What is Reaganomics?

Reaganomics is a popular term referring to the economic policies of Ronald Reagan, the 40th U.S. president (1981–1989). His policies called for widespread tax cuts, decreased social spending, increased military spending, and the deregulation of domestic markets. These economic policies were introduced in response to a prolonged period of economic stagflation that began under President Gerald Ford in 1976.

Understanding Reaganomics

The term Reaganomics was used by both supporters and detractors of Reagan's policies. Reaganomics was partially based on the principles of supply-side economics and the trickle-down theory. These theories hold the view that decreases in taxes, especially for corporations, offer the best way to stimulate economic growth. The idea is if the expenses of corporations are reduced, the savings "trickle down" to the rest of the economy, spurring growth. Prior to becoming Reagan's vice president, George H. W. Bush coined the term "voodoo economics" as a proposed synonym for Reaganomics.

Key Takeaways

  • Reaganomics refers to the economics policies instituted by former President Ronald Reagan.
  • Reaganomic policies instituted tax cuts, decreased social spending, increased military spending, and market deregulation.
  • Reaganomics was influenced by the trickle-down theory and supply-side economics.
  • Under President Reagan's administration, marginal tax rates decreased, tax revenues increased, inflation decreased, and the unemployment rate fell.

The Objectives of Reaganomics

As Reagan began his first term in office, the country suffered through several years of stagflation, in which high inflation was accompanied by high unemployment. To fight high inflation, the Federal Reserve Board was increasing the short-term interest rate, which was near its peak in 1981. Reagan proposed a four-pronged economic policy intended to reduce inflation and stimulate economic and job growth:

  • Reduce government spending on domestic programs
  • Reduce taxes for individuals, businesses, and investments
  • Reduce the burden of regulations on business
  • Support slower money growth in the economy

Reaganomics in Action

Although Reagan reduced domestic spending, it was more than offset by increased military spending, creating a net deficit throughout his two terms. The top marginal tax rate on individual income was slashed to 28% from 70%, and the corporate tax rate was reduced from 48% to 34%. Reagan continued with the reduction of economic regulation that began under President Jimmy Carter and eliminated price controls on oil and natural gas, long distance telephone services, and cable television. In his second term, Reagan supported a monetary policy that stabilized the US dollar against foreign currencies.

Near the end of Reagan’s second term, tax revenues received by the US government increased to $909 billion in 1988 from $517 billion in 1980. Inflation was reduced to 4%, and the unemployment rate fell below 6%. Although economists and politicians continue to argue over the effects of Reaganomics, it ushered in one of the longest and strongest periods of prosperity in American history. Between 1982 and 2000, the Dow Jones Industrial Average (DJIA) grew nearly 14-fold, and the economy added 40 million new jobs.

The Viability of Reaganomics Today

There are plenty of people who believe that the same policies set in place by Reagan in the 1980s could help the American economy today. But critics object, saying that we aren't in the same situation and that any application could actually have the opposite effect. Reagan cut individual taxes when they were 70%, a far cry from where they are today. And cutting taxes even further may result in a decrease in (tax) revenues for the government.