The Contradictions of Ronald Reagan’s America

by Dan Lieberman / October 5th, 2023

As the memory of President Ronald Reagan’s administration recedes, estimation of his deeds grows, and for good reason. A cursory look at his end-of-office stats impresses the casual observer — 67%  increase in GDP, from $3 trillion in 1981 to $5 trillion in 1988, net job addition of about 18 million, reduction in the unemployment rate from 7.5% to 5.5%, at that time, one of the longest peacetime expansions in U.S. history, and inflation rate falling from 13.5% to 4.1%. Reagan served with a Democratic Congress and it is difficult to determine whose actions and policies determined outcomes. Was he more a bystander than an active participant in the downfall of the Soviet Union? Statistics show that during his administration the United States started on its road to continuous monetary and trade deficits.

Placing Reaganomics in its realistic context displaces Republican rhetoric that extols the Great Communicator as the model for presidential performance. President Reagan had enviable accomplishments for which he deserves praise, the most significant being the dignity he brought to the office, the trust and stability he gave the American people, and his manner of communicating and connecting with the populace.

Reaganomics had four simple principles — reduce government spending, reduce income and capital gains marginal tax rates, reduce government regulation, and control the money supply to reduce inflation. Containing the Soviet Union and preventing the spread of communism dominated foreign policy.

Reduce Government Spending

The top graph shows federal debt increasing from $998 billion to $ 2.6 trillion during Reagan’s reign. The lower graph has total credit outstanding also almost tripling from $5 trillion to $14 trillion during the same period.

True, it was a Democratic Congress that initiated the federal deficit, but this occurred during his administration and he had some executive power to lower it.

Reagan’s administration’s fiscal policy directly opposed his stated objectives and those of the GOP. Credit throughout the nation and federal deficits started a fast rise in debt that determined America’s future economies.

Tax Reduction

The 40th president of the United States reduced income and capital gain taxes. Objectively, income tax rates determine the transfer of money between the government and taxpayers. Neither direction, taxes up or taxes down, adds or subtracts money to the economic system or allows more or less available spending to the economy; purchasing power stays the same, which means the total purchases of goods and services remain the same.

Individual workers and taxpayers benefit from tax cuts. Stimulating the entire economy with income tax breaks is a psychological phenomenon. The exaggerations, promises, and optimism generated by tax breaks fashion a more optimistic public that incorrectly assumes the cuts stimulate additional spending to an already combined consumer and government spending. Creeping into the debate are other false assumptions — those who have excess funds will purchase domestic goods, invest, and stimulate growth. Not considered is that individuals might purchase imports and invest in speculative ventures that only churn money, both decreasing available purchasing power in the domestic economy. Reagan’s tax cutters were also against government deficits and did not realize that the former leads to the latter.

New York Times, March 6, 2018, “In Blow to Trump, America’s Trade Deficit in Goods Hits Record $891 Billion.”

Money from the tax cuts helped Americans buy more imported goods than ever in 2018. In addition, to finance the tax cuts, the government needed to borrow more dollars, some of which came from foreign investors.

GDP has steadily grown, with a few bumps, and no relation to the lowering of taxes has been proven. A government report: Taxes and the Economy: An Economic Analysis of the Top Tax Rates since 1945, Thomas L. Hungerford Specialist in Public Finance, September 14, 2012, concludes:

The top income tax rates have changed considerably since the end of World War II. Throughout the late-1940s and 1950s, the top marginal tax rate was typically above 90%; today it is 35%. Additionally, the top capital gains tax rate was 25% in the 1950s and 1960s, 35% in the 1970s; today it is 15%. The average tax rate faced by the top 0.01% of taxpayers was above 40% until the mid-1980s; today it is below 25%. Tax rates affecting taxpayers at the top of the income distribution are currently at their lowest levels since the end of the second World War. The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced, lower top tax rates may be associated with greater income disparities.

To fund government programs, Reagan signed tax increases into law every year Huge increases in FICA and signing of the Tax Equity and Fiscal Responsibility Act, the “largest peacetime tax increase in American history,” describe Reagan’s ambivalence to tax reductions. If the budget was balanced, then a reasonable conclusion could relate the growth of GDP to a cut in taxes. The economic stimulus due to deficit spending and credit, coupled with the reduction of oil prices and interest rates, probably played more significant roles in the GDP rise.

Note that the graph of GDP coincides with the previous curves of credit outstanding and government debt. All these parameters started their huge increases during the Reagan administration.

Deregulation

True to his word, Reagan offered some deregulation. Was it beneficial?
The Garn–St. Germain Depository Institutions Act of 1982, which deregulated savings and loan associations and allowed banks to provide adjustable-rate mortgages, contributed to the savings and loan crisis of the late 1980s. William A. Niskanen, a member of Reagan’s Council of Economic Advisers has written that deregulation had the “lowest priority” of the items on the Reagan agenda.” Reagan “failed to sustain the momentum for deregulation initiated in the 1970s” and he “added more trade barriers than any administration since Hoover.”

