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The Reagan Economic Legacy

Budget of the United States Government: Fiscal Year 1989

US Government Printing Office, 616 pp., $18.00

Economic Report of the President, Transmitted to the Congress, February 1988, Together with The Annual Report of the Council of Economic Advisers

US Government Printing Office, 374 pp., $10.00


The twelve million new jobs that were created during the Reagan years fall into four main categories. The first group consists of services to wealth, or to the rich. Two million new jobs between 1981 and 1987 were created in finance, insurance, real estate, and legal services. 1 “Sales representatives, securities and financial services,” “investigators and adjusters, except insurance,” “managers, properties and real estate.” These are among American occupations that have grown most rapidly in the 1980s.2

The second category is the semiprivate welfare society that I have described in the June 30 issue. Health, education, social services, and government provided 3.1 million new jobs in the Reagan years. “Managers, medicine and health,” “administrators, education,” and prekindergarten teachers—these, too, are boom American jobs; they are dependent on government programs, and they are very largely for women.

The third category consists of services provided by the poor, or poverty jobs, such as for cooks and salesclerks. Of the new jobs 3 million were in industries, such as retail trade and hotels, that pay poverty wages. People in “service occupations” are the worst paid of all American workers (except in agriculture); they have the highest concentration of black or Hispanic workers, and their number has increased by 1.8 million from 1981 to 1987.3

The fourth category of new jobs is for people, most of them men, who handle and move material things. There were 2.3 million new jobs in construction, trucking, and wholesale trade, mostly for “operators,” of vehicles, for example, and for production workers. The most successful single occupation of the recent boom—increasing more than five times as fast as all employment—was that of “light truck drivers.” There are other expanding occupations, of course (such as computer equipment operators), and other expanding industries (such as guided missiles and horticultural services). But the new jobs consist largely of services to the rich; of services such as education to the welfare society; of services supplied mainly by the poor, such as retail trade; and of jobs in trucking, moving, and building.

The high-employment service economy is the principal economic success of the Reagan period. Mr.Reagan’s Council of Economic Advisers say in their 1988 Annual Report that the US expansion was shaped by “market-oriented, policies,” which are thereby a “blueprint” for world-wide economic growth. This hypothesis is difficult to verify, as was shown in an earlier article.4 Taxes were in fact higher during the Reagan period than in preceding years; transfer payments, made to individuals for social security and welfare, were higher; government spending was higher, and so was the government deficit. Investment was lower and savings slumped; profits were sharply lower; and the economic advantages of deregulation and privatization were not yet evident.

The rate of US economic growth was virtually the same, from 1981 to 1987, as the average rate for OECD countries, and the growth of productivity was much less. The rate of inflation fell in the US after 1980, but it also fell in other OECD countries. The US share of total OECD exports fell sharply, as the US external deficit—the difference between import and export transactions—increased.5

The distinctive US achievement, under these circumstances, was the capacity to create employment. US employment, mostly in service industries, has increased by an average of more than two million jobs a year since 1976. This, if anything, is the US “blueprint.” It is not only the consequence of the Reagan administration’s economic policies, since the rise in employment has continued under three successive administrations. Nor is it the result of policies for reducing government, as has been seen. But other Reagan administration policies—notably for government deficits, monetary expansion, and international borrowing—may have helped to establish the conditions under which the employment boom could continue.

It is also possible that there is some special relationship between employment in service jobs and Reagan’s policies. The members of the Council of Economic Advisers are forthright in their defense of service industries. The new jobs of the 1980s are in “higher paid, high-skill” occupations, they suggest; the “apparent poor productivity performance” in services “appears inconsistent with observed improvements in technology.”6 They even recommend services to other countries—another US blueprint, of sorts. “Resources need to shift away from tradable goods and toward nontradable goods,” they write; they mean by this that countries should produce fewer goods and services for export, and more of the public and private services—light truck deliveries, for example, or kindergarten education—that do not enter into international trade. 7


