The Success of Reaganomics

A few days ago one of the architects of Reaganomics, Murray Weidenbaum, passed away.

Looking back, Reaganomics was a success.


When President Reagan entered office in 1981, he faced actually much worse economic problems than Obama faced in 2009:

  • Three worsening recessions starting in 1969 were about to culminate in the worst of all in 1981-1982.
  • Unemployment soaring into double digits at a peak of 10.8%.
  • Roaring double-digit inflation, with the CPI at 11.3% in 1979 and 13.5% in 1980 (25% in two years).
  • Double digit interest rates, with the prime rate peaking at 21.5% in 1980.
  • The poverty rate started increasing in 1978, eventually climbing by 33%, from 11.4% to 15.2%.
  • A fall in real median family income that began in 1978 snowballed to a decline of almost 10% by 1982.
  • From 1968 to 1982, the Dow Jones industrial average lost 70% of its real value, reflecting an overall collapse of stocks.


    Reagan conservative policies amounted to the most successful economic experiment in world history:

  • 20 million new jobs were created.
  • Unemployment fell to 5.3% by 1989.
  • The top income tax rate was cut from 70% to 28%.
  • The Reagan Recovery took off once the tax rate cuts were fully phased in. Total federal spending declined to 21.2% of GDP in 1989 (even with the Reagan defense buildup, which won the Cold War.)
  • Eliminated price controls on oil and natural gas. Production soared, and aided by a strong dollar the price of oil declined by more than 50%.
  • Real per-capita disposable income increased by 18% from 1982 to 1989 (meaning the American standard of living increased by almost 20% in just 7 years.)
  • The poverty rate declined every year from 1984 to 1989, dropping by one-sixth from its peak.
  • The stock market more than tripled in value from 1980 to 1990 (a larger increase than in any previous decade.)
  • The Reagan recovery started in official records in November 1982, and lasted 92 months without a recession until July 1990 (when the tax increases of the 1990 budget deal killed it.)
  • During this 7-year recovery, the economy grew by almost one-third (equivalent of adding the entire economy of West Germany to the U.S. economy.)
  • In 1984 alone real economic growth boomed by 6.8%, the highest in 50 years.
  • The inflation from 1980 (in the Carter era) was reduced from 13.5% to 3.2% by 1983.
    (The contractionary, tight-money policies needed to kill this inflation inexorably created the steep recession of 1981 to 1982, which is why Reagan did not suffer politically catastrophic blame for that recession.)
  • The Reagan Recovery kicked off a historic 25-year economic boom (with short recessions in 1990 and 2001.)
  • The period from 1982 to 2007 is the greatest period of wealth creation in the history of the planet. In 1980, the net worth–assets minus liabilities–of all U.S. households and business was $25 trillion in today’s dollars. By 2007, net worth was just shy of $57 trillion. Adjusting for inflation, more wealth was created in America in the 25-year boom than in the previous two hundred years.
  • Economic growth averaged 7.1% over the first 7 quarters.
  • The Bush tax cuts helped end the 2001 recession and softened the blow of the 2008 crisis. Trickle down economics may have its flaws but no one has proposed a better alternative. On a related note, ending the gold standard lifted the constraints that had been holding the economy back. The world has never seen this much cash, profits, innovation, wealth creation, and liquidity. Everything is awesome, and no one (especially the left) is happy. While the left still insist the economy is weak, corporate profits are smashing records every quarter. The largest six banks alone earned $76 billion in profits last year. Compared to the cyclical low of $55.71 trillion of household net worth in Q1 2009, US households have gained almost $25 trillion in wealth over the last four years. It’s better to help the rich get ahead because that can help everyone else, even if it takes time the benefits to trickle down. Supply side economics works because instead of appropriating the poor a bigger slice of the pie from the successful, you make the pie higher instead.

    The economic impact of the weak labor market isn’t as significant as all the headline hype would suggest. Even if the Luddite fallacy is no longer a fallacy that doesn’t mean it’s time to abandon technological process. It’s a bifurcated recovery. Nominal hourly earnings, labor market & GDP only give a small piece of the picture. Other parts of the economy such as profits & earnings, exports, consumer spending, web 2.0, and real estate are thriving. The left has unrealistic expectations for job creation and GDP. The recovery may seem slow but it’s still faster than all of Europe and no slower than before the recession. The low labor force participation is a social problem more than an economic one. It’s time to choose profits and growth over class warfare. We’re becoming a nation of crybabies, blaming the economy, Washington, the fed, the rich, and technology for falling between the cracks, instead of ourselves.

    Someone replied:

    Ending the Gold Standard may have worked in the short run. It remains to be seen if it will work in the long run. All fiat currencies have failed in the end.

    Admittedly in the end we are all dead, but fiat currencies don’t seem to have done all that well to me since the end of the gold standard. They may be about to do a lot worse.

    This is an example of the fallacy of the hasty generalization. Just because other fiat currencies have failed doesn’t prove the US dollar will share their fate. The overwhelming evidence suggests this wont happen. For example, long & short term yields are still at historic lows. As shown below, the US is paying less interest on its debt relative to GDP than in the 80’s. The US dollar has out-performed over 95% of currencies since 2011.

    The only criticism of Reaganomics lies with Paul Volcker – the overrated, liberal octogenarian hero of the left. Volcker didn’t need to ‘break the back’ of inflation, creating a bad recession in the process. Considering the persistence of the decline of long term rates, it’s reasonable to assume double digit inflation would have resolved itself, without his heavy-handedness. Tax cuts and cheaper energy (80’s oil glut) ended the recession and contributed to the decline of interest rates, neither of which Volcker played a role in. It came as little surprise Volcker was one of the leading proponents of regulation post 2008 since destroying wealth is one of his expertises.