Inflation

Reagan’s policies for controlling the money supply to reduce inflation were contradictory. Paul Volcker, who chaired the Federal Reserve from August 1979 through August 1987, resolved the anomaly.

It always seemed to me that there is a kind of common sense view that inflation is too much money chasing too few goods. You could oversimplify it and say that inflation is just a monetary phenomenon. There are decades, hundreds of years, of economic thinking relating the money supply to inflation, and people to some extent have that in their bones. So I think we could explain what we had to do to stop inflation better that way than simply by saying that we’ve got to raise interest rates. It was also true that we had no other good benchmark for how much to raise interest rates in the midst of a volatile inflationary situation. Then in October [1982], or whenever it was, the money supply (by some measures) was increasing again rather rapidly. We had a tough explanation to make, but I thought we had come to the point that we were getting boxed in by money supply data that was, in any event, strongly distorted by regulatory changes and bank behavior. We came to the conclusion that it was not very reliable to put so much weight on the money supply any more, so we backed off that approach.”

Decreasing income taxes and increasing the money supply by lowering interest rates and running deficits are not the recommended means to reduce inflation. So, why did inflation get tamed — chalk it up to greatly lowered oil prices and cheap imports from rising Japan and the rejuvenated China.

Reduced Unemployment

We come to the most often cited success of Reagan’s policies; an increase of 18 million jobs, but where? All of them were in the non-manufacturing sectors. The Bureau of Labor Statistics, shown below, reports 11 million growth in the service industries, 4.5 million in wholesale and retail trade, and 2 million in the financial industry.

Any employment increase is welcoming and significant. Few of these industries are export industries and are, in effect, supported by the surplus income of manufacturing workers. Banks don’t normally lend to consumers to buy hamburgers, and going to a doctor doesn’t increase assets. Services, trade, and finance create intangible assets and not the tangibles that have defined prices.

This leads to Reagan’s greatest failure; during an era of global prosperity, and while Japan and Germany enhanced their export industries, America started its monotonically increasing deficit in its surplus account. The graph below shows that 1983 was a fatal year for the United States; the year it became a global debtor nation.

During the Reagan decade, Japan’s current account balance went from a record deficit of $10.7 billion in 1980 to a record surplus of $87 billion in 1987 before declining to $57.1 billion in 1989. Similarly, the Federal Republic of Germany, after experiencing deficits during 1979–81, had its current accounts balance rebound to about a DM 9.9 billion surplus in 1982 and increase to DM 76.5 billion in 1986.

While Reagan talked mellifluously, the world’s principal nations trade (including an emerging China) flowed with honey. Examine all the graphs and tables and the conclusion becomes obvious: Reagan’s administration policies increased federal and private debt at exponential rates, decreased manufacturing employment, and turned a positive current account into an ever-mounting negative.

Cold War

Reagan talked tough and acted tough — excoriating the Soviet Union, militarily challenging Moscow by greatly increasing the defense budget, and covertly helping Pakistan intelligence in supplying arms to the Afghan Mujahedeen. His 1983 NSC National Security Decision Directive 75 stated that” a central priority of the U.S. in its policy toward the Soviet Union contains, and over time, reverses Soviet expansionism.” The directive noted: “The U.S. must rebuild the credibility of its commitment to resist Soviet encroachment on U.S. interests and those of its Allies and friends, and to support effectively those Third World states that are willing to resist Soviet pressures or oppose Soviet initiatives hostile to the United States, or are special targets of Soviet policy.” None of these pursuits intended to overthrow the Soviet Union, all were long-term, and did not provide mechanisms to end the Cold War.

The Reagan administration approached the 1986 Reykjavik Summit meeting as an informal exploratory session with a limited agenda and found Soviet leader, Mikhail Gorbachev proposing dramatic reductions in strategic arms. Gorbachev led the negotiations between the two governments and led the Soviet Union into disintegration. An end to the Cold War automatically followed. Reagan’s involvement in the proceedings was more as an observer who did not discourage Gorbachev and refrained from interfering rather than a direct participant who engineered the outcome. He was not in office when Russian President, Boris Yeltsin, on December 8, 1991, signed the Belovezha Accords with President Kravchuk of Ukraine, and Chairman Shushkevich of Belarus, “recognizing each other’s independence and creating the Commonwealth of Independent States (CIS) to replace the Soviet Union.”

Step away from Reagan’s relation to the decline of the Soviet Union and step forward to examine his policy of preventing communist expansion and his foreign policy initiatives appear troubling.

