Transcription
This week on the Lectures in History podcast, Brigham Y Young University historian Grant Madson examines the supply side economic agenda of the 40th [music] President Ronald Reagan. Policies that came to be known as regonomics. Reganomics was an economic approach championed by Ronald Reagan that emphasized tax cuts, deregulation, and reduced government spending to spur growth by boosting private investment and job creation. More in a moment.
All right, welcome to class and today we're going to be talking about regonomics. So, uh, what we're really going to talk about and we say regonomics is this combination of what policy prescriptions Ronald Reagan advocated as well as what was going on with the economy during the 1980s. So, anticipate a little bit about both of those things as we talk.
Now, this is a history class and so like we always do that means I am going to take a step backwards before we move forward. So, the question is what was going on in the economy in the 1970s? In other words, what was happening before Ronald Reagan took office? Well, this is something that you probably remember from last week. This is a combination of the inflation rate and the unemployment rate. Uh people at the time referred to the combination of these two things as the misery index. So all of the bad things going on in the economy. And as you can see through '77 up to 1980, both inflation and unemployment were quite a bit higher than what the targets would have been. And this is in other words a um rebuttal or a contradiction of what we talked about a little bit earlier, the Phillips curve. So remember policymakers before this had said there's a tradeoff between unemployment and inflation. But if we look at the stats here you can see inflation just kept going up and unemployment would sort of go down but then go back up. So it refutes in other words the whole kind of policy prescription of the 1960s and '70s and so we should in other words we should not see both unemployment and inflation increase at the same time according to the Phillips curve and this forced a bit of a re-evaluation of macroeconomic theory across the board. What should government do to rectify a situation like this? Most people don't remember now, but that was probably the worst economic situation the United States had been in since the Great Depression of the 1930s. >> Inflation was roaring. Interest rates were going up. People couldn't afford to buy homes. A lot of people remember very clearly if they were old enough to drive a car, then you couldn't buy gasoline. No matter how much money you had. >> We had a hostage crisis in Iran. People were getting worried. >> All right. All right. So you can see a lot of things were going wrong, particularly in the economy and that's the situation that was, you know, existing when Reagan took over.
So Reagan came into the office uh basically trying to say how can we think of things differently? What's a different approach? Well, summarizing a lot of the stuff we've talked about so far, most of what we've talked about since we started talking about John Maynard Keynes has to do with demand-side economics, right? A lot of us, particularly in the '60s, Walter Heller, the Kennedy tax cuts, Lyndon Johnson, all of those things, the Great Society, they were all framed as ways to maintain high demand. So, we would call that demand-side economics. By contrast, Reagan uh sort of latched on to a theory from a professor Arthur Laffer who said the issue isn't demand, the issue is supply. The problem with the American economy is that there's too much demand, there's not enough supply. And then said that a lot of what government does, it doesn't just affect aggregates, it also shapes incentives. So the question that he raised is how do we create more incentive for people to supply? Well, okay. The idea is basically this. Demand won't work if people are incentivized not to work. And his basic theory is something like high taxes, in particular, creates an incentive not to work. Well, how does that make sense? Well, it's now famously called the Laffer curve and it looks something like this. And the idea is if, okay, so on your y-axis that is the tax rate and on the x-axis that's tax revenue. So in theory, if the, well, not in theory, but in practice, if you can think about this, this makes sense to us. At a 0% tax rate, the government is going to take in 0% taxes, right? If it doesn't tax anything, there's no tax revenue. But also, if the government taxed at 100%, it would take in 0% revenue. Why is that? Well, if you knew that everything you earned just went to the government, would you bother working? Right? And so if the answer is pretty much, well, no, I'm not going to work just to give all my money away. So the theory was something like there are certain tax rates when they get high enough, people are less inclined to actually work because they know that their money is actually just going to go to the government. So you can imagine here we have that point A, that's far enough along the curve where if the government actually increased the tax rate, its tax revenue would decline. The goal is rather to be at what I'm calling point B here, or it's M on this graph. The idea is that's the rate at which government can maximize revenue because it's not disincentivizing work. Anything above that rate will disincentivize work. Okay. So depending where we are on this curve, this does create a really seductive claim, which is if we're up at point A, tax cuts should theoretically pay for themselves. By reducing the tax rate, government could actually take in more money in tax revenue. And this all fit within Reagan's broader claims about the size of the government. And so the Laffer curve, Laffer's argument ended up having a lot of influence on Ronald Reagan. >> Reganomics literally is, as far as I'm concerned, uh, it is the provision of incentives to the marketplace to allow [music] the economy to perform its functions properly. >> Dr. Laffer, would you draw your curve for me and explain how it works? >> Sure. In a very simple sense, if you tax people who work and you pay people who don't work, don't be surprised if you find a lot of people not working. Hello, is that so complicated? >> I mean, if you tax rich people and give the money to poor people, you're going to have lots and lots of poor people and no rich people. >> All right, so there you go. That's Laffer kind of explaining the essence and it's all about incentives. Now, you also heard him bring up welfare. The idea is in an expanded welfare state, once again, the government is creating incentives not to work. What if you add the two things together? In other words, government policy is shrinking the incentives to create more supply. And so his basic premise is if government cuts taxes but also cuts welfare pay spending, then the result will be greater supply and, uh, maybe ironically, greater government revenue. Tax cuts will not only pay for themselves, but it will solve the problems of inflation by driving up production and will increase overall prosperity.
