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Date sent:        Sun, 12 May 1996 22:45:11 -0700












REAGANOMICS: INEFFECTIVNESS AT ITS BEST











by

Kelly R. McGuire






















Honors English III
Mrs. Benson
May 13, 1996

Outline

Reaganomics was and ineffective economic plan for the country.

I.  Theory of Reaganomics

II.  Factors for Reaganomics
A.  1970s tough compared to 1960s
B.  Less defense spending, more private

III.  Application of Reaganomics
A.  Cut government spending
B.  Tax-cuts
1.  Not applied effectively
2.  Tax-cuts but no spending cuts
3.  Small fraction shows up as private savings
C.  Deficit spending
1.  Produce $100 billion
2.  Spend  $300 billion
3.  Funding nation with borrowed money
D.  Economic growth compared to wages
1.  Poverty fell little with boom
2.  1960s boom slashed poverty much more
3.  Poor workers lose wages
4.  Top 20 percent of workers increase wages
E.  Budget Deficits
1.  Government has less tax revenue
2.  Mounting national debt
3.  Net nationals savings collapse
4.  Drop in net national investment
F.  Loss of Revenue
1.  $644 billion lost to Treasury department
2.  Debt doubled
3.  Additional tax breaks
a.  Capital-gains
b.  Business write-offs
c.  Retirement accounts
4.  Collect less than $171 billion less than forecasted
5.  Deficit expands

IV.  Effects of Reaganomics
A.  Tax-Cut Effects
1.  Shift in burden of taxation
a.  Top fifth's taxes fall
b.  Bottom fifth's taxes rise
2.  States increase taxes
a.  26 states increase taxes
b.  Rise in total national tax burden from states
3.  National Debt
a.  Doubles in size
b.  Blame on Reaganomics


4.  Potential declines
a.  Loss in GNP
b.  Declining investments
c.  Less new technologies

V.  Present day effects of Reaganomics
A.  Cut $700 billion in spending
B.  Already have cut $247 billion
C.   Still not paying of debt

