A common supply-side interpretation of the 80s goes something like this: "Carter's tax-and-spend policies ruined the economy, and sent America into the worst recession since World War II. Reagan inherited many of those economic problems, but once he cut taxes, America's entrepreneurial spirit was unshackled. We experienced the greatest peacetime expansion in postwar history - the so-called 'Seven Fat Years' from 1983 to 1989. Then George Bush broke his 'Read my lips: no new taxes' pledge, and sent the economy back into recession."

There are several problems with this story. First, Carter actually began many of the policies that Reagan would later become known for; Carter gave the rich a capital gains tax cut, massively deregulated key industries like trucking and airlines, and even increased defense spending. This was also the period that corporate PACs began compelling Congress to pass pro-business legislation. According to supply-side theory, these actions should have nudged the economy in the right direction, not plunged it into the worst recession in 40 years. Other problems involve timing: Reagan's first tax cuts went into effect in 1982, but this was also the summer that the Federal Reserve Board slashed interest rates and expanded the money supply. Most economists believe the Fed, not Reagan, was responsible for the following recovery. Finally, the recession of 1990 began four months before Bush broke his "no new taxes" pledge. The recession began in July 1990; Bush signed his tax increases into law in November 1990.

And supply-siders are careful to note that Reagan's was the longest peacetime expansion since World War II. In truth, the Kennedy-Johnson expansion was longer: 106 months compared to Reagan's 92.1 Of course, there was a war in Vietnam, which gives supply-siders an excuse to dismiss it because wars are beneficial to the economy. But they are beneficial because governments engage in Keynesian borrowing and spending during them (which could be directed to social services as well as war). Unfortunately for supply-siders, it was really Keynesianism that produced the longest economic boom since World War II.

And this observation is even more of a victory for Keynesianism than it sounds. For all his public promotion of supply-side economics, Reagan actually practiced a massive form of Keynesian borrowing and spending. Almost $2 trillion worth, to be exact. (Although most liberals would point out this was excessive even by Keynesian standards.)

The following chart shows the business cycle (recessions and recoveries) since 1973:

Real Growth of Gross Domestic Product2
1973     5.2
1974    -0.5
1975    -1.3
1976     4.9
1977     4.7
1978     5.3
1979     2.5   
1980    -0.5
1981     1.8
1982    -2.2
1983     3.9
1984     6.2
1985     3.2
1986     2.9
1987     3.1
1988     3.9
1989     2.5
1990     1.2
1991    -0.6
1992     2.3
1993     3.1
1994     4.1

As you can see, economic growth varies considerably from year to year. This allows political spin doctors to prove anything they want to prove, by choosing the most convenient comparison dates and indulging in clever rhetoric. Economists have a way of getting around this. They arrive at an accurate assessment by measuring potential growth instead of actual growth. (More) The result of such a measurement shows that Reagan did no better or worse than Ford, Carter or Bush. Potential growth under all four presidents remained pretty much the same: about 2.5 percent.3

Supply-siders had boasted that their policies would increase potential growth, not just actual growth. The fact that they failed stands as yet another indictment of their theory.

As mentioned earlier, the cycle of recessions and recoveries is normal. But they generally follow a long-term trend of growth; therefore, a deep recession is going to be followed by an even steeper recovery. This is why the unusually severe 80-82 recession was followed by such a long recovery. Reagan's fortune with the economy was predetermined by events that occurred even before his first tax cuts.

The following chart shows the 70s' growing problem with inflation. Coupled with growing unemployment, it formed the "misery index" or "stagflation" that had been predicted by economists in the 60s. The misery index reached 20 percent by 1980, and was a major factor in costing Jimmy Carter the presidency.

Inflation Rate4

1960   1.7%
1965   1.6
1970   5.7
1975   9.1
1976   5.8
1977   6.5
1978   7.6
1979  11.3
1980  13.5
1981  10.3
1982   6.2
1983   3.2
1984   4.3
1985   3.6
1986   1.9
1987   3.6
1988   4.1
1989   4.8
1990   5.4
1991   4.2
1992   3.0

In the following chart, notice that the 1979 unemployment rate was not recovered until 1988.

Unemployment Rate5

1960   5.5%   
1965   4.5 
1970   5.0 
1975   8.5 
1976   7.7 
1977   7.1 
1978   6.1 
1979   5.9 
1980   7.2 
1981   7.6 
1982   9.7 
1983   9.6
1984   7.5 
1985   7.2 
1986   7.0 
1987   6.2 
1988   5.5 
1989   5.3 
1990   5.5 
1991   6.7 
1992   7.4

Many misconceptions exist about job growth and loss during the 80s. The charge that we suffered a net loss of jobs because corporations were shipping them overseas to low-wage nations is a myth. Although some industries may be doing this, the U.S. has actually been the world's success story in creating jobs.

Job Growth, 1973-19906

United States  38%
Japan          19
Europe          8

Another myth concerns our loss of manufacturing jobs. First, manufacturing jobs do not pay significantly more than service jobs: only 10 percent more. Second, all industrialized nations have been losing their manufacturing jobs, as technology and computerization continue to make production more efficient. (More)

Employment in Manufacturing as a Percentage of Non-Agricultural Employment7

                1970    1991
United States    27%     17
Japan            33      27
Germany          40      33

Another myth is that Reagan was one of the best Presidents for job creation. In reality, he's among the worst:

Job Growth Per Year Under Most Recent Presidents8

Johnson   3.8%
Carter    3.1
Clinton   2.4
Kennedy   2.3
Nixon     2.3
Reagan    2.1
Bush      0.6

The following statistics shed light on this surprising finding:

Civilian Labor Force and Participation Rates9

Year   (millions)   Percent of Population
1970    82.8        60.4%
1980   106.9        63.8
1990   124.8        66.4
1993   128.0        66.2

Supply-siders boast about the 18 million jobs created in the 80s, but they grow unusually mum over the 24 million jobs created during the 70s. The 80s put 2.6 percent more of the population to work, but the 70s outdid them at 3.4 percent. The increasing percentage of the population joining the workforce during these two decades can be attributed to two factors: baby-boomers coming of age, and women joining the workforce in record numbers.

Percent of Men and Women in Labor Force10

Year   Men     Women
1960   83.3%   37.7
1970   79.7    43.3
1980   76.3    51.5
1985   76.3    54.5
1990   76.1    57.5

Why were women joining the workforce in greater numbers? Because their husbands' earnings have been generally declining since 1973, and families have had to form two-paycheck households to maintain their parents' standard of living. Unfortunately, in accordance with the laws of supply and demand, an influx of workers into the workforce puts downward pressure on wages. So the solution partially contributed to the problem.

Labor Force Participation Rate of Married Women with Children Under 6-Years Old11

1960   18.6%
1970   30.3
1980   45.1
1993   59.6

The 1980s featured a record flurry of deregulation, bankruptcies, stock speculation, junk bonds and corporate mergers and takeovers. To make sense of all this activity, it is helpful to know that it was essentially an age of corporate Darwinism -- an era of kill or be killed -- fueled by massive deregulation. In truth, Reagan did very little to deregulate business; the basic deregulatory machinery had already been put in place by Jimmy Carter before he left office. Reagan simply accelerated the process. The Federal Register is where all of America's proposed and adopted regulations are found, and in 1980 it ran 87,012 pages. By 1986, this was cut almost in half: to 47,418 pages.12

The unrestrained competition that followed temporarily resulted in lower consumer prices and better service. But before long, the competition turned keen, then destructive. A backlash grew against deregulation as businesses cut safety and environmental corners, laid off thousands of workers and began cutting services to unprofitable rural areas. In a few years, business failures shot up to five to six times their usual number:

       Business Failures13
Year   Number    Per 10,000 business concerns
1970   10,748     44
1975   11,432     43
1980   11,742     42
1981   16,794     61
1982   24,908     88
1983   31,334    110
1984   52,078    107
1985   57,078    115
1986   61,616    120
1987   61,111    102
1988   57,098     98
1989   50,361     65
1990   60,747     74
1991   88,140    107
1992   97,069    110

Meanwhile, the survivors began taking over the stragglers:

Takeovers, Mergers, Acquisitions and Leveraged Buyouts (of $5 million or more)14

Year    Unions
1984    1,442
1985      939
1986    1,407
1987    1,475
1988    1,696
1989    2,137
1990    2,332

In 1988, Federal Trade Commissioner Andrew Strenio remarked: "Since Fiscal Year 1980, there has been a drop of more than 40 percent in the work years allocated to antitrust enforcement. In the same period, merger filings skyrocketed to more than 320 percent of their Fiscal Year 1980 level."15 In almost all fields, productive and economic power began concentrating in the hands of a few. The emerging monopolies and oligopolies then began raising prices, cutting back services and generally abusing their power -- the deregulated Savings & Loan industry being the prime example. (More)

One of the supply-siders' central promises was that tax cuts would allow greater savings and investment, which would spur the economy. In fact, savings and investment worsened in the 80s:

Disposable personal savings16

1980  7.9%
1984  8.0
1985  6.4
1986  6.0
1987  4.3
1988  4.4
1989  4.0
1990  4.2

National Savings, public plus private17 
1970 - 1979   7.7%
1988 - 1990   3.0

Private investment18 
1970 - 1979   18.6%
1980 - 1992   17.4

Public investment was about 3 percent during the 50s and 60s. By the Reagan-Bush era, it was about 1 percent. Although Reagan and Bush did not start this decline, their policies did steepen it.19

This is a major problem for supply-side theory. Supply-siders boast that the 80s were a golden era of American entrepreneurialism, but this was supposed to be the result of greater savings and investment, thanks to liberated tax dollars. That is, we should have seen the percentage of savings and investment rise as the percentage of taxes fell. But if no such greater savings and investment even occurred, then the supply-side defense of the 80s is debunked outright.

Some true believers might then argue that supply-side economics were not tried at all, since the general rate of taxation in the 80s remained just as high as the 70s (18.7 percent of the GDP). This is an expensive concession, since it abandons the argument that cutting taxes for the rich helps the economy. Even more expensively, it leaves Keynesians to claim credit for the 80s. However, applying supply-side tax cuts to the general rate is also an unpromising theory. As the section comparing the U.S. to other rich nations will show, the U.S. has the lowest general tax rate in the entire industrialized world -- and the worst savings and investment rates as well!

Next Section: Poverty and Welfare
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1 Expansion is measured from trough to peak of business cycle. U.S. Bureau of Economic Analysis, Survey of Current Business, October 1994.
2 U.S. Department of Commerce, Bureau of Economic Analysis.
3 Analysis by Paul Krugman, Peddling Prosperity, (New York: W.W. Norton & Company, 1994), p. 25. Krugman writes: "The measurement of potential output is one of the more solid and uncontroversial pieces of modern economic analysis."
4 U.S. Department of Commerce.
5 Bureau of Labor Statistics.
6 Krugman, p. 262.
7 Translated from graph from Krugman, p. 263.
8 Based on data from the Bureau of Labor Statistics, Current Employment Statistics Survey.
9 U.S. Bureau of Labor Statistics, Bulletin 2307.
10 U.S. Bureau of Labor Statistics.
11 Ibid.
12 "Rolling Back Regulation," Time, July 6, 1987, p. 51.
13 Dun & Bradstreet Corporation, New York, NY, Monthly Failure Report.
14 Security Data Company, Newark, New Jersey, Merger & Corporate Transactions Database, (copyright).
15 "Wave of Mergers, Takeovers Is Part of Reagan Legacy," Washington Post, October 30, 1988.
16 Krugman, pp.126-127
17 Ibid.
18 Ibid.
19 Ibid.