President Reagan’s first year in office was tumultuous to say the least. Minutes after he took the oath of office Iran released the hostages trapped inside the United States embassy. Sixty-nine days into his term the President was shot and seriously wounded by a .22 caliber bullet fired from John Hinckley’s gun. Only seven months into his term he faced a major crisis when the nation’s air traffic controllers decided to conduct an illegal strike. President Reagan had run a campaign that focused on his desire to tackle three challenges: the economic morass the nation was in, diplomatic relations with the Soviet Union, and modernizing the United States armed services. Thirty-five years ago, going in to the second half of his first year in office, the President and his fledgling administration had been unable to make significant progress towards these goals, although the President’s approval rating remained over 50 percent.
Over the course of the summer the administration and Congress worked on economic policy to attempt to address high unemployment and inflation. The Economic Recovery Tax Act of 1981 was a comprehensive piece of legislation that President Reagan endorsed. Introduced in the House of Representatives as House Resolution 4242 in the 97th Congress on July 23, 1981, it eventually became Public Law 97-34 on August 13, 1981 when President Reagan signed the law from his personal retreat, Rancho del Cielo, near Santa Barbara, California.
- 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.
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.
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.
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.