Okay. So, well, once in office, after Reagan won in 1980 and took office, he made tax reduction the key focus of almost all he did. The Carter administration had made a terrible mistake by sending up so much legislation in their first 100 days that [music] the focus became very diffused. We didn't make that mistake. [music] I said, "Look, our 100-day plan says we are to have three uh priorities and those three priorities are economic recovery, economic recovery, and economic recovery. And that's what we ought to focus on for the first 100 days and carry out our plan." >> All right. So, you see that was that's uh Jim Baker. He was uh chief of staff and very important Reagan adviser talking about those first months in office. And so, Reagan did. He went, went and lobbied Congress. Really made it the focus of everything he did.
Okay. One of the things that's interesting about this particular moment um in, you know, fiscal policy is that uh policymakers became aware of a phenomenon called tax, or excuse me, bracket creep. And so you're asking yourself, what is bracket creep? Well, it goes something like this. Inflation is a general rise in prices, but it usually also means a general rise in wages. Now, those wages can't buy anymore as they're going up, but they are going up. Well, the way the tax code was written, it went something like this. If you earn, let's say, $1,000, you paid this percentage of your income in taxes. If you earned $5,000, then it would be a higher percentage of your income in taxes, $10,000, and so on. So, with each incremental rise in wages, you paid a higher percentage of your income. Well, as you can imagine, in an inflationary environment where my wages are going up, but so are prices, I am nevertheless moving from one tax bracket to a higher tax bracket, not because I'm earning more in real terms. I'm earning more in nominal terms. And so, you can kind of capture this in this chart I have over here on the right. So, the top tax rate was for top taxpayers, 70%. Right? So the marginal amount they, you know, on the margin, they were paying 70% of their income and you can see that the percent of personal income going to taxes, there would be a change like in 1970, it changed from 71.75 down to 70. And so the tax as a percent of personal income declined, but over time it would climb back up and then they would make a change and it would drop, but then it would climb back up. So by '78, '79, once again, '80, a higher percentage, '81, of people's income is going to taxes, not because they're earning more in real terms. It's just that their income is going up because of inflation, but so are their costs, but their tax burden was also climbing. So, one of the things that Reagan also wanted to tackle in tax reform was not just reducing taxes, but making sure that the government couldn't, didn't have it's essentially taking away an incentive for the government to run inflation uh throughout the economy as a way to capture more tax revenue. Right? Does that make sense? So, it's an incentive, it was an incentive, the government, the government had an incentive to create inflation in order to get more tax revenue.
All right. Well, as it turned out in 1980 through the elections, many Democrats had also campaigned and endorsed tax reduction. They all had different ideas about what they wanted cut, but generally speaking, there was bipartisan support for a tax bill. And Reagan took advantage of that and so worked with Democrats to a certain degree to build what ultimately became the Economic Recovery Tax Act, ERTA for those at the time, that's the acronym, which made it through Congress and became law in August of 1981. Like I said, it passed with bipartisan support and it included cuts for both businesses and individuals. It had a ton of itemized tax credits and reductions. This is part of what happens when you run a tax cut through Congress. Everybody has something they want protected and so those all got added to the final bill. And the most important thing for uh, you know, Reagan, I think was probably that it indexed, well, maybe not the most important, but one of the important things is that it, it indexed tax brackets to inflation so that bracket creep wouldn't happen. Josie, you've got a question. >> Yes, I do. Um, I was just wondering if we should, like, how these tax cuts, like, do they relate to Keynesian economics? >> Yeah. Right. So this is a really good question and I think it's one of those things that economists would still debate. The rationale for the tax cuts was very different. Remember, for Keynes, the rationale is always going to be we need more demand, that money isn't getting used. Right? This whole thing we talked about liquidity traps where money is trapped in savings and isn't recycling back through the economy. Of course, in 1980-'81, the problem is the opposite. There's too much money getting recycled too quickly. That's what's driving inflation. So the justification would be very different. Now, is the effect that it had Keynesian? That's a much more controversial question. I don't know the answer to that. I think, uh, that's the kind of thing where I think economists still are arguing about it. But, uh, but it is a good question. We'll have to kind of think about. Yeah. Hey, >> so how close to Laffer's theory was the tax reform in actuality? Like, did it, did Congress modify it at all for their own interest or how did that work? >> Yeah. Right. So this is also controversial. Good question. Um, I would say in spirit, it is pretty close to what Laffer was saying. My sense is, uh, from what I've understood, he said subsequently to really be effective, you have to take into account not just what the federal government is taxing, but also what state governments are taxing. So you'd have to mix both, all, so the total tax bill, as it were, for for individuals. Uh, but by contrast, um, so there's a guy, David Stockman. He was the budget director for Ronald Reagan during this period and he was a little bit disillusioned with the consequences of the tax cuts. And he sort of famously said, and I'm going to approximate his quote, but he said something like, supply-side theory had as much to do with this particular tax cut as love has to do with an orgy. Uh, in other words, uh, you know, uh, it would be an accident if that was the case. And so, anyway, Sarah, I know you're all snickering. It's a BYU professor saying the word orgy. Uh, let me just be on the record of saying this. I am in no way advocating for that. I am just quoting uh what David Stockman had to say at the time. All right, let's keep going.
