There is a widespread belief that the Reagan Presidency resulted in a fundamental change in the American economy. According to this line of thinking the American welfare state had become far too bloated by 1980 and Reagan successfully rolled it during his presidency. What’s more he was so successful in changing the political landscape that even Bill Clinton was helpless especially after Gingrich took over.
If you look at the facts this is a pretty puzzling view of the past 20 years.
For instance in 1979 the Federal government spent 20.1% of US GDP. In 1999 it was 18.7%. This is not a large change especially when you consider that defense spending is much lower today as a fraction of GDP and that GDP is about 70% larger.
If you look at individual changes you get the same story: Entitlements (ie the welfare state) were 9.9% of GDP in 79 and are actually 10.7% in 99). Means-tested benefits for the poor are virtually identical after 20 years. The only significant change is in discretionary spending. Domestic discretionary spending is about 1.5% of GDP smaller in 99 than 20 years before. This is not a revolution.
Of course spending is not the only measure of government intervention. Regulation is probably lower now. But then the process of deregulation began in earnest under Carter. In any case there is still lots of regulation and in some areas like the environment it may even have increased.
The bottom line is that the US was a strongly mixed economy in 80 and remains a strongly mixed economy with a slightly smaller government.
So was the Reagan Revolution a lot of hot air?
The budget data is here:
See this article by economist Brad De Long which makes the same point: