“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” Most economists, conservative or liberal, would agree with Reagan’s words, but would on dispute how to handle the mugger. President Reagan’s fiscal policies in tandem with Federal Reserve Chair Paul Volcker’s monetary policy allowed the 1980s to be a period of boom economic growth. . Inflation can be the increase in the money supply or the increase in price levels. Typically, the increase in money supply directly leads to an increase in price levels; this process is known as inflation. Inflation can be detrimental to an economy when it is rapid and uncontrollable. Proponents of Reagan’s economic policies often ponder his presidency and tend to neglect his reduction of rampant inflation rates. Instead, they focus on wage improvements, GDP growth, and employment figures, but Reagan’s economic achievements would not be possible without the containment of inflation. However, the attempt to cease rapid, uncontrollable inflation caused economic woes. Though the short-term effects of the Reagan administration’s efforts to reduce inflation were harmful, the long-term results were far more beneficial to the economy.
Reagan did not inherit a booming economy from Carter; instead, he was burdened by economic contraction, dependence upon new currency, and rampant inflation. When Reagan took office in 1981, annual inflation growth was 13.5%. This figure contributed to immutable 7.6% unemployment, stalled growth, reduction in value of the U.S. dollar, stingy consumers, and less competitive domestic products. This myriad of economic sorrow became know as stagflation because it all rooted in enormous inflation rates. Carter is not solely to blame because the reduction in oil production played a critical role in a stagnant economy. The high price of oil and excessive inflation would define the economic policy of Carter, and contribute to his defeat in the election of 1980. Throughout the campaign, Reagan had promised to control Federal spending, deregulate the economy, and terminate the excessive inflation.
Inflation rates and the general economic success are very closely related. Reagan himself states that inflation is connected to deficit spending, workers wages, saving and investing, and a generally less stable economy. Many may view inflation as a problem that only impacts the wealthy and those who possess obscene amounts of savings. However, inflation plays a critical role in the average American’s life. From 1977 to 1981 the U.S. Bureau of Labor Statistics reports that wages, on average, increased by 35% while prices jumped by 49.4 percent, producing an overall drop in excess of 14% in the real value of American paychecks. Alone, the 35% average pay increase may look flattering to an economist, but it masks economic contraction. This is exactly what Reagan implied when he said: “American’s cannot keep up with inflation.” Inflation contributes to everyday household products more expensive for consumers. If an employee earns the same salary but has to pay 10% more for his groceries, utilities, and gas, he would be negatively affected by the inflation. Rich Danker, the project director for Economics at American Principles Project, stated that “high inflation was a fact of life in the 1970s and when Reagan took office it was still the worst thing plaguing the economy.” A Brookings literature review analyzed the 1980s recovery and concluded, “The strength of the recovery over the 1980s could be ascribed to monetary policy.” This review explains fiscal policy, such as tax cuts and deregulation, did not benefit the U.S. economy nearly as much as influential monetary policy, such gutting inflation rates.
