Last weekend in his regular radio address President Reagan offered a defense of Reaganomics that skipped over some relevant information. Below is the text of that speech; on the right, Washington Post economics reporter John M. Berry fills in some of the detail the president did not include. Bold-face numbers in the text refer to points made on the right.
MY FELLOW AMERICANS, I'd like to talk to you about a word. It's a word we've all been hearing a lot lately. The word is "Reaganomics." Somewhere along the line our economic program got tagged with that label. To tell you the truth, it isn't a name I would have chosen. It sounds like a fad diet or an aerobic exercise. But we seem to be stuck with it. With every anchorman on the evening news, a goodly share of political pundits, and more than a few politicos using it, it has a good chance of becoming standard Americana.
There wouldn't be anything wrong with that, except that it's used as a term for something that's supposed to have failed. (1)So if you don't mind, I'm asking for equal time -- well, at least, for about the next five minutes.
We are, and have been for some time, in a recession. Unemployment was running at 10.8 percent as the year ended. But we learned yesterday the welcome news that it dropped to 10.4 in January. And if you include our men and women in the military as part of the work force, which makes sense, it's down to 10.2 percent.
Still, only about two-thirds of our industrial capacity is being used. Our government is facing large deficits and interest rates are still too high. And we're told all of this is the result of an economic program put into place by our administration and which, for obvious reasons, is called Reaganomics.
I know some will say I'm being defensive, but I'll risk that, because in the weeks ahead decisions are going to be made here in Washington that will have a bearing on whether unemployment continues to go down and the economy continues to turn up. You will help determine some of these decisions because public opinion does influence government. Therefore, you must have a clear fix on the facts, the economic realities.
Thomas Jefferson said, "If the people know the truth, they'll never make a mistake."
So let's start with some dates. Back in 1979 inflation was rising, unemployment was increasing, and by 1980 we were in a recession.(2) Unemployment had reached such a point in the last half of 1980 that I referred to it as a depression.(3) I was criticized for that by technical-minded people who said it was only a recession. But you'll have to forgive me. I was campaigning in Flint, Mich., where the unemployment rate was already 20 percent; in Detroit it was 18 percent, and across the line in Ohio, steel mills were closing.(4) In an Indiana city, unemployment was 23 percent. Inflation was in double digits for 1979 and '80 and reached 14 percent during the 1980 campaign.(5) Interest rates went to 21.5 percent, and the housing industry was at a standstill.(6)
Our administration opened up shop on Jan. 20, 1981. The prime interest was still above 20 percent, inflation was 12.4 percent, and unemplyment was 7.3 percent. The 1981 budget had already been put in place by the previous administration and began on Oct. 1, 1980. Now, there was nothing we could do about that budget; it wasn't ours, although we did manage to squeeze out a few billion dollars through some management changes.
For the most part, however, we were engaged in a struggle to get our budget proposals for 1982 adopted and the other part of our economic recovery program, tax cuts for all Americans to help stimulate the economy.(7)
All the time, interest rates stayed high, unemployment kept increasing and by July the bottom had fallen out.(8)
About this same time, our economic program, most of it, was passed, major reductions in the gowth of spending and a 25 percent cut in income tax rates to be phased in over a three-year period. But none of this went into effect until Oct. 1, 1981. The first portion of the tax cut was only 5 percent. Another 10 percent would take place in July of 1982. Reaganomics, as they would have it, started only 16 months ago.(9) There was another 10 percent cut in the income tax scheduled for this coming July.
Now, what has happened in those 16 months of Reaganomics? Well, with the help of the Federal Reserve Board, inflation has dropped to only 3.9 percent for all of 1982, the lowest it's been in 10 years. Interest rates are about half what they were.(10) The effect of that is a 40 percent increase in housing starts, automobile sales are up, as are all retail sales. Factory orders have begun to increase. One timber company I know of, which a year ago today was completely shut down, is now on two shifts a day, five days a week. Real wages are up for the first time in three years.(11) And the rate of personal savings is up, meaning more capital for investment.(12)cd10> And, as I've already mentioned, "the lagging indicator," as it's called, unemployment, just took its first drop, 10.8 to 10.4. A survey of business establishments shows somewhere around 300,000 more people working. We have long way to go; but that's a start at last.
Now, I've seen in the flesh some of these statistics I've quoted. A few days ago, I visited a Chrysler plant in Fenton, Mo., where 1,700 workers are being called back to a newly moderized plant. Another plant will be calling back an additional 1,500 workers by late summer. In nearby Hazelwood, the Ford plant was adding another entire shift and General Motors has announced it plans to call back more than 21,000 of the indefinite layoffs over the next few months. For eight out of the last nine months, the leading economic indicators have been up.
In the weeks ahead there'll be debates as to what course we should follow. The choice that will be offered is to turn away from our economic recovery program and go back to what was being done before.(13) May I point out, all of the good things I've mentioned didn't begin until after our program, Reaganomics, if you will, was put in place. Prior to that everythingghad been a mess for three years or more. I wonder if they'll still use that name when they've found out it works.
Until next time, thanks for listening and God bless you.