All right, so the, what, what did it actually include? What did ERTA have? So it dropped that top rate that we looked at before from 70% to 50%. And it phased in overall, just about everybody got a tax cut, about 23% for all taxpayers. This is one that's really important for business. It accelerated depreciation deductions. So if you're investing, you can get a tax cut by virtue of investment. So this is a good way. Again, this fits that supply-side theory. We want more production coming out of business. As I mentioned, it indexed individual income to inflation so that you wouldn't get pushed into a higher tax bracket just because of inflation. And, uh, it started this practice. We could start doing IRAs, which I know doesn't matter to all of you because you were young and not even thinking about it. For people like me who are contemplating retirement, this is an important innovation. Yeah. Jordan. >> So is this also Keynesian in the sense that you're pulling, instead of the government having to spend more, you're getting the investment side of it because accelerated depreciation deductions and also establishing IRAs puts more money in for investment. So is that also the Keynesian side of this or >> Yeah. Right. So you're, this is exactly right. This is one of those questions we have. I mean, in a sense, it's like Keynesian economics, but again, it wasn't the rationale. So whether it had a Keynesian effect, we'll have to answer that in about 15 slides when we see what happened next. And I think you could make the argument this is just Keynesian stimulus, but again, the justification was on the supply side. That's at least the argument. All right, so let's keep going.
So in the meantime, and this is something we've talked a lot about. Uh, in '79, Paul Volcker became the chair of the Federal Reserve and had already decided to take action on inflation even before Reagan took office, right? And that meant mostly shrinking the money supply, or I shouldn't say shrinking, but shrinking the growth in the money supply, trying to hold, you know, the stock of money in check. And did that in part by raising interest rates dramatically. And so there were already anti-inflationary measures being implemented even before Reagan took office, right? And this actually had the consequence of pushing the economy into a really severe recession in 1982, just about the moment that the tax cuts got passed. >> In 1979, Volcker was appointed chairman of the Federal Reserve Board of Governors. The Fed tries to avoid inflation because it causes many problems. Businesses don't know where prices are headed and can't plan for the future. Individuals tend to spend their money faster before it loses even more value. And they tend to save less. >> If you're going to build more factories, if you're going to buy some machines, you have to have some savings. But there's no incentive to save. If you see your savings going up in smoke, so to speak, because prices are rising. What's the use of saving $10 this year if it's going to cost you $15 next year, uh, for what you didn't buy this year? One fear was that inflation could spiral into hyperinflation, as it had in Argentina, when the government kept printing more and more currency. At one point, Argentina's inflation got so out of control that consumers rioted against rising prices. So in 1979, the Fed was forced to take strong action. Inflation can only persist with big growth in the money supply that feeds and and supports the inflationary, uh, process. So what the Federal Reserve does fundamentally is control the money supply. And we finally reached a point where we said, look, we're just not going to permit an increase in money supply to support this inflation. >> All right, so there's Volcker explaining some stuff we've already talked about. One way to capture this is, okay, you can see in the yellow, that's the inflation rate. White is the interest rate that was prevailing in the country. My father-in-law tells this kind of nightmare story. He and my mother, uh, mother-in-law bought, uh, their, the house there in, still in, I think 1981. And he felt lucky that he got an 18% interest rate. Right? Today, you can see the signs when you're driving along I-15 offering interest rates for 30-year mortgages and they're like around 5.96%, something along those lines. Right? So three times higher interest rates at this point. I mean, I think he was lucky to be able to afford a house at that interest rate. Right? So anyway, this had an obviously a real impact on the economy generally and drove the country into recession. But you can see by the time we get to like 1982, '83, that inflation rate was coming down and so then the interest rates started to follow that down.
All right. So, uh, we have then a really curious situation. And and this is one of the complexities that are going Oh, yeah. Okay. Yeah. Question is about the last slide. So, did Reagan ever, did he try to fire Paul Volcker? Or like, if he was doing something that was like opposite, did he ever like put pressure on him to? >> Yeah. Right. So very interesting, very topical question, right? Does, is it a good idea for the president to pressure the chair of the Federal Reserve on monetary policy? And so one of the interesting things is Reagan never put pressure on Volcker. Uh, generally supported Volcker, Volcker in this effort and, um, and generally was, um, you know, appreciative of the work that Volcker was doing, even though, right, this is a tough thing for a president. Uh, if your economy is in a recession in 1982, which is a midterm election year, you know, it could have cost Republicans seats in Congress. Nevertheless, basically was like, okay with this. Said, "We have to get this done. This is the right move." Yeah. Okay.
