The Reagan Years: A Sobriety Test

I realize that many of my fellow friends of free-market capitalism will consider this article blasphemous. However, in view of the recent attacks on Newt Gingrich for having been overly critical or even disloyal toward President Reagan, it is time to take a sober look at the Reagan presidency.

There is no doubt that Reagan is one of the greatest presidents America has had. He was incredibly inspirational, and he stood up and defended this country against the Soviet bullies with unwavering resolve. He rightly earned credit, together with Margaret Thatcher, for having brought the Soviet empire to its knees. Back in the ’80s no one predicted the collapse of the Soviet Union; after it fell, many who had criticized Reagan for his hard-line foreign policy suddenly began saying that “oh, yeah, we all knew it was gonna collapse, Reagan had nothing to do with it”… Nonsense, no doubt. Reagan won the cold war for the free world.

On the economic home front, Reagan is often cited as the president who gave America 20 years of steady growth and rising prosperity. His tax cuts did indeed inspire the private sector, but to credit his tax cuts for the strong growth during the Clinton years is frankly disingenuous. The economy is far more complex than to let one change in one variable – even a big one like the tax-to-GDP ratio – have such a profound influence over all other variables for two long decades.

Reagan’s tax cuts did a whole lot of good, but they would have done more if he had also held back government spending. His tax cuts were necessary and welcome, but they also exemplify the kind of isolated mindset that seems to be the guiding principle for many fiscal conservatives. Their economic policy strategies tend to zero in on finding one silver bullet that will solve all our problems. (Welfare reform during Clinton is a similar example, but that’s a topic for another time.) A closer look at some key macroeconomic variables shows that the Reagan era was good for the American economy, but not uniquely good.

Let us start with GDP data from the Bureau of Economic Analysis. We compare seven presidential eras: Kennedy-Johnson; Nixon-Ford; Carter; Reagan; Bush Sr; Clinton; and Bush Jr. Our first variable is inflation-adjusted GDP growth per year, average for each presidential period:

GDP
Kennedy-Johnson 4.9%
Nixon-Ford 2.8%
Carter 3.3%
Reagan 3.4%
Bush Sr 2.2%
Clinton 3.9%
Bush Jr 2.0%

Reagan comes in third, behind Kennedy-Johnson and Clinton.

Notably, the four years with Carter yielded almost the same average annual growth rate as the Reagan years. This would make a statist jump up and down with joy and point out that Reagan was not all that good of a president after all. However, a closer look at the components of GDP reveal where that Carter growth came from – and why the Reagan years were better for the U.S. economy despite the similarity in growth. In the following table, C=Private consumption, I=Private business investments, X=Exports, Z=Imports and G=Government spending:

C I X Z G
Kennedy-Johnson 4.7% 6.4% 5.6% 8.3% 4.8%
Nixon-Ford 3.5% 3.7% 6.9% 4.7% -0.1%
Carter 2.7% 4.8% 8.4% 3.7% 2.0%
Reagan 3.8% 4.7% 4.6% 7.9% 3.3%
Bush Sr 2.1% 0.2% 8.5% 3.7% 1.9%
Clinton 4.1% 9.1% 7.2% 10.9% 1.3%
Bush Jr 2.4% 0.1% 4.3% 3.5% 2.2%

The first thing that stands out is the remarkable difference in annual private consumption growth between Carter and Reagan. During the Reagan years, private consumption grew more than one percent faster on an annual basis. This does not sound like much, but in today’s economy a single percent higher private consumption means $100 billion in more spending. To private businesses, that is worth more than one million jobs.

A higher growth rate in private consumption is also a good indicator of growing prosperity among America’s families. This means, among other things, buying a better home, putting better clothes on your kids, eating better, driving a better, safer and more environmentally friendly car, going on higher-quality vacations, and today (though not back in the Reagan years) making sure your kids always have an up-to-date computer.

Another stand-out shift from the Carter years to the Reagan era is the shift in foreign trade. During Carter America was an exporting nation, at least in relative terms. During Reagan our imports grew faster than exports. Conventional wisdom would say that this is bad for the economy, but there is another side to that. Big exports means we produce to satisfy the needs of others than Americans, and as international macroeconomic data tells us, it is not a good idea to rely on exports to create domestic prosperity. The multiplier effects are not that strong from exports to other sectors of the economy.

To sum up, our GDP data tells us that the Reagan years were good but not outstanding, and that the prosperity of the American people grew well but not excellently.

Another way to look at the growth of prosperity is to study personal income. The variable that makes the biggest difference is the so called Disposable Personal Income, or “what you have in your pocket” every month. This variable is determined in many different steps, from employment earnings to dividends and interest on savings to transfer payments from government. At the end of the day, Disposable Personal Income (DPI) is a good indicator of how well the finances of the American people are developing:

DPI TPG
JFK-LBJ 7.0% 18.1%
Nxn-Ford 9.6% 14.9%
Carter 11.4% 13.7%
Reagan 8.1% 14.6%
BushSr 6.2% 15.2%
Clinton 5.6% 8.2%
BushJr 5.2% 7.2%

As far as DPI goes, the Reagan era was better than any other presidency following him. The 12 years preceding his presidency obviously did more for the American people, but we have to keep in mind that the Carter era was one of very high inflation. Furthermore, the second column shows how government siphoned money off people’s earnings through “transfer payments to government”. These are payments in addition to the employer-mandated contributions to Social Security, Medicare etc. These payments grew very rapidly during all presidential periods, with double-digit annual increases through Bush Sr. While nominally small, these payments drained disposable personal income and got in the way of, e.g., private retirement savings.

The bottom line as far as personal income goes is that the American people’s standard of living is still growing, but at an ever slower rate. This correlates with the growth in government and shows that we are heading for a point where our children will grow up to a less prosperous life than we have had. Europe has already reached that point.

The third variable for evaluating the Reagan years is “jobs”, or employment data. Looking, again, at annual growth figures, these numbers from the Bureau of Labor Statistics tell us that the Reagan years were better than the Bush Sr and Bush Jr periods, but that the ’90s under Clinton and a Republican Congress were actually a tad better on the private job front:

Tot Nonf. Private Fed State Local Total Gov
JFK-LBJ 2.9% 2.6% 2.4% 6.0% 4.9% 4.4%
Nxn-Ford 2.0% 1.8% 0.0% 3.7% 3.6% 2.9%
Carter 3.3% 3.6% 1.2% 2.5% 2.5% 2.2%
Reagan 1.9% 2.2% 0.5% 1.5% 0.7% 0.9%
BushSr 0.8% 0.6% -0.1% 2.0% 2.2% 1.7%
Clinton 2.4% 2.7% -1.0% 1.0% 1.9% 1.3%
BushJr 0.5% 0.4% -0.4% 1.0% 1.3% 1.0%

During Reagan there was very little growth in government jobs, 0.9 percent per year on average. States expanded payrolls at 1.5 percent per year. During Clinton it was time for local governments to grow: their expansion at 1.9 percent annually drove total government job growth to 1.3 percent per year.

During both the Reagan and Clinton years, private job growth handily outpaced government job growth. This was not the case during Bush Jr, when local governments added jobs at an annual rate three times higher than the rate of private job growth. That parity was even worse during his father’s presidency.

All in all, Reagan was good for the American economy, and it is entirely possible that he would have done even better had he been given a Republican-led Congress by voters. If we can learn anything from his years, especially when compared to the Clinton era, it is that a fiscally conservative Congress working with a big-government president is better for the country than having a big-government Congress work with a fiscally conservative president.

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