This part in the series will focus on the fiscal policy of the Reagan administration, his priorities and it’s impact upon deficits and the national debt. Ronald Reagan put a great deal of weight into the idea that a major tax cut was necessary. Successfully selling that idea upon a skeptical Democrat-controlled Congress was not easy, but it was passed never the less.
The other half of the equation that got lost was the need to decrease spending at the same time. Reagan’s budget director David Stockman slashed away at certain departmental budgets. However, at the same time that Stockman was proposing massive cuts to certain budgets, he was confronted with another reality. Reagan had been critical of his predecessor in allowing the U.S. military to become weakened and vulnerable during Carter’s administration. Notwithstanding Carter’s development of the Trident Sub program and his failed attempt at his original proposal for an MX Missile system (mobile missiles), conservative think-tanks, many funded by arms manufacturers, had worked on selling the public on the idea that the U.S. was militarily weak relative to the Soviet Union. The result was a massive increase in military spending during the Reagan years. Military spending grew during the 1980’s from $136 billion in 1980 to $282 billion in 1987.
Reagan also was reluctant to do anything with social security or medicare, both large components of the budget. The results were quite predictable. The budget deficits that were so alarming during the Carter administration were exceeded greatly and were now approaching $200 billion by 1983, this during a period of relatively high interest rates. These deficits needed to be funded by the Government issuing bonds, bonds at dangerously high interest rates. As a result, interest expense would increase as a part of the federal budget every year. From 1980 to 1984, interest expense would nearly double going from $64 billion in 1980 to $111 billion in 1984. By 1987, interest expense would be $138 billion.
By the end of the Reagan administration, the national debt as a percentage of gross national product (GNP) had gone from 26.8% to 43.2%. The impacts these deficits upon capital markets and upon the distribution of wealth in the United States will be the subject of Essay 3 of this series.