So, look, here's what I was saying before. So, '82, '83, this is a really fascinating moment because think about what's going on. There's a clear contradiction in policy here. So on the one hand, we have the Federal Reserve advocating for a contractionary policy. At the same moment that the federal government is advocating for an expansionary fiscal policy. Right? So tax cuts on the one side, while you're trying to limit the supply of money on the other side. So they're kind of working in some ways at cross purposes. All right. Well, here was the longer-term, or at least medium-term, consequence. You can see inflation did, in fact, come down, but so did unemployment. So again, this is a refutation of the Phillips curve. You have these two things that should work inversely, actually working in tandem. So that by the time we get to 1983, '84, '85, inflation, unemployment is now back around 6%, which is not super low, but is definitely better than 10%. >> C-SPAN's Lectures in History podcast continues in a moment. Now back to C-SPAN's Lectures in History podcast. >> Right. And so, uh, one, you know, by the time Reagan did come to re-election in 1984, the economy, at least, was looking pretty solid, right? So, it looked like inflation had finally been beaten and, uh, and the economy was actually growing.
Okay. So Reagan had promised to reduce government spending while reducing taxes, but it turns out it's really hard to reduce government spending in general, let alone when facing a really severe recession. So as a result, uh, the spending didn't necessarily come down. Moreover, the tax cuts actually did not, at least initially, pay for themselves. So as a basic question, like, when tax revenue declines even while government spending increases, what is the result? And you guys can all say it at once. Yeah, Jack. Yeah, you get a big deficit, right? So, one of the consequences is that debt, and I'm measuring it here as a percentage of GDP, grew quite a bit during the Reagan years and for the obvious reason, right? Like I said, if you're cutting your income, while you're increasing your expenditures, debt is one of the consequences. And this was already clear in 1982. So even while the recession is going on, as both Republicans and Democrats in Congress and Reagan are looking at this, they sort of work together to say, "Okay, we got to do something to at least try to close this debt a little bit." So in 1982, Congress passed and Reagan signed the Tax Equity and Fiscal Responsibility Act, which increased taxes on interest and dividends, reduced depreciation deductions, which we just talked about, and increased consumption taxes on, often called sin taxes. You increase taxes on things you don't want people to do anyway, like smoke cigarettes. So, they tried to raise a little bit more revenue that way, try to reduce the debt, but as you can see, the debt kept climbing moving forward. Yeah. Erin. >> Yeah. So, in this situation, since the taxes were raised, is this just a reversal of effects or did it, did it completely cut out the, the tax cuts that were previously done? >> So, really good question. And, uh, the answer is, the, the tax revenue generated, as we can see, the tax revenue generated from these increases was smaller than the tax cut, right? That's why we keep seeing deficits growing. So it's, it's trying a little bit, hoping that things will, you know, the economy will rebound and maybe that'll help something along those lines. So the net effect is the big tax cut was bigger than the increase. But let's keep going because that was just increase number one because look, 1983, you still have the same problem. And in this case, in 1983, the, uh, the growing deficit was affecting Social Security's ability to pay out benefits. So Congress worked with President Reagan to save Social Security. And, uh, in 1983, the Social Security Reform Act made its way through Congress, became law. This raised payroll taxes. So you guys pay these right now if you have a job, that goes to Social Security. Uh, and also taxed Social Security benefits. So it reduced the amount of benefits going to retirees and delayed payouts for a little bit of time, uh, and so on. So, in other words, this helped save Social Security, but in, but actually raised taxes. Okay. And then you keep fast, you know, looking forward and you can see that the def, the debt was still pretty high in 1984. So in '84, once again, Congress and Reagan worked together to see about reducing the deficit. And this time they passed the Deficit Reduction Act. So in July of '84, this further increased taxes on interest and dividends, further reduced depreciation deductions and so on. So, in other words, if you're keeping track, you have one big tax cut followed by three smaller tax increases.
All right. Well, I said things were actually picking up by 1984 in the economy. And you can kind of see it. This is GDP. So there's that negative number in 1982. That's the recession. But by 1983, you can see the economy came roaring back, right? That's a big number. 8% growth is a really big number for, you know, the United States. The average growth for the last, let's say, hundred years is around two and a half%. So this is four, four times, you know, not quite four times more than the average, uh, but a really big number. And then it stayed very solid, uh, throughout the remainder of Reagan's term, which meant that as Reagan sought reelection, he was actually in a pretty good spot, right? And I want to show another stat because this one we don't talk about a lot. We always talk about the unemployment rate. And unemployment measures the number of people who want jobs, uh, versus the number, you know, so how many people want a job but don't have a job. But that could mean, you know, a lot of different things. And we talked about this before, maybe a lot of people want jobs and therefore, or the unemployment rate is really high. Maybe people have given up looking for jobs. And so the unemployment lowers not because more people have jobs, it's just because fewer people are looking. But this is the percentage of Americans who actually have jobs. And you can see in the Reagan years, the total number of people who got jobs actually went up pretty dramatically. And part of this is women entering the workforce, but part of it is that the economy was just very strong. And so more people could find jobs. Okay. So, yeah, there are the Reagan years.
