Seven myths about Reagan's economy that both sides still repeat

Everybody has their own Reagan. On the right there is the Reagan who cut taxes, shrank Washington and let a grateful economy roar. On the left there is the Reagan who handed the country to the rich, gutted the safety net and left a mountain of debt. Both of those Reagans make for a good speech, and neither one of them is the man who actually sat in the Oval Office from 1981 to 1989.

This is a Republican site and we admire the man. That is exactly why it is worth getting his record right. If we are going to invoke Ronald Reagan, and we will, we should invoke the one who existed, because the real one has better arguments than the legend, and because the first time a skeptical nephew looks up the numbers, a legend collapses and an argument does not. So here are seven myths, a mix from both camps. For each one I will state the claim, test it against the record, and give a verdict. I have been careful to use only figures I am sure of and to tell you where to check the rest.

Myth 1: "The tax cuts paid for themselves"

This is the favorite on our side, and it is wrong as stated.

The Economic Recovery Tax Act, signed August 13, 1981, cut individual income tax rates in three steps: 5 percent in October 1981, 10 percent in July 1982 and 10 percent in July 1983. It was sold as a 25 percent cut, but the steps compound: 0.95 times 0.90 times 0.90 is about 0.77, so the real reduction in rates was about 23 percent. It also lowered the top rate from 70 percent to 50 percent and, beginning in 1985, indexed the brackets to inflation so that a cost-of-living raise would stop pushing a worker into a higher bracket. You can read more about the end of bracket creep in reagan's 1981 tax cut and the quiet end of bracket creep.

The revenue tells the real story. Federal receipts were about $517 billion in 1980 and about $909 billion in 1988. That sounds like proof, and it is the number you will hear on talk radio. But work through it. Dollars bought less in 1988: consumer prices rose about 44 percent over those years, from an index of 82.4 to 118.3. Divide 909 by 517 and you get 1.76, a 76 percent increase. Divide that by the price increase of 1.44 and you get roughly 1.22, a real increase of about 22 percent. That is a solid gain, helped along by growth, but it is not a case where revenue exploded. And measured against the size of the economy, receipts slipped from about 18.5 percent of output in 1980 to about 17.6 percent in 1988.

Verdict: False. Revenue grew, but not enough to cover the cuts. The honest version, which is still a good argument, is that lower rates and growth together produced rising revenue in dollars and that the economy was far stronger than it would have been otherwise.

Myth 2: "Reagan shrank the federal government"

Another favorite, and another one that fails the arithmetic.

Federal spending was about $591 billion in 1980 and about $1.06 trillion in 1988. That is a rise of roughly 80 percent in dollars (1,064 divided by 591 is 1.80). Some of that was inflation. But as a share of the economy, spending ended about where it began, a little above 21 percent. Defense outlays more than doubled in dollars during the buildup. The national debt, which I come to below, nearly tripled.

What did shrink? Domestic discretionary programs, the part of the budget that Congress decides each year, grew much more slowly than before, and some, like certain job-training and housing programs, were cut. But the big things that drive the budget, Social Security, Medicare and interest, were growing on autopilot and he did not touch them. Government was not smaller in 1989. It was bigger. It was simply growing more slowly in some places and faster in others, and the faster places were defense and interest on the debt.

Verdict: False. Reagan slowed some domestic spending and rebuilt the military, and he changed the direction of the argument, but he did not shrink Washington. Anyone who says otherwise has not looked at a budget table.

Myth 3: "Reagan never raised a tax"

This one comes from our side as a point of pride and from the other side as an accusation of hypocrisy. Both are a little off.

Reagan raised taxes more than once. The Tax Equity and Fiscal Responsibility Act of 1982 reversed a meaningful part of the 1981 cuts by closing loopholes and tightening rules, and it was a large tax increase. In January 1983 a surface transportation law raised the federal gasoline tax by five cents a gallon. In 1984 the Deficit Reduction Act added more revenue. And, as I describe below, the 1983 Social Security rescue sped up payroll tax increases. By the end of 1990, the employee's share of the payroll tax had risen from 6.13 percent of wages in 1980 to 7.65 percent. Those taxes landed on working people's paychecks.

