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  • Lessons for Today from Reagan's 1982 Deficit Reduction Compromise

    Want some perspective on the debt ceiling negotiations and calls for tax increases in exchange for spending cuts? You might want to consider a cautionary tale dating back to 1982 when President Ronald Reagan agreed to a deficit-reduction compromise—and a result he didn’t bargain for.

    Former Attorney General Edwin Meese III, who served under President Reagan, and Heritage Action for America’s Michael Needham write in today’s USA Today of the agreement Reagan struck in 1982 in hopes of tackling high deficits. He agreed to a modest increase in business taxes (which he didn’t like) in exchange for spending cuts (which he wanted). The higher taxes were enacted, but the spending cuts never arrived. Meese and Needham explain:

    The president had no interest in increasing taxes, but he agreed to consider some kind of compromise with Congress. His representatives began meeting with members of House Speaker Tip O’Neill’s team to find some way to hammer out a deficit-reduction pact. So began what, in our opinion, became the “Debacle of 1982.”

    From the outset, the basic idea of the GOP participants was to trade some kind of concessions on the tax front for a Democratic agreement on spending cutbacks. The negotiators knew that Ronald Reagan would be hard to sell on any tax hikes. So they included a ploy they felt might overcome his resistance: a large reduction in federal spending in return for a modest rise in business (but not individual) taxes.

    The ratio in the final deal — the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) — was $3 in spending cuts for every $1 in tax increases. It sounded persuasive at the time. Believing it to be the only way to get spending under control, most of the president’s colleagues signed on. He disliked the tax hikes, of course, but he agreed to it as well.

    You don’t have to be a Washington veteran to predict what happened next. The tax increases were promptly enacted — Congress had no problem accepting that part of the deal — but the promised budget cuts never materialized. After the tax bill passed, some legislators of both parties even claimed that there had been no real commitment to the 3-to-1 ratio.

    Did the higher taxes help bring down the deficit? Nope. Meese and Needham write that “spending for fiscal year 1983 was some $48 billion higher than the budget targets, and no progress was made in lowering the deficit. Even tax receipts for that year went down — a lingering effect of the recession, which the additional business taxes did nothing to redress.”

    As Congress considers which road to take on the debt ceiling, they ought to take a look at their history books and realize that in Washington, what you bargain for isn’t always what you get.

    Posted in Economics [slideshow_deploy]

    12 Responses to Lessons for Today from Reagan's 1982 Deficit Reduction Compromise

    1. Frank Restly says:

      Growth in federal spending fell from 1980 (19% annualized growth) to mid 1983 (3% annualized growth). So while federal spending did not contract, its growth rate slowed down significantly.
      http://research.stlouisfed.org/fred2/graph/fredgr

      • Steve says:

        That's like saying "instead of hitting you over the head 10 time a minute, i'll only hit you 2 times a minute"… It still hurts.

    2. Mike, Wichita Falls says:

      Oh for the good old days when actual spending only exceeded the budget by $48B. That's a rounding error today.

    3. the real says:

      The debt ceiling was raised 17 times under Reagan

      • Mark says:

        …But Reagan's economic policies doubled government revenues from $686B to $1.2T, keeping the debt less than 4% of the GDP – immeasurably lower than the current quandary. Under RR, we could afford it because of his sound fiscal policies; under the Obam-unists, it's impossible, as they have no idea what they're doing.

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