Well, as a result, when the '84 election came around, Reagan was in a strong position. And very quickly, it turns out the main issue driving the election was, is Reagan too old? And this sounds very weird. You know, we've just had Trump and then Biden and then Trump again, and they're all pretty old, right? So, uh, so Reagan went into his debate with his opponent, Walter Mondale, and Mondale was pressing the case. Reagan might, might have been pretty good, but is he going to be, you know, alert enough to get through a whole second term? >> You already are the oldest president in history, and some of your staff say you were tired after your most recent encounter with Mr. Mondale. I recall yet that President Kennedy had to go for days on end with very little sleep during the Cuban missile crisis. Is there any doubt in your mind that you would be able to function in such circumstances? >> Not at all, Mr. Trud. And I and I want you to know that also I will not make age an issue of this campaign. I am not going to exploit for political purposes my opponent's youth and inexperience. [applause] >> All right. So, uh, when you kind of mix a good economy with a lot of charm, uh, it all bowed well for Reagan going into the '84 election. As it turns out, it was not super close. So, uh, this is the electoral map and you can see Mondale carried his home state of Minnesota along with the District of Columbia, but lost all of the other states. And, uh, you can see even in the popular vote, uh, Reagan won by really significant margins. Right? So, okay.
So this is also, I, I wanted to point this out because part of what we're talking about is not just Reagan the policies, but Reagan who the symbol, right? Reagan sort of casts this shadow over politics ever since, partly because of what he did, but partly because you look at this and you're like, this is a person who, you know, really dominates. So if you're, if you're a Republican, this is part of why Reagan, people keep going back to Reagan and saying, this is what we've got to continue. This is kind of the hero. And if you're a Democrat, this is the, the image that you need to tear down in some ways and try to clarify why it wasn't so great and why this was a mistake and, and so on. So, okay, which leads us into the next part of what we want to talk about, evaluating Reagan because there are a lot of things people say about Reagan, but we in history class want to go back and look at the record and say, well, is that an accurate appraisal of what actually happened, what he was about, what he was trying to do, and what the consequences were. So the next few, few slides, that's what we're going to do. And we're going to start with his supporters. >> There was a strategy. Less regulation, lower tax rates, get inflation under control. If you do those things, you may have a short-term problem, but in the longer term, you'll have a strategy that works. >> People forget the fact that when we came into power, the top marginal tax rate was 70%. It's time to create new jobs, to build and rebuild industry, and to give the American people room to gave us a prototype. Low taxes, less regulation, limited spending. That's the model. He created an economic miracle. >> It's clear that recovery is strengthening and spreading throughout the economy. And as Al Jolson would have said, you ain't seen nothing yet. >> Okay, so you heard this is, and this is very common. I think if you talk to people who really like Ronald Reagan, want to talk about the things that he accomplished, these, this is usually the list. So he cut taxes, he cut regulation, got inflation under control, brought about an economic recovery or even an economic miracle, uh, and limited spending, shrank government. That's, that's basically the claim. So okay, let's go through these one at a time.
So let's start with cut taxes. Well, uh, overall tax revenue did, uh, decline as a percentage of GDP after '81, but as we know, he raised taxes three times. So that it approached where Jimmy Carter's taxes were in the 1970s. So if we look at this graph, you can see, right? So Reagan's, you know, the big cut right in '81, but by the time we get to '87, '88, that's roughly as a percent of GDP where taxes were in '77, '78 when Jimmy Carter was in office. So in a sense, he did cut taxes, right? Or, and he definitely cut the growth rate in taxes, but he also raised them enough to try to close the deficit so that we're kind of a put the country back where it was in the 19 early, sort of mid-1970s rather than late 1970s, 1970s. So we'll call that, that one half true. All right, let's try the next one. Cut regulation. So we didn't really talk about this and I hate to say it. I don't mean to be a lazy professor. I'm just going to skip this. Uh, the problem is that it turns out Jimmy Carter also cut regulations and it's not always clear whom to give credit to in evaluating this. So if you guys will forgive me and in the interest of time, this means we will get out on time, which you guys always like. So, uh, you will get out on time by virtue of the fact that we're going to skip the question about regulation. Got inflation under control. All right, we're going to call this one maybe a little true. Now, how little I leave up to all of you because we have to say Paul Volcker probably had more to do with this than Ronald Reagan, right? It's the, as we've talked about a lot of times, inflation tends to be a monetary phenomenon. So, Volcker in terms of controlling the monetary supply, he probably is the one to do it. But to his credit is that, you know, Reagan didn't criticize or pressure Volcker to reverse course. It was consistent in his mind with what he was up to. And so again, you know, we have to give him at least credit for not making it harder for Volcker to do what he wanted to