Working Paper No. 00-05:
Ronald Reagan And The Rise Of Large Deficits: What Really Happened In 1981

Author(s):

Timothy Muris

Date Posted: 2000

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Abstract:

In the battle over Ronald Reagan's legacy, the events of 1981 are prominent. Critics contend that the large deficits of the 1980s were Reagan's fault: the product of an irresponsible plan to cut taxes and increase defense founded upon economic assumptions that were obviously over optimistic. The critics are wrong. Because budget projections in early 1981 called for massive surpluses, it was possible, based upon the data then known, to cut taxes, increase defense, and still balance the budget. Regarding the economic forecast, the Reagan package of projections were, at most, only mildly more optimistic than other forecasts at the time. Neither Reagan nor other forecasters thought throughout 1981 that the country was on the verge of the worst recession since the Great Depression. This recession drastically reduced inflation, benefitting America, while producing the budget deficits that only recently have ended.