The Reaganomics legacy

History is going to remember Ronald Reagan as the man who made the US the only superpower in the world.

He catalysed the disintegration of the USSR by ending the Cold War through his simplistic "Let's talk to each other instead of talking about each other" approach, and engaging what he called the "evil empire" when it was at its weakest point in history.

In the process, he ensured that the matrix of political power across the globe was changed. The avalanche of changes in the landscape of Soviet communism was surely set off by the pebbles thrown by Reagan in the course of his five summits with his Soviet counterpart and later friend, Mikhail Gorbachev.

The world of business should also remember him for the economic resurgence of the US that he engineered through an eclectic blend of economic policies.

The number of global political leaders who have decisively changed the course of economic policy-making and created their own brand of economic management can be counted on the fingers of one hand.

Reagan was certainly one of them. His Reaganomics emphasised low taxes, low social services spending, and high military expenditure. The result of this policy mix was that the "stagflation" that plagued the US economy from 1973 through 1982 was transformed into a sustained period of higher growth and lower inflation.

The major achievements of Reaganomics were sharp reductions in marginal tax rates and in inflation. The maximum tax rate on individual income was slashed from 70 per cent to 28 per cent. The corporate income tax rate was reduced from 48 per cent to 34 per cent.

The individual tax brackets were indexed for inflation. And most of the poor were exempted from the individual income tax. These measures were somewhat offset by several tax increases. An increase in Social Security tax rates was brought about. Some excise rates were increased, and some deductions were reduced or eliminated.

The inflation rate declined from 10.4 per cent in 1980 to 4.2 per cent in 1988 without any long-term ill-effects on the unemployment rate, which declined from 7 per cent in 1980 to 5.4 per cent in 1988, proving that there is no long-run trade-off between the unemployment rate and the inflation rate, a la Phillips' Curve.

Similarly, despite the sharp drop in marginal tax rates, the federal revenue share of the GDP declined only slightly, from 20.2 per cent in fiscal 1981 to 19.2 in 1988. Compared to this, his adverse legacies were limited. The biggest was that at the end of his second term the privately held federal debt increased from 22.3 per cent of the GDP to 38.1 per cent.

During the period he was in power, the rate of economic growth was far too rapid and sustained for this to become a problem; up to that point in history, it was during the Reagan administration that the US economy experienced its longest peacetime expansion.