Conclusion










REAGANOMICS: INEFFECTIVNESS AT ITS BEST

The national debt is as old as the nation itself.  Alexander Hamilton, Treasury secretary in
the George Washington administration, started running the country on borrowed money partly
because he thought it was desirable for the government to owe money to the wealthy. However,
Hamilton did not want the government to borrow money for the sheer thrill of being in debt.
When Hamilton ran the Treasury, the ink was just dry on the Constitution, and Hamilton did
not know whether the new government would last two years or two centuries. So Hamilton
thought it wise to give the wealthy a reason to root for the longevity of a new government.
If the government owed the wealthy money, Hamilton figured they would want the government to
thrive and last long enough to pay them back.1 Similar to Hamilton, Ronald Reagan, president
of the United States from 1981-1989, had a fiscal plan that significantly involved the use
of the national debt.  Reagan's economic plan, which is most often called Reaganomics, was
tested, and in effect, throughout his two terms in office during the 1980s.  At the time the
economic plan was being used many felt that it was generating great affluence across the
nation.  However, the effects of Reaganomics, namely the national debt, are what prove its
ineffectiveness. Reaganomics has caused much more harm to the  present day economy than it
did to that of the 1980s economy.  Moreover, few goals of Reaganomics were accomplished.
The purpose of this paper is to prove that Reaganomics was an ineffective economic plan for
the country. In order to understand how Reaganomics led to such severe economic issues, one
must first understand the basic premise of Reaganomics, also called supply-side economics.
The overall assumption of Reaganomics was that taxes could be cut-even if slashing the
government's income sent the budget deeply into deficit-because the tax cuts would stimulate
so much economic growth that they would pay for themselves and bring the debt back down.
This, unfortunately, did not happen.2  Moreover, many of these tax cuts were to be given to
the wealthy, and most often to corporations.  This was done under the basis that if the
corporations had more money, from paying less to the government in taxes, they would
eventually "trickle down" some of this excess capital to those under them.  Once again, this
is not what transpired. There were many factors that led to the use of Reaganomics, and in
some ways these factors played a role in the overall implementation of  Reaganomics.  When
Reagan campaigned against Jimmy Carter in the 1980 presidential election, Reagan posed the
question to the American public, "Are you better off than you were four years ago?"  Soon,
newspaper polls began to report a surge of support for Reagan, which led to a Reagan
landslide one week later.  Evidently, this question struck a cord with many in the country,
which suggests that events prior to his administration effected how Reagan's fiscal plan
would soon come to evolve. Reagan was right in the debate with Carter: the 1970s were tough
by comparison with the 1960s. He was also right in observing that lower productivity growth
and higher federal-benefit growth during the 1970s "squeezed out" defense spending in favor
of privately earned spending on consumption. What looks quite significant in retrospect,
however, is that at least the squeezing did take place. Few Americans watching the debate in
1980 ever imagined that over the coming decade we would just decide to ignore the law that
limits consumption to production.3 Ronald Reagan, however, was not one individual solely
bent on the destruction of the economy.  Many of his contemporaries believed that his plan
would work, and more importantly so did a large portion of the American people.  For
instance Reagan's Office of Management and Budget predicted that the economy would grow a
robust 4.4 percent annually and produce a federal budget surplus of $28 billion by 1986. The
application of Reaganomics, as shown with actual results, will eventually help to show why
the effects of Reaganomics were so severe.  One part of the overall plan of Reaganomics was
to cut government spending.  However, contrary to an early Reagan pledge, federal spending
actually rose during his presidency.  But the portion devoted to productive assets such as
highways and schools declined.4 Furthermore, the most crucial part of the plan, tax-cuts,
were not applied effectively. Most of the 1981 tax cut was simply an across-the-board cut in
personal income-tax rates and thus did little to alter the relative tax burden on savings
versus consumption. In any case, what is truly inexcusable is the expectation that we could
come out ahead simply by cutting the overall level of taxation while still allowing federal
spending to grow. When tax cuts go unmatched by spending cuts, they must be accompanied by
additional public borrowing from households and firms--thus by a dollar-for-dollar reduction
in otherwise investable private savings. Therefore, in a near-full-employment economy only a
tiny fraction of the cut is likely to show up as additional private savings. If families and
firms treat the tax cut just as they treat other income, the savings might be six or seven
cents on the dollar--a tiny margin that can disappear entirely if there is a negative shift
in the private sector's overall inclination to save.5  In other words, because the tax cuts
were applied outright to personal income-tax rates, what to the government was a macroscopic
venture, was basically a small amount of extra capital to the average person. Furthermore,
from 1979 to 1986 the total annual increase in workers' production amounted to about $100
billion (in 1986 dollars). The comparable total for increases in personal consumption plus
government purchases was about $300 billion. That leaves a difference of a bit more than
$200 billion--just slightly more than the increase in annual federal deficits over the past
six years.6  Basically, we were funding our nation with money that we did not have.
Whatever could not be paid, the deficit, would have to be rolled over into the national
debt.  Essentially Reagan was looking for economic action at a price we could not pay. This
is why Democrats generally disparage the economic performance of the middle '80s as credit
card prosperity.7 In addition, in the 1980s economic growth as compared to wages behaved
differently, and to a large degree unfairly, than it had in past years.  Poverty rates in
the U.S. fell very little from 15 percent of the population to 12.8 percent, during the
seven-year economic expansion of the 1980s.  After all, a comparable burst of growth during
the 1960s slashed poverty from 21 percent to 12.1 percent.  Wage growth during the 1980s
simply exempted the poorest 10 percent of workers.  In the 1960s, every 1 percent increase
in the gross national product added $2.18 to the weekly wages of the working poor.  By the
1980s, however, a 1 percent increase in GNP actually reduced their wages by about 30 cents,
though their total income rose slightly because they worked longer hours.  For the top 20
percent of workers, wages actually rose more in the 1980s than in the 1960s.8 Budget
deficits and the national debt are the most compelling pieces of Reaganomics.  Each year
