Born in Tampico, Illinois, on February 6, 1911, Ronald Reagan initially chose a career in entertainment, appearing in more than 50 films. While in Hollywood, he worked as president of the Screen Actor’s Guild and met his future wife, Nancy. He later served two terms as governor of California. Originally a liberal Democrat, Reagan ran for the U.S. presidency as a Republican and won two terms, beginning in 1980, ultimately becoming a conservative icon over the ensuing decades.
Reaganomics is the term used to refer to the economic policies of Ronald Reagan, the 40th U.S. president, which called for nation wide tax cuts, decreased social spending, increased military spending, and the deregulation of domestic markets. These economic policies were introduced in response to a elongated period of economic depression that began under President Gerald Ford in 1976. The term Reaganomics was used by both supporters and critics of Reagan’s policies. Reaganomics was originally 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, arousing growth and spending. Before he was Reagan’s vice president, George H. Bush made the term “voodoo economics” a synonym for Reaganomics.
As Reagan began his first term in office, the country had been suffering through several years of stagflation, in which high inflation was accompanied by high unemployment. To fight high inflation, the Federal Reserve Board had been increasing the short-term interest rate, which was near its peak in 1981. Reagan proposed a four-legged economic policy that was intended to lower inflation and create economic and job growth. The policy reduces government spending on domestic programs. Reagan’s plan reduced taxes for individuals, businesses and investments. The policy also reduced the burden of regulations on business, and supported slower money growth in the economy.
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 70% from 28%, and the corporate tax rate was reduced to 48% from 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 U.S. dollar against foreign currencies. Near the end of Reagan’s second term, tax revenues received by the U.S. 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 did usher 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. President Reagan delivered on each of his four major policy objectives, although not to the extent that he and his supporters had hoped. That’s according to William A. Niskanen, a founder of Reaganomics. Niskanen belonged to Reagan’s Council of Economic Advisers from 1981 to 1985. Inflation was tamed, but it was thanks to monetary policy, not fiscal policy. Reagan’s tax cuts did end the recession. But government spending wasn’t lowered, just shifted from domestic programs to defense. The result? The federal debt almost tripled, from $997 billion in 1981 to $2.857 trillion in 1989.
Today’s conservatives prescribe Reaganomics to make America great again. President Donald Trump, 2012 Tea Party followers and other Republicans advocate it as the solution the economy needs. But the theory behind Reaganomics reveals why what worked in the 1980s could harm growth today. Reaganomics and supply-side economics can be explained by the Laffer Curve. Economist Arthur Laffer developed it in 1979. The curve showed how tax cuts could stimulate the economy to the point where the tax base expanded. It showed how Reaganomics could work. Tax cuts reduce the federal budget immediately, and dollar-for-dollar. These same cuts have a multiplier effect on economic growth. Tax cuts put money in consumers’ pockets, which they spend. That stimulates business growth and more hiring. The result? A larger tax base. The effect that tax cuts have depends on how fast the economy is growing when they are applied. It also depends on the types of taxes and how high they were before the cut. The Laffer Curve shows that cutting taxes only increases government revenue up to a point. Once taxes get low enough, cutting them will decrease revenue instead. Cuts worked during Reagan’s presidency because the highest tax rate was 70 percent. They have a much weaker effect when tax rates are below 50 percent.