Imagine looking at the architectural blueprint
for this massive gleaming skyscraper. Right,
the initial drawings. Yeah, exactly. And on paper,
it's just perfectly drawn. The lines are clean,
the load -bearing calculations are flawless,
and the math just adds up beautifully. But then
you actually go visit the construction site a
few years later. Right. And the finished building
rarely matches that initial perfection. Right.
You get there and realize, you know, There's
a whole extra wing nobody originally planned
for. Yo, yeah. The foundation had to be completely
altered to deal with unstable soil, and the plumbing
is just this labyrinth of workarounds. Because
the elegant theory promises one thing, but the
sheer physics of the real world demand another.
And that brings us to today. Welcome to today's
Deep Dive. Glad to be here. Today we are looking
at Reaganomics. And, you know, because this is
a topic that still reliably starts, uh... pretty
heated arguments at Thanksgiving dinners, we
are leaving our politics at the door. Our mission
today, for you listening, is purely to analyze
the data, the historical record, and the varied
economic arguments from the source material.
We aren't here to take a side or tell you who
was right. We just want to impartially unpack
the actual mechanics of an era that completely
rewired American politics and culture. Yeah,
to set the stage here, we really need to define
our terms first. Reaganomics is a portmanteau
of Reagan and economics, right? It's a term famously
popularized by broadcaster Paul Harvey, and it
refers to the sweeping neoliberal economic policies
championed by U .S. President Ronald Reagan from
1981 to 1989. And when we say neoliberal in this
context, we're talking about a shift away from
heavy government intervention in a moving toward
market oriented policies. Yeah. Think privatization,
deregulation and lower taxes, which his supporters
passionately defended as free market economics
while his opponents. And honestly, even some
of his fellow Republicans at the time dismissed
it as trickle down or voodoo economics. Yeah,
voodoo economics was a popular critique. But
at a high level, the approach rested on four
main pillars. First, significantly increasing
defense spending. Second, slowing down the growth
of domestic government spending. Third, drastically
reducing federal income and capital gains taxes.
And fourth, tightening the money supply to combat
inflation. Okay, let's unpack this. Because before
we can look at what Reagan actually did, we have
to understand the crisis he inherited. I mean,
you don't get a mandate to completely rewrite
the American economic playbook unless the old
playbook is visibly on fire. And the late 1970s
provided exactly that kind of fire. The U .S.
economy was suffering from this grinding, really
miserable condition called stagflation. Stagflation.
Right. It was a toxic cocktail of high unemployment
combined with persistently high inflation. Prices
were soaring, but the economy wasn't growing.
Which completely broke every rule of standard
economic theory at the time, right? Oh, totally.
Because under the traditional Keynesian economic
models, the ones that dominated since World War
II, inflation and unemployment were supposed
to operate on a seesaw. If the economy is booming,
unemployment is low, but inflation might creep
up because everyone has money to spend, you know,
and demand outpaces supply. But conversely, if
the economy tanks, people lose jobs, but prices
drop because nobody is buying anything. But stagflation
meant that seesaw essentially snapped in half.
Wow. Both unemployment and inflation were punishingly
high at the exact same time. The economic orthodoxy
of the era was just baffled by it. Yeah, you
had those miles -long lines at the gas pumps,
double -digit inflation, eroding savings, and
businesses just refusing to hire. The public
was desperate for a radical new approach and
enter supply -side economics. And a massive part
of the justification for this new approach was
rooted in this concept called the Laffer Curve.
Right, developed by Arthur Laffer. Yeah, who
actually served on Reagan's advisory board. And
the fundamental theory here is is that there's
an optimal tax rate that maximizes government
revenue. And if you tax people too heavily, you
actually end up collecting less money. A lot
of people struggle with the mechanics of how
that works. But it's fundamentally about human
behavior. Like, if a government taxes earnings
at 100%, nobody works. And the government collects
$0. If they tax it 0%, everyone works. But the
government still collects $0. I always think
about it like, um, pricing tickets for a massive
stadium concert. Oh, that's a good way to look
at it. Yeah, like, if you charge just $1 a ticket,
the stadium will completely sell out in five
seconds, but you're gonna make practically no
money. Right, exactly. But on the flip side,
if you charge $10 ,000 a ticket... the studio
will be completely empty, and you still make
zero revenue. You have to find that sweet spot.
Exactly. You find that exact spot where lowering
the price actually increases your total revenue
because so many more people show up to the concert
and buy hot dogs and t -shirts. And applied to
the national economy, the supply -siders argued
that the 1970s tax rates had become that $10
,000 concert ticket. Ah, I see. They believe
taxes were so punitive that they were actively
discouraging people from working. investing,
and innovating. So it was stifling growth. Right.
