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.



Summary

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.



Argument

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 Scenario."

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 those years: 

Inflation (1)



1979   11.3%

1980   13.5

1981   10.3

1982    6.2

1983    3.2

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.

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Endnotes:

1. U.S. Bureau of Labor Statistics, CPI-U (1982-84=100), not seasonally adjusted, table CUUR0000SA0.