To appreciate the magnitude of Reagan's achievement, it is important to recall just how bad the economic situation was in 1980. There was a recession that year, beginning in January and ending in July. As a consequence, real growth for the year was negative, with the national unemployment rate averaging more than 7 percent. Yet, inflation remained dangerously high.
By December 1980, the consumer price index was 12.4 percent higher than a year earlier. Inflationary expectations, combined with monetary tightening by the Federal Reserve, caused interest rates to hit the highest levels in U.S. history. The prime rate went above 20 percent at mid-year and was still above 15 percent when Reagan took the oath of office.
Reagan's predecessor, Jimmy Carter, was baffled by the combination of economic evils. Many economists believed that it would take the equivalent of another Great Depression to break the back of inflation and restore the nation's economic health, something no sane politician would ever contemplate. A common estimate was based on "Okun's Law," named for economist Arthur Okun, which says that to bring inflation down by one percentage point will cause the economy to contract by 10 percent. Thus eliminating a 12.4 inflation rate would either take a very, very long time or involve an unthinkable economic cost.
Nevertheless, by 1986 the U.S. inflation rate was down to just 1.1 percent and real gross domestic product was rising at a healthy pace. The unemployment rate and interest rates were still stubbornly high, but on a downward trend. Although the U.S. economy had suffered a sharp recession from July 1981 to November 1982, it was far less severe than most economists expected, given the drop in inflation.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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