Reaganomics: Definition, Policies, and Impact

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

Key Takeaways

  • Reaganomics refers to the economic policies instituted by former President Ronald Reagan.
  • President Reagan instituted tax cuts, decreased social spending, increased military spending, and implemented 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.

Understanding Reaganomics

The term Reaganomics was used by both supporters and detractors of Reagan's policies. Based on the principles of supply-side economics and the trickle-down theory, Reaganomics proposed that decreases in taxes, especially for corporations, stimulate economic growth. If the expenses of corporations are reduced, the savings then "trickle down" to the rest of the economy, spurring overall growth.

Objectives of Reaganomics

As Reagan began his first term, the country suffered through several years of stagflation, where high inflation was accompanied by high unemployment. To fight high inflation, the Federal Reserve Board increased the short-term interest rate, reaching a 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

Measures Introduced by Reaganomics

A proponent of supply-side economics, Reagan regarded government intervention as a damper on economic growth that reduced economic incentives and distorted market signals. To spur the free market, he introduced several measures to reduce government interference.

Domestic Program Spending Cuts

To curtail 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.

Though Reagan ordered government spending cuts to domestic programs, he increased defense spending by 35% to achieve "peace through strength" in his opposition to Communism and the Soviet Union.

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% in 1982, along with sharp cuts to corporate and estate taxes.

In 1986, GDP stood at 3.5%, but the unemployment rate was at a high of 6.6%. Reagan cut the tax rate to 38.5% in 1987 and unemployment fell to 5.7%.

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 expenditures which encouraged them to invest in equipment.

Decreased Government Regulation

Reagan removed price controls on oil and gas, reduced restrictions on the financial services industry, and relaxed the enforcement of the Clean Air Act. The Department of the Interior also opened large areas of public land for oil drilling.

In 1982, Congress passed the Garn-St. Germain Depository Institutions Act for savings and loan banks to deal with rising inflation and interest rates by further deregulating deposit rates.

Tight Monetary Policy

As president, Reagan encouraged the Federal Reserve to tighten the money supply as Federal Reserve Chairman Paul Volcker had steadily raised the federal funds rate to 20% by 1980 and these high-interest rates helped end double-digit inflation. The Reaganomics monetary policy was developed to complement the Federal Reserve's policy of raising interest rates to reduce borrowing and spending.


Some of the deregulation and monetary reforms associated with Ronald Reagan were initiated under President Carter. To the extent that these policies were consistent with Reagan's laissez-faire worldview, they are generally included with "Reaganomics."

Advantages and Disadvantages of Reaganomics

Advocates of President Reagan's policies cite "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. The top marginal tax rate on individual income was slashed from 70% to 28% and the corporate tax rate was reduced from 48% to 34%. Inflation was reduced to 4%, and the unemployment rate fell below 6%.

Between 1982 and 2000, the Dow Jones Industrial Average (DJIA) grew nearly 14-fold, and the economy added 40 million new jobs. However, 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 risen."

Although Reagan reduced the economic regulation that began under President Jimmy Carter and eliminated price controls on oil and natural gas, long-distance telephone services, and cable television, critics argue that the deregulation of the financial services industry during the Reagan administration played a part in the Savings and Loan crisis, as well as the financial collapse of 2008.

  • The inflation level decreased significantly

  • Individual, corporate, and investment taxes were reduced

  • Deregulation encouraged a more open and free market

  • Public and social programs were curtailed

  • Both the national deficit and national debt increased

  • The divide increased between the wealthy and middle and lower classes

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 into 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 government.

These policies garnered reduced inflation, lower unemployment, and an entrepreneurial revolution that later became synonymous with the 1980s. However, federal deficits grew, and the increased wealth gap increased the divide between the rich and the poor.

Article Sources
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  1. The White House. "Ronald Reagan."

  2. Bureau of Labor Statistics. "Labor Force Statistics From the Current Population Survey."

  3. University of Houston: Digital History. "Reaganomics."

  4. Federal Reserve History. "Volcker's Announcement of Anti-Inflation Measures."

  5. International Inequalities Institute. "The Economic Consequences of Major Tax Cuts for the Rich," Page 3.