There is one sense in which the economic policies of the Reagan period clearly did establish the conditions for employment growth. The US economy has grown without interruption since 1982, and public policies have helped to make this possible. Government has consistently spent more than it receives in taxes: it has provided a “fiscal stimulus” to the domestic economy in the form of the overall government deficit, or the difference between what the government spends and what it removes in taxes. This amounted to 2.9 percent of GNP, on average, during the seven years of the Reagan administration. Monetary policy has also been expansive, for most of the time since 1982: interest rates have fallen and the supply of money has increased faster than output. The “real money supply” has increased six times as much in the Reagan period as in the previous twenty years.8

The US has meanwhile consumed more than it has produced; it has spent more on imported goods and services than it receives from foreigners for its exports. Imports have exceeded exports by 1.8 percent of GNP, on average, and these exports have been financed with capital provided by the rest of the world. If the US pays more for its imports (of, say, computers from Italy or financial accounting services from Hong Kong) than it receives for its exports (of computer software to West Germany or tobacco to South Korea), then it must finance the consequent deficit—the excess of payments over receipts—with “foreign investment” from the rest of the world or “foreign disinvestment” by the US): by borrowing money from foreigners, or by selling US assets to them.

Net investment” by foreigners in the US amounted, in this sense, to a cumulative total of $531 billion from 1981 to 1987 (or a US deficit of $76 billion per year). The cumulative total from 1948 to 1980, by contrast, amounted to net foreign investment by the US of $95 billion (or a US surplus of $3 billion per year).9

Mr. Reagan’s present Council of Economic Advisers seems to be pleased, in general, with the effects of fiscal, monetary, and international stimulus. The members of the council even include such stimulus in their blueprint for worldwide growth:

Clearly, it is important to maintain policy momentum in the macroeconomic area…when appropriate, judicious easing of monetary policy and increased spending on worthwhile public investments can contribute to demand and output growth without raising risks of inflation.

They see further potential for growth in increased borrowing: the “removal of artificial restraints on mortgage and consumer credit can aid growth under appropriate circumstances.”10

US economic policy has come a long way, evidently, from the initial positions of the Reagan administration’s economists. Mr. Reagan campaigned for the presidency against government deficits, for “monetary restraint” (or slower and steadier growth in the supply of money), and against “fine tuning” of the economy by frequent changes in fiscal and monetary policy.11 For most of the period, successive Councils of Economic Advisers have blamed budget deficits—and thus fiscal stimulus—on Congress.12 They have blamed fluctuations in the money supply—and thus monetary policy—on the Federal Reserve.13

The Reagan advisers’ present view of polices that stimulate the economy is different, and welcome. Even “fine tuning” has been rehabilitated in the present Report, at least in the special circumstances of the Federal Reserve’s response, week by week, to the stock market crash of October 1987.14 Some combination of congressional, executive, and Federal Reserve policies—some “easing” and some “spending”—has made the economic recovery possible. But this hardly justifies the Reagan administration’s claims to international leadership, or its demand, expressed by Secretary of the Treasury James Baker to the 1988 Economic Summit, that the world “will recognize the enormous contributions made by the Reagan-Bush administration to the course of the world’s economic policy over the past eight years.”15

United States international policies are the most novel aspect of the “Reagan-Bush” (or the “Reagan-Volcker-O’Neill-Greenspan-Wright”) expansion of the economy. They are also the aspect that makes the US experience least plausible as an international “blueprint.” Deficit spending and loose money are a fairly familiar prescription, after all, for economic recovery.16 But as “left-wing” policies, they have almost always been stymied by the combined pressure of international financial markets and international financial institutions. Countries that try to spend their way out of recession find that the value of their currencies falls (they become “low confidence monies,” as earlier Reagan economists put it), and they have difficulty in paying for their imports. They also find that they must reduce government investment in order to satisfy their international creditors.17

The US expansion was remarkable in several respects: it has lasted a long time; it has brought an uninterrupted increase in imports; it was accompanied for four years by a sharp increase in the value of the dollar; and it was also accompanied by a large and continuing flow of foreign investment to the United States. The dollar has fallen, of course, since its peak in 1985. But the “adjustment,” so far, is gentle by the standards of other debtor countries.18

The sustained excess of imports over exports, and the corresponding flow of foreign investment into the US, is thus the distinctive element in the Reagan administration’s policy for economic recovery. It is also one of the policies that were announced in advance by Reagan’s economists—in the form of an expressed desire for foreign savings—and then actually carried out. If foreigners invest their savings in the US, they noted, then the savings available for US investment are thereby increased.

There is some evidence that Reagan’s economic advisers were looking hungrily at foreign savings as early as their first Annual Report, as was pointed out in these pages at the time. They were concerned, even then, about the low level of US savings (which have since fallen much further).

The solution…is to seduce savings from countries that save more: “Some saving could also come from abroad.”… This flow of foreigners’ “savings” would presumably be offset—as the Report does not point out—by an increase in US imports of goods and services.19

The subsequent increase in imports was even more dramatic—producing the cumulative $531 billion deficit—than could then have been predicted. But the Reagan advisers were prepared for the worst, or the best: “Nor should a current account deficit [i.e., an excess of payments to foreigners over receipts from them] that is comfortably financed by net inflows of capital evoke concern.20

  1. 1

    Figures for employed civilians by detailed industry in 1981 and 1987 taken from Employment and Earnings (January 1988), Table 28; Bureau of Labor Statistics, “Labor Force Statistics Derived from the Current Population Survey: A Databook,” Vol.1, Table B-21. These are annual averages derived from household data. They differ from those presented in Table B-32 of the 1988 Economic Report of the President in that they exclude the Resident Armed Forces.

  2. 2

    Figures for employed civilians by detailed occupation and by detailed industry—over 400 occupations and over 300 industries—taken from Employment and Earnings (January 1988 and January 1984), Tables 22 and 28. The classification of occupations changed substantially in 1983, and the comparisons for detailed occupations and industries given here are therefore for 1983 and 1987, unless otherwise noted.

  3. 3

    Deborah Pisetzner Klein, “Occupational Employment Statistics for 1972–82,” Employment and Earnings (January 1984).

  4. 4

    Emma Rothschild, “The Real Reagan Economy,”The New York Review of Books (June 30, 1988).

  5. 5

    OECD Economic Outlook (December 1987), Tables 1, 16, 36; R-1, R-9, R-11. OECD Historical Statistics 1960–1985 (OECD 1987), Tables 3.7 and 6.15, Economic Outlook, Tables 1 and 16. The average rate of growth of GDP (Gross Domestic Product) from 1981 to 1987 was 2.7 percent in the US and 2.6 percent in other OECD countries. The growth of GDP per employed person was 0.9 percent per year in the US over the same period, and 1.7 percent per year in the other OECD countries.

  6. 6

    1988 Economic Report of the President, p.4; 1988 Annual Report of the Council of Economic Advisers, p.66.

  7. 7

    1988 Annual Report, p. 124. The main “advantage” of such a shift is presumably that other countries would produce fewer goods for export to the US. The Reagan economists seem to envisage a future worldwide expansion in which US exports to Germany (for example) increase sharply; German export industries grow slowly; and German auto workers find employment as kindergarten teachers, truck drivers, and financial investigators.

  8. 8

    1988 Annual Report, Tables B-3 and B-67; the “real money supply” is defined, following the OECD Economic Outlook, as M-1, divided by the implicit price deflator for GNP. See footnote 14 below.

  9. 9

    1988 Annual Report, Table B-20. These are statistics for “foreign transactions in the national income and product accounts” (NIPA), as shown in Table 4.1 of the NIPA series in the Department of Commerce Survey of Current Business. “Net foreign investment” by the US in the rest of the world is the difference between what the US receives from foreigners for its exports and what it pays to them for its imports, and for interest and transfer payments; when receipts are less than payments, there is “net foreign disinvestment” by the US, or “net investment” by foreigners in the US.

  10. 10

    1988 Annual Report, p. 125.

  11. 11

    See, for example, the first Reagan Annual Report: “Though it is necessary for the government to have macroeconomic policies,…such policies are not suitable for correcting small fluctuations in economic activity”; “policy recommendations based on the notion that it is possible to ‘fine tune’ the economy from quarter to quarter or year to year promise more than economics can deliver” (pp. 36 and 49).

  12. 12

    1984 Annual Report, p. 41. In 1983, for example, “the Congress failed to adopt” the administration’s “deficit reduction program.” The question in 1984 and 1985 was rather “whether the Congress prefers to restrain spending or increase taxes”: 1985 Annual Report, p. 68.

  13. 13

    See, for example, the 1984 Annual Report, pp. 24–26, the 1985 Annual Report, pp. 27–28, and the 1988 Annual Report, p. 33.

  14. 14

    The authors of the Report grade the Federal Reserve on a week by week basis. There was a possibly excessive “tightening through mid-October”; “immediately following the 508-point drop in the Dow, the Federal Reserve’s operations were exemplary. It was in the right place at the right time, supporting the financial system with ample liquidity.” By December, “the stance of monetary policy at the end of 1987 may have underestimated the risks to adequate economic growth” (pp. 38 and 45). If this is “tuning,” it is hardly unrefined. The role of money is otherwise greatly reduced, at least by the standards of early Reagan Reports. As Alan Greenspan explained, defending the Federal Reserve decision of 1987 not to set a target range for M1 (the narrowest measure of the amount of money in circulation): “The linkage between money and credit growth and economic performance has become noticeably looser in recent years.” (Statement of February 23, 1988, before the Committee on Banking, Finance and Urban Affairs, US House of Representatives.)

  15. 15

    International Herald Tribune (June 11–12, 1988).

  16. 16

    Even Secretary of Defense Caspar Weinberger felt obliged to explain, in 1981, that “we are not Keynesian among other things”: speech of October 27. 1981, quoted in Emma Rothschild, “The Philosophy of Reaganism,”The New York Review (April 15, 1982).

  17. 17

    1982 Annual Report, p. 169. There are frequent descriptions of this process in US economic documents, since the US has consistently been a chief pharisee of the orthodoxy of others. The 1984 Annual Report account of economic stimulus—in the third world—is fairly typical: “The debtor countries also made policy mistakes. The mistakes fall into two broad categories: overexpansion of demand and overevaluation of currencies. Both kinds of mistakes led to excessive trade deficits and therefore excessive borrowing to finance these deficits…. In many countries the government sector expanded too quickly…. Though much of the money was used for profitable investment, some went to unwise projects, to consumption, and to capital flight out of the countries involved.” There then followed “adjustment,” in which major debtors “have had to suffer severe recessions in order to reduce expenditure on traded goods.” The International Monetary Fund (IMF) could then give “a ‘seal of approval’ to countries that have agreed to follow particular programs of needed policy changes, enabling them to borrow from banks and other sources” (pp. 74, and 78–80).

  18. 18

    The effective exchange rate of the dollar was 37 percent lower, late in 1987, than at its 1985 peak, and 10 percent below its 1981 level. This decline was modest, even by the standards of certain other OECD countries: the effective exchange rate for the Australian dollar, for example, was 47 percent below its 1981 level, for the Greek drachma 60 percent lower than in 1981, and for the Turkish lira 88 percent lower than in 1981. Calculated from OECD Economic Outlook (December 1987), Tables 45,47, and R-22.

  19. 19

    Emma Rothschild, “The Philosophy of Reaganism,” The New York Review (April 15, 1982), quoting the 1982 Annual Report, p. 101. Gross US savings fell as a share of Gross National Product (GNP) from 17.1 percent in 1981 to 12.6 percent in 1987, and net savings as a share of net national product (NNP) from 6.4 percent to 2.2 percent: 1988 Annual Report, Tables B-22 and B-28.

  20. 20

    1982 Annual Report, p. 181.

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