Ronald Reagan and the Rise of Large Deficits
Muris, Timothy J., Independent Review
What Really Happened in 1981
In the controversy over Ronald Reagan's legacy, the events of 1981 loom large. Critics contend that the large deficits of the 1980s were Reagan's fault, the product of an irresponsible plan to cut taxes and increase defense spending that was founded on obviously overoptimistic economic assumptions. Sidney Blumenthal has been one of the most strident commentators. In 1993 he used his New Yorker column to repeat the charge that the Reagan administration had manipulated the budget numbers, lighting the fuse for the deficit explosion. Even generally sympathetic accounts of Reagan deplore his budget record. Thus, the 1998 Public Broadcasting series American Experience credited Reagan for his role in ending the Cold War but decried his budget and economic plans.
The critics are wrong. Because budget projections in early 1981 indicated massive surpluses, it seemed to be possible, based on the data then at hand, to cut taxes, increase defense spending, and still balance the budget. The Reagan administration's economic forecasts were, at most, only slightly more optimistic than other forecasts at the time. Throughout 1981, neither Reagan's forecasters nor other forecasters Perceived that the country was verging on the worst recession since the Great Depression. That recession drastically reduced inflation, benefiting Americans, but it also produced large budget deficits that ended only recently.
The First Reagan Plan
Despite many claims to the contrary, the Reagan proposal never assumed that tax cuts would increase revenues. Instead, the proposal followed the normal budgeting convention that reducing tax rates would decrease revenues below their projected levels (Anderson 1988, 152-57). Under the policies in place at the beginning of 1981, revenues were projected to increase rapidly. As we shall see later in more detail, so large were those increases that massive budget surpluses, not deficits, were projected for the mid-1980s. Given the expected surpluses, taxes could be cut and the budget still balanced.
Still, a knowledgeable critic might respond that the original Reagan program Relied on a wildly optimistic economic forecast; even if the Reagan numbers never directly assumed that tax cuts would increase revenues, the economic forecast predicted unreasonably high revenues. David Stockman's book The Triumph of Politics (1986) is oft-cited proof of this charge. In Stockman's words, "The budget numbers printed in February 1981 said you could have a big tax cut and a big defense buildup, and still have a balanced budget by 1984. That would be followed by a $28 billion surplus by 1986. But it all depended upon Rosy Scenario" (396). The infamy of the Reagan administration's initial forecast has become so familiar that many refer to it as the Rosy Scenario, with the capital letters denoting its notoriety, as in Stockman's book. To ascertain whether the original Reagan program was based on the economics of the free lunch, we must consider that first forecast.
How do we measure whether the initial forecast was really rosy? It has been Condemned as rosy by comparison with what actually happened. The administration's forecasted deficit for fiscal 1982, released in February 1981 with its proposed program, was $45 billion (Office of Management and Budget [OMB] 1981, 2), whereas the actual deficit turned out to be $128 billion.(1) Even though many of Reagan's proposals were eventually enacted, the deficit forecast was inaccurate largely because of the inaccuracy of the economic forecast. But hindsight is, as they say, twenty-twenty. To understand the actual degree of optimism of the Reagan forecast, we must view the world as Stockman and his compatriots did in 1981, not as it turned out to be months or years later. Thus, we must consider what those in the Reagan administration knew at the crucial times when that administration's tax and spending policies were created and implemented. …