• Nicaragua ─ Use of the illegal sale of arms to Iran to fund the Contra rebels in Nicaragua was a major scandal.
• El Salvador ─ Despite the atrocities committed by the El Salvador governments, which Reagan never persuaded the Central American government to halt, he provided the Salvadoran government with substantial military aid and advisors.
• Guatemala ─ Reagan attempted to justify his shipments of military hardware to the repressive Rios Montt regime by claiming that Guatemala’s human rights conditions were improving. In May 2013, Ríos Montt was found guilty of genocide against Mayan Indian groups by a Guatemalan court. He was sentenced to 80 years in prison, 50 years for genocide, and 30 years for crimes against humanity.
• Grenada ─ Reagan misstated the construction of a civilian airport by Cuban laborers as a military airport for delivery of military hardware to Angolan rebels and used that as an excuse to invade defenseless Grenada and overthrow the leftist government. Casualties from the unnecessary invasion ─ 24 Cuban laborers killed and 59 wounded, the Grenadian Army suffered 21 killed and 58 captured, and 24 Grenadian civilians died during the operation. The United Nations General Assembly condemned the invasion as “a flagrant violation of international law” by a vote of 108 to 9.
• Angola ─ China originally assisted Jonas Savimbi and his National Union for the Total Independence of Angola (UNITA), which espoused Maoist thoughts. A later UNITA modified itself and aligned with Western capitalism, bringing Reagan to militarily support UNITA in its struggle with the communist-oriented Popular Movement for the Liberation of Angola (MPLA). U.S. support for UNITA prolonged the conflict and caused havoc.
• Afghanistan ─ Reagan’s CIA’s assistance to the fundamentalist insurgents through Pakistani intelligence, in a Civil war that was not part of the Cold War, and where the U.S. had no interest, proved fatal to America. Reagan’s assistance to Pakistani intelligence enabled the Taliban victory and the organization of al-Qaeda. Enough said.
• Philippines — The Reagan administration aligned itself with Dictator Ferdinand Marcos, through all his assassination of opponents, repression, corruption, and election rigging until military and government leaders abandoned Marcos.
• Libya ─ Libyan leader Muammar Gaddafi did not ingratiate himself with Ronald Reagan, The tit-for-tat invectives and hostile actions exploded into Reagan ordering full-scale bombings by the U.S. air force of Libyan territory. By a vote of 79 in favor to 28 against with 33 abstentions, the United Nations General Assembly adopted a resolution that “condemns the military attack perpetrated against the Socialist People’s Libyan Arab Jamahiriya on 15 April 1986, which constitutes a violation of the Charter of the United Nations and of international law.”
• Beirut ─ President Reagan sent U.S. troops to Lebanon as part of a peace-keeping force, dispatched to assist Lebanese armed forces in the “departure from Beirut of armed PLO personnel and to assist in the transition of authority to the Lebanese government in Beirut.” Troubles for the American-backed regime of President Amin Gemayel led US warships to shell Syrian and Druze militia positions outside Beirut, which Reagan explained as a military intervention to prevent the Middle East from being “incorporated into the Soviet bloc.” Several months later a bombing of the U.S. barracks in Beirut killed 241 U.S. Marines. Four months later, after one of the biggest debacles in U.S. history, Reagan ordered all U.S. forces to leave Lebanon.
• Iran Air Flight 655 ─ On July 3, 1988, surface-to-air missiles, fired by USS Vincennes, shot down a scheduled passenger plane over Iran’s territorial waters in the Persian Gulf and killed all 290 people on board. Excuses of misidentification intensified criticism of Reagan’s orders that sent U.S. military into war zones where they were not wanted or needed. As usual, Reagan used the Soviet bogeyman as a superficial reason for sending a U.S. warship close to Iran’s shores. President Reagan said that “increasing the American naval force and protecting the tankers are necessary to defend the principle of free navigation and to prevent the Soviet Union, which is leasing tankers to Kuwait, from establishing itself as a gulf power.”

Conclusion

President Ronald Reagan had a vision that serves one sector of today’s Republican Party, a vision of self-reliance, limited government, stout defense, and world leadership toward freedom. His administration contradicted that vision, using big government to expand the economy, expand the defense budget, and engage in useless assistance to anti-communist tyrants who crippled their defenseless peoples and stained America’s image as a democratic and peace-loving nation. Federal debt and trade deficits gained impetus during the Reagan presidency. A pledge to balance the federal budget never materialized in any of his eight years in office.

The Gipper can take some credit for propelling an already declining Soviet Union into total decline. The most significant contribution to the political environment of the time was himself. The nation was more united during his tenure in office, exhibiting bipartisan cooperation and not displaying the antagonisms, adversities, and lack of cohesion that characterize 21stcentury America. He connected with the populace, performed with dignity, and portrayed an optimism that energized the public. The contradictions he personally displayed mirrored the contradictions of his policies ─ at times Ronald Reagan seemed disengaged and disenchanted with his surroundings, but his private notes, policy directives, speech writings, and alertness when the U.S. was challenged indicate he was deeply involved in governing the United States of America. Similar to Ronald Reagan, the results of the governing are contradictory and depend upon perspective.

Dan Lieberman edits Alternative Insight, a commentary on foreign policy, economics, and politics. He is author of the non-fiction books A Third Party Can Succeed in America, Not until They Were Gone, Think Tanks of DC, The Artistry of a Dog, and a novel: The Victory (under a pen name). He can be reached at: alternativeinsight@earthlink.net. Read other articles by Dan.