Now the fairness caveat. On the 1982 bill, the White House had been promised a ratio of roughly three dollars in spending cuts for every dollar of new revenue. By Reagan's own later account the cuts never arrived at anything like that size, and he regretted agreeing. It is a perfect example of why conservatives are leery of "deficit deals" that promise the cuts later. That lesson is the reason I argue in Why Spending Restraint Keeps Losing in Washington, Whoever Is in Charge that the cuts have to come first.

Verdict: False. Reagan cut rates, and he also signed several tax increases. The record is a mix, as it is for nearly every President.

Myth 4: "It was all trickle-down for the rich"

That is the left's classic, and it fails in a different way.

Start with the term. "Trickle-down" was a label put on the policy by critics. What the policy actually claimed was that lower marginal tax rates at every income level would encourage work, saving and investment, and a growing economy would lift everyone's pay. You can test that claim, and you can reject it, but it is not the same as saying that tax cuts for the wealthy would drip down to the poor.

Now the facts. Yes, the top rate fell, first from 70 percent to 50 percent in 1981 and then, in the Tax Reform Act of 1986, signed on October 22, 1986, from 50 percent to 28 percent, while the corporate rate dropped from 46 percent to 34 percent. But the 1986 law also nearly doubled the personal exemption over time, raised the standard deduction, expanded the Earned Income Tax Credit, and took millions of low-income households off the federal income tax rolls entirely. It paid for lower rates by closing loopholes and shelters, mostly ones that benefited high earners. The best account of that law is in the 1986 tax reform that lowered rates by closing loopholes. And the bracket indexing in the 1981 law was worth the most to ordinary wage earners, who had been taxed on inflation alone.

On the other side of the ledger, the payroll tax increases I just mentioned fell hardest on those who earn modest wages, because the payroll tax applies to every dollar of earnings up to a cap and does not apply to investment income. So the left has a legitimate point about those, and I will not pretend otherwise.

Verdict: Mostly false. The income tax changes lowered rates for people at every level and removed many working families from the rolls. The payroll tax moved in the opposite direction. Both are true, and the fair summary has both.

Myth 5: "The recovery was all tax cuts" (or "all Volcker")

I include this because the right and the left each have their favorite villain-and-hero, and each is half right.

Here is the sequence. Paul Volcker became chairman of the Federal Reserve in August 1979, appointed by Jimmy Carter. Inflation had been climbing for years: the average annual consumer price inflation rate was 13.5 percent in 1980, and the prime rate, what banks charge their best customers, peaked at 21.5 percent in December 1980. Volcker's Fed tightened the money supply hard to break the back of inflation, and he kept doing it even when the political pressure was fierce. Reagan stood by him, and in 1983 reappointed him. For the full story, see How Paul Volcker broke inflation and why it hurt so much.

It hurt. The country fell into a recession that ran from July 1981 to November 1982, and the unemployment rate peaked at 10.8 percent in November and December 1982, the highest since the Great Depression. Inflation did come down: the annual average rate was 3.2 percent in 1983. The economy then recovered strongly, and by 1988 the unemployment rate was about 5.5 percent.

So who gets the credit? Tight money broke inflation, which was the precondition for everything else. The tax cuts, which phased in through 1983, supported demand and rewarded work and investment on the way back up. Looser monetary policy from the second half of 1982 helped. The honest answer is that it took both, plus a good deal of resilience in the American worker. If you hear someone telling you it was only one, ask what they think happened to the recession.

Verdict: Incomplete either way. Volcker's inflation fight and Reagan's tax cuts both mattered, and Reagan deserves credit for backing a painful policy that cost his party House seats in the 1982 midterms.

Myth 6: "The deficits were all Congress's fault" (or "all Reagan's")

Our side says Congress, led by a Democratic House and Speaker Tip O'Neill, refused to cut spending. The other side says Reagan's tax cuts and defense buildup made the deficits. Look at the numbers.

