Emulating Reagan

President Trump’s economic plan, still something of a work in progress, appears to be the biggest break with economic orthodoxy since Ronald Reagan’s in the early 1980s. A look back at Reagan’s economic program (and its consequences politically for his administration) helps put the current Trump one in clearer historical perspective.

When Reagan became president in January 1981, he and his advisors pursued what was then viewed as a highly unorthodox mix of economic policies. The Reagan economic approach combined strong support for keeping interest rates high (to wring high inflation out of the economy); very big tax cuts (for the affluent especially); big increases in military spending (in order to wage the Cold War more effectively); and big domestic-spending cuts (to shrink the size of the federal budget deficit that his proposed tax cuts and defense-spending boosts would likely create). Except for the high-interest-rates part, which required only the support of the Federal Reserve Board (and which it provided), Reagan’s economic plans required congressional approval. His economic team managed to get most of what they wanted from Congress in the spring and summer of 1981, although the domestic-spending cuts were somewhat smaller than Reagan would have liked, and the big tax cuts were reduced in size slightly and phased in over three years. In August 1981, as Congress prepared to go into recess, Reagan added another element, which was to fire the unionized air-traffic controllers who had gone on strike illegally. Diverging from the union-friendly pattern first set in the 1930s by Franklin Roosevelt’s administration and mostly adhered to since then, Reagan opted to permanently replace the strikers, breaking their union. That very publicized step sent a clear message to private-sector employers to take a much harder line against unions, which contributed to their already ongoing decline in the private sector. That would mean, among other things, much less bargaining power for blue-collar workers.

In the short run, Reagan’s unusual mix of economic policies wasn’t successful, either economically or politically. The economy entered a recession in August 1981 that became very deep in 1982. In October of that year, the nation’s official unemployment rate topped 10% for the first time since the Great Depression. At the same time, inflation, though declining, remained high, falling from an average of 10.3% in 1981 to 6.1% in 1982. The deep recession, by shrinking the size of the economy, also reduced federal tax collections. That situation, combined with shrinking revenue from Reagan’s tax cuts and more military spending, caused the federal government’s budget deficit to balloon, from $79 billion (2.6% of GDP) in 1981 to $110.7 billion (3.8% of GDP) in 1982, a 40% increase. The stock market also performed poorly then. In 1981, the average close of the Dow Jones Industrial Average (DJIA) was 933. In 1982, it was 885.

In the short run, the political consequences were equally severe. In the off-year elections of 1982 Republicans lost 26 seats in the House of Representatives, roughly the number that they had gained in the 1980 election cycle. (The margin in the Senate was unchanged.) The Democrats also made major gains at the state-government level, including the election of several new governors in the big industrial states. That Reagan’s policies (which the Democrats dubbed “Reaganomics”) were to blame for those results seemed clear. His approval rating as measured by polls had hovered in the high 50s for most of 1981, but declined sharply in 1982. By January 1983, after two years as president, it stood at just 41%. The New York Times in an editorial that same month proclaimed that “a pall of failure” hung over Reagan’s presidency.

The Times was, of course, wrong about that. In 1983-84, Reagan’s economic policies ignited a boom, which carried him to a landslide re-election victory. That turn of events helped solidify the major changes that Reagan and his economic team had made. A whole new era in American economic life dawned in which the economy grew faster, inflation and unemployment declined, and unions began to become fairly unusual in private-sector workplaces. Not everything about the “Reagan revolution” in economic policy seemed positive, then or later. Big federal budget deficits became the norm, not the exception. The Reagan reorientation did bring greater overall prosperity, but also greater income and wealth inequality, as the top fifth of the income distribution moved ahead much faster than the vast middle.

What makes this history relevant today is that Trump’s economic team seems to think that its own highly unusual mix of economic policies can produce Reagan-like success. In Trump’s case, that combination includes much higher barriers to trade and immigration; less government spending on military and humanitarian aid to allies and friendly nations abroad; low taxes (for the affluent especially); heavy de-regulation of the economy; and major shrinkage in the size of the federal workforce. Like Reagan’s approach in 1981, Trump’s in 2025 marks a major break with economic orthodoxy. What remains to be seen is whether it will produce positive results, economically and politically, over the long term especially. Just because things worked out for Reagan is no guarantee that they will for Trump, but he and his economic team appear to be betting that they will.