Let's look at the mechanism. If a corporation
faces a massive tax burden on its next dollar
of profit, it won't build a new factory. It won't
hire 100 new workers. But if you lower that tax
burden, they build the factory, they hire the
workers, and then the government gets to tax
the wages of those 100 new employees. Yes. You
expand the overall size of the economic pie so
much that the government collects more total
revenue, even though the slice they're taking
is proportionately smaller. It makes sense on
paper. But what's fascinating here is that Reagan
didn't just rely on 1980s economists to sell
this idea to the public. He actually drew inspiration
from deep history. Specifically, a 14th century
Arab scholar named Ibn Khaldun. Wait, a 14th
century philosopher being used to pitch a 20th
century tax cut? That is an unbelievable bit
of political framing. It really is. Khaldun had
observed the rise and fall of empires centuries
ago. He noted that societies flourished when
taxes were modest because citizens felt motivated
to produce and, you know, keep the fruits of
their labor. But those same societies collapsed
when taxes became burdensome. to prop up bloated
dynasties. Reagan actually paraphrased him in
a 1981 press conference. Yeah, he noted that
at the beginning of a dynasty, great revenues
are gained from small assessments, but at the
end, small revenues are gained from large assessments.
That sounds incredible in a press conference,
but grand centuries old philosophies tend to
get pretty mangled when they make contact with
the reality of Washington, D .C. politics. So
how did this actually translate into policy?
The translation happened quickly and aggressively.
During his first year in office, Reagan signed
the Economic Recovery Tax Act of 1981. OK. This
was a monumental piece of legislation. It slashed
the top marginal tax bracket from 70 percent
down to 50 percent. Wow. And eventually, through
later legislation in 1986, that top rate dropped
all the way to 28%. Real quick, I want to clarify
what a marginal tax bracket actually is for you
listening because it's a widely misunderstood
concept. It really is. A 70 % marginal rate didn't
mean the government took 70 % of everything a
wealthy person earned. It meant that for every
dollar they earned above a certain high threshold,
they only got to keep 30 cents. Exactly. Dropping
that to 50 % and then 28 % meant that suddenly
high earners were keeping 72 cents of that last
dollar instead of 30 cents. I mean, that is a
staggering change to the incentive structure
of the American economy in just a single decade.
It absolutely rewired corporate and individual
incentives. But here is the plot twist in the
historical record. Despite his enduring reputation
as the ultimate champion of tax cuts, Reagan
found himself facing exploding federal deficits
shortly after that first bill passed. The economic
boom just hadn't materialized fast enough to
offset the lost revenue. So in 1982 and 1984,
he signed bills that rolled back some of those
initial cuts. Wait! In fact, tax historian Joseph
Thorndyke actually characterized the 1982 legislation
as the biggest tax increase ever enacted during
peacetime. Wait a minute, stop right there. Reagan
is the absolute poster child for cutting taxes.
How could he possibly authorize the biggest peacetime
tax hike in American history? That breaks the
entire narrative. It comes down to the difference
between the headline tax rate and the effective
tax base. Okay. The top marginal rates The headline
numbers everyone sees stayed much lower than
they were in the 1970s. But Reagan's later bills
aggressively closed loopholes and removed deductions.
Ah, I see. They changed corporate depreciation
rules and tightened tax compliance. By forcing
people and corporations to pay taxes on money
that was previously shielded by accounting tricks,
the government drastically increased its revenue
collection compared to the 1981 baseline. Because
they desperately needed the cash. Exactly. Because
they were bleeding revenue from the rate cuts,
but simultaneously pouring money into the first
pillar you mentioned earlier, which was defense
spending. Defense spending skyrocketed during
this era. It rose to roughly six percent of the
total gross domestic product. That's a math.
It was a level of military expenditure unseen
since the height of U .S. involvement in the
Vietnam War. They were funding new weapons systems,
expanding the Navy and investing heavily in the
Cold War arms race. So the math becomes incredibly
precarious here. You're drastically lowering
the main income tax rates, hoping growth eventually
pays for it. But you are buying billions of dollars
worth of military equipment right now. That requires
massive borrowing. And borrow they did. The United
States took on heavy debt, both domestically
and abroad, to cover those yawning budget deficits.
During Reagan's presidency, the national debt
nearly tripled. It went from $997 billion to
$2 .85 trillion. Tripled. Wow. Yeah. And as a
direct result, the U .S. transitioned from being
the world's largest international creditor to
the world's largest debtor nation. Reagan himself
was acutely aware of this. He famously described
the exploding debt as the greatest disappointment
of his presidency. OK, so we have sweeping theories.