The gross federal debt was a little over $900 billion at the end of fiscal 1980 and about $2.6 trillion at the end of fiscal 1988. Divide 2.6 by 0.908 and you get about 2.86, which is to say it nearly tripled. The annual deficit passed $200 billion in fiscal 1983.

Both parties share the blame. Reagan asked for large increases in military spending and for large tax cuts, and he got both. The Democratic House did not cut domestic programs as deeply as he asked, and the Republican Senate did not push as hard as it could have. Reagan's budget proposals were often declared dead on arrival on Capitol Hill. Divided government explains a lot of what happened, and I take up that subject in divided government gave us welfare reform and a balanced budget.

The conservative's honest takeaway is not that the deficits were someone else's fault. It is that a deal that promises tax cuts today and spending restraint tomorrow rarely delivers the second half. For a plain-English guide to where the debt stands as a policy problem, see twelve questions about the national debt, answered straight.

Verdict: Both versions are false. The deficits were a joint product of the tax cuts, the defense buildup, the 1981-82 recession and a Congress that would not cut deeper, and the President's party held part of the responsibility.

Myth 7: "Reagan wanted to destroy Social Security" (or "Reagan saved it")

The left says the first and the right sometimes says the second. Here is the record.

In May 1981 the Reagan administration proposed trimming early-retirement benefits, and the Senate responded with a resolution opposing the idea by a vote of 96 to 0. The proposal died, and it taught the White House that Social Security is the third rail. It then did what a sensible administration does when a program is running toward insolvency. It formed a bipartisan commission, chaired by Alan Greenspan, which reported in January 1983. Reagan and Speaker Tip O'Neill, a Democrat, reached a deal, and Reagan signed the Social Security Amendments of 1983 on April 20, 1983.

The law sped up scheduled payroll tax increases, subjected part of the benefits of higher-income recipients to income tax, delayed a cost-of-living increase by six months, and gradually raised the full retirement age from 65 to 67. That last change phased in starting in the year 2000. This is the most successful Social Security repair of the modern era. It was bipartisan and it combined tax increases with benefit changes. How the program works and how it has been repaired is in How Social Security works and the promise built into its 1935 design.

So the "destroy" claim fails because the program got a rescue. But "saved it" overstates matters too. The 1983 fix was designed to hold the program for several decades, not forever, and the program has faced shortfalls again since. The right lesson is that a deal can be made when both parties negotiate honestly.

Verdict: Both exaggerate. Reagan's first idea was rejected and his second was a bipartisan compromise, which is how Social Security reform has always worked.

What both sides get right

After seven myths, here is what is true and defensible.

First, inflation was broken, and the central bank, backed by the President, deserves credit. Second, marginal tax rates were cut substantially, to a top rate of 28 percent by 1988, with a broader tax base, and the economy grew for most of the rest of the decade. Third, the country regained confidence. The mood in 1984 was nothing like the mood in 1980, and I would argue that confidence is itself an economic fact. Fourth, the costs were real: deficits, a debt that nearly tripled, and a structural problem that his successors in both parties inherited.

The right way to honor Reagan is to learn from all of it. I wrote about the philosophy behind it in The Three-Legged Stool Still Holds Up the Republican Party, and about the rate-by-rate details in The Reagan Tax Cuts Rate by Rate and the Tax Reform of 1986.

The bottom line

• Reagan's tax cuts raised revenue in dollars but not enough to pay for themselves. Do the arithmetic before you repeat the claim: after inflation, the 76 percent rise in receipts shrinks to about 22 percent.
• He slowed some domestic spending and rebuilt the military, but government grew in dollars and stayed about the same share of the economy. He also signed several tax increases, including the 1982 act and the 1983 payroll tax acceleration.
• The recovery needed both Paul Volcker's tight money and Reagan's rate cuts. Anyone who credits only one has skipped a chapter.
• Debt nearly tripled, from about $908 billion to about $2.6 trillion. Warn your friends who treat deficits as a left-wing problem.
• The next time someone quotes Reagan to you, whichever party they belong to, ask for the number and check it at the Bureau of Labor Statistics, the Treasury or the Office of Management and Budget's historical tables.