1 New directions in economic policy
Reagan’s backstory:
● Ronald Reagan's employment history (sportscaster, Hollywood actor and TV star)
gave him a relaxed, effective public speaker reputation as the 'great communicator of
politics’.
○ Reagan's Hollywood career lasted from 1937 to 1964.
○ At the height of his popularity in movies, federal and state taxes took 91% of
his income
○ This created his intense loathing of taxation, which he considered a
disincentive to work (in some years he refused offers to make more than two
movies a year because the high taxation rate made it unprofitable).
● Reagan was elected governor of California from 1967 to 1974, impressing many, and
many voters responded to his persuasive and repeatedly articulated calls for cuts in:
○ Taxation
○ 'Big government' (excessively large or unconstitutionally involved in certain
areas of public policy or the private sector)
○ crime welfare payments
● Reagan believed in supply-side economics, which emphasised economic growth
through low taxation and less government regulation.
● During his presidency, these economic beliefs were known as Reaganomics.
The impact of Reagan's policies on workers and their families:
● Reagan wanted to cut taxes, reduce the size and role of the federal government, cut
public spending and minimise welfare state arrangements where possible.
● Despite his campaign rhetoric, Reagan knew it would be political suicide to cut
programmes such as social security and Medicare, because elderly voters were a
powerful bloc.
● Reagan recognised that he would not be able to totally dismantle the Great Society
but that he could begin to reverse it.
Family incomes:
● In spring 1981, Congress agreed to reduce the budget of 212 federal programmes,
most of which had aided the working poor.
● Among their numbers were food stamps, student loans and child nutrition
programmes.
● Reagan's budget reduced the level and range of benefits for 'safety net' programmes
such as Aid to Families with Dependent Children (AFDC).
○ Of the 13 million children living below the poverty line in 1984, many were the
offspring of single mothers who depended heavily upon AFDC.
, ○ The majority of those women were black Americans, and conservatives
believed that AFDC encouraged promiscuity, irresponsibility and the break-up
of the traditional family.
● Reagan's 1981 cuts in individual and corporate taxes benefited the rich rather than
the poor and the subsequent tax rises that Reagan called 'revenue enhancements’
hit the less wealthy hardest.
● Consequently, his tax and social programme policies increased the gap between rich
and poor during the 1980s:
○ The share of the national income of the wealthiest 1% rose from 8% to 15%
○ The average income of the poorest decreased by $1,300 per annum.
○ The number of homeless people increased from 200,000 to 400,000.
● The years 1981-83 were particularly hard on workers and their families, with
double-digit inflation and 10% unemployment (around 50% in the Rust Belt).
● Average family income plummeted under Reagan. It recovered in 1987 but only to
1973 levels. Only half of America's families maintained their standard of living in the
1980s, usually because both parents worked.
Employment rights and deregulation:
● He opposed the minimum wage and obstructed congressional attempts to increase it,
which further widened the gap between rich and poor.
● He was hostile to unions.
○ For example, in 1981, 12,000 air-traffic controllers ignored the 'no-strike for
federal employees' clause in their contracts and went on strike for higher
wages.
○ The president had the power to fire federal employees who ignored the
clause, but no one really expected any president to do so.
○ However, Reagan fired them all and called in the military to do their jobs while
new controllers were trained.
○ Liberals and labour leaders were horrified at this attack on workers' rights.
○ However, conservatives were impressed, especially when the number of
strikes plummeted as major companies followed Reagan's anti union policies.
● He appointed over 400 conservatives to the judiciary.
○ Their rulings in the late 1980s made it harder for women, minorities, the
elderly and the disabled to sue employers over employment discrimination.
● Reagan cut the staff of regulatory agencies by an average 25% but failed to
differentiate between economic regulations and regulations that protected the
environment and health and safety.
● There was a 50% fall in prosecutions for illegal disposal of hazardous waste, which
adversely impacted upon the environment.
● His regulatory agency appointees ensured that bodies such as the Occupational
Safety and Health Administration made decisions in favour of business and against
labour, so that workers had decreased protection against accidents and unhealthy
working conditions.
, ● The number of personnel in the Consumer Product Safety Commission was cut by
38%, so the Commission was less active in ensuring that the products that
consumers purchased were safe products.
● Deregulation policies such as these disadvantaged many workers and families.
Congressional and public resistance:
● When Reagan was informed that the fund from which social security payments came
would be bankrupt by 2000, he suggested almost immediate cuts in benefits for early
retirees but backed down when Congress did not accept.
● Although Congress accepted his 1981 budget, his later budgets were substantially
rewritten and Congress was unco-operative over many of his attempts to reduce the
size of the federal government.
○ For example, although he vetoed the renewal of the $18 billion Clean Water
Act (he said it was too expensive), Congress overrode his veto of the virtually
identical 1987 Water Quality Control Act.
Economic successes in the Reagan years:
● His massive defence expenditure brought prosperity to regions with defence and
aerospace industries, such as the West Coast.
● His tax reform bill of 1986 simplified the tax code, increased taxes on corporations
and capital gains, lowered the top rate of taxation from 50% to 28%, and raised the
bottom rate of taxation from 11% to 15%.
● Following the recession early in Reagan's first term, the United States experienced
its longest-ever period of economic growth in peacetime.
○ Between 1980 and 1988 inflation fell from 13.5% to 4.7%, unemployment fell
from 7% to 5.2% and 16 million new jobs were created.
○ This economic growth was mostly due to the tight money policies of Paul
Volcker at the Federal Reserve Board, to whom Reagan gave full support,
and to external factors such as the fall in oil prices consequent upon the
discovery of new oil sources.
The budget and trade deficits:
● Although Reagan had emphasised reductions in federal expenditure during his
campaigns, he failed to balance the budget because his tax cuts decreased federal
government income and his defence expenditure skyrocketed.
○ 'Defence', he said, 'is not a budget item’.
● Reagan had criticised the $1 trillion national debt in 1980-81 as 'mortgaging our
future and our children's future' but it tripled to more than $2.6 trillion on his watch.
● Federal expenditure increased from $699.1 billion in 1980 to $859.3 billion in 1987
and even non-defence expenditure increased.
● The budget deficit in constant dollars was over five times that of his predecessors,
prompting Congress to pass the Balanced Budget and Emergency Deficits Control
Act (1985), which tried to ensure a future balanced budget through spending cuts.