We have massive tax legislation and we have a
tripling of the national debt. Let's look at
the actual outcomes. So what does this all mean?
How did this impact everyday Americans living
through the 1980s? The historical data presents
a deeply polarized picture. If you view the economy
from 30 ,000 feet like the macroeconomic level.
There were undeniable historic victories. Real
GDP, which is the total output of the goods and
services in the economy, grew by over a third
during his presidency. That's huge. It has an
average annual growth rate of 3 .5 percent. That
kind of sustained growth is just massive. It
is an incredible run of expansion. And the misery
index we discussed earlier, that brutal combination
of inflation and unemployment shrank drastically.
Inflation plummeted from a terrifying 13 .5 percent
in 1980 down to just 4 .1 percent by 1988. Unemployment
fell from 7 .2 % to 5 .5%. Millions of non -farm
jobs were created. By those traditional metrics,
the American economy came roaring back to life.
But when you look at the ground level, the data
tells a much more fractured story. The overall
economic pie got larger, but the slices were
distributed very differently than in previous
decades. Real wages for working -class Americans
actually continued to decline, which was a trend
that had begun in the 1970s. Meanwhile, the top
1 % of income earners saw their share of the
national income skyrocket. The income gap widened
significantly, and there were visible visceral
consequences in American cities. During Reagan's
first term, critics highlighted a severe surge
in urban homelessness. Researchers noted the
homeless population nearly doubled in just three
years, from 1984 to 1987. They often point to
aggressive cuts in federal housing assistance
and social services as a primary driver. And
when confronted with this crisis, Reagan's response
was highly controversial. Yeah, in a late presidency
interview with David Brinkley, Reagan stated
his belief that the homeless made it their own
choice for staying out there. He argued that
there were shelters available that people simply
chose not to use. He also asserted that a large
proportion of the homeless population were mentally
impaired, a situation he attributed to lawsuits
by organizations like the ACLU that made it harder
to institutionalize people against their will.
So we are left with this wildly conflicting picture.
The inflation monster is slain and the overall
GDP is booming, but working class wages are stagnating
and homelessness is spiking. Exactly. It's almost
like installing a massive jet engine on a train
to shatter speed records, but quietly uncoupling
half the passenger cars at the station. The locomotive
is performing better than ever, but a lot of
people got left behind on the platform. That's
a great analogy. And if we connect this to the
bigger picture, this precise divergence is why
brilliant economists can look at the exact same
data from the 1980s and draw entirely different
conclusions about whether Reaganomics was actually
a success. Let's look at how the different camps
interpret that data. On the right, supporters
like the Cato Institute, economist Stephen Moore,
and the legendary Milton Friedman view this era
as just an unmitigated triumph. Yes, they do.
Their perspective is that the combination of
tax cuts, deregulation, and free trade unleashed
the greatest sustained wave of prosperity the
country had ever seen. Moore argues that these
policies produced a $15 trillion increase in
American wealth. Unbelievable. From this viewpoint,
the 1981 tax cut was the profound engine of that
growth. By letting people keep more of their
money, it restored consumer and investor confidence,
incentivizing this massive entrepreneurial revolution
that essentially modernized the American economy.
But then you have the left -wing perspective,
championed by economists like Paul Krugman, who
argues that this massive expansion wasn't magic,
and it certainly wasn't the tax cuts. Right.
Krugman argues it was just the natural business
cycle playing out. The argument here is essentially
the concept of pent -up demand. The economy was
bouncing back from a very deep painful recession
in 1981 and 1982. When an economy contracts that
severely, people delay buying houses, cars, appliances.
Yeah, you just hold onto your cash. Exactly.
When things finally stabilize, all that delayed
spending floods the market at once. Krugman's
view is that when you hit the absolute bottom,
the only way to go is up. And there's plenty
of room to grow rapidly, regardless of what the
tax rate is. Critics also point out that the
dramatic drop in inflation, which, honestly,
was arguably the real miracle of the 1980s, was
actually the work of the Federal Reserve Chair
Paul Volcker. Right, who was appointed by Jimmy
Carter, Reagan's predecessor. Exactly. Volcker
used incredibly strict monetary policy to crush
inflation. Specifically, he drastically raised
interest rates. The prime rate peaked at over
20 percent. 20 percent? That is wild. Think about
the mechanics of that. With interest rates that
high, nobody takes out a mortgage to buy a house,
and businesses just can't afford loans to expand.
