The most significant element of Reagan's first months in office, however, was not the crafting of his public image or the shaping of his style of governance—as important as both those things were to the future of his presidency. It was his bold effort to transform the nation's economic policies. Relying on the arguments of the supply-side theorists who had been so important to his campaign, he proposed a three-year, 30-percent reduction in both individual and corporate income tax rates—the biggest single tax reduction in American history. The tax cuts affected people in all income groups; but the greatest beneficiaries were people in the highest brackets—those who, according to the supply-siders, would be most likely to use the surplus income to invest in the economy. Congress approved the president's proposal in late July 1981, after lowering the reduction slightly, to 25 percent.
Cutting taxes, Reagan insisted, would stimulate economic growth much more effectively than the traditional liberal approach of increasing government spending. But Reagan, in fact, increased spending too. He proposed an enormous increase in the military budget ($1.5 trillion over five years) to rebuild armed forces that he claimed had been allowed to deteriorate badly in the 1970s. Congress approved that increase, although it was later scaled back significantly. At the same time, the administration set out to make substantial cuts in domestic spending. David A. Stockman, Reagan's talented budget director, supervised an effort to squeeze more than $41 billion out of the government's nonmilitary "discretionary" spending. The task was extremely difficult. The administration could not reduce the 10 percent of the budget committed to paying interest on the national debt (which reached $1 trillion during Reagan's first year in office) and had already agreed to actual increases in the 25 percent of the budget that went to the military. It was not willing to make any significant changes in spending on Social Security, Medicare, and several other broad-based programs. That left a host of much smaller programs, constituting about 10 percent of the budget, many of which were designed to help the poorest Americans. Almost by definition, the bulk of the cuts Stockman proposed came from these programs.
The administration increased the already tight spending restrictions on Medicaid, the major program of medical assistance for the poor, which the federal government financed jointly with the states. It reduced federal subsidies for low-income housing, cut spending on food stamps, reduced federal aid to education and federal contributions to state governments, and placed new restrictions on Aid to Families with Dependent Children (the principal program of direct assistance to the poor). It also substantially reduced spending on government itself—forcing staff and service cuts in almost all departments and agencies. In some cases, the cutbacks eliminated the waste and inefficiency that Reagan argued was characteristic of many government programs. In other cases, they impaired the ability of agencies to function effectively and contributed to the growing popular belief that government could not be trusted to do anything well.
The administration did not win congressional approval of all the budget reductions it requested, but it did much better than most observers had expected. Even many programs that had once seemed unassailable experienced significant reductions. It became clear early in 1981 that the results of the 1980 election had sent shock waves through Congress. Republicans and Democrats alike were scrambling to respond to what they thought the voters had demanded. But they were also responding to evidence of the president's growing popularity. The administration pushed its legislative package through Congress in part through skillful lobbying by the talented White House staff. But equally important were the president's effective television addresses to the nation, which aroused groundswells of popular support for his proposals.
Men and women whom Reagan appointed fanned out through the executive branch of government, committed to reducing the role of government in American economic life. Deregulation, an idea many Democrats had begun to embrace in the Carter years, became the religion of the Reagan administration. Secretary of the Interior James G. Watt had been a major figure in the Sagebrush Rebellion, a movement among western conservatives to fight federal environmental regulations, which they believed had a particularly devastating effect on their region's economy. Watt opened up public lands and water to development and tried to ease other restrictions on the private use of public lands. The Environmental Protection Agency (before its directors were indicted for corruption) relaxed or entirely eliminated enforcement of critical environmental laws and regulations. The Civil Rights Division of the Justice Department eased enforcement of civil rights laws. The Department of Transportation slowed implementation of new rules limiting automobile emissions and imposing new safety standards on cars and trucks. By getting government "out of the way," Reagan officials promised, they were helping to ensure economic revival.
The Reagan administration also transformed the federal judiciary. By the time he left office, Reagan had named more than half of all the federal judges in the nation and three justices of the Supreme Court, among them Sandra Day O'Connor, the first woman ever appointed. Reagan's court appointments, like his appointments to regulatory agencies, had the effect of reversing many of the judicial trends that had been gathering force for over twenty years. The conservative judges and justices who took office in the 1980s set about limiting the effect of some of the decisions of the Warren Court in the 1960s—tempering the strict protections of criminal rights, softening some civil rights measures, and perhaps most notably, weakening (although never eliminating) the right to abortion established by the Supreme Court's 1973 decision in Roe v. Wade . Symbolic of the conservative shift was Reagan's elevation of William H. Rehnquist, one of the most conservative Supreme Court justices, to chief justice; and his appointment to the Court of Antonin Scalia, a brilliant legal scholar of exceptionally conservative views. Reagan attempted to appoint Robert H. Bork, another fervently conservative judicial activist, to the Supreme Court but was stymied in that effort after a well-organized campaign by liberals and feminists against Bork's controversial views.
Reagan's policies were seldom as radical as his rhetoric (and never as radical as the agenda of the militantly conservative Republican Congress of the mid-1990s). But taken together, the achievements of Reagan's first term represented a significant shift in the direction of public policy. That was visible above all in the administration's economic policies. For the first time since the 1920s, the government was shaping its fiscal policy (its taxing and spending) to promote investment more than consumption and to reduce the tax and regulatory burden on corporations and wealthy people. For the first time since the 1950s (and much more energetically than then), an administration was attempting to stop the growth of many areas of government and to reduce, at times even to eliminate, programs that many Americans had come to consider timeless and unassailable. So distinctive was the new economic program that many began describing it as the Reagan Revolution or, even more frequently and enduringly, Reaganomics.
Both in his campaign and in his early presidential speeches, Reagan had promised not only to reduce taxes and cut spending, but to balance the federal budget. He never did. Instead, his policies contributed to the largest budget deficits in American history and a tripling of the national debt during his eight years in office. Indeed, one of Reagan's most important legacies was his contribution to an enduring fiscal crisis. He helped create a federal budget that was structurally, and radically, unbalanced; and he launched an era in which the national debt grew steadily and dramatically for many years.
The fiscal crisis did little to erode Reagan's popularity. Even though his administration never proposed, let alone achieved, anything approaching a credible balanced budget, the public apparently did not care very much, or accepted the president's explanation that the deficit was the fault of Congress. But the fiscal crisis had a profound and lasting effect on American politics. Over time, it deeply eroded the already weakened faith of the American people in their government and their leaders. And it placed an enormous, even insuperable, obstacle in the way of future leaders who wished to use government to address domestic or international problems. By the mid-1990s, the federal deficit, and efforts to reduce it, had become one of the central facts of American political life.
Reagan had not intended to explode the federal deficit, but his decisions as president led inevitably to that result. He cut taxes substantially and continued to support those cuts even when they did not produce the increase in government revenues that supply-side advocates had promised. He increased the military budget by much more than he was able to cut domestic spending. He refused to consider taking the politically difficult steps of finding savings in popular entitlement programs, most notably Medicare and Social Security, despite strong pressure from members of Congress to do so. His budget officers based their economic projections on dubious, at times even preposterous, assumptions that they themselves knew were false. David Stockman delivered a sharp blow to the administration's image late in 1981 when, in a remarkably candid interview in the Atlantic Monthly , he suggested that the Reagan Revolution had failed. The president's tax cut, he claimed, was a "Trojan horse," promising reductions for everyone but really designed to reduce the rates at the top. The administration had never made a serious effort to balance the budget and never had a reasonable idea of how to do so. "None of us really understands what's going on with all these numbers," he conceded.
By the end of Reagan's third year in office, funding for domestic programs had been cut nearly as far as Congress (and, apparently, the public) was willing to tolerate, and still no end to the rising deficits was in sight. Congress responded with the so-called Gramm-Rudman bill, passed late in 1985, which mandated major deficit reductions over five years and provided for automatic budget cuts in all areas of government spending should the president and Congress fail to agree on an alternative solution. Under Gramm-Rudman, the budget deficit did decline for several years from its 1983 high. But much of that decline was a result of a substantial surplus in the Social Security trust fund. (The administration had helped engineer a dramatic increase in Social Security taxes, which for people of low and moderate incomes more than offset the effects of the 1981 income tax reduction.) By the late 1980s, many fiscal conservatives were calling for a constitutional amendment mandating a balanced budget—a provision the president himself claimed to support but did little to promote. (Congress came within one vote of passing such an amendment in 1995.)
Much more damaging to the president's political fortunes was a steep recession that began late in 1981 and soon became the most severe since the Great Depression. Reagan's economic policies were not responsible for the downturn; few of them had yet had a chance to have an impact on the economy. But the administration did little to fight the recession once it began. Reagan took his lead in part from Paul Volcker, the strong-willed chairman of the Federal Reserve Board (appointed by Jimmy Carter), who considered inflation a more serious threat to the economy than recession. Volcker's policies of high interest rates had been one of many causes of the recession, and his slowness to reduce the rates was one reason the recession became so severe. The recession was particularly devastating to American industry. Manufacturers had been suffering from the high interest rates for several years. High rates made it difficult to borrow and invest; they also made the dollar expensive in world markets and sharply reduced American exports. The nation's trade deficit rose from $25 billion in 1980 to $111 billion in 1984. Once the recession began, businesses closed plants and eliminated hundreds of thousands of jobs. Unemployment in 1982 reached 9.7 percent, its highest point in more than forty years. Farmers, even more dependent on exports than manufacturers, fared worse. Hundreds of thousands of them lost their land in the course of the 1980s.
Reagan expressed sympathy for victims of the recession, but he never seriously considered changing course. He supported Volcker's commitment to the anti-inflation strategy even as the economy slid further downward. He refused to alter his economic program, insisting that if the nation would "stay the course" it would emerge healthier and more prosperous at the end. And in fact, the recession lifted more rapidly and impressively than almost anyone had predicted. By the end of 1983, unemployment had fallen to 8.3 percent, and it continued to decline for the next five years. The gross national product had grown 3.6 percent in a year, the largest increase in nearly a decade. Inflation had fallen to below 5 percent. The economy continued to grow, and both inflation and unemployment remained low (at least by the more pessimistic standards the nation seemed to have accepted) for the rest of the decade.
The recovery was a result of many factors. The Federal Reserve finally eased interest rates early in 1983. A worldwide "energy glut" and the virtual collapse of the powerful cartel of Middle Eastern oil producers stopped the upward spiral of energy prices that had done so much to fuel inflation and inhibit economic growth in the 1970s. And the staggering levels of deficit spending pumped billions of dollars into the sagging economy. Reagan's policies had not worked as their initial advocates had expected, and much of his administration's contribution to the economic recovery was inadvertent. The recovery itself, moreover, was less robust than the major economic indicators revealed. The benefits of the economic growth flowed disproportionately to those in the upper income categories, and the boom did not create jobs or increase incomes for working-class and lower-middle-class people in any way comparable to what earlier booms had done. The poverty rate not only failed to decline, but actually rose in the 1980s from its levels of the 1970s. But these problems became visible only slowly. In the meantime, the president reaped enormous political benefits from the prosperity of 1983 and beyond, which his supporters later called, with some justification, "the longest peacetime expansion in American history."