Was Reagan a neoliberal?

Reaganomics has often been labelled as neoliberal. Before Reagan became President of the United States, he pledged to support free markets and to reduce government intervention.

There were four pillars of Reaganomics which led to the neoliberal label being applied. They were:

1. Reducing government spending
2. Reducing taxes
3. Reducing government regulation
4. Controlling inflation

By 1984, President Reagan promised a balanced budget thanks to the reforms he planned on making. It was a key pledge of his campaign in the build-up to the election against President Carter.

The theory was that these reforms would lead to the end of stagflation, which had plagued the US economy throughout the 1970s.

All four pillars are part of what a neoliberal economic platform would look like, but did Reagan actually follow through with them? Was Reagan actually a neoliberal or was it another case of a politician saying one thing, and doing the opposite?

Did Reagan cut government spending?

Reagan did not cut government spending, in fact, his deficits were often worse than President Carter’s who was portrayed as someone that didn’t care about government finances.

In Carter’s last year, the Federal Government spent $591bn. By the end of Reagan’s Presidency, that number had almost doubled.

In all of his years as President, Reagan never proposed a budget that cut the overall level of government spending.

By 1984, Reagan had a budget deficit of over 5.5%, instead of the balanced budget he proposed in the election.

Spending on defence increased dramatically during Reagan’s presidency. Defence originally accounted for around 22% of government spending, but Reagan increased that to over 27%.

The debt to GDP ratio increased significantly during the 1980s. It was around 31% when Reagan took office, and he left a debt ratio of around 50% for President Bush.

Reagan did not cut government spending during his time as President, so the claim he is a neoliberal because he cut back the state, is incorrect. He actually spent more than President Carter, and was one of the highest spending leaders ever, outside of war time.

Did Reagan cut taxes?

Tax is another area that has led to Reagan being called a neoliberal, but once again, the reality is separate from perception.

In 1981, the Economic Recovery Tax Act was passed. On paper, this legislation was designed to cut many taxes, including:

1. Income Tax
2. Estate Tax
3. Capital Gains Tax
4. Windfall Taxes

Part of the proposed Income Tax cut was cutting the highest rate from 70% to 50%, which prompted the reputation of being a neoliberal.

The cut in the highest Income Tax band from 70% to 50% was almost immediate, meanwhile taxpayers in other tax bands actually had a tax increase during Reagan’s Presidency.

The reason for this is due to bracket creep. The 1981 Act legislated for tax brackets to be linked to inflation, but only from 1985, so until then, inflation was driving up increased tax bills for people.

Tax cuts for the richest, but not the rest, at least in the short-term.

Social security taxation also increased under Reagan. In 1983, an amendment was passed meaning that up to half of the value of social security payments could be taxed.

There is an argument that those people with lots of wealth getting social security should pay tax, but that wasn’t Reagan’s argument in the build-up to the election. He promised no tax increases, and he increased plenty of taxes during his tenure.

One of the biggest tax increases in American history was passed under Reagan. In 1982 the Tax Equity and Fiscal Responsibility Act was passed.

The provisions of this act helped to close tax loopholes, which is a good thing as it helps to simplify the tax system. At the same time though, taxes on businesses were increased considerably.

The tax treatment of business expenses became more complex, with different expenses having different tax treatments attached to them.

The worst part of the business tax changes though was that they were applied retroactively. It put a lot of pressure on businesses that had spent much of the previous decade struggling to survive.

Federal tax receipts increased by 49% under Reagan’s Presidency. I suppose he had to pay for his inflated spending somehow, but it’s not very neoliberal.

Did Reagan cut regulation?

In the early stages of his Presidency, Reagan was credited with cutting regulations on oil and gas price controls, as well as the airline and trucking industry. These were all started under President Carter, and simply signed into law under Reagan.

Reagan did go further than previous administrations on privatisation. For example, Conrail was privatised under Reagan, raising $1.6bn. Whilst Reagan went further than previous Presidents, President Clinton went further than Reagan.

Unlike New Zealand, the USA did not liberalise agricultural regulations during the 1980s. Price controls were still a key part of agricultural policy across the country, with price guarantees being offered to farmers for wheat and cotton.

Business regulation went up under Reagan too. Pressure was placed on the administration because Japan happened to manufacture better goods at cheaper prices. This led to Reagan intervening and increasing regulation on imports.

The culmination of this was the Plaza Accord in 1985. Rather than let the free market decide which businesses should succeed and which shouldn’t, President Reagan pushed for currency manipulation in favour of the US Dollar.

The main aim of the Plaza Accord was reducing America’s Current Account deficit, but that didn’t work. A key pillar of neoliberalism is free trade. Reagan was not a supporter of free trade.

Did inflation fall under Reagan?

The 1970s had seen many economies having to deal with the problem of stagflation. This is when unemployment is high, and inflation is too.

Normally if one is high, the other is low. For instance, if unemployment is high, consumer spending decreases, leading to lower levels of inflation. If unemployment is low, wages increase, as does consumer spending, which pushes inflation up.

Throughout the 70s, this was flipped on its head.

When Reagan took office, American inflation was one of the highest in the G7, at over 14%.

Whilst it is true that American inflation declined under President Reagan, there are two additional points to consider.

Firstly, inflation by the end of his tenure was still higher than Canada, France, Germany, and Japan. Inflation was around 4%, which is twice the Federal Reserve target.

Secondly, the credit for reducing inflation shouldn’t go to President Reagan, it should go to Paul Volcker who was the Chair of the Federal Reserve during this time.

Volcker increased interest rates significantly in the early 1980s to combat inflation. Interest rates in 1979 were around 11%, and by June 1981, they had reached 20%. Compare that to the sub-1% interest rates many countries have today!

Raising interest rates did lead to a reduction in inflation, but it also led to a large increase in unemployment at the same time.

It also led to the US Dollar strengthening relative to the Japanese Yen and Deutsche Mark, which contributed to the Plaza Accord because Reagan couldn’t tell businesses that in capitalism there are winners and losers.

Ultimately, inflation did fall under President Reagan, but it certainly wasn’t down to him. The increased inflation after 1983 is partly his fault, due to his increased import tariffs that he imposed to try and protect Harley-Davidson.

Conclusion

Reagan is often labelled as a neoliberal, but that’s being very generous with the use of the word. Neoliberals believe in smaller government and free trade. Neither was the case under Reagan.

Government expanded significantly under him. Spending increased, particularly on the military, as did taxes and regulations.

On free trade, he allowed corporate interests to influence his economic policy, leading to protectionist measures such as import tariffs against Japan.

The main thing that supports of Reaganomics take credit for, reducing inflation, wasn’t even down to him. It was down to Paul Volcker, whom Reagan sacked at the first opportunity. If anything, Reagan’s protectionist approach actually increased inflation.

Reagan was definitely a capitalist, but not a neoliberal in reality. Perhaps in rhetoric, especially during the campaign, but once he was in office, he turned his back on neoliberal economics.