To explain and evaluate the macroeconomic policy of the Reagan administration, one needs to review the economic situation as it existed in the United States in 1980. The Reagan policy started as a response to what were, or were perceived to be, the problems in the years leading up to the 1980 election. The extent to which those problems were solved is the natural standard for measuring the achievements of Reagan economics; and the extent to which they were not solved, or their “solutions” caused other problems, creates the agenda for economic policy in the years ahead.

Problems seen in 1980

When candidate Reagan asked his famous question in 1980, “Are you better off than you were four years ago?” the statistics gave at best an ambiguous answer. One could certainly have argued that we were better off. Between 1976 and 1980 real output had increased by 3.1 percent per annum, almost exactly the average of the 25 years before 1976. In those four years real per capita disposable income had increased at an average annual rate of 1.5 percent, only a little less than the rate of the preceding 25 years. Total employment had increased greatly – 10 million, or more than 10 percent, in four years. The unemployment rate in 1980 was 7.0 percent, down from 7.6 percent in 1976.

Yet Mr. Reagan could ask that question in 1980 with confidence that most Americans would respond that they were worse off.