Figure 1. President Ronald Reagan signs economic reform legislation at his ranch in California. Note the blue jeans, denim jacket, and cowboy boots he wears.

The “Reagan Recession”

The new administration appeared to be flying high in the fall of 1981, but developments challenged the rosy economic forecasts emanating from the White House.

Failed Efforts to Reduce Government Spending

As Reagan ratcheted up tension with the Soviet Union, Congress approved his request for $1.2 trillion in new military spending. In addition to this, although he had long warned about the dangers of big government, he created a new cabinet-level agency, the Department of Veterans Affairs, and the number of federal employees increased during his time in office. He allocated a smaller share of the federal budget to anti-poverty programs like Aid to Families with Dependent Children (AFDC), food stamps, rent subsidies, job training programs, and Medicaid, but Social Security and Medicare entitlements, from which his supporters benefited, were left largely untouched except for an increase in payroll taxes to pay for them. Indeed, in 1983, Reagan agreed to a compromise with the Democrats in Congress on a $165 billion injection of funds to save Social Security, which included this payroll tax increase.

The combination of lower taxes and higher defense budgets caused the national debt to balloon. By the end of Reagan’s first term it equaled 53 percent of GDP, as opposed to 33 percent in 1981. The increase was staggering, especially for an administration that had promised to curb spending. Meanwhile, Federal Reserve chairman Paul Volcker continued his policy from the Carter years of combating inflation by maintaining high interest rates, which surpassed 20 percent in June 1981. The Fed’s action increased the cost of borrowing money and stifled economic activity.

Increasing Unemployment and Decreased Social Welfare Spending

As a result, the United States experienced a severe economic recession in 1981 and 1982. Unemployment rose to nearly 11 percent, the highest figure since the Great Depression. Reductions in social welfare spending heightened the impact of the recession on ordinary people. Congress had followed Reagan’s lead by reducing funding for food stamps and Aid to Families with Dependent Children and removed a half million people from the Supplemental Social Security program for the physically disabled. The cuts exacted an especially harsh toll on low-income communities of color. The head of the NAACP declared that the administration’s budget cuts had rekindled “war, pestilence, famine, and death.”^[1] Reagan also received bipartisan rebuke in 1981 after proposing cuts to social security benefits for early retirees. The Senate voted unanimously to condemn the plan, and Democrats framed it as a heartless attack on the elderly. Confronted with recession and harsh public criticism, a chastened White House worked with Democratic House Speaker Tip O’Neill in 1982 on a bill that restored $98 billion of the previous year’s tax cuts. Despite compromising with the administration on taxes, Democrats railed against the so-called Reagan Recession, arguing that the president’s economic policies favored the most fortunate Americans. This appeal, which Democrats termed the “fairness issue,” helped them win twenty-six House seats in the autumn congressional races.^[2] The New Right appeared to be in trouble.

Reagan Bounces Back

​​Reagan nimbly adjusted to the political setbacks of 1982. Following the rejection of his social security proposals, Reagan appointed a bipartisan panel to consider changes to the program. In early 1983, the commission recommended a onetime delay in cost-of-living increases, a new requirement that government employees pay into the system, and a gradual increase in the retirement age from sixty-five to sixty-seven. The commission also proposed raising state and federal payroll taxes, with the new revenue poured into a trust fund that would transform social security from a pay-as-you-go system to one with significant reserves. Congress quickly passed the recommendations into law, allowing Reagan to take credit for strengthening a program cherished by most Americans.

The president also benefited from an economic rebound. Real disposable income rose 2.5 percent in 1983 and 5.8 percent the following year. Unemployment dropped to 7.5 percent in 1984. Meanwhile, the “harsh medicine” of high interest rates helped reduce inflation to 3.5 percent.^[3] While campaigning for reelection in 1984, Reagan pointed to the improving economy as evidence that it was “morning again in America.”^[4] His personal popularity soared. Most conservatives ignored the debt increase and tax hikes of the previous two years and rallied around the president.

Democratic Disagreements

Figure 2. Walter Mondale and his running mate, vice presidential nominee Geraldine Ferraro campaigning in Fort Lauderdale, Florida.

The Democratic Party, on other hand, stood at an ideological crossroads in 1984. The favorite to win the party’s nomination was Walter Mondale, a staunch ally of organized labor and the civil rights movement as a senator during the 1960s and 1970s. He later served as Jimmy Carter’s vice president. Mondale’s chief rivals were civil rights activist Jesse Jackson and Colorado senator Gary Hart, one of the young Democrats elected to Congress in 1974 following Nixon’s downfall. Hart and other “Watergate babies” still identified themselves as liberals but rejected their party’s faith in activist government and embraced market-based approaches to policy issues. In so doing, they conceded significant political ground to supply-siders and conservative opponents of the welfare state.

Ideological Tension Within the Democratic Party

Many Democrats, however, were not prepared to abandon their New Deal heritage, and so the ideological tension within the party played out in the 1984 primary campaign. Jackson offered a largely progressive program but won only two states. Hart’s platform—economically moderate but socially liberal—inverted the political formula of Mondale’s New Deal-style liberalism. Throughout the primaries, Hart contrasted his “new ideas” with Mondale’s “old-fashioned” politics. Mondale eventually secured his party’s nomination but suffered a crushing defeat in the general election. Reagan captured forty-nine of fifty states, winning 58.8 percent of the popular vote.

Neoliberalism is another significant economic term, often used to describe the 20th-century resurgence of 19th-century ideas associated with free-market capitalism. Although “liberal” is routinely used in American political discourse to refer to the views of the progressive Left, liberal has a much-longer history and also refers to 19th-century ideas of free-market capitalism as a means of remaking society away from the hold of monarchy and the aristocracy (more economic power held by the people and not the ruling classes). In other words, neoliberalism means little government regulation of the economy and low or no corporate taxes. Neoliberalism is often linked with conservative politicians like Reagan in the United States. Nevertheless, it would be wrong to associate neoliberalism with conservative Republicans since many Democrat policies are also neoliberal, as seen in President Clinton’s 1994 signing of the North American Free Trade Agreement (NAFTA).

The Democratic Leadership Council

Mondale’s loss seemed to confirm that the new breed of moderate Democrats better understood the mood of the American people. The future of the party belonged to post–New Deal liberals like Hart and to the constituency that supported him in the primaries: upwardly mobile, White professionals and suburbanites. In February 1985, a group of centrists formed the Democratic Leadership Council (DLC) as a vehicle for distancing the party from organized labor and Keynesian economics while cultivating the business community. Jesse Jackson dismissed the DLC as “Democrats for the Leisure Class,” but the organization included many of the party’s future leaders, including Arkansas governor Bill Clinton.^[5] The formation of the DLC illustrated the degree to which the New Right had transformed American politics: New Democrats looked a lot like old Republicans.

Reagan’s Second Term

Reagan entered his second term with a much stronger mandate than in 1981, but the Grand Old Party (GOP) makeover of Washington, D.C., stalled. The Democrats regained control of the Senate in 1986, and Democratic opposition prevented Reagan from eliminating means-tested social welfare programs, although Congress failed to increase benefit levels for welfare programs or raise the minimum wage, decreasing the real value of those benefits.

Democrats and Republicans occasionally fashioned legislative compromises, as with the Tax Reform Act of 1986. The bill lowered the top corporate tax rate from 46 percent to 34 percent and reduced the highest marginal income tax rate from 50 percent to 28 percent, while also simplifying the tax code and eliminating numerous loopholes. The steep cuts to the corporate and individual rates certainly benefited wealthy individuals, but the legislation made virtually no net change to federal revenues. In 1986, Reagan also signed into law the Immigration Reform and Control Act. American policymakers hoped to do two things: deal with the millions of undocumented immigrants already in the United States while simultaneously choking off future unsanctioned migration. The former goal was achieved (nearly three million undocumented workers received legal status) but the latter proved elusive.

One of Reagan’s most far-reaching victories occurred through judicial appointments. He named 368 district and federal appeals court judges during his two terms. Observers noted that almost all of the appointees were White men. (Seven were African American, fifteen were Latino, and two were Asian American.) Reagan also appointed three Supreme Court justices: Sandra Day O’Connor, who to the dismay of the religious right turned out to be a moderate; Anthony Kennedy, a solidly conservative Catholic who occasionally sided with the court’s liberal wing; and archconservative Antonin Scalia. The New Right’s transformation of the judiciary had limits. In 1987, Reagan nominated Robert Bork to fill a vacancy on the Supreme Court. Bork, a federal judge and former Yale University law professor, was a staunch conservative. He had opposed the 1964 Civil Rights Act, affirmative action, and the Roe v. Wade decision. After acrimonious confirmation hearings, the Senate rejected Bork’s nomination by a vote of 58–42.