do. Okay. Brought about economic recovery, economic miracle. Yeah. Jordan, do you think if Paul Volcker didn't do what he did with inflation that regonomics, as a general, would actually have worked as well as it did? >> Uh, so that's, you're asking my opinion. >> Your opinion. >> So I will say this is controversial. Uh, I don't think so. I mean, I, I am persuaded personally, I am persuaded that if, if you're always increasing the money supply, you eventually get inflation, no matter what the, the Fed, you know, the federal government does, right? So monetary policy ultimately determines inflation in a way fiscal policy doesn't. But I will be honest, there are good counterarguments and, uh, and people, very smart people would disagree with me on this. So, so, uh, if you're ever, if you're applying to business school or something and this comes up, make sure you know what the person thinks across. You don't just, don't just quote me, right? Uh, we want to get you into school. Okay, so point four, brought about economic recovery, economic miracle. Let's say this could be true, right? And it's a tricky question and it goes something like this. So here's again our graph. There is no question that GDP expanded dramatically, uh, from the trough that was coming, you know, at the end of the Carter years and then the early, uh, part of his own term. So that part is true. And again, employment participation we talked about. But the question is this, uh, and, and you're going to want me to answer this one too, and I don't know the answer to this one very well, which is, uh, what was the role of the Federal Reserve? Right? You have these two big players in the economy working in opposite directions. Which one gets the credit? Right? Maybe the tax cuts are responsible for the economic growth? Maybe it was the stabilization of prices? Or, and this is the answer you guys love to give every time I give you an essay question, it's like, well, they're both right. You know, everybody is so nice here at BYU, right? Uh, so maybe there's this way that they're both important. So you have to have both stabilization and a smaller tax footprint in order to get the kind of 8% growth, uh, almost 8% growth we saw in '83, right? Something like that. So anyway, so it's a tough one to evaluate. So I'm going to call it could be true, might be true, you know, probably is true, maybe. I don't know. Somewhere in that range. Okay, limited spending. This one we're just going to call false. And you can see it here. This is government spending, federal government spending as a percentage of GDP. And you can see that at almost no point in the Reagan years was it lower than the lowest point in the Carter years. I mean, you can say that maybe he reversed the trend that was running up through 1982. But in practical terms, the government, in terms of, and again, in terms of spending, was about as big when he took office as it had been under Gerald Ford in the '70s and higher than it was at the low point in the Carter administration. So in this sense, you'd have to say this claim is not true. All right. So those are his advocates. What about the people that don't like Reaganomics? What do they say about it? >> Easy part of it is, you know, let the market be free. Let the people who own the businesses do whatever they want, cut their taxes, uh, give them incentives to produce more. Now, the problem is that generally speaking, when you cut taxes really dramatically, obviously the amount of money going into federal coffers is is reduced. Therefore, the federal government has to either cut spending or they're going to run a huge deficit. Well, the Reagan people came up with a theory that you could cut taxes and this would goose the economy so much that you could actually increase proceeds at the same time and it would all work out. George Bush famously called it >> Sold as less government. In other words, less spending and less taxes. But there was a fundamental deception about that because there was only less spending in certain areas. I'm sure there's one department you've been waiting for me to mention, the Department of Defense. It's the only department in our entire program that will actually be increased over the present budgeted figure. >> The cuts were only in relation to social spending, education, welfare, food stamps, [music] that sort of thing. Uh, enormous increases in military spending. He told the secretary, >> "The essence of regonomics was a massive transfer of wealth towards the rich and away from the poor." The Reagan administration, by cutting taxes overwhelmingly for the wealthiest and the corporations, set in motion arguably the single greatest government-led transfer of wealth in history and in the direction of the top 2% of the country. >> In 1980, the top 1% of Americans earned wages of about $110,000 a year. By 1990, after about 10 years of reggonomics, boing, the top 1% had seen their wages rise by 80%. Trickle-down economics, though, right? What's good for the rich is good for all of us, right? Not quite. Here's the average wages of the rest of the country in 1980. And here's what happened for the rest of the country after about 10 years of reggonomics. Flat. A whopping 3% rise in wages in 10 years. The richest people see their fortunes go up like the Matterhorn. Everybody else, f-nothing. This is what family income growth looked like during the 1980s. Look at that. The richest 1% of Americans had an awesome decade. They saw their family income skyrocket by 74%. Everybody else, not so much. In fact, the poorest Americans saw their income shrink by more than 4%. That was reggonomics. That was what reggonomics did. That was the impact of reggonomics. It was the results of this experiment called trickle-down economics. The rich did great. Everybody else still waiting for the trickle.
