June 16, 2004
By Brian M. Riedl
Critics of President Reagan's budget deficits should answer one
simple question: Would you trade the collapse of communism, your
smaller tax burden, some of your income -- and possibly your job --
in exchange for eliminating that $2.1 trillion in added debt?
Coverage of President Reagan's
legacy has been generally fair, with one exception. Many say,
"Reagan masterfully won the cold war … but those budget
deficits." Or "America needed Reagan's infectious optimism …
but those budget deficits."
Not all debt is bad. Mortgage debt and student loan debt are worthy
investments. No one criticizes President Franklin Roosevelt for the
massive debt that financed World War II. Yet the commentators
criticizing President Reagan for the $2.1 trillion in added debt
(all numbers are in today's dollars) ignore how that debt won the
Cold War, lowered the tax burden, and ignited the largest economic
boom in American history.
Those who denounce the Reagan deficits should answer the following
Would you bring back the Soviet
empire? President Reagan spent $3 trillion on
defense, well above the $2.2 trillion baseline. What did that extra
$800 billion buy? The end of the Cold War -- saving, perhaps, a
billion lives from nuclear extinction.
No less than former Soviet Union Foreign Minister Alexander
Bessmertnykh has been quoted crediting President Reagan's defense
buildup for the accelerated collapse of the Soviet Union. The
fragile communist economy, already stretched thin by substantial
defense spending, could not keep up with America's defense buildup.
The possibility of American missile defense, and President Reagan's
powerful rhetoric, further persuaded the Soviets they could not win
the Cold War, and induced the reforms that culminated in the
collapse of the Soviet empire -- without America firing a single
shot. It was the best $800 billion investment America ever
Would you raise the top income-tax rate back to 70
percent? Commentators also blame the 1980s
deficits on President Reagan's insistence on reducing taxes in
1981. Yet President Reagan inherited the worst economy since the
Great Depression. Excessively high tax rates were discouraging work
and investment and therefore damaging the economy while raising
little revenue. President Reagan removed barriers to
entrepreneurship by reducing tax rates, cutting red tape, and
stabilizing the economy, thereby encouraging risk takers. The
centerpiece of this policy was a radical series of across-the-board
tax cuts that lowered the top income tax rate from 70 percent to 50
percent, and eventually to 28 percent. (It stands at 35 percent
This tax relief unleashed a 20-year surge of entrepreneurship, as
the U.S. economy tripled in size. The lasting impact of these
policies can be seen in successive presidents, who ratified
Reaganomics by refusing to even consider raising taxes back to
their 1970s levels. Thus, America continues to benefit from lower
Would you trade 2.8 million jobs? Before the
Reagan tax relief, the unemployment rate averaged 7.7 percent.
Since the tax cuts, it has averaged 5.8 percent -- a difference
that translates into 2.8 million jobs per year.
Would you trade $15,000 of your annual income? In
the two decades before the Reagan tax relief, the average
household's annual disposable income increased $13,000. In the 20
years following Reagan's tax cuts, these incomes surged
Would you trade the stock market boom? In the two
decades before the Reagan tax relief, the S&P 500 increased 120
percent. In the 20 years following Reagan's tax cuts, the market
jumped 575 percent.
And don't forget the 12 percent inflation rate and 21 percent
interest rates that Reaganomics slew.
The Reagan tax cuts replaced the deepest recession since the Great
Depression with the largest 20-year boom in American history. Tax
revenues actually grew faster in the low-tax 1980s than in the
high-tax 1970s, and rising incomes meant the share of taxes paid by
the wealthy actually increased throughout the 1980s. Millions of
people who had entered the 1980s in the lowest income quintile
surged to the highest income quintile by 1990.
All a coincidence? As Reagan would say, "there you go again."
Sure, President Reagan would have preferred to minimize the
deficits by eliminating wasteful spending. However, the only way to
persuade a Democratic Congress to accept a defense buildup and
pro-growth tax cuts was to agree to their domestic spending
Ironically, the 1980s budget deficits made the 1990s surpluses
possible. The budget was balanced by surging tax revenues from a
booming, low-tax economy and defense savings brought on by the end
of the Cold War.
To paraphrase a classic President Reagan line: Are you better off
today than you were in 1980?
is Grover M. Hermann Fellow in Federal Budgetary Affairs in the
Thomas A. Roe Institute for Economic Policy Studies at The Heritage
Distributed nationally on the Knight-Ridder Tribune wire
Critics of President Reagan's budget deficits should answer one simple question: Would you trade the collapse of communism, your smaller tax burden, some of your income -- and possibly your job -- in exchange for eliminating that $2.1 trillion in added debt?
Brian M. Riedl
Grover Hermann Fellow in Federal Budgetary Affairs
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