Reaganomics

An economic policy that emphasizes the downsizing of government and of costly government-supported social programs whose curtailment permits reductions in taxation

The supply-side economic policies of the Reagan administration resulted initially in a severe recession and in a drastic reduction in social services that adversely affected the poor, while they simultaneously ran up huge federal deficits. However, before Reagan left office, the American economy had improved significantly.

When he was inaugurated on January 20, 1981, Ronald Reagan became president of a nation beset by overwhelming economic problems that had been growing for almost two decades. These problems resulted in towering inflation, interest rates that approached 20 percent, and widespread unemployment. During his run for the presidency against incumbent Jimmy Carter, Reagan, who considered runaway inflation the nation’s most salient economic problem, proposed a revolutionary plan for dealing with the economy.

This plan, based largely on the economic theories of Arthur Laffer, a University of Chicago professor ofeconomics, emphasized lowering taxes to stimulate the economy. Laffer had gained his tenured professorship at Chicago by claiming to hold a PhD in economics, which he did not hold. Laffer took seriously the pronouncement of the eighteenth century French philosopher Baron de Montesquieu that the government that overtaxes will eventually erode the sources of its revenue. Reagan, who majored in economics at Eureka College, was under considerable pressure to promote new ideas for dealing with the nation’s economic problems. Laffer’s theories intrigued him.

During his run for the presidential nomination, Reagan articulated a revolutionary economic policy based largely on Laffer’s model. He reasoned that money from tax reductions, once released, would encourage people to save (thereby creating new capital) and to use that capital to invest, which, in turn, would lead to corporate growth and to an improved and much strengthened economy, as would permitting corporations to accelerate their depreciation credits.

Prior to Reagan’s nomination, George H. W. Bush , who also sought the party’s nomination for the presidency, labeled Reagan’s views “voodoo economics.” Bush subsequently became Reagan’s vice president, but he was not comfortable with Reagan’s brand of “supply-side” economics. David Stockman, who became Reagan’s budget director, also had strong reservations about Reaganomics. He knew what the numbers indicated as he worked through the complexities of a huge budget that in many aspects was too complex to be fully comprehensible. Stockman expressed his reservations forthrightly in an article in the December, 1981, issue of The Atlantic Monthly in which he contended, before it was ever sent to the Capitol for congressional approval, that Reagan’s economic plan would not work.

Three Salient Elements of Reaganomics

The fundamental aspects of Reaganomics had considerable public appeal, because they appeared, superficially at least, to offer hope of improving the economy painlessly. Contradictions inherent within the three elements of Reagan’s proposed reforms were overlooked or ignored by many in the administration who examined them. Reagan outlined his plan to the American people in a presidential address on February 18, 1981, less than a month into his presidency.

To begin with, Reagan called for a significant reduction in the rates at which individuals and corporations were to be taxed. He reasoned that such reductions would increase the average person’s disposable income and would put more money into circulation. Corporations, released from the impediment of high taxation, would plow more money into expansion, thereby creating jobs and helping to alleviate unemployment. Reagan called for a 30 percent tax cut across the board, 10 percent per year over three years.

Related to this tax cut was the second element of his proposal, that of substantially reducing federal oversight of corporations and permitting accelerated depreciation. Reagan reasoned that implementing this deregulation plan would free corporations from many complicated bureaucratic rules and regulations that struck him as burdensome and unnecessarily restrictive.

The third and probably most controversial element of his proposal was to cut drastically the size of the federal bureaucracy, much of which he considered wasteful and inefficient. Whereas the economic policies of his predecessors from Franklin D. Roosevelt to Jimmy Carter had championed the establishment of government welfare programs and other stimuli to a sluggish economy, Reagan held an opposite view. He argued for the elimination or severe reduction of many of the social programs designed to help the poor, including welfare for dependent children, institutionalization and custodial care for the mentally ill, and financial aid for the unemployed. He was convinced that such cuts would reduce unemployment and that, although corporations and the more fortunate members of society would not be damaged by these cuts, the poor would eventually benefit as well from what Reagan’s critics cynically termed the “trickle-down” effect.

Along with all of these mandates, Reagan called for significantly increased spending on national defense. The contradiction inherent in his proposals, which many advisers pointed out to Reagan, was the seeming impossibility of increasing substantially the money spent on national defense in the face of the tax reductions the president proposed. Reagan countered such objections by pointing out that his policies would make people more productive, would reduce materially the unemployment rate, and would result in bringing increased revenue to the federal government despite the tax reductions.

Reaction to Reagan’s proposals was immediate. Members of racial minorities raged against what they considered benefits to the middle and upper classes at the expense of the less fortunate. The notion of a “trickle-down” effect did little to assuage their concerns.

The Economic Recovery Tax Act of 1981

On March 30, 1981, two months into his term, Reagan was shot and almost killed by John Hinckley, Jr. This near-fatal event and the president’s upbeat attitude following it helped to endear the president to many Americans who until then had not been supportive of him. A major increase in his approval rating made it possible for him to put many of his policies into effect.

In August, 1981, Congress passed the Economic Recovery Tax Act of 1981. This legislation reduced individual and corporate income taxes drastically, reducing by $33 billion the amount of tax revenue coming into the government for fiscal 1982. It represented the largest tax cut in American history.

Even as this legislation was being passed, the United States slumped into a recession. On one hand, the recession cooled the raging inflation, but on the other hand increased the ranks of the unemployed. Many small businesses were forced into bankruptcy. Large reductions in the amount of tax money coming into federal coffers led inevitably to an alarming federal deficit.

Looming Federal Budget Deficits

By 1982, the growth of the deficit was so great that Congress was left with no choice but to raise taxes. With a federal budget deficit of $110.7 billion in 1982, the tax increase Congress imposed—the largest in the history of the country—was insufficient. It amounted to $91 billion, resulting in a shortfall of nearly $20 billion. As early as the fall of 1981, a poll of Americans revealed that more than 60 percent of those questioned considered themselves in worse condition economically than they had been during the preceding administration. By 1982, unemployment in the United States had reached a staggering eleven million people, the highest number since 1941.

The economy began to improve rapidly in 1983, but the federal budget deficit reached another new high of $195 billion in that year. This was followed by yet another record-setting deficit in 1984. The deficits run up during the first three years of the Reagan administration exceeded half a trillion dollars. Distraught presidential economic advisers recommended that the administration cut back on defense spending as a means of controlling the runaway federal deficits.

The Cost of Defense Spending

In the face of reduced tax revenues, the Reagan administration continued to pour huge sums into defense spending . Reagan, a staunch anticommunist, noted that the Soviets were spending 50 percent more than the United States on defense. Because he was convinced that this imbalance had to be eliminated, Reagan turned a deaf ear to those who recommended that he attempt to balance the budget by making major cuts in this colossal drain on the federal coffers.

Even though the economy revived substantially in 1984 and inflation waned, the deficit continued to grow, and the federal bