Ronald Reagan and Free Market Economy
Ronald Reagan and Free Market Economy
The real role of government in relation to the economy is much like the role of the captain of a sailboat: If he has rigged the sails correctly, the ship will steer itself.Reagan used supply-side economic policies to change the way the United States looked at the economy. His policies, regardless of standpoint, were a huge change from the prior decades. Reagan promised real change and actually delivered on it.The economic policies of Ronald Reagan’s administration accomplished the administration’s four major policy objectives: reduce the growth of government spending; reduce the marginal tax rates on income from both labor and capital; reduce regulation; and reduce inflation. The United States Federal Government needs to adopt these policies again to get the country out of depression and back on track.
Princeton’s lexical database defines supply-side economics as “the school of economic theory that stresses the costs of production as a means of stimulating the economy; advocates policies that raise capital and labor output by increasing the incentive to produce” (Princeton). Policies like these were implemented under Ronald Reagan. Critics often called the policies “Reaganomics,” however, supporters have adopted the term as a positive reference. At this point, the terms are used interchangeably (Uchitelle).
Economics stems back to the dawn of centralized currency in the seventh century BC. During the past few hundred years, economics has become an important part of civilization especially since the emergence of the free market economy. The implementation and maintenance of these economies may be more difficult, but the freedom they provide is priceless. The debate of Reaganomics has been present since Reagan began his election campaign. Many criticized his policies and still do today.
The debate of supply-side economics is based on whether Reagan’s policies worked. Statistics show his progress was concrete and undeniable, but still many people remain doubtful, and many others claim that big government should micromanage the economy, at the cost of freedom. The basis of the American economy and ways of thinking, financially, follow the principals of laissez-faire, a term which translates to “let it happen.” This theory states that government has three roles and only three roles: that a government should protect the people’s right to own property; maintain a stable currency; and provide for the public defense (McFall). That means that government need not be very large. Although some do not agree with these principles, they are the ones the country was founded on.
Some believe that the government should interfere with the economy and provide for every individual through programs such as public health care. Those people believe that the wealthy should pay more taxes and the less wealthy should pay less; in other words, the wealthy should be giving away their money to those who do not have as much. They also believe in generally high taxes to pay for the programs they support, which benefit only lower income families. This side is considered the liberal view on the economy and government. Others believe that supply and demand, the free market economy as a whole, will manage itself. The more government interferes, the worse off everyone is. They believe in low taxes and a small government which serves only those three roles of government described under laissez-faire. This is considered the conservative view. Reagan himself held this view.
Reagan’s biggest problem, which hurts how supply-side economics is perceived to this day, was his inability to produce a balanced budget within his presidency, to put it frankly, Reagan spent too much money. For any government to work, its spending must balance out with its income. This is also true for people and businesses. If a government spends more than it takes in, it falls into debt. If that problem is not corrected, the deficits begin to add up, increasing the debt. During his campaign, Reagan promised he would cut taxes, get control of government spending, and get government out of the way of American businesses (Second Revolution). Unfortunately, he was only able to deliver on part of his promise.
President Reagan did not get government spending under control like the American people wanted. He spent massive amounts of money on defense and created a deficit, the likes of which had not been seen since the Second World War. USA Today published an article in 2004 stating, “Federal spending as a share of the economy was at about the same level in 1988 as in 1981” (Kirchhoff 2), which shows that although Reagan did not increase spending, he did not decrease it either. Jason Furman, director of the Hamilton Project at Brookings Institution elaborated, “If you are cutting taxes without offsetting the cuts through reductions in spending, then all you are doing is increasing debt and postponing the taxes” (Uchitelle), which makes perfect sense. If the income of the government is cut, then so must be its expenditure. If Reagan had been able to cut his spending directed towards the military, then his budget deficit would have been cut dramatically.
A plan with a defense budget as ridiculous as his would not be even slightly justifiable today; however, the times were different then. It is observed that Reagan ended the Cold War. Without his spending on projects such as the Strategic Defense Initiative, the Cold War could very well be going on today, or worse, it could have gone the way of nuclear warfare. Reagan’s spending, although it was over the top, can be justified. Without it, America, and the rest of the world, might not be standing today.
Faced with the Cold War and armed with a love for his country, he was compelled to increase defense spending. Unlike President Jimmy Carter, Reagan was willing to make tough decisions and start progressing towards real peace. At the time Reagan was President, the country was still locked in a Cold War with the Soviet Union. His military spending was very much influenced by this war and the nuclear arms race surrounding it. He took a new, outside-of-the-box approach to the race. Instead of a bigger and better missile, he opted for a missile defense system that would shoot down incoming nuclear threats (Reagan). His actions and others ended the Cold War and the threat of worldwide nuclear annihilation.
President Reagan’s administration turned over record deficits to Presidents Bush and Clinton. Reagan’s Vice President, George H. W. Bush, shared Reagan’s views on how to treat an economy and a government; however, President Clinton disagreed and begun reverting the policies of the administration past, under the presumption that the supply-side policies were not working. The truth is they were working, but the excessively poor state of the economy slowed progress and real benefits of Reagan’s supply-side policies were not seen until well after their implementation. Then, during his presidency, Clinton turned up a budget surplus (Weisenthal). This surplus is thought to be his biggest accomplishment and proof that Reagan’s take on the economy was not working.
This surplus was a curse, not a ray of hope. It ruined any chance the American economy had for returning to a stable state. Clinton’s administration sucked more money out of the economy than the economy could bear (Weisenthal) and it exacerbated the way of life for every American living in the United States today. Interest rates on personal savings plummeted, household debt soared, and the U.S. trade deficit worsened intensely over the eight years Clinton wreaked havoc in the White House (Weisenthal). Stephanie Kelton, an Economics professor at the University of Missouri claims, “…we are still suffering the harmful effects of the Clinton budget surpluses,” and the data shows that she is correct.
Taxes are an extremely controversial issue when it comes to supply-side economics. The premise that lowering taxes increases tax revenue is not the easiest to grasp, especially when the revenue never really comes around. Although the economy was growing vigorously, many claim, “the promised boon in tax revenue never materialized” (Uchitelle). The left wing media and politicians would like to believe that what followed Clinton’s actions was, in the words of Gene Sperling, an advisor to both Hillary and Bill, “…the longest recovery in history” (Uchitelle). However, in the years following President Clinton’s tenure with stagflation at an all-time high and the worst depression since the Great Depression in full swing, it is now apparent that it was not that at all, but instead only economic turmoil in the works.
The lack of tax revenue can be explained by the delay caused by the abhorrent state of the economy preceding Reagan’s presidency. By the time the tax boon was going to come around, the Clinton administration scared the American public back into the old mentality of defensive saving and economic stagflation, especially with the wealthy. However dreary the tax revenue may have seemed, it was still a 5.6% increase over the course of Reagan’s presidency, according to the White House Office of Management and Budget (Uchitelle).
Aside from transfers, such as Social Security payout and dividends from investments, from which most citizens are not receiving income from,wages are the only way for consumers to earn money (Evans). This makes it a very delicate item to tamper with, especially when the government is taking more money out of the pockets of its citizens. President Reagan completely changed the way people think about taxes. Clint Stretch, the national director of tax policy for Deloitte &Touche, said, “That sense that taxes are tax payers’ money, rather than a contribution the common good is somehow entitled to,” and it couldn’t be better said.
Tax money is money directly taken from the only income most citizens have−their wages. When people make less money, they spend less money, and the economy tumbles into depression, such as the one currently looming over the United States. Reagan cut taxes dramatically. The top rate in 1980 was 70%, and the rate for a family making $30,000 dollars in income was 37% (Kirchhoff 2). After tax cuts were implemented, the top rate plummeted to just 28% (Kirchhoff 2), leaving consumers more money and leaving businesses and employers more money to hire workers andbegin to move America forward.
