A June 9 article on Ronald Reagan's economic policies misstated the impact that some economists now estimate budget deficits will have on interest rates. Economist Eric M. Engen has estimated that the 2004 deficit would raise interest rates by 0.12 percentage points and that over 10 years deficits equal to 1 percent of the economy would raise interest rates by 0.3 percentage points. Economists William G. Gale and Peter R. Orszag have estimated that such deficits over a decade would raise interest rates from 0.3 to 0.6 percentage points. The article also misstated the amount of federal debt owned by foreign investors. It is $1.7 trillion, not $1.7 billion.
Reagan Policies Gave Green Light to Red Ink
Wednesday, June 9, 2004
The line is not likely to make this week's eulogies to Ronald Reagan, but when Vice President Cheney allegedly declared, "Reagan proved deficits don't matter," he summed up an enduring argument from the former president's economic legacy.
In late 2002, Cheney had summoned the Bush administration's economic team to his office to discuss another round of tax cuts to stimulate the economy. Then-Treasury Secretary Paul H. O'Neill pleaded that the government -- already running a $158 billion deficit -- was careering toward a fiscal crisis. But by O'Neill's account of the meeting, Cheney silenced him by invoking his take on Reagan's legacy.
It wasn't that Reagan's policies proved that government borrowing had no impact on the economy. But his administration's record -- particularly with some years of hindsight -- did give reason to question traditional thinking and provided a new context for future arguments about deficit spending.
"The lesson we should have learned [from those years] is that deficits have little or no short-term economic impacts," said William A. Niskanen, a member of Reagan's Council of Economic Advisers.
As important, they appeared to have no impact politically, said Stephen Moore, a conservative economist at the Club for Growth who worked in Reagan's budget office.
"Voters and politicians became anesthetized to big deficits," Moore recalled. "Reagan was running these big deficits, and liberals argued it was going to be Armageddon. We were going to ruin the economy. Interest rates were going to go through the roof. And none of these things happened."
The fiscal shift in the Reagan years was staggering. In January 1981, when Reagan declared the federal budget to be "out of control," the deficit had reached almost $74 billion, the federal debt $930 billion. Within two years, the deficit was $208 billion. The debt by 1988 totaled $2.6 trillion. In those eight years, the United States moved from being the world's largest international creditor to the largest debtor nation.
To some economists, the impact was clear. Interest rates rose in the late 1980s and early 1990s, the economy slowed, then slipped into recession, and productivity barely advanced. Americans feared their nation had slipped into the shadows of Japan and Germany.
Reagan's "economic policy . . . was a disaster," University of California at Berkeley economic historian J. Bradford DeLong wrote this past weekend on his Web site. "The tax cuts made America a more unequal place, and the deficits slowed economic growth in the 1980s significantly."
But after the boom years of the 1990s, and the steady economic slides of those international rivals, some economists are reevaluating that version of history. The argument against deficits is more about self-righteous moralism than economics, they say.
The Reagan "experience changed the debate dramatically," said Kevin A. Hassett, an economist at the American Enterprise Institute. "Back then, it seems that everybody believed Reagan must be some kind of kook and the people who agreed with these views were flimflam artists. Not so anymore."
Indeed, since the Reagan years, the argument over the deficit has been turned on its head. In the 1980s, prominent liberal economists dismissed the significance of government red ink to head off the slashing of social welfare spending. Now, many liberal economists have become the fiercest deficit hawks to head off still more tax cuts.