February 6 was the 100th anniversary of Ronald Reagan’s birth. Several commentators have reflected on the Reagan legacy and, as one might suspect, these assessments have been quite divergent. Some thirty years after Reagan’s first inaugural, there remain many on the right and the left who claim that there was something amounting to a Reagan revolution.
The basic narrative runs something like this: after years of stagflation and mounting evidence that the welfare-regulatory state inherited from the New Deal and Great Society was failing to achieve its objectives and undermining the incentives for growth and entrepreneurship, Ronald Reagan assumed the presidency with a clear message: government is the problem, not the solution. Over the course of the next eight years, he worked diligently to reverse the changes of previous decades.
High marginal tax rates were slashed via the Economic Recovery Tax Act and the Tax Reform Act.
The size of the government was reduced through significant cuts in domestic spending and a series of welfare reforms that set the stage for the elimination of AFDC a decade later.
The regulatory state was disciplined through the application of cost-benefit analysis –based regulatory review (executive order 12291), reductions in regulatory budgets, and further deregulation.
Inflation was eliminated via tight monetary policy and, when combined with tax cuts, the foundations were created for an era of steady non-inflationary growth.
The selective protectionism of the past was eliminated by fidelity to free trade. The administration’s efforts led, ultimately, to NAFTA and the creation of the World Trade Organization.
Carter-era détente was cast aside for a policy of “rollback” that led, ultimately, to the collapse of the Soviet Union.
While Reagan may not have achieved all that he hoped to achieve, subsequent presidents (George H.W. Bush and Bill Clinton—with the prodding of Republican majorities in Congress) consolidated and extended his accomplishments. In subsequent decades, the key features of the US political economy would be largely in accordance with the broad vision articulated by Reagan in 1981.
Analysts may well diverge on their evaluation of this new order and whether the changes rise to the level of a “revolution.” But there is little question that Reagan was the key architect. At least this is the argument…
In a few postings this week, I would like to provide my interpretations of the Reagan revolution and his long-term legacy. Lets start with the low hanging fruit.
Reagan and the Size of Government
In 1981, Ronald Reagan famously noted: “government is not the solution to our problem; government is the problem. From time to time we’ve been tempted to believe that society has become too complex to be managed by self-rule…Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else?”
It is commonly claimed that Reagan implemented his broad vision by waging a war on the sprawling state that had been constructed during the New Deal and expanded dramatically during the Great Society and the 1970s. To evaluate this claim, it is useful to turn to some empirical indicators.
To simplify a bit, let us just consider federal outlays as a percentage of GDP. All figures are from OMB Historical Table 1.2
In 1940, on the eve of US entry into World War II, the federal government was spending 9.8 percent of GDP. Spending had actually peaked at 10.3 percent in 1939.
In 1950, federal outlays were 15.6 percent of GDP
In 1960, federal outlays were 17.8 percent of GDP
In 1970, with a hot war in Vietnam and the welfare state expansions of the Great Society and War on Poverty, federal outlays were 19.3 percent of GDP
In 1980, the last year of the Carter presidency, federal outlays had reached 21.7 percent of GDP, more than twice the level relative to the economy as had been reached during the peak year of pre-war New Deal spending.
During Reagan’s first term in office, federal outlays averaged 22.8 percent of GDP. During his second term in office, federal outlays were an average of 22.1 percent of GDP. The average for the Reagan presidency as a whole was 22.4 percent of GDP.
Did the Reagan administration shrink government (the problem, not the solution)? The simple answer is: No! If fact, government expanded during this period such that relative to the economy, the Reagan administration spent 20 percent more than the Johnson presidency that was so reviled by the critics of the Great Society.
Now, one might argue that there were good reasons for this pattern of spending (e.g., a deep recession, the growth in defense spending designed to bring an end to the Cold War). Regardless, there is no evidence to support the contention that Reagan ushered in an era of small government.
Domestic per capita spending
In a post last year, I provided a different indicator of government growth: per capita, inflation adjusted domestic spending. I argued at the time that this is a useful measure because if GDP grows faster than the population, the government’s claim on GDP could overstate levels of spending. I focus on domestic spending not because I think that military spending is unimportant—in fact it is quite important. But a focus on domestic spending allows us to see the trend more clearly. Figures are derived from data in OMB Historical Tables 3.1 and 15.3, and expressed in 2005 dollars.
In 1940, the federal government spent $715 per person.
By 1960, federal non-defense spending was $1,332 per capita, and by the end of the Johnson presidency, it has reached $2,286 per capita.
By 1980, non-defense spending rose to $2,633 per capita.
By the last year of the Reagan presidency, nondefense spending had risen to $4,827 per person—more than twice the level of the Great Society.
In sum, when we look at per capita domestic spending in constant dollars, the data reveals significant expansion under Reagan.
Once again, there are explanations to consider, some of which I may touch on later in the week. For now, let us be content with a simple but important take home message: for all the claims that Reagan ushered in a period of small government, the government actually expanded during the Reagan presidency and, depending on your indicator, the expansion may be characterized as significant.