Reaganomics: Definition, Policies, and Impact

What Is Reaganomics?

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.

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.

Reagan believed that by reducing the tax burden on individuals and corporations, they would be incentivized to invest, innovate, and generate economic growth. This approach was rooted in the belief that a strong private sector would ultimately benefit all levels of society. Reagan also pursued deregulation across various industries, believing that reducing government intervention would spur competition, innovation, and efficiency.

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.

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 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, detractors of Reagan's policies claim that federal deficits grew, and the increased wealth gap increased the divide between the rich and the poor.