The logic behind these tax cuts is that workers would have more incentive to get to work, taking home more money for their time and effort, and that it would prompt people to start taking that extra shift or to go and get educated to make even more money. According to Kevin Hassett, director for economic policy studies at the American Enterprise Institute, “What really happens is that the economy grows more vigorously when you lower tax rates,” (Uchitelle) and that growth triggers more cash to flow through America’s economy and increases tax revenue.
The best support for supply-side economics is in the numbers it generates. During the Reagan presidency, 20 million jobs were created (Second). This meant more Americans making money the old-fashioned way:by working hard. Reagan also killed rising inflation. He allowed the central bank to make the tough calls and keep a tight money policy that stabilized the dollar (Kirchhoff 1). If a currency is strong and stable, the economies relying on it will follow the same trend because people feel safe about investing their wealth in it. When the dollar is strong, the economy is strong, but better yet, America is strong. Tight money policies kept the dollar strongby limiting currency printing and raising short-term interest rates to cut inflation from 13.5% in 1980 to 4.1% in 1988. This was key to improving the economy as a whole.
Reagan saved America from government control, and turned it around towards the free markets (Kirchhoff 1). The Reagan Foundation describes the situation such that, “businesses and entrepreneurs were no longer hassled by their government, or paralyzed by burdensome and unnecessary regulations every time they wanted to expand” (Second). As an added benefit, by the time Reaganwas out of office, prime interest rates were back down to 10% in 1988, from 21.5% in 1981 (Second), which allowed business and entrepreneurs to expand their businesses, therefore growing America.
Two huge indicators for the immediate state of the economy, the Gross National Product(the total value of goods produced and services provided by a country during one year), and the Dow Jones Industrial Average (the total value of 30 of America’s most successful companies and the most widely cited indicator for the state of the stock market) (Princeton), both experienced incredible growth. GNP grew 26% during the 1980’s (Second), and the Dow grew by 11.4% annually (Krantz). Stocks continued to go up after Reagan left office, something which cannot be said for Carter before him, or Clinton after (Krantz).
The people saw huge benefits from these policies by the end of the 1980s, even though the government may not have. The net worth of families making $20,000-$50,000 grew by 27% during the implementation of supply-side economic policies (Second). Also relating directly to the people, unemployment went from 7.6% to 5.5% (Second), a number that would be ideal to see today. Of the 20 million jobs created, more than half went to women and the employment of blacks was improved by 25% overall (Second) both of these things being extremely good indicators of the economy and extremely good indicators that supply-side economics work.
The economic policies of Ronald Reagan’s administration accomplished the administration’s four major policy objectives: reduce the growth of government spending; reduce the marginal tax rates on income from both labor and capital; reduce regulation; and reduce inflation. The United States Federal Government should to adopt these policies again to get the country out of depression and back on track.High inflation and soaring oil prices gave Reagan the toughest period since World War II (Uchitelle), and he did his best with what he was handed. He pushed for all the right things to fix the economy. He may have spent too much money to truly balance the supply-side economics he was attempting to fulfill, but that should not subtract from the true supply-side theory, which can be proven to work through the data collected during the 1980s under Ronald Reagan. President Reagan set the tone for all Republicans to follow
Fellow patriots, this is a call to arms. Do not let America fall any deeper than it already has. Vote for the candidates who support supply-side theory. Vote for those who wish to bring the country up, not sink it down further with stimulus packages and universal health care that the country cannot afford. It is not the duty of the wealthy to support the poor. It is the duty of Americans to exercise their rights to the pursuit of happiness and financial prosperity. Redistribution of wealth carried out by a government that wishes to micromanage the economy through overregulation and taxes is not the answer to the problems the United States faces. Set the sails and let the ship sail itself, because freedom and prosperity do not have to be on opposite ends of the spectrum. Supply-side economics work and they will continue to work in the future.
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“The Untold Story Of How Clinton’s Budget Destroyed The American Economy.”Business Insider. Business Insider, 05 Sept. 2012. Web. 05 Dec. 2012.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 9 January 2017
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