(POSTWAR WELFARE STATE to THATCHER and REAGAN – continued)
In his inaugural address, Ronald Reagan said that it was his intention to make government work. "In the days ahead," he said, "I will propose removing the roadblocks that have slowed our economy and reduced productivity."
Reagan kept as chairman of the Federal Reserve Board the man Carter had appointed: Paul Volcker, a Democrat. Under Reagan, Volcker continued his policy of high interest rates to squeeze inflation out of the economy.
The high interest rates slowed the economy – viewed by Volcker and Reagan (and Thatcher in Britain) as temporary medicine that had to be endured. By the summer of 1981, people had difficulty borrowing money for homes and cars, and many business people could not borrow money to invest in growth. Automobile sales declined. The economy went into recession. In 1982 business failures were triple what they were in 1979. Unemployment by the end of 1982 was at 10.8 percent, its highest since the 1930s. In 1982 the economy declined by 2.2 percent growth. The prime interest rate reached 21.5 percent in June. And the cover of a publication for builders had an image of a "wanted" poster of Volcker. It accused Volcker of having murdered millions of small businesses. Congressmen moved to impeach Volcker or to appoint members of the Federal Reserve Board who would be sympathetic to farmers, workers, consumers and small businesses. Jack Kemp, a Republican congressman from New York, called for Volcker's resignation. In August 1982, Senator Robert C. Byrd of West Virginia introduced the Balanced Monetary Policy Act of 1982, which would have forced a reduction in interest rates.
Reagan was portrayed as leading an economic assault against ordinary Americans. He supported Volcker through 1982, and in January 1983 his approval rating was down to 35 percent, with 56 percent disapproving – as the economy was beginning to recover. Interest rates fell from over 20 percent down to 10 percent, and in the first three months of 1983 the economy had a rate of growth equivalent to 2.6 percent per year. In the second three months (quarter) of the year the economy grew at an annual rate of 10.9 percent. In 1983, inflation was only 3.2 percent – down from 10.3 percent in 1981. And for last half of 1983 and into 1984 the economy's growth rate hovered between 5 and 7.4 percent.
The medicine that so many had disliked had worked. The economy was booming. Joy had spread to Wall Street. The Dow Jones Industrial Average (DJIA) had bottomed at 784 in March 1982, and anticipating recovery it had climbed to a new high of 1,200 in April, 1983. On election day in early November 1984 unemployment was down to 7.2 percent. Reagan won against Walter Mondale, who had promised the nation that he would raise taxes. Reagan won 58.8 percent of the vote to Mondale's 40.6 percent. Mondale won only in his home state – Minnesota.
Writing in 1988 for the economically conservative Von Mises Institute, Sheldon L. Richman described much of what had been done in deregulation as having begun with President Carter – "such as abolition of the Civil Aeronautics Board and deregulation of oil prices." Of Reagan's deregulation he wrote:
Some deregulation has occurred for banks, intercity buses, ocean shipping, and energy. But nothing good has happened in health, safety, and environmental regulations, which cost Americans billions of dollars, ignore property rights, and are based on the spurious notion of "freedom from risk."
The liberal economist Paul Krugman was to complain that the "Reagan era," 1982 bi-partisan Congressional Garn-St. Germain Act, signed into law by Reagan, provided the banking industry with "a license to gamble with taxpayers’ money, at best, or simply to loot it, at worst." note44
Early in his first term as president, Reagan unveiled his "program for economic recovery." He called for $41.4 billion in cuts from the Carter budget, mostly from "Great Society" programs to benefit the poor, Reagan vowed to maintain a "‘safety net" for the poor, the disabled and the elderly. He also called for a 30 percent tax cut over three years and an increase in defense expenditures, and vowed not to cut Social Security. In 1981, Congress passed Reagan's budget and tax bills. Instead of a tax cut of 30 percent, Reagan received and accepted 25 percent.
Reagan's Director of the Office of Management and Budget, David Stockman, favored more radical cuts in spending. He was with Reagan in what he, Stockman, called "the bloated American welfare state." He saw conflict between 40 some odd billion in cuts and a projected deficit of $130 billion. In his office's estimations there would be only $47 billion in domestic savings for the budget of 1984 – just one-third of what was needed to achieve a balance budget. note45
in August, 1981, Stockman had a showdown in a working luncheon in the Cabinet Room of the White House with Reagan and multiple personages on Reagan's team. Reagan said, "No, we can't give up on the balanced budget. Deficit spending is how we got into this mess." Reagan's Secretary of the Treasury, Donald Regan, objected to any suggestion of tax increases. Stockman was to write in his Triumph of Politics that he had been repeating "until blue in the face" his lecture that tax cuts would not stimulate an increase in revenue, as many Republicans believed it would. Of the meeting he wrote, "As I looked around the table, it was evident that I had accomplished nothing." He repeated to no avail that "...the only way to reduce these red ink projections is by cutting more spending or raising some new revenue. That is the strategic choice we face." note46
The budget issue was not to be resolved during Reagan's presidency. Reagan had inherited a budget deficit that was 2.5 percent of the economy, with an interest payment rate on the national debt at $69 billion. When Reagan left office in January 1989 the budget deficit had increased to 5 percent of the economy. Budget deficits had contributed to a larger national debt. The national debt had been at 32.5 percent of GDP when he took office – the lowest since World War II. It was at 43.8 percent when he left office. In an interview with the writer Lou Cannon in 2001, Reagan said that this was the "greatest disappointment" of his presidency.
To some conservatives, Reagan was the greatest of presidents. Margaret Thatcher described him as having "transformed a stagnant economy into an engine of opportunity," as having brought the world "greater freedom and prosperity" and as having left something behind that he did not have: "his example."
When Reagan left office the economy was growing at a rate of 4.1 percent – compared to the average rates of 1.9 percent per year for Nixon, 2.1 for Carter, 2.3 for Eisenhower and 4.6 for Ford. Unemployment was listed as 5.5 percent. Employment growth was chugging along at around 2 percent per year and had been since 1985, which is about the same as it had been under Eisenhower, Kennedy and Johnson. note47 The unemployment rate in Reagan's last year in office averaged 5.5 percent, the same as it had been for Eisenhower in his last year, 1960.
When Reagan left the presidency he also left the nation with a steep rise in credit market debt. A new culture of borrowing was underway with an expanded use of credit cards that had begun under Carter but was accelerating under Reagan. This opened Reagan to criticism from the liberal economist Paul Krugman, who wrote:
Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending – restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down....it was the explosion of debt over the previous quarter-century that made the U.S. economy so vulnerable. Overstretched borrowers were bound to start defaulting in large numbers once the housing bubble burst and unemployment began to rise. note48
Reagan had a different take on the overall effect of his economic policies, which he viewed as a success for all Americans, blacks and whites. In his memoirs, published in 1990, he wrote of per capita income having increased employment for blacks 29 percent between November 1982 and November 1988. And during this period, according to Reagan, per capita income for blacks rose 18 percent and for whites it rose more than 14 percent. note49
Reagan left office with a job approval rating of 64 percent and disapproval at 27 percent, close in approval to where Eisenhower and Kennedy ended and where Clinton, at 65 percent, would end in 2001.
Austerity Britain: 1945-51, by David Kynaston, 2008
An American Life, by Ronald Reagan, 1990
The Thatcher Revolution, by Earl A Reitan, 2002
The Triumph of Politics: Why the Reagan Revolution Failed, by David Stockman, 1986
"United Kingdom general election, 1945," Wikipedia
"United Kingdom general election, 1951," Wikipedia
"James Callaghan", Wikipedia
Time magazine, August 6, 1979
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