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Reagan Economic Woes Essay

59b. Reaganomics


President Ronald Reagan unveils a new tax program, calling it "a second American Revolution for hope and opportunity." Upon taking office, Reagan called for a phased 30% tax cut, but Congress would only agree to a 25% cut.

The media called it Reaganomics.

During the campaign of 1980, Ronald Reagan announced a recipe to fix the nation's economic mess. He claimed an undue tax burden, excessive government regulation, and massive social spending programs hampered growth. Reagan proposed a phased 30% tax cut for the first three years of his Presidency. The bulk of the cut would be concentrated at the upper income levels. The economic theory behind the wisdom of such a plan was called supply-side or trickle-down economics.


By using laser-equipped satellites, Ronald Reagan's Strategic Defense Initiative hoped to shield the United States from a Russian missile attack. Here, a rocket sends a military satellite into the heavens.

Tax relief for the rich would enable them to spend and invest more. This new spending would stimulate the economy and create new jobs. Reagan believed that a tax cut of this nature would ultimately generate even more revenue for the federal government. The Congress was not as sure as Reagan, but they did approve a 25% cut during Reagan's first term.

The results of this plan were mixed. Initially, the Federal Reserve Board believed the tax cut would re-ignite inflation and raise interest rates. This sparked a deep recession in 1981 and 1982. The high interest rates caused the value of the dollar to rise on the international exchange market, making American goods more expensive abroad. As a result, exports decreased while imports increased. Eventually, the economy stabilized in 1983, and the remaining years of Reagan's administration showed national growth.

The defense industry boomed as well. Reagan insisted that the United States was open to a "window of vulnerability" to the Soviet Union regarding nuclear defense. Massive government contracts were awarded to defense firms to upgrade the nation's military. Reagan even proposed a space-based missile defense system called the Strategic Defense Initiative. Scientists were dubious about the feasibility of a laser-guided system that could shoot down enemy missiles. Critics labeled the plan "Star Wars."


Ronald Reagan's increased spending and accompanying tax cuts resulted in dramatic budget deficits during the 1980s. A deficit occurs when spending exceeds revenues in any year. The drop you see at the end of this chart represents recent attempts to achieve a "balanced budget" — a spending plan where the funds available for use equal the funds spent by the federal government.

Economists disagreed over the achievements of Reaganomics. Tax cuts plus increased military spending would cost the federal government trillions of dollars. Reagan advocated paying for these expenses by slashing government programs. In the end, the Congress approved his tax and defense plans, but refused to make any deep cuts to the welfare state. Even Reagan himself was squeamish about attacking popular programs like Social Security and Medicare, which consume the largest percentages of taxpayer dollars. The results were skyrocketing deficits.

The national debt tripled from one to three trillion dollars during the Reagan Years. The President and conservatives in Congress cried for a balanced budget amendment, but neither branch had the discipline to propose or enact a balanced budget. The growth that Americans enjoyed during the 1980s came at a huge price for the generations to follow.

The Rise of Supply-Side Economics
Although unaffiliated with any major institution or agency, this site provides one of the clearest and most interesting introductions to the subject out there on the web. The author offers a surprisingly fair evaluation of supply-side economics, and goes on to trace the theory's origins. A very helpful site that exposes several common misconceptions and assumptions surrounding Reaganomics.

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None of us really understands what's going on with all these numbers. -David Stockman, budget director for Ronald Reagan, 1981.
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President Ronald Reagan's Economic Policies

How Reagan Ended the 1980s Recession

Ronald Reagan was the U.S. president from January 20, 1981 – January 20, 1989. He was the first conservative president in more than 50 years. His first task was to combat the worst recession since the Great Depression.

To do so, Reagan promised the "Reagan Revolution." It focused on reducing government spending, taxes, and regulation. His philosophy was "Government is not the solution to our problem, government is the problem." Reagan was an advocate of laissez-faire economics.

He believed the free market and capitalism would solve the nation's woes. His policies matched the "Greed is good" mood of 1980s America.

