Deficit Hysteria Brings To Mind Reactions to the Reagan Tax Cuts

The hysterical reactions to the Republican tax bill is strikingly similar to the overwrought reactions to the  Reagan tax cuts in the early 1980s.  Now, like then, Congressional Democrats and the media are suddenly worried about deficits, and their impact of interest rates, inflation, and the economy.

The New York Times recently wrote that higher deficits from the Republican tax cuts “will put upward pressure on interest rates, weakening the economy.”  The Washington Post has the same concerns, writing that the increased deficits will “leave interest rates higher, slowing the economy.”

In 1981, the New York Times sounded the same warning. The Reagan tax cuts, they wrote, would result in “huge budget deficits, causing interest rates to soar, choking off economic growth.”  This after ignoring  four years of stagflation, double-digit interest rates and inflation, and slow growth under the Carter administration.

Leading House Democrats repeated the same message. House Way and Means Committee Chairman Dan Rostenkowski said the Reagan tax cuts would increase the deficits and “lead to higher interest rates and higher inflation.” House Speaker Tip O’Neill said even he was worried about deficits.

Deficits did increase in the 1980s as government spending soared to levels not seen since World War II.  But the dire economic warnings about the deficits never came to pass. After the Reagan tax cuts, interest rates and inflation dropped, and economic growth surged.

Interest rates fell from double-digit rates in 1981 to single digit levels. Inflation dropped from 13.5% to 4.3% in 1984 and averaged 3.3% a year through 1988. The economy boomed, growing 8% in 1983 and averaging  nearly 5% a year through 1988, the strongest economic growth since the Kennedy tax cuts in the 1960s.

The deficit hysteria was misplaced in the 1980s and  is misplaced now, especially by those who call for higher taxes. As Joseph Calhoun pointed out in a recent article, The Debt Distraction, in RealClearMarkets, interest rates and inflation are not correlated with deficits and debt. From the 1980s through 2020, budget deficits grew steadily but interest rates and inflation stayed at low levels. As Calhoun noted,  markets are focused on future growth, and can handle deficits and debt as long as long term growth prospects are good.

Deficits are a problem, and need to be addressed. But deficits are caused by high levels of spending fed by constantly rising revenue. In the first nine months of fiscal 2025, spending increased by 6% while revenue rose 7%. Limited government, lower spending and lower taxes, is the best and only way to insure long term growth and reduce our fiscal imbalance.