Defending the Reagan Deficits
June 16, 2004
Critics of President Reagan's budget deficits should answer one simple question: Would you trade the collapse of communism, your smaller tax burden, some of your income -- and possibly your job -- in exchange for eliminating that $2.1 trillion in added debt?
Coverage of President Reagan's legacy has been generally fair, with one exception. Many say, "Reagan masterfully won the cold war … but those budget deficits." Or "America needed Reagan's infectious optimism … but those budget deficits."
Not all debt is bad. Mortgage debt and student loan debt are worthy investments. No one criticizes President Franklin Roosevelt for the massive debt that financed World War II. Yet the commentators criticizing President Reagan for the $2.1 trillion in added debt (all numbers are in today's dollars) ignore how that debt won the Cold War, lowered the tax burden, and ignited the largest economic boom in American history.
Those who denounce the Reagan deficits should answer the following questions:
Would you bring back the Soviet empire? President Reagan spent $3 trillion on defense, well above the $2.2 trillion baseline. What did that extra $800 billion buy? The end of the Cold War -- saving, perhaps, a billion lives from nuclear extinction.
No less than former Soviet Union Foreign Minister Alexander Bessmertnykh has been quoted crediting President Reagan's defense buildup for the accelerated collapse of the Soviet Union. The fragile communist economy, already stretched thin by substantial defense spending, could not keep up with America's defense buildup. The possibility of American missile defense, and President Reagan's powerful rhetoric, further persuaded the Soviets they could not win the Cold War, and induced the reforms that culminated in the collapse of the Soviet empire -- without America firing a single shot. It was the best $800 billion investment America ever made.
Would you raise the top income-tax rate back to 70 percent? Commentators also blame the 1980s deficits on President Reagan's insistence on reducing taxes in 1981. Yet President Reagan inherited the worst economy since the Great Depression. Excessively high tax rates were discouraging work and investment and therefore damaging the economy while raising little revenue. President Reagan removed barriers to entrepreneurship by reducing tax rates, cutting red tape, and stabilizing the economy, thereby encouraging risk takers. The centerpiece of this policy was a radical series of across-the-board tax cuts that lowered the top income tax rate from 70 percent to 50 percent, and eventually to 28 percent. (It stands at 35 percent today.)
This tax relief unleashed a 20-year surge of entrepreneurship, as the U.S. economy tripled in size. The lasting impact of these policies can be seen in successive presidents, who ratified Reaganomics by refusing to even consider raising taxes back to their 1970s levels. Thus, America continues to benefit from lower tax rates.
Would you trade 2.8 million jobs? Before the Reagan tax relief, the unemployment rate averaged 7.7 percent. Since the tax cuts, it has averaged 5.8 percent -- a difference that translates into 2.8 million jobs per year.
Would you trade $15,000 of your annual income? In the two decades before the Reagan tax relief, the average household's annual disposable income increased $13,000. In the 20 years following Reagan's tax cuts, these incomes surged $28,000.
Would you trade the stock market boom? In the two decades before the Reagan tax relief, the S&P 500 increased 120 percent. In the 20 years following Reagan's tax cuts, the market jumped 575 percent.
And don't forget the 12 percent inflation rate and 21 percent interest rates that Reaganomics slew.
The Reagan tax cuts replaced the deepest recession since the Great Depression with the largest 20-year boom in American history. Tax revenues actually grew faster in the low-tax 1980s than in the high-tax 1970s, and rising incomes meant the share of taxes paid by the wealthy actually increased throughout the 1980s. Millions of people who had entered the 1980s in the lowest income quintile surged to the highest income quintile by 1990.
All a coincidence? As Reagan would say, "there you go again."
Sure, President Reagan would have preferred to minimize the deficits by eliminating wasteful spending. However, the only way to persuade a Democratic Congress to accept a defense buildup and pro-growth tax cuts was to agree to their domestic spending demands.
Ironically, the 1980s budget deficits made the 1990s surpluses possible. The budget was balanced by surging tax revenues from a booming, low-tax economy and defense savings brought on by the end of the Cold War.
To paraphrase a classic President Reagan line: Are you better off today than you were in 1980?
Brian Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.