1980-1981 Recession

Reagan inherited an economy mired in stagflation. It's a combination of double-digit economic contraction with double-digit inflation. To combat the recession, Reagan aggressively cut income taxes from 70 percent to 28 percent for the top income tax bracket. He cut the corporate tax rate from 48 percent to 34 percent. He also promised to slow the growth of government spending and deregulate. At the same time, he would reduce the money supply to combat inflation.

Reaganomics

Reagan's economic policies are known as Reaganomics. Reagan based his policies on the theory of supply side economics. This theory says tax cuts encourage economic expansion enough to broaden the tax base over time. The increased revenue from a stronger economy is supposed to offset the initial revenue loss from the tax cuts.

But according to the Laffer Curve, this only works if the initial tax rates are high enough. High taxes fall in the curve’s “Prohibitive Range.” Reagan's tax cuts worked because tax rates were so high in the early 1980s. 

Reagan and Deregulation

Reagan was applauded for continuing to eliminate the Nixon-era price controls.

They constrained the free-market equilibrium that would have prevented inflation. Reagan removed controls on oil and gas, cable television, and long-distance phone service. He further deregulated interstate bus service and ocean shipping.

In 1982, Reagan deregulated banking. Congress passed the Garn-St. Germain Depository Institutions Act. It removed restrictions on loan-to-value ratios for savings and loan banks. Reagan's budget cut also reduced regulatory staff at the Federal Home Loan Bank Board. As a result, banks invested in risky real estate ventures. Reagan's deregulation and budget cuts contributed to the savings and loan crisis of 1989. 

Reagan did little to reduce regulations affecting health, safety, and the environment. In fact, he reduced regulations at a slower pace than the Carter administration.

Reagan's enthusiasm for the free market did not extend to trade. Instead, he raised import barriers. Reagan doubled the number of items that were subject to trade restraint from 12 percent in 1980 to 23 percent in 1988.  

Reagan Did Not Reduce Government Spending

Despite campaigning on a reduced government role, Reagan wasn't as successful as he was at tax cuts. During his first year, he cut domestic programs by $39 billion.

But he increased defense spending to achieve "peace through strength" in his opposition to Communism and the Soviet Union. He was successful in ending the Cold War. That’s when he uttered his famous quote, "Mr. Gorbachev, tear down this wall." To accomplish these goals, Reagan wound up increasing the defense budget by 35 percent.

Reagan did not reduce other government programs. He expanded Medicare. He increased the payroll tax to insure the solvency of Social Security. Under Reagan, government spending increased 2.5 percent annually. By the end of Reagan's two terms, the national debt had more than doubled.

Beating Inflation

Reagan captured the mood of voters when he said, "Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." To combat inflation, Federal Reserve Chairman Paul Volcker steadily raised the fed funds rate to 20 percent.

That successfully ended double-digit inflation.

But it also triggered the resumption of recession, lasting from July 1981 to November 1982. This contractionary monetary policy reduced business spending. It resulted in a 10.8 percent unemployment rate. That’s the highest of any recession. Unemployment remained above 10 percent for almost a year.

Council of Economic Advisers

During his eight-year term, Reagan brought on board many well-known economists to the Council of Economic Advisers. New Chairmen included Murry Weidenbaum, Martin Feldstein and Beryl Sprinkel. The Council also included William Niskanen, Jerry Jordan, William Poole, Thomas Gale Moore and Michael Mussa. Niskanen was one of the founders of Reaganomics. The staff included Nobel Prize winner and New York Times columnist Paul Krugman and Harvard professor Larry Summers. Summers later became President Obama's Director of the National Economic Council.

Reagan's Early Years

Ronald Reagan was born on February 6, 1911. He received a Bachelor of Arts in economics and sociology from Eureka College in Illinois. He became a radio sports announcer, then an actor in 53 films. As president of the Screen Actors Guild, he became involved in rooting out Communism in the film industry. That led him to develop more conservative political views. He became a TV host and spokesman for conservatism. He was Governor of California from 1966-1974.

In 1980, Reagan was nominated as the Republican presidential candidate. George H.W. Bush was the nominee for vice president. Reagan beat Jimmy Carter to become the 40th President of the United States. 

Other Presidents' Economic Policies