In fact, Reagan inherited chronic deficits. Since Franklin Roosevelt, the budget had been balanced a handful of times, mainly under President Eisenhower . From 1981-89, the deficit under Reagan increased from $79 billion to $153 billion. It peaked in 1983-86, hitting $221 billion. Yet, once the economy started booming, the deficit steadily dropped.
Tax cuts were not the problem. Tax revenues under Reagan rose from $599 billion in 1981 to nearly $1 trillion in 1989. The problem was that outlays all along outpaced revenue, soaring from $678 billion in 1981 to $1.14 trillion in 1989.
The cause of the Reagan deficits was the 1982-83 recession and spending — as is always the case. And, yes, the culprit was not just social spending by congressional Democrats but Reagan defense spending designed to take down the Soviet Union . What a bargain that turned out to be: It helped kill an "evil empire" and win the Cold War , paving the way for a peacetime dividend in the 1990s.
Yet it is clear today that we have refused the proper lessons of history. For one, our problem remains excessive spending. Obama must bear this in mind if he's considering tax increases (which hamper growth) as part of his "balanced" approach to deficit reduction. More than that, the best "stimulus" relies on the tried-and-true American way: Let free individuals stimulate the economy through their earnings and activity.
Ignoring such realities explains the mess we face in August 2011 — a millennium removed from the wisdom of August 1981.