Okay, so those are the typical complaints about reggonomics. So let's go through it. So raise the deficit, cut social spending while raising military spending, increased inequality, a massive transfer of wealth from poor got poorer, rich got richer, and the middle class got squeezed. So let's go through these. All right, so let's start with number one. Raise the deficit. Well, we know that that's true, right? We already saw the chart. Everything else. So, this part we have to say the critics are right about. Okay. Two, cut social spending, raised military spending. We're going to call this one half true, right? So, as it turns out, through the Reagan years, more money went to the military. So, this is kind of an absolute dollars. And I know it says in hundreds of thousands, so that's actually in billions. So it should be like 50 billion, 100 billion, so on. By the time, uh, he left office, the US was spending about $300 billion on the military, which is a fair amount of money. But what about the cutting social spending? Well, we already know that's not quite true. So here, this chart, this is increases in welfare spending. So if he had cut spending, some of these numbers should be negative, should be below zero, right? But you can see in every single year, it's on the positive side. There was an increase in the amount of welfare spending. Now, you could say it might be less than say the Carter and Ford years. So that might be an argument, but in, uh, in absolute terms, we'd have to say welfare spending increased every single year Reagan was in office. Yeah. Jordan. >> This chart year to year, so like '84, it's that much higher than '84. >> Exactly. That's right. So it's compounding. You're exactly right about that. Okay. Right. So, welfare spending increased. So we'll call this half true because it's true that increases happened in, uh, the military, but also with welfare spending. And here if you see them side by side, right? So the red line is welfare spending. The blue line is military spending. You see military spending outpaced welfare spending except for in the last couple years. Oh, I'm sorry, I don't have it shaded, but Reagan was in office all the way till '89 there. So in the last year or two of his, uh, time in office, welfare spending was increasing faster than military spending. So, uh, in other words, we're going to have to call this one half true. All right, point three, increased inequality. This one's going to be a little bit more challenging to evaluate. I'm going to call this one could be true. So, here's the part of it that is true. During his time in office, the top 10% of income earners grew. You know, you can see their share of everybody's income went up. So in other words, if the top 10% of earners were earning about 31, 32, 33% of all income in the country in '81 when Reagan took office, by the time he left office, that had gone up to about 39%. So that part is true. So income inequality grew more stark during his years in office. Here's where it gets complicated. Especially in about the last 15 years, economists have done a lot of research on income inequality. And the question is something like, was this a Reagan phenomenon or is this a global phenomenon? >> C-SPAN's Lectures in History podcast continues in a moment. Now back to C-SPAN's Lectures in History podcast. >> And you know, in this class, we've always asked that question. If the same thing is happening not just in the United States, but throughout sort of the Western world, uh, then is there an underlying cause that doesn't have to do with the specific policies of that country? So here is Europe, and then again, we're looking at the Reagan years, and you can see that from a similar starting point, the top 10% of income earners also saw a pretty significant increase. Now, not as dramatic as the US. In Europe, it's maybe from about 30% or so, 31% to maybe 33%, something like so a couple percentage points increase, whereas the US, it was from 31, 32 up to about 38. But still an increase. Uh, and so maybe there's something else going on in the economy. And then if we look at this chart in more, even sort of fine-tuned way, so different parts of Europe and over a longer span of time, we can see that in fact, parts of Europe have seen very similar rises in inequality, particularly Eastern Europe, right? But also that in the United States, you see similar climbs in inequality through periods we wouldn't expect. Right? If this is all about reggonomics, then why under the Clinton years would we see a similar climb in inequality, or under the Obama years, Obama years, excuse me, would we also see a climb in inequality? So the question very quickly becomes, well, was it reggonomics that did this, or is there a broader phenomenon that is both longer-lasting and more global in reach? So this one we'd say could be true. Okay, let's keep going. Oh, with, so in other words, it is true, I'll summarize it this way. It is true that inequality increased during the Reagan years. It is true it happened more in the US than elsewhere, but it happened in Europe as well, and it has continued to happen even after Reagan has left office. Okay, let's go now to this last one. Massive transfer of wealth. Poor got poorer, rich got richer. So I went and looked and I don't know, can any of you read this? It's from the, the sources, the Economic Policy Institute. So one of you maybe can track down the study that Rachel Maddow is citing here. I tried, I'll admit, I didn't spend a lot of time. I spent like maybe 10 minutes trying to track it down and when I couldn't find it, I just was like, "All right, I'm not going to worry about it. I'm just going to try to duplicate the study." So I went to the census data and I have to call this one false. So, this is what I found when I went and looked at the US Census data and I went back a little bit further to try to help clarify what was going on. Again, this is a history class. We always want to know what happened before. So, okay. So if you break it down in quintiles, so 20% groupings, which is typically what the census does, and you look at household data, not family data, which I'll explain in just a second why that's important. It turns out that compared to the '70s, the Reagan years were pretty good for all quintiles. Now, it does capture the inequality problem, right? In other words, the upper 20% did make quite a bit more, really, you know, so in other words, this is from '81 to '88. So in '88, that upper quintile was doing about 20% better than it had in '81. Uh, but even the lowest 20% is still doing about 8%, 7 and a half% better on average than it had.
done in 1981. So all quintiles are better off. And as you can see comparatively, that's a much better record than what we see from '89 to 2000, and clearly a lot better than what was going on in the seven years before Reagan took office.