After assuming office Reagan stated that the continued path of rapid inflation was detrimental to the economy because Americans were not able to save if the value continued to tumble and business productivity would decrease. He opined that the only solution was to reduce taxes and deregulate the private sector. Tragedy struck the white house in 1981 when the fate of their optimistic and charming leader was jeopardized. Reagan had been shot, but a quick recovery and was addressing Congress only one month after the attempt on his life was made. Reagan’s injury might have helped him get his reduction in tax rates get passed along with the approval of the lowering of interest rates. The Reagan administration cut all taxes by at least 25% and Paul Volcker, Federal Reserve Chair, significantly raised interest rates to a staggering level of 20%. 20% interest rates were unheard of and remained the highest recorded interest rates in American history. Many skeptics suspected that these rates would reduce borrowing and therefore the economy would be even more stagnant with the lack of investment. The Federal Funds rate, which is how much interest is charged when banks make overnight loans to meet the set limit for available withdraw, was raised from 10% to 20%. 20% interest makes borrowing disadvantageous. The prime rate, the interest charged on banks loaning to their most creditworthy customers, was raised to 21.5% from roughly 10%. These ubiquitous rate hikes were intended to prevent reckless debt. The late seventies were a time to extend credit and invest because the rates were far lower and saving cash would not be profitable due to the fact that one’s savings would be worth over 13% less each year. However, the early eighties were a time of enormous change. Americans would be much better suited to refrain from borrow at all because the interest rates would almost certainly market their venture hard to fund and unprofitable and simply saving money would have irrefutably been the safest means to preserve money. The immediate results wrecked havoc among banks, and many became close to being insolvent because they could not afford the astronomical rates to borrow. Another critical aspect to reducing inflation and solving the problems of Carter was to restrict the printing of money. Reagan’s monetary policy heavily restricted the amount of tender produced. Though reducing the amount of money brought into circulation to prevent the decline in the value of the currency seems logical, there were consequences. The strong dollar hurt much domestic business that was dependent upon a diluted currency to compete with internal products. The immediate decline in US exports and increased imports was perhaps the most influential cause of the recession of 1981-1982. The trade deficit had increased from 39.7 billion in 1981 to 42.7 billion in 1982. Agricultural exports fell from $26.6 billion in 1981 to $21.4 billion in 1982. Meaning that U.S. products would be priced higher than competing companies of different countries. Lawrence B. Krause, senior fellow in economics at the Brookings Institution in Washington, D.C., estimates that blame for the trade deficit lies “50–50 between the recession and the strong dollar.” However, the strong dollar was what the Reagan administration set out to achieve, yet it was then exacerbating the problems it set out to address. The strong dollar also encouraged the greater importation of cars because American cars would have been too expensive. Auto imports increased from $20.6 billion in 1981 to $18.4 billion in 1982. The chairman of the Department of Agriculture's World Food and Agricultural Outlook and Situation Board, Jim Donald, argued that the decline in agricultural exports was due to “very weak world economic conditions, along with the strength of the dollar.” The dollar appreciated 20.4 percent between 1981 and 1983 among the currencies of the 23 other countries into the Organization for Economic Cooperation and Development. Businesses were dependent on the constant devaluation of the currency in the late 1970s, and Reagan’s immediate restriction on the printing of money disrupted the status quo. In 1981 almost 30% of all cars sold in the U.S. were imported. The legislative representative for the United Auto Workers expressed concern with the auto sales when he said that if the current trend continues, imports will make up 35-40% of the American car market, and 300,000 auto workers would be out of a job. The recession was the worst economic tragedy since the Great Depression; the 10.8% left 9 million Americans unemployed and the federal budget was well over 200 billion after sustained spending while lowering taxes. The manufacturing sector took the biggest hit due to the increase in imports as the stronger US dollar made it more challenging for American companies to export products. Michigan was burdened by 17% unemployment rate due to the high percentage of manufacturing jobs lost because of the lack of exports. The real income of the 1% was still slowly rising, but the average income was consistently in decline. The economy was gravely suffering, but since the beginning, Reagan had voiced that this would be a long-term solution. Reagan himself had acknowledged that ridding the economy of inflation produced unwanted consequences. A key campaign promise of his was that he would balance the budget, which he failed to do in his entire presidency. In March of 1982 when witting to a columnist who was critical of his record he responded “May I, however take issue with a line in the editorial that I have gone back on my promise to balance the budget. This is still my goal. Unfortunately, the recession (and that has to be laid at the door of four decades of Democratic policy) changed our estimates drastically. One change we are responsible for-we lowered inflation faster than we anticipated and, since inflation is a source of revenue for the government, this reduced our estimates revenues which further added to the projected deficit.” Reagan touts the fact that he had decimated inflation, but also offers the notion that sacrifices needed to be made to combat inflation, and that the inability to balance the budget was largely the fault of Carter’s term.
