The Reagan Revolution and the New Economy: 1982-1999

In 1981, President Ronald Reagan presided over a collection of fiscally expansive economic policies marked by a reduction in federal income tax rates by 25%. His combination of tax cuts and dramatic increases in defense spending, in conjunction with continued spending on social welfare and insurance programs supported by a Democratic Congress, led to large federal deficits, including a tripling of the national debt from $930 billion in 1981 to $2.6 trillion in 1988. While debt almost always increased under every president in the latter half of the 20th century, it declined as a percentage of GDP under all presidents after 1950 and prior to Reagan. At the same time, inflation dropped dramatically from 13.5% annually in 1980 to just 3% annually in 1983; this was associated with a sharp recession resulting from historically high interest rates caused by Federal Reserve Chairman Paul Volcker’s tighter control of the money supply. Real GDP contracted in 1980 and 1982 and the unemployment rate peaked at 10.8% in late 1982. Following the recession, GDP growth rebounded and unemployment dropped sharply, falling to 5.4% at the end of Reagan’s presidency in January 1989. In addition, the deregulation movement that had begun under Ford and Cater accelerated under Reagan and became a bipartisan operation removing many of the New Deal regulations from energy, communications, transportation and banking.

President George H. W. Bush succeeded Reagan in 1988 and continued many of Reagan’s policies at the start of his term. As a “compassionate conservative,” Bush was viewed as more “moderate” than Reagan, but shared his views on a number of issues, including free trade. In 1988 Canada and the United States signed the Canada-United States Free Trade Agreement. American then entered into negotiations with the Mexican government for a similar treaty and Canada asked to join the negotiations in order to preserve its perceived gains under the 1988 deal. The result, the North American Free Trade Agreement (NAFTA) was signed in 1992 and created the largest trading block in the world. Bush partially reversed Reagan’s policies on taxes while simultaneously entering into a war in the Persian Gulf. The economy dipped into a mild recession which contributed to the election of Bill Clinton in 1992. In contrast to many politicians, Clinton was viewed by many as being more “centrist,” however, due to controversies early in his term, conservatives were swept into office in 1994, handing the Republican Party control of both houses of Congress for the first time in forty years. The election of conservatives all but assured a slowing of government involvement in the economy and a more disciplined approach to fiscal policy and deficits.

The CEPPI Index clearly shows an improvement in economic conditions from Poor to Good in the late 1980’s followed by a worsening of conditions between 1990 and 1993. By the end of 1994, economic conditions improved strongly as inflation, unemployment and budget deficits fell and economic growth accelerated. Over the entire time frame, economic conditions trended up with Excellent performance recorded in 1997 through 2000. Also noteworthy is the fact that the federal budget ran surpluses for four straight years beginning in 1998.