Now, why is the household thing interesting? Uh, there's just, it's a weird quirk of the census that the census thinks of families. Well, the census thinks of families in the way we would, uh, some kind of legal relationship. So, husband, wife, with children that belong to them all together, that's a family income. Household would be, let's say you have a man cohabitating, that's two separate families, there's no legal relationship. So, if you're, this is a trick. If you want to talk to somebody about income inequality, if they pull out family data, they're trying to say the problem is worse. Because think about it, if there's a man and woman living together but not married, and one of them works full-time and the other one is stay at home, family income will say there's a huge gap between wealthy employer, right? One has zero income, the other has all the income. Whereas if it's household income, it averages the two, and so you don't get that gap. So, I think that's also part of what the Rachel Matto thing is showing is that I think they, they were selective in what they picked in order to get to the outcome they wanted.
But, okay. So, we're going to have to call this one false. Leads me to the last claim. The middle class got squeezed. So, I'm pretty much definitionally middle class. That's, uh, what an average professor's income is, right? Uh, maybe not if I taught in econ or law, but in history, we're pretty much middle class. Uh, I don't know what it means to feel squeezed. Uh, I'm not sure about this. Maybe someone else knows. I think this is just a way of saying that, you know, uh, you know, the middle class. I don't, I don't actually, I just don't know. So, I just have question marks. I'm not sure how to evaluate that particular claim. Uh, okay.
So, let's bring it all together. So, here it is. Cut taxes, half true. Raise deficit, true. Less regulation, we skipped. Sorry, but we're going to get you out on time. Cut social spending, half true. Stopped inflation, a little true. Increased inequality, could be true. Economic recovery, miracle, could be true. Massive transfer of wealth, false. Shrank government, false. Middle class got squeezed, who knows, right? That is the rough evaluation of Reaganomics.
Okay. So, yeah. Abraham. >> I was just wondering like, who should get more credit for the economic recovery? Should Boer or should? >> See, I knew you were going to ask me this. I said, you're going to want me to take a stand on this. >> Uh, so I don't know. Uh, but I would say maybe given the fact that Reagan was actually supportive of the Vulkar program, we could say Reagan deserves. I should maybe change it from could be true to probably true. Does that make sense? But, but, um, but I don't know because you'd have to add in the part that he didn't just cut taxes, right? He then raised them. So, it's maybe the combination of all the things that ended up helping the economy grow.
Okay. So, here is, if you want to be historically grounded and rooted, what are the things we can say about Reaganomics that would be accurate? Well, we should say this. Reagan saw significant economic growth with a disproportionate share of that growth going to the wealthiest Americans, right? So, not all of it, but more of it went to the wealthiest Americans than went to everybody else, but significant economic growth. Okay. Reagan increased federal spending. So, he didn't cut any part of, you know, like I said, maybe individual programs, but, but in the aggregate, federal spending went up with the military budget growing a little faster than the rest of the budget. My sense is that those are both historically defensible claims.
Now, it all leads me to an interesting point, and you guys have maybe heard this in your own, as you've listened to, you know, different people on t, uh, well, you guys never watch TV, YouTube, Instagram, maybe TikTok talking about the Reagan years, right? Uh, there's this weird way that both conservatives and liberals talk about Reagan that, based on what we have just clarified, it's not true. Right? So, we have a situation where they keep repeating things that you would think the other side would say, "Well, that's not true. Why do you keep saying?" I'll just give you one example quick here.
>> Paul's Church. >> Hi, Russ. I, um, I'm calling because, well, first of all, I'm a liberal, and I seriously don't understand, uh, this Reagan idolatry on behalf of conservatives. I'll get, I'll give you my reasons. Instead of privatizing Social Security, he raised taxes. We're all paying higher taxes today out of our paychecks every single week because he decided to save Social Security. He >> hold, I need to go way. Oh, jeez. Um >> the Greenspan Commission. >> Um >> he, he signed it into law, and it raised taxes on social security. >> You're talking about Reagan or Clinton? >> I'm talking about Reagan. >> Would understand it. Where, where did, where did you get this silly notion that Reagan raised taxes on Social Security? What, what websites do you read? Where did you pick that up? Reagan was, I don't, do you understand the notion Ronald Reagan fought for America? He loved America. >> All right. So that's Limba trying to explain. No. What do you mean he raised tax? But we know he did. I think Limbbo actually knows that he did too, but it doesn't kind of fit the narrative somehow.
So, it's, we have this weird situation that I'm going to ask you guys, as our kind of our last thought. Why is it that people that disagree about everything, Rachel Matto and Rush Limba, you know, conservatives and liberals, why is it that they both have decided to agree on what is actually kind of a false narrative about Reagan, that he cut taxes and he cut social spending?
>> Yeah, Jack, he's more of a symbol than like a real actual like historical figure. Yeah, I mean, I have to agree with that. Thank you. That's actually the perfect summary of, of what we're talking about here. I mean, I think that in some important ways, Reagan the symbol is more useful for contemporary political talk than Reagan the historical figure. And, and so he continues on, and these myths about him continue on about cutting government spending, shrinking government, cutting taxes, all this sort of stuff because that remains a valuable argument for both the left and the right, but sadly obscures the actual historical record.
Okay, you guys, I promised I'd get you out of here on time. Our time is up. Thank you all, and I will see you all back here, uh, later this week. [applause] To find more of our history programming, visit our website at cyphenspan.org.