The economy had faced great adversity in the first two years of Reagan’s term. The slow, yet steady GDP growth of the middle and late seventies was due to a reasonably fiscally responsible federal government, relatively low-interest rates, the constant influx of money into circulation, and decent trade deals. Reagan and Paul Volcker shook this up by cutting taxes and increasing military spending to make the deficit larger, cutting the amount of monetary production with the implementation of the tight money policy, trade deficits, and high-interest rates. However, the Reagan administration was able to improve on a component of the economy that Carter was never able to control. A component that greatly influences all other influential conditions – inflation. One of Reagan’s primary economic goals in his first term was to combat inflation. In his February 5th, 1982 Address to the Nation on the Economy, he mentioned the word inflation 17 times. Reagan set out to end inflation, and though the immediate consequences were received in 1981 and 1982, the economy would stabilize in 1983 and maintain growth for the rest of his presidency. Every aspect of the economy experienced improvement; including, but not limited to manufacturing, employment for all, GDP growth, and increases in average net worth.
The beneficial long-term trends of Reagan’s termination of excessive inflation would begin to show in 1983. Unemployment peaked in December of 1982 at 10.8%, but then consistently declined, and by December of 1984 unemployment was at 7.3%. GDP in the fourth quarter of 1982 was recorded at 5189.8 billion, and one year later was 5590.5 billion – far greater than Carter’s pinnacle GDP. Many would make the false misconception that the drastic interest rate changes and restricted monetary policies would produce stalled growth. However, the Reagan period as a whole was one of the most successful periods in American economic history. Just some of the general accomplishments of Reagan include 18.7 million new jobs created, an unemployment rate of 5.5%, middle class net worth’s (between 20,000 and 50,000) grew by 27%, Gross National Products (value of goods and services produced) increased by 26%, and the lowering of rates once the economy had stabilized from 21.5% in the begging to 10% at the end.
With inflation contained the American economy had the opportunity to thrive. Up until this point, economic success was limited by inflation. Stagflation had dictated subpar business growth, but with inflation being recent history business had the chance to succeed. Deregulation and lower taxes made growth possible while also raising rates and reducing the amount of money printed. The strict monetary policy was sweetened by a generous fiscal policy that kept government uninvolved in the private sector. The economic success did not only benefit the middle and upper classes, but also the poorest of Americans. The poorest fifth of American’s income was up 12% (inflation-adjusted) from the beginning to the end of Reagan’s presidency. The number of people impoverished dropped from 7 million in the seventies to 4 million in the eighties.19 Between 1982-1988 African American employment rose by over 25%, and over half of the new jobs created in Reagan’s two terms went to women. Reagan was credited with the strongest manufacturing economy during peacetime. However, Reagan was able to create a myriad of manufacturing jobs because of his heavy investment in the military and defense. Many companies in the defense industry expanded due to Reagan’s eagerness to beat the Soviets in an arms race. By investing much more money than his predecessors Reagan was able to indirectly intervene to kick-start the economy, and provide a strong defense. Investment including stocks, bonds, and real estate all increased by roughly 50%, which produced 5 trillion more dollars of wealth. From 1970 up until 1982 the Standard and Poor’s, a respected index that is used to show economic expansion and contraction was up 35%, but from 1982 until one year after Reagan left office in 1988, the S&P had tripled.
Reagan’s economic accomplishments during his presidency are great, but his missteps are not unnoted. Reagan performed the largest economic overhaul since the New Deal because it was the monumental change that needed to occur. Though the results were not immediately flattering right away, they proved to be effective in the long-term. Reagan was able to suffer the worst recession since 1929 and still be considered one of the greatest economic presidents of all time. His policies were far from the quick fixes proposed by Carter that merely added to the problem by providing constant short-term solutions like low rates and the flooding the market with currency. In order for real, long-term growth to occur, revolutionary economic change was needed. The Reagan visionary mindset allowed him to look past the immediate consequences and contemplate the prosperous future.