“This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. ... All in all, I think we hit the jackpot.”
So declared Ronald Reagan in 1982, as he signed the Garn-St. Germain Depository Institutions Act.He was, as it happened, wrong about solving the problems of the thrifts. On the contrary, the bill turned the modest-sized troubles of savings-and-loan institutions into an utter catastrophe. But he was right about the legislation’s significance. And as for that jackpot well, it finally came more than 25 years later, in the form of the worst economic crisis since the Great Depression.For the more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn the turn that made crisis inevitable took place in the early 1980s, during the Reagan years.
Attacks on Reaganomics usually focus on rising inequality and fiscal irresponsibility. Indeed, Reagan ushered in an era in which a small minority grew vastly rich, while working families saw only meager gains. He also broke with longstanding rules of fiscal prudence.
On the latter point: traditionally, the U.S. government ran significant budget deficits only in times of war or economic emergency. Federal debt as a percentage of G.D.P. fell steadily from the end of World War II until 1980. But indebtedness began rising under Reagan; it fell again in the Clinton years, but resumed its rise under the Bush administration, leaving us ill prepared for the emergency now upon us.The increase in public debt was, however, dwarfed by the rise in private debt, made possible by financial deregulation. The change in America’s financial rules was Reagan’s biggest legacy.And it’s the gift that keeps on taking.The immediate effect of Garn-St. Germain, as I said, was to turn the thrifts from a problem into a catastrophe. The S.& L. crisis has been written out of the Reagan hagiography, but the fact is that deregulation in effect gave the industry whose deposits were federally insured a license to gamble with taxpayers’ money, at best, or simply to loot it, at worst.
By the time the government closed the books on the affair, taxpayers had lost $130 billion, back when that was a lot of money. But there was also a longer-term effect. Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down.These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded. Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped.Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior.We weren’t always a nation of big debts and low savings: in the 1970s Americans saved almost 10 percent of their income, slightly more than in the 1960s. It was only after the Reagan deregulation that thrift gradually disappeared from the American way of life, culminating in the near-zero savings rate that prevailed on the eve of the great crisis.
Household debt was only 60 percent of income when Reagan took office, about the same as it was during the Kennedy administration. By 2007 it was up to 119 percent.All this, we were assured, was a good thing: sure, Americans were piling up debt, and they weren’t putting aside any of their income, but their finances looked fine once you took into account the rising values of their houses and their stock portfolios. Oops.Now, the proximate causes of today’s economic crisis lie in events that took place long after Reagan left office in the global savings glut created by surpluses in China and elsewhere, and in the giant housing bubble that savings glut helped inflate. But it was the explosion of debt over the previous quarter-century that made the U.S. economy so vulnerable. Overstretched borrowers were bound to start defaulting in large numbers once the housing bubble burst and unemployment began to rise. These defaults in turn wreaked havoc with a financial system that also mainly thanks to Reagan-era deregulation took on too much risk with too little capital.There’s plenty of blame to go around these days. But the prime villains behind the mess we’re in were Reagan and his circle of advisers men who forgot the lessons of America’s last great financial crisis, and condemned the rest of us to repeat it. "
"Main article: Reaganomics
The Laffer curve and supply-side economics inspired Reaganomics and the Kemp-Roth Tax Cut of 1981. Supply-side advocates of tax cuts claimed that lower tax rates would generate more tax revenue because the United States government's marginal income tax rates prior to the legislation were on the right-hand side of the curve. This assertion was derided by George H. W. Bush as "voodoo economics" while running against Reagan for the Presidential nomination in 1980.[49] During the Reagan presidency, the top marginal rate of tax in the United States fell from 70% to 28%.David Stockman, Ronald Reagan's budget director during his first administration and one of the early proponents of supply-side economics, was concerned that the administration did not pay enough attention to cutting government spending. He maintained that the Laffer curve was not to be taken literally—at least not in the economic environment of the 1980s United States. In The Triumph of Politics, he writes: "[T]he whole California gang had taken [the Laffer curve] literally (and primitively). The way they talked, they seemed to expect that once the supply-side tax cut was in effect, additional revenue would start to fall, manna-like, from the heavens. Since January, I had been explaining that there is no literal Laffer curve."[50] Stockman also said that "Laffer wasn't wrong, he just didn't go far enough" (in paying attention to government spending).[51]Some have criticized elements of Reaganomics on the basis of equity. For example, economist John Kenneth Galbraith believed that the Reagan administration actively used the Laffer curve "to lower taxes on the affluent".[52] Some critics point out that tax revenues almost always rise every year, and during Reagan's two terms increases in tax revenue were more shallow than increases during presidencies where top marginal tax rates were higher.[53] Critics also point out that since the Reagan tax cuts, income has not significantly increased for the rest of the population. This assertion is supported by studies that show the income of the top 1% nearly doubling during the Reagan years, while income for other income levels increased only marginally; income actually decreased for the bottom quintile.[54] However, a 2018 study by the Congressional Budget Office showed average household income rising 68.8% for the bottom quintile after government transfers (in the form of various income support and in-kind programmes, subsidies, and taxes) from 1979 to 2014. This same study showed the middle quintile's income rising 41.5% after government transfers and taxes.[55]""
"In their economics textbook Principles of Economics (7th edition), economists Karl E. Case of Wellesley College and Ray Fair of Yale University state "The Laffer curve shows the relationship between tax rates and tax revenues. Supply-side economists use it to argue that it is possible to generate higher revenues by cutting tax rates, but evidence does not appear to support this.[47][27] The lower tax rates by the Reagan administration decreased tax revenues significantly and contributed to the massive increase in federal debt during the 1980s