It deliberately chokes off borrowing and slows
the economy to a crawl. It was a brutal, painful
process that intentionally caused a recession
to squeeze inflation out of the system. Critics
argue Volcker's willingness to inflict that pain,
not Reagan's tax cuts, is the true hero of the
inflation story. And what I find so fascinating
here is that the debate wasn't just left versus
right. There was an intense internal feud among
conservatives as well. Oh, absolutely. Like Greg
Mankiw, right? He's a conservative Republican
economist who later served under George W. Bush.
He referred to the extreme supply -siders, the
ones who claimed that tax cuts would 100 % pay
for themselves without any spending cuts. He
literally called them charlatans and cranks.
Charlatans and cranks. Even traditional mainstream
supply -siders sounded the alarm. Martin Feldstein,
who served as Reagan's own chairman of the Council
of Economic Advisers, felt the new extremists
in his own party were making these wild hyperbolic
claims. Right. Feldstein argued this loose talk
gave fundamentally sound economic policies a
bad name and provided political cover for the
massive budget deficits we discussed earlier.
The contradictions are just everywhere, especially
when you look at deregulation. Deregulation was
supposedly a core pillar of the Reagan revolution.
You know, get the government off the backs of
businesses. But the historical record on whether
he actually deregulated the economy is shockingly
mixed. This is one of the great paradoxes of
his presidency. On one hand, William Niskanen,
an architect of Reaganomics, pointed out that
Reagan actually added more trade barriers than
any administration since Herbert Hoover in the
1930s. Wow. He restricted imports significantly
to protect domestic industries like automobiles
and steel. But then you have Milton Friedman
arguing the exact opposite. He pointed out that
the number of pages added to the Federal Register,
which is that massive daily journal where all
new government rules and regulations are published,
that declined sharply under Reagan. And they
are both technically correct. It comes down to
the mechanics of how the government operates.
You have to understand the difference between
statutory deregulation and administrative deregulation.
Okay, break that distinction down for us. So,
statutory deregulation involves Congress actually
passing new laws. to remove regulations from
the books. That process was fairly slow under
Reagan. In fact, a lot of major industry deregulation,
like the airlines and the trucking industry,
had already been initiated under Jimmy Carter.
Interesting. Administrative deregulation, however,
is about how federal agencies actually enforce
the rules that already exist. Oh, I see. So it's
not about changing the speed limit. It's about
telling the highway patrol to stop pulling people
over. That is a perfect way to conceptualize
it. By cutting the budgets of regulatory agencies,
appointing agency heads who favored lighter touch
and intentionally slowing down the drafting of
new rules, Reagan dramatically changed the regulatory
environment administratively. Right. He didn't
need Congress to repeal laws left and right to
make businesses feel less scrutinized. Here's
where it gets really interesting for me. If the
results are this mixed -like, if the national
debt nearly tripled, if working -class wages
stagnated while inequality rose, if even his
own conservative economic advisors were calling
some of the math crank science and the deregulation
record is full of asterisks, why does Reaganomics
remain such a powerful, enduring blueprint today?
Like, why is it still the baseline for so much
political rhetoric 40 years later? Reaganomics
successfully shifted the entire baseline of American
economic confidence. Okay. After the misery,
the gas lines, and the malaise of the 1970s,
Reagan offered a highly effective narrative of
optimism. He fundamentally changed the conversation
from, you know, what can the government do to
fix this to how can we get the government out
of your way so you can fix it. Right. Even if
the reality involved massive tax hikes in 82
and exploding federal deficits, the ideology
of low taxes and free markets became deeply embedded
in the American psyche. It set the absolute terms
of economic debate for the next four decades.
The narrative and the emotional shift were ultimately
stronger than the math. Often in the history
of American politics, they are. Which brings
us to one final lingering irony from the historical
record that perfectly encapsulates the gap between
the blueprint and the building. Lay it on me.
When Ronald Reagan was campaigning, part of his
incredibly effective branding was a promise to
drastically shrink the size of the federal government.
He specifically vowed to completely abolish two
massive cabinet -level agencies, the Department
of Energy and the Department of Education. And
yet, the record shows he failed to abolish either
of them. Far from shrinking the president's cabinet,
he actually expanded it by elevating Veterans
Affairs to full cabinet -level department status.
And overall, the number of federal civilian employees
actually increased by 4 .2 % under his watch.
That is wild. It leaves you wondering, is it
actually possible for any modern president to
shrink the federal government, or does the machinery
of a superpower simply demand constant expansion,
regardless of who sits in the Oval Office? Keep
that gap between political branding and bureaucratic
reality in mind the next time you hear a politician
make massive economic promises. It is never as
simple as the theory suggests. Thank you so much
for joining us on this deep dive into the numbers,
the narratives and the messy reality of Reaganomics.
We'll catch you next time.