Reaganomics

views updated May 29 2018

REAGANOMICS

There was a story that circulated within the Washington Beltway during the 1980s that "Reaganomics" began as a doodle on a cocktail napkin as two economists employed by the Reagan administration sat whiling away happy hour in a Washington, D.C. cocktail lounge. The story may or may not be true, but at least it has the ring of truth. The term "Reaganomics" was derived from the name of its best-known supporter, fortieth U.S. President Ronald Reagan (1981–1989). Reagan, however, did not originate the theory. Reaganomics, also called supply-side economics or trickle-down economics, is based on a thing called the "Laffer Curve."(It was the Laffer Curve that was supposed to be the subject of the doodle.) The economist Arthur B. Laffer is the true creator of the supplyside theory. He asserts that high marginal tax rates and government regulation of industries discourage private investment in areas that stimulate economic growth, and that if the taxes and the regulation go away, the additional capital available to the private sector will "trickle down" to the rest of the population. Supply-side theory gained popularity during the late 1970s, when tax rates were at an all-time high, inflation hovered around 15 percent, oil shortages brought high energy costs, foreign competition took profits from domestic operations, and the business community complained about confining government regulations.

The theories of Milton Friedman, the founder of monetarism and economic adviser to Reagan in the 1970s, also influenced Reagan's economic policies. Monetarism claims that the level and direction of spending on the federal budget is more important than the amount of the deficit, and that a stable monetary policy allows borrowing to finance an unbalanced budget.

Although supply-side economics and monetarism are rival conservative theories, Reagan more or less combined the two when he administered a plan that relied on faith in free enterprise, not in government, as the basis for economic expansion. Reaganomics consisted of four main initiatives: (1) tax reductions that would encourage investment and production, (2) spending cuts that would reduce the size of government, (3) elimination of federal regulations that were constricting business growth, and (4) a stable monetary policy that would keep inflation under control.

In 1982 as a nation in recession witnessed tax cuts, defense weaponry buildup, and a reduction in services for school lunch programs, the New York Times named Ronald Reagan's economic agenda "Reaganomics." By 1984 however, the economy had turned and inflation and unemployment dropped dramatically. The United States maintained an economic boom that lasted for the remainder of the Reagan administration.

The president's policies have continued to be an issue of critical debate. Supporters of Reaganomics claimed that by adopting supply-side economics, the Reagan administration conquered the inflation that plagued the economy during the 1970s and set the economy on the tracks of the longest peacetime economic recovery in U.S. history. Opponents of Reaganomics argue that huge tax cuts were simply a gift to Reagan's political constituency among the rich even though it brought a doubling of the federal deficit.

True to his agenda, Reagan brought some of the largest tax cuts in history. According to Reaganomics, lower taxes prompted corporations to invest, leading U.S. consumers to buy more. As the economy grew, thanks to increased consumer spending, they would indirectly raise government tax revenues. The trend would "trickle down" to benefit even the poorest U.S. citizens. An initial shock to these new policies led to a recession in the early 1980s, but by 1984 the economy began to surge, inflation leveled and unemployment dropped.

Still many experts believed that the middle class and the poor did not benefit from Reaganomics. It was widely reported that the share of income going to the wealthiest 20 percent of the nation's population nearly doubled during the Reagan era, while the share going to the remaining 80 percent fell to its lowest level since the mid-1940s. Yet almost everybody but the very poor were better-off.

Reaganomics also encouraged many industries to deregulate during the early 1980s. At first, deregulation led to greater competition and lower prices for consumers. Diminished government supervision, however, also brought about problems. By the mid-1980s, the savings and loan industry collapsed amidst fraud and mismanagement. In the airline industry, deregulation led to the failure of many airlines, while others were bought out by rival airlines; the ultimate outcome was less competition and higher ticket prices.

The Reagan era also produced a large increase in the federal budget deficit (the difference between money the government spends and the amount it earns through taxes and other sources). When Reagan's policies were put in effect in the early 1980s, tax cuts did stimulate the economy, but Federal spending continued to grow, because of the refusal of a Democratic Congress to cut domestic spending as dramatically as Reagan wanted. There was also an increase in borrowed money to fund the creation of defense weaponry at the climax of the Cold War and.

Ronald Reagan served two terms as U.S. president. Reaganomics contributed to the creation of more than 20 million jobs and a $1 trillion federal deficit. Some economists say that Reagan's policies were ultimately a failure that should never be repeated, although others argue that Reagan's polices have been clearly vindicated over time by our increasingly prosperous society. Regardless of opinion, the effects of Reaganomics were felt well past the end of Reagan's terms of office. Ronald Reagan himself once remarked that "the best sign that our economic program is working is that they don't call it Reaganomics any more."

See also: Milton Friedman, Alan Greenspan, Andrew Mellon, Monetary Theory, Ronald Reagan, Supply-Side Economics

Reaganomics

views updated May 18 2018

REAGANOMICS

REAGANOMICS denotes the economic policies of President Ronald Reagan in the 1980s. He sought to remedy the high inflation and recessions of the 1970s, which conservatives attributed to the heavy burden government imposed on private enterprise. Reagan called for sharp reductions in federal taxes, spending, and regulation as well as a monetary policy that strictly limited the growth of the money supply.

The administration implemented most of its program. The Federal Reserve pushed interest rates to historic highs in 1981, limiting monetary growth; Congress reduced tax rates in 1981 and again in 1986; and Reagan appointees relaxed many federal regulations. Reagan also secured immediate cuts in domestic spending, but he failed to arrest the growth of social security, Medicare, and Medicaid, which continued to grow automatically with the aging of the population and new medical technology.

Reaganomics was and remains controversial. The country suffered a severe recession in 1981–1982, but inflation fell from 13.5 percent to 3.2 percent. In 1983, the economy began a substantial boom that lasted through 1989, and unemployment gradually fell to 5.3 percent. Throughout, inflation remained under control, hovering between 3 and 4 percent a year. But Washington ran heavy deficits throughout the 1980s, with the federal debt tripling. The international balance of payments went from equilibrium to an annual deficit of over $100 billion, and the distribution of income became less equal.

BIBLIOGRAPHY

Stein, Herbert. Presidential Economics: The Making of Economic Policy from Roosevelt to Clinton. Washington, D.C.: American Enterprise Institute, 1994.

WyattWells

See alsoSupply-Side Economics .

Dictionary of American History Wells, Wyatt