By political standards Reaganomics would seem to be quite successful. Running on much the same platform in 1984 as he did in 1980, Ronald Reagan was reelected with a substantial plurality. The intervening four years apparently didn't dissuade voters of Reagan's competence to manage the economy. So-called supply-side economics comprised much of Reaganomics as it does still today.
On grounds other than political the supply-side record is wide open to all who wish to look.
While the tax bill passed in 1981 the actual tax cut didn't take place until much later. In fact, because the tax cuts were delayed, in reality there was only a 1.25 percent cut in calendar year 1981, a cumulative 10 percent cut in 1982 and a cumulative 20 percent cut in 1983. The bulk of our tax cut began literally on Jan. 1, 1983, and the economic recovery began at exactly the same time. Isn't it amazing how tax cuts don't work until they take effect?
More to the point, the downturn of 1981 and 1982 as foreseen by many a supply-side economist was actually the consequence of delayed tax cuts. In the year before a tax cut, people do all they can to postpone realizing income from the higher-taxed year in order to defer its recognition into the lower- taxed year.
By all accounts, the recovery of 1983 and 1984 was spectacular. Real GNP in those two years grew at an average annual rate of 6 percent. Notwithstanding the masses of data and commentary emanating from the White House and the Republican Party during 1984 and beyond, some people still haven't comprehended the magnitude of the effects of tax cuts.
Perhaps most surprising to traditionalists is the fact that inflation has fallen during this period of nascent and actual tax cuts. To supply-siders and the electorate, this result seems quite rational. Just as a bumper crop of apples leads to a fall in apple prices, so too does an aggregate supply increase lead to lower inflation. In the period from 1981 to 1983, consumer price inflation fell to 3.2 percent from 10.4 percent. If the Reagan/supply-side recovery had in reality been good old demand stimulation of the pump-priming variety, inflation should have risen. It didn't.
It is hard to attribute all of the reduction in inflation and interest rates to the traditional view of monetary policy. M1 growth during the 1983-84 period was exceptionally high, averaging 7.8 percent. In 1979, the last time inflation accelerated to double digits, money grew 7.2 percent. Rapid money growth is seen by traditionalists as leading to higher inflation and interest rates and a weaker economy. Wrong again.
The Fed definitely does deserve much of the credit for lower inflation, interest rates and a stronger dollar. The Fed's success however wasn't based on austerity. The Fed changed its policy to targeting prices. This fundamental policy change allows rapid money growth to coexist with lower inflation, interest rates and an expanding economy. No more stagflation!
Perhaps the one area where I was farthest off the mark was in forecasting the path of federal budget deficits. They are a lot larger than I ever thought they would be, especially given the economic growth of the past 21/2 years.
Before I kill myself, however, I should point out that the NIPA deficit (a seasonally adjusted Commerce Department measure) peaked in the fourth quarter of 1982, just before the actual tax cuts, and was $43.1 billion lower in the first quarter of 1985 than the fourth quarter of 1982. State and local surpluses have risen a substantial $20.8 billion over this period.
After adjusting for inflation, tax revenues for FY 1985 exceeded the Reagan administration's optimistic forecast of January 1983 by $30.5 billion. Not bad, eh? Defense spending is also $25.6 billion less than had been projected back then. Both tax revenues and defense spending reduced the deficit by $56.1 billion. What could possibly have gone wrong?
Congress has literally gone on a spending spree in nondefense items. It exceeded the generous projections of January 1983 by $77.8 billion. As the president stated, Congress has spent like drunken sailors, the only difference being that drunken sailors spend their own money. Congress spends our money.
Quite frankly, my error on the deficit was due to my overly generous perception that Congress would live up to its appointed role. The solution to the deficit problem must also include spending restraints. Tax cuts alone just aren't enough.