that the government brought in less money from a loss in tax revenue, the government would
end up spending more than it had, and as a result have a huge budget deficit.  These
deficits were complied into the mounting national debt.  Whatever the effects of cuts in
taxation and shifts in spending, they were more than offset by skyrocketing budget deficits.
 Overall, the governments borrowing caused net national savings to collapse from 7 percent
of the gross national product in the 1970s, to 3.5 percent in the 1980s.  This resulted in a
drop in net national investment from 7.1 percent to 5.2 percent.9 As a result of bad
planning, poor implementation, and miscalculated statistics, Reaganomics resulted in many
striking results.  The fiscal policy in the 1980s accomplished exactly the opposite of
almost every key economic promise made by Ronald Reagan early in his presidency.  Federal
spending, which was supposed to shrink, grew from 21.1 percent of gross national product in
the 1970s to 23.4 percent in the 1980s.  Investment in factories and machines, which was
supposed to blossom, contracted from 3.5 percent of national output to 3 percent.  And the
federal budget deficit, instead of being reduced as the Reagan administration promised,
swelled from 1.8 percent of national output to 3.6 percent.10
 Loss of revenue to the federal government due to decreased tax rates led to many problems.
 Overall, the Treasury Department lost $644 billion in forgone revenues, the federal debt
 doubled in size and there was no special burst in worker productivity.  When Congress
 approved the sweeping reduction of income tax rates in 1981, it also enacted additional tax
 breaks, such as those for capital-gains, generous write-offs for business investment and
 expansive rules for individual retirement accounts.  Despite the extra money in the system,
 there was no large stimulation of the economy.  However, tax revenues fell steadily as a
 share of gross domestic product, and in 1986 alone the Treasury collected $171 billion less
 than Reagan administrators had forecast.  Federal spending continued to grow, however, and
 the federal deficit soared to an unprecedented $221 billion in 1986.  The theory that
 cutting taxes could increase government revenues seems to have been widely discredited.11
 Washington's deficits passed record levels, while public-sector credit demands smothered
 the promised gains in private-sector activity.  Saving by individuals fell from about 5
 percent of income in 1981 to 2.5 percent by the mid-1980s.  Net business investment in new
 equipment and buildings also declined from 3.2 percent of the gross national product in
 1981 to 1.9 percent in 1986.  And though the massive tax cuts probably prolonged the
 economic expansion of the 1980s, overall growth averaged 2.8 percent annually, far below
 the promised spurt.12 It can further be seen that tax-cuts effected different segments of
 the population differently.  Perhaps the most dramatic of which was the shift in the burden
 of taxation.  Families in the top fifth of the income distribution saw their prevailing
 federal tax rates fall from 29 percent in 1980 to 26 percent in 1985, while families in the
 bottom fifth saw their tax rates rise from 8 percent to 10 percent.  In addition, in an
 attempt to cut government spending,  Washington cut grants to state and local governments.
 This led at least 26 states to raise their own income and sales taxes to make ends meet.
 By 1988, the states share of the national tax burden had risen to 27 percent, up from just
 24 percent in 1980.13 Once again, the most damaging effect of Reaganomics is the national
 debt.  In the years since Reaganomics has been in effect, the national debt has grown to
 record levels.  In 1985, the debt reached an all time record of almost $2 trillion.  Since
 then this figure has more than doubled.  Many blame decisions made early in the Reagan
 administration for current problems.  Reaganomics has had many long-lasting and far
 reaching consequences, that extend well beyond the 1980s.  In present day America, the task
 of paying off our national debt has been long and arduous.  In many cases this is because
 not only did Reaganomics leave a legacy of indebtedness, but it also effected our
 potential, and thus has limited our economy today.  For example, because of huge deficits,
 the US has lost over 2.5 percent to even 3.5 percent of potential gross national product.14
  This may not seem to be a very large number, but when contrasted to the billions of
 dollars in goods and services that we produce, one can see that in fact this percentage is
 staggering. Furthermore, a critical segment, the nation's productive capital, has also
 declined.  This was an important target of supply-side economics.  Because of declining
 investments in new assets, the nation's net capital stock in 1990 was 7 percent below what
 it would have been without Reaganomics.  Even worse, when business investment in new
 factories slows down, so does industry's ability to bring new and innovative technologies
 to market.  It has been predicted that the economy will continue to underperform without a
 reduction in the budget deficit, and increase in investment.  All told, the national output
 will be fully 5 percent below what it might have been without Reaganomics.16 Today, both
 President Clinton and Congress are attempting to fix the errors made by Reagan and his
 administration.  It is estimated that spending cuts will have to be truncated to the sum of
 over 700 billion dollars over the next five years.  This will be a huge task, since
 Congress and the President have already trimmed off more than $247 billion in spending cuts
 in1993.  All of these cuts in spending are being made in hopes to reduce, or even balance,
 the deficit.16  However, the deficit only comprises what we cannot pay for each individual
 year, the national debt is made up of what we currently owe for every year that our budget
 has not been balanced.  We pay the deficit mainly with treasury bonds, and loans. What is
 discouraging, is that Treasury bonds do not have an automatic debt-retiring feature built
 in.  So the monthly payments to the holders of Treasury bonds pay the interest only.  The
 full principal remains.  When the bond matures, the government owes the bondholder the
 original face value.  But no money is budgeted to pay the bondholder off.  So the
 government must sell a new bond to raise the money to pay off the old bond.  So even if the
 budget was balanced, the debt would not go down.  For the debt to actually decline, the
 budget would have to go beyond balanced and into surplus.17  With the huge debt, and large
 deficits, this is not very practical. Reaganomics was a severely ineffectual economic plan.
  When Reaganomics was tested in the 1980s, taxes dropped, but there was no extremely
 effective boom in the economy to pay for the tax-cuts. Moreover, the tax-cuts not only did
 not help most Americans, but in many ways they actually hurt Americans.  To a large extent
 Reaganomics led to the poor getting poorer and the rich getting richer.  Most importantly,
 Reaganomics sacrificed long term economic prosperity, which can be seen by the nations
 current national debt of $5,088,829,415,488.70.18  Reaganomics was a severely poor economic
 plan, which did not accomplish any of its key concepts.


