When Ronald Reagan assumed office, the economy resembled the Great Depression with Americans focusing on the misery index. Combined, unemployment and inflation raced to never-before-seen levels. The economy continued to spiral downward until finally correcting leading to a dramatic economic expansion. By the end of the decade, the economy boomed and the misery index a bad memory.
The economy sputtered throughout the 1970s. The Great Society sapped the economy leading to large deficits. Two energy crises led to long gas lines and inflation. The end of the Vietnam War led to cutbacks on military spending, a sluggish economy, and unemployment. Government regulations, policies and high level of taxation slowed the economy further and personal income plummeted.
The economy grew at 5% under President Ford and continued to grow into the next administration. When Carter assumed office, unemployment stood at 7.5% and dropped to a little over 5%. In 1979, the second energy crisis struck the nation and poor monetary policy led to inflation. Carter attempted price controls, but this resulted in hyperinflation. The economy began to spiral out of control. On top of this, Iran held 52 Americans hostage embarrassing the nation and making Carter look weak. People felt helpless and the president seemed to blame the people. As a result, Carter lost his re-election bid in a landslide.
In January 1981, the unemployment rate was back to 7.5%, inflation topped 15%, the prime rate dropped to 20%, and 30-year mortgages topped 18.5%. Personal income had dropped throughout the 1970s and the budget deficit had hit postwar highs. Pundits wondered whether democracy could survive in the modern era. The American people hired Reagan to fix the mess.
Ronald Reagan’s economic platform centered on “getting the government off peoples’ back.” He promised to reduce taxes, control the money supply to reduce inflation, deregulate the economy, reduce government spending, and increase defense spending. At first, the Democrats promised to fight the president. However, events intervened and derailed Democratic opposition. John Hinckley Jr. decided to assassinate President Reagan in order to impress actress Jodie Foster. Hinckley believed he was another Travis Bickle, the disturbed and violent vigilante in Taxi Driver. He shot the president, but Reagan survived.
The assassination attempt was the latest in a long line of shocks absorbed by the American people dating to 1963. The assassinations of John and Robert Kennedy, Martin Luther King, and John Lennon were fresh in peoples’ minds. Additionally, Vietnam, Watergate, and the Carter Administration shattered faith in government. The Iran Hostage Crisis and Soviet invasion of Afghanistan called into question American strength. Americans were weary and afraid to hope.
President Reagan survived the assassin’s bullet. The president joked with doctors and told his wife that he “forgot to duck” upon entry into the hospital. Reagan’s popularity soared and cowed the Democrats into surrender on the tax cut issue. His economic recovery package passed congress with bipartisan support. In 1982, the Job Training Partnership Act helped unskilled workers back into the labor force. In 1986, the Tax Reform Act eliminated many tax shelters, included new tax incentives, and reduced individual tax rates. Throughout his administration, the president moved to reduce burdensome regulations to promote a pro-business environment.
In addition to tax and regulatory policy, the country embarked on an arms buildup and military modernization. The U.S. essentially moved to a wartime economy during peacetime. As the government spent more on the military, it continued to spend on other programs as well. The result was large deficits. Federal tax receipts increased from $309 billion in 1980 to $550 billion by 1989. Despite this, spending increased at a higher level. The administration attempted to adjust to the problem with a tax increase in 1984. Despite the 1984 tax increase, overall tax rates were significantly lower in 1989 than in 1980.
By late 1983, it was clear that a dramatic recovery was underway. The unemployment rate, which peaked at 10.6%, began to decline. Democrats tried to portray Reagan as a hypocrite for supporting the 1984 Deficit Reduction Act, but people began to feel better about the country and the economy. This proved key to Reagan’s re-election. He defeated Walter Mondale in one of the greatest landslides in history.
By 1989, the Carter Administration was a marginalized memory. The unemployment rate dropped from 10.6% to 5.4%. Inflation dropped from nearly 12% in January 1981 to 4.7% eight years later. The Prime Rate dropped to 10.5% and a 30-year mortgage stood at around 10%. From 1974-2011, overall personal income dropped. The one exception to this was the 1980s when every quintile enjoyed an inflation adjusted increase. The one blight on the Reagan record was the budget deficit, but the spending did help destroy the Soviet Union and end the arms race. Additionally, the Reagan deficits do not seem excessive and appear puny in comparison to the Obama years.
There is little doubt that the economy improved dramatically between 1980 and 1989. The only question is what caused the economic turnaround. Some claim it was inevitable and the government and Reagan had little to do with the turnaround. The recovery was part of the boom and bust economic cycle. Ironically, this argument comes from leftists. Supply side advocates and libertarians give credit to the tax cuts and deregulation. Few seem to credit the military arms buildup, which provided high paying jobs in the private sector. Whatever the cause, there is no evidence to support the assertion that the Reagan economic record was a failure. In fact, all the economic data provided through the Treasury Department, Census Bureau, the Labor Department, and the Federal Reserve demonstrate a dramatic turnaround and economic recovery.
President Reagan took over a depressed economy. In some respects, the economy was worse from 1979-1982 than from 2008-2011. However, Reagan did the opposite of Barack Obama and achieved opposite results. The economy improved at a breakneck pace by the time of Reagan’s re-election and continued to grow until a mild recession struck in 1990. Perhaps this is one reason Barack Obama holds Ronald Reagan up as a model of presidential success.