Has Reaganomics failed? Judgments differ. The administration forecast in February 1981 that Reaganomics would raise the 1982 gross national product to $1,560 billion (in constant 1972 dollars), cut the unemployment rate to 7 percent by the fourth quarter of 1982 and reduce inflation to a 7.2 percent rate during 1982. Economic growth and domestic spending cuts would balance the budget in 1984.
Last year real GNP, the nation's total output of goods and services, turned out to be about $1,476, or 5.4 percent less than forecast. At the end of 1982 real GNP was running about 2.4 percent lower than when President Reagan took office.
Unemployment in the fourth quarter was 10.7 percent, 3.7 percentage points higher than predicted, and about 3 points higher than in January, 1981.
However, after the long recession, inflation has dropped substantially more than predicted. Consumer prices rose only 3.9 percent last year instead of the 7.2 percent forecast.
The promised balanced budget for 1984 now looks likely to be $200 billion in the red -- three times bigger than any pre-Reagan deficit.
2. The National Bureau of Economic Research, which dates the peaks and troughs of business cycles in the United States, has determined that the 1980 recession began in January and ended in July of that year. The NBER, at the time headed by Martin Feldstein, now chairman of Reagan's Council of Economic Advisers (CEA), later said the ensuing recovery continued until July 1981, when a separate and distinct recession began.
3. Economist Alan Greenspan, CEA chairman in the Ford administration and an occasional adviser to Reagan, was traveling with Reagan at the time he made his remarks in Columbus, Ohio. Greenspan discussed the differences of magnitude between depressions and recessions and said the 1980 episode was clearly one of the latter.
4. In December, 1982, the unemployment rate in the Detroit metropolitan area was still 17.7 percent. In Flint, it was 22 percent.
5. Inflation reached a peak in 1979, when consumer prices rose 13.3 percent. In 1980 the figure was 12.4 percent, and in 1981, 8.9 percent. Much of that slowdown was the result of a sharp drop in the rate of increase in volatile food and energy prices.
6. In January 1981, the prime lending rate at commercial banks peaked at 21.5 percent. But blue chip corporations were still issuing long-term bonds at rates less than 13 percent, and new home mortgage rates were only slightly higher.
Housing was not standing still, however. New housing starts the month Reagan took office were running at an annual rate of 1.6 million units, and had been moving up. In December, 1982, housing starts were at a rate of 1.2 million.
7. The president's "Program for Economic Recovery" consisted of four parts, not just two. Along with spending and tax cuts, it also called for "prudent relief of federal regulatory burdens" and a steady reduction in the growth of money and credit "from the 1980 levels to one-half those levels by 1986." Most economists now agree that this tight money policy was the single most influential factor affecting economic activity in the last two years.
8. During the first half of 1981, interest rates did stay high but unemployment did not increase. Rather, the unemployment rate stayed between 7.5 percent and 7.2 percent until September, when the slide into recession began in earnest.
9. Only the personal income tax cuts began then. The large business tax cuts were retroactive to January 1981, and some regulatory reform had begun. More important, with the administration's backing, the Federal Reserve had throughout the year been slowing growth of the money supply -- the major reason why interest rates remained so high and that the economy plunged into a recession.
Some administration officials say the Fed was responsible for the recession because it did a poor job of managing the money supply. Other economists, including CEA Chairman Feldstein, believe that any serious effort to reduce inflation using monetary policy inevitably would have produced a recession.
10. Long-term interest rates are more important economically than short-term rates because they have a much greater impact on investment decisions. While the prime rate is now 11 percent, compared to about 19 percent in October 1981, those blue chip corporate bond rates are still at 12 percent, down only about 3.5 percentage points since that time.
11. Average hourly earnings for production and non-supervisory workers rose 0.8 percent in 1982 after adjustment for the increase in consumer prices. They had fallen 3.1 percent, 4 percent and 1 percent in 1979, 1980 and 1981, respectively. On the other hand, gross weekly earnings -- which are also affected by the number of hours worked -- fell 1.3 percent last year after adjustment for inflation.
12. Personal saving was 6.4 percent of disposable personal income in 1981 and 6.5 percent in 1982. That compares with 5.9 percent in 1979 and 5.8 percent in 1980.
However, the higher saving rate did not necessarily mean more funds were available for capital investment. Personal saving did grow to $141.1 billion last year, up from $96.7 billion in 1979. But measured comparably, the federal budget deficit grew twenty times faster -- from $16.1 billion in 1979 to $147.9 billion in 1982 . Thus, in 1979 the private sector could draw on the bulk of personal saving -- as well as corporate saving -- to finance business investment and housing construction. In 1982, financing the budget deficit absorbed all personal saving and then some.
13. Reagan himself has made major modifications in Reaganomics. Pressed by Congress last year, he agreed to and later lobbied hard for a tax bill that took back a portion of the business cuts passed a year earlier. In addition, he has just proposed advancing scheduled Social Security tax increases and a set of "contingency" taxes for 1985 if the deficit remains as large as expected and other conditions are met. By 1988, by administration calculations, the total federal tax burden would be equal to 21.6 percent of GNP, only a shade lower than the 21.9 percent level of 1981.
Reagan's latest spending plans would leave federal outlays at 23.2 percent of GNP in 1988, compared to 22.4 percent in 1980 and 22.9 percent in 1981.
The administration has also modified its goals for controlling growth of the money supply, and now recommends that the Fed pursue a less restrictive policy than it initially sought.