End Notes

1.  Eric Black.  "Forever Indebted."  STAR TRIBUNE. August 23, 1993.
2.  Black.
3.  Peter G. Peterson. "The Morning After."  THE ATLANTIC. October 1987.
4.  David Hage. "Dropping of the Charts."  U.S. NEWS AND WORLD REPORTS.  June 29, 1992.  p.
41. 5.  Peterson. 6.  Peterson. 7.  Black. 8.  David Hage. "Why poor workers lost ground in
the 1980s."  U.S. NEWS AND WORLD REPORTS. June 1, 1993. p. 46. 9.  Hage. "Dropping of the
Charts." p. 41 10.  Hage. 11.  David Hage. Robert F. Black. "The repackaging of
Reaganomics." U.S. NEWS AND WORLD REPORTS.  December 12, 1994. p. 50. 12.  Hage. Black. 13.
Hage. Black. 14.  Hage. "Dropping of the Charts." p. 41 15.  Hage. 16.  Hage. Black 17.
Black. 18.  The Department of Treasury "The Public Debt"


Works Cited

Hage, David. "Why poor workers lost ground in the 1980s." U.S. News & World Reports 1 June.
1992:                     46-47 Hage, David, and Robert F. Black. "The repackaging of
Reaganomics." U.S. News & World Reports 12 Dec. 1994: 50 Hage, David. "Dropping off the
charts" U.S. News & World Reports 29 June 1992: 41 Black, Eric. "Forever Indebted." Star
Tribune 22 Aug. 1993 Peterson, Peter. "The Morning After."  The Atlantic October 1987.
United States. Department of the Treasury. The Public Debt 9 May 1996