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.
- Reaganomics refers to the economic policies instituted by former President Ronald Reagan.
- As president, Reagan 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.
- Current perceptions of Reaganomics are mixed. While GDP and business activity grew, the policies came at the cost of a larger wealth gap, decreased economic mobility, and higher federal debt.
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 that 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.
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
Factors of Reaganomics
As a believer in supply-side economics, Reagan regarded government intervention as a damper on economic growth, reducing economic incentives and distorting market signals. In order to clear the field for the free market, he proposed a number of measures designed to reduce government interference and make it easier to do business.
Domestic Program Spending Cuts
In accordance with his suspicion of government intervention, Reagan cut or reduced funding to multiple domestic welfare programs, including Social Security, Medicaid, Food Stamps, education, and job training programs. In a deeply controversial move, he also ordered the Social Security Administration to tighten enforcement on disabled recipients, ending benefits for more than a million recipients.
Reduced Corporate, Individual, and Investment Taxes
In the first year of his presidency, Reagan lowered taxes significantly. Income taxes on the top marginal tax bracket dropped from 70% to 50%, along with sharp cuts to corporate and estate taxes. Some of these cuts were partially reversed by later legislation. Another tax reform was passed in 1986, reducing both the number of tax brackets and the highest marginal tax rate.
The goal of these reforms was not only to reduce tax burdens, but also to simplify the tax code. Some of Reagan's reforms eliminated write-offs, exceptions, and other loopholes for favored businesses. They also changed the way companies accounted for expenditure, thereby encouraging them to invest in equipment.
Decreased Government Regulation
In order to restore market signals in the economy, Reagan removed price controls on oil and gas, reduced restrictions on the financial services industry, and relaxed enforcement of the Clean Air Act. The Department of the Interior also opened large areas of public land for oil drilling.
Slower Money Growth
As president, Reagan encouraged the Federal Reserve to tighten the money supply, which had already begun a three-year contraction during the term of President Carter. The contraction was intended to reduce inflation, which had already reached double-digit figures by the start of the Reagan presidency.
Some of the deregulation and monetary reforms associated with Ronald Reagan were actually initiated under President Carter. To the extent that these policies were consistent with Reagan's laissez-faire worldview, they are generally included with "Reaganomics."
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 Long-Term Impact of Reaganomics
Economists remain divided on the long-term impact of Reagan's policies. Unsurprisingly, those experts who are most favorable to laissez-faire policies also have the most favorable reviews. "From December 1982 to June 1990, Reaganomics created over 21 million jobs—more jobs than have been added since," wrote Arthur Laffer, whose work heavily influenced Reagan's tax cuts. Laffer also noted the decline in strike activity, Social Security liabilities, and a stock market that went "through the roof."
Others are less favorable. Nobel laureate Paul Krugman downplayed the success of Reagan's policies. "Yes, there was a boom in the mid-1980s, as the economy recovered from a severe recession," Krugman wrote in the New York Times. "But while the rich got much richer, there was little sustained economic improvement for most Americans. By the late 1980s, middle-class incomes were barely higher than they had been a decade before and the poverty rate had actually risen."
In addition, many of the consequences of the Reagan era would not be truly understood until the end of the Reagan presidency. For example, the deregulation of the financial services industry would play a major part in the Savings and Loan crisis, as well as the financial collapse of 2008.
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 revenues for the government.
What Did Reaganomics Do?
Reaganomics reduced taxes on individuals and businesses, as well as cutting federal regulations and domestic social programs.
What Were the Goals of Reaganomics?
Reaganomics sought to reduce the cost of doing business, by reducing tax burdens, relaxing regulations and price controls, and cutting domestic spending programs. Reagan also sought to reduce inflation by tightening the money supply.
What Were the Major Parts of Reaganomics?
The four main pillars of Reaganomics were tax cuts, deregulation, cuts to domestic social spending, and reducing inflation.
Did Reagan Ever Say Trickle Down?
While there is no record of President Reagan using the phrase "trickle-down," his economic philosophy was closely aligned with the idea that business-friendly policies would ultimately benefit the entire economy. By reducing taxes on the wealthy, Reagan hoped the benefits would "trickle down" in the form of increased employment and business activity.
Does Trickle Down Economics Really Work?
While economists remain divided on various elements of Reaganomics, the suggestion that wealth would "trickle down" has so far remained unrealized. On the contrary, economic studies have found that tax cuts, such as those enacted by Reagan, tend to increase economic inequality rather than reduce it.
The Bottom Line
Reaganomics was regarded as a common-sense approach to the perception of stagflation and over-regulation that prevailed at the end of the Carter presidency. By reducing government spending and taxes, and making it easier to do business, President Reagan hoped to incentivize economic activity and reduce dependence on the welfare state.
These policies were rewarded by reduced inflation, increased employment, and an entrepreneurial revolution that later became synonymous with the 1980s. However, some of the promises of Reaganomics did not materialize. Federal deficits grew, and the increased wealth gap left the poorest Americans in worse shape.