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Mon, Jun 07, 2004 - Page 12 News List

Reaganomics left mixed legacy of deficit, growth

`SUPPLY-SIDE' POLICY The US economy grew steadily during the 1980s but the policy slammed as `trickle-down economics' by critics remains a very polarizing topic today


Few leaders have whole movements named for them, especially one as emotionally laden as "Reaganomics" -- the late US president Ronald Reagan's blend of tax cuts and massive military spending that got the economy moving but tripled the US' debt.

It was a policy former president Bill Clinton dubbed "reckless" as he pressed to use budget surpluses to pay down debt instead of cutting taxes. Reagan's prescription, coupled with a business-backed drive to deregulate, was denounced as "trickle-down economics" by those who said tax cuts for the wealthy meant crumbs for the poor. But Reagonomics fans counter that it helped snap the US economy out of a lethargy that had reigned for much of the 1970s.

The US economy expanded steadily from late 1982 to July 1990, creating nearly 20 million jobs and triggering a boom in stock markets that carried on until 2000.

Nonetheless, nearly a quarter-century after Reagan was elected in 1980 to his first four-year term, his economic legacy remains polarizing. Whether Reaganomics was good or bad for America, fair or unfair to different income groups, may never be resolved.

"The disagreement over the 1980s ... will almost certainly become a prominent feature of intellectual life," wrote Reaganomics proponent Robert Bartley in his book The Seven Fat Years.

The debate has its echoes under the administration of President George W. Bush, who has presided over big tax cuts and a return to deficits. However, that massive fiscal stimulus seems now to be paying off with the recovery from the 2001 slump at last arriving, albeit with millions of jobs lost.

Reagan administration veterans and rightist scholars say the policy helped end a period of malaise in the 1970s when inflation soared and interest rates were high.

Critics point to massive debts -- the country owed more than $3 trillion by the decade's end -- and say Reaganomics triggered a "decade of greed" with Wall Street traders growing rich on bond dealing while the ranks of America's homeless grew from near-invisibility to the hundreds of thousands.

Officially, the Reagan doctrine was known as supply-side economics, a policy based on the expectation that big cuts in tax rates would mean workers would keep and spend more of their wages, thus creating the need for more production.

This would lead to more investment and more jobs. It would also generate rapidly growing output that would ease inflationary pressures and stimulate a greater flow of revenues to keep budget deficits in check.

William Niskanen, former acting chairman of Reagan's Council of Economic Advisers who is now chairman of Washington-based Cato Institute, said much -- but not all -- of the theory worked.

One reason is that supply-side stimulus was implemented at the same time as Reagan began a vast military buildup that is credited with helping trigger the collapse of the Soviet Union by simply out-spending it.

"The two greatest accomplishments of the Reagan era were breaking the back of inflation and substantially reducing marginal tax rates," Niskanen said. "One of the major charges is that there was a big accumulation of debt, and that is accurate ... But I would contend that ending the Cold War and breaking the back of inflation made it worthwhile," he added.

In 1980 inflation was running at 13.5 percent annually. It was under 5 percent when Reagan left office in 1989.

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