The following article is by
Steve Kangas from the website Liberalism Resurgent
Myth: The recession of 1982 was Carter's fault.
Fact: That recession occurred in the second year of Reagan's
term, following tax cuts and deregulation.
The recession of 1982 hit during Reagan's second year in
office. Double-digit inflation was well on its way to being
defeated by this time, and Reagan's tax cuts and deregulation
policies were already in effect. Blaming Carter's tax and
regulation policies for this recession is therefore difficult.
Many conservatives and libertarians take it as an article
of faith that the unusually severe recession of 1982 should be
blamed on Carter's mishandling of the economy, even though it
happened in the second year of Reagan's term. But why should
that be? Was the 82 recession really the fault of Carter?
Let's take a look:
Reagan came into office in January 1981, and within 108 days
passed a budget that contained his famous supply-side tax
cuts. Of course, a budget passed in 1981 would be enacted in
1982, so business owners had plenty of advance notice of their
impending good fortune. It is true the tax cuts were supposed
to be phased in over three years, 10 percent a year. But David
Stockman had produced computer simulations "proving"
that the tax cuts would result in 5 percent growth in 1982
alone. Optimism was so high that today Stockman derisively
refers to the 5-percent growth calculation as the "Rosy
Furthermore, Reagan imposed a moratorium on all new federal
regulation enforcement the moment he took office. In fact, the
Reagan administration began slashing and burning existing
federal regulation; it cut the Federal Register nearly
in half by 1986.
Yet 1982 was the worst year since the Great Depression, with
-2.2 percent growth. Why should that be? The private sector
knew about the tax cuts well in advance. Many conservatives
argue that impending changes in tax rates affect corporate
behavior; for example, when the rich learned in 1986 that
capital gains would be raised in 1987, they took all the
appropriate counter-measures in 1986. Then why did this not
occur in 1981, with news of massive tax cuts on the horizon?
Furthermore, by 1982 there had already been enormous
cuts in the capital gains tax, the most sacred tax cut that
conservatives hold dear. Between 1978 and 1982, the top rate
on capital gains was cut from 39 to 20 percent. And the top
rate on unearned income fell from 70 to 50 percent (mirroring
a similar rate cut in earned income).
As for deregulation, that actually began under Carter, not
Reagan. Carter deregulated airlines, trucking, railroads, oil
and interest rates, and set up much of the deregulation
machinery that Reagan would later use.
The supply-sider's dream was largely realized by 1982 -- and
yet that year turned out to be the worst year since the Great
Depression. So the question is: why is Carter still to blame
for the that recession, when Reagan had a full year to install
a radical supply-side agenda?
Carter's double-digit inflation? But double-digit inflation
was already tumbling by 1982! Consider the inflation rates for
Actually, the above chart leads to the real reason
for the 1982 recession. Students of the Federal Reserve know
that in late 1979, Chairman Paul Volcker sought to defeat
rising inflation by tightening the money supply -- that is, he
put the U.S. economy through an intentional recession. There
was a brief and unintentional recovery in 1981, so, with
inflation still high, he tightened the money supply yet again,
resulting in the unusually severe 1982 recession. By the end
of that year, inflation looked beaten, so Volcker flooded the
economy with money and fueled the subsequent recovery.
If Carter deserves "blame" for this recession --
which Wall Street heavily supported, because soaring inflation
had to be defeated -- then his responsibility is limited to
his nomination of Paul Volcker to the Fed. As you can see,
attempts to pin the blame on tax and regulation policies fail,
because Carter actually began reigning in the federal
government. Furthermore, Reagan dramatically accelerated this
trend for an entire year before the recession hit. Therefore,
this myth is complete nonsense.
1. U.S. Bureau of Labor Statistics, CPI-U (1982-84=100),
not seasonally adjusted, table CUUR0000SA0.
The Ronald Reagan
Years - The Real Reagan Record
by Mark Tracy