rose to its highest point of the post-WWII period.In 1989, capital goods production was 38% of total manufacturing production, as compared with 1967 when it was 28%.In 1989, exports of capital goods were 45% of total capital goods production, compared to 20% in 1967.Results (2)Domestic-based manufacturing employment fell from 20.3 million in 1980 to 19.2 million in 1990, a decline of 6%, probably as a result of productivity gains.U.S. exports of manufacturing goods grew by 90% between 1986 and 1992, compared with 25% for the rest of the OECD countries.Results (3)The U.S. raised its share of the world’s manufacturing exports from 14% in 1987 to 18% in 1991.In 1990, the U.S.’s share of world manufacturing exports was the same as in 1975.Results (4)More than 18 million new jobs were created in the 1980s in the U.S.—this was more than Japan, Britain, and Germany combined.82% of the jobs created were high-pay, high-skill managerial and technical positions. 12% were low-skill service jobs.While real wages declined from $11.41 per hour in 1978 to $10.02 per hour in 1990, workers’ total compensation increased as workers demanded increased benefits.Results (5)Reaganomics did not gut social welfare programs. In fact, social welfare spending was the largest cause of the budget deficits of the Reagan administration.Outlays for means-tested programs rose 19.7% from 1982-1989 (CPI adjusted). As a percentage of GNP, this is a higher rate than the Carter years.Results (6)U.S. Real Income Growth, 1983-1989Quintile Real Income GrowthLowest 20% 11.1%Second 20% 10.1%Third 20% 10.7%Fourth 20% 11.6%Highest 20%
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