By 1991, individual income taxes, as a share of the nation's output of goods and services, were virtually identical to the level posted in 1977, according to the CBO. "There was very little change in the level of taxation by the end of the 12-year period," noted one senior congressional tax analyst.
Today, only the very richest and the very poorest are still benefiting from tax cuts enacted during the Reagan-Bush years. The richest 1% have tax rates that are 19% lower than they were in 1977, because the effects of the 1981 tax bill on the wealthy were so powerful that they could not be fully offset by a 15.7% rise in effective tax rates for that elite group between 1985 and 1992. Meanwhile, the poorest 20% of Americans enjoyed a 9.9% cut in their tax rates, thanks largely to the tax bills passed in 1986 and 1990, which restored progressive features of the tax code that had been lost in earlier legislation.
But the damage done to the budget by tax cuts, the defense buildup, and the uncontrolled growth in Medicare and other entitlements could not be undone by later tax hikes. So the deficit ballooned, stimulating the economy. Fortunately for Reagan, that stimulus came just as tight money policies at the Federal Reserve Board were finally beginning to wring inflation out of the economy.
That lucky combination of tax and monetary policies meant that the government was spurring demand and consumption in a new era of stable prices. That was a formula for rapid economic growth. But it was also conventional economics--and had nothing to do with supply-side theory.
"The great irony is that the tax cuts expanded consumption in the 1980s," and apparently did little to motivate people to work harder or invest more, argued Paul Krugman, an economist at the Massachusetts Institute of Technology.
"Reaganomics was falsely labeled," added Jeff Faux, an economist at the Economic Policy Institute in Washington. "They attributed the growth in the 1980s to the supply-side, but what they were really doing was a huge, bastardized Keynesian experiment in fiscal stimulus."
Meanwhile, Reagan-era deregulation of financial institutions gave momentum to a debt-induced speculative bubble that had a ripple effect throughout the private sector. The emergence of junk bonds and highly leveraged corporate buyouts left many companies heavily in debt, while poorly supervised savings and loans poured money into an overheated commercial real estate market. Corporate America borrowed roughly $1 trillion during the 1980s, and little of that went into productive investments.
The consequences became clear as soon as the great economic expansion of the 1980s ran out of steam and the economy inevitably turned down in the early 1990s. Corporations, financial institutions, and individuals were unable to keep up with their payments, and the vast American credit machine ground to a halt. A mild recession turned into a crisis the likes of which America had not experienced since World War II. Paralyzed by its own public deficits, Washington was unable to do much to help America get out from under the credit crunch in the private sector.
"You had an incredible orgy of borrowing, and you ended up with a private debt overhang and very little to show for it," observed Faux.
Yet Reaganomics can't be held responsible for all of the ills of the 1980s, either. Most economists now believe, for instance, that government policies in the Reagan-Bush era were not the driving force behind the widening gap between rich and poor that became so obvious over the past decade. The trend toward greater income inequality was in place even before Reagan took office, and the growth in that trend has been far larger than could be explained by changes in federal taxes or government regulations. Indeed, most of the growth in inequality has shown up in pretax income--which means that something besides tax policy has been at work.
The inflation-adjusted incomes of the top 1% of Americans grew 75.5% between 1980 and 1990, while the poorest 20% suffered a 3.7% decline. The failure of federal spending on poverty programs to keep up with inflation clearly depressed incomes at the bottom. At the top, tax breaks for the wealthy, surging defense spending for a handful of large corporations, as well as regulatory relief that benefited businesses and their affluent investors, may have all played a role.
Yet most economists now believe income inequality has expanded largely because of a deeper trend dating back to the early 1970s: increasing economic globalization and its long-term effects on unskilled American workers. Forced to compete head-to-head with low-wage workers in the Third World, unskilled American factory workers have suffered devastating losses in jobs and income.
By contrast, highly educated professionals have enjoyed much greater insulation from import competition. As a result, the relationship between income and education is greater than ever before.
So while Reagan's policies magnified the underlying trends, they were not the root cause.
"When you look at the worsening income disparity, you cannot honestly blame it on Reagan tax cuts," said Blinder.
Which leads finally to an intriguing, and obviously controversial question: Was Reaganomics a political response to growing income inequality that was already building in the American economy, rather than the cause of it? Was the tax revolt of the late 1970s, which set the stage for Reagan's rise to power, brought on by growing discontent over government policies among the beneficiaries of rising income inequality?
"Perhaps it was income disparity that was driving Reagan, rather than the other way around," observed Krugman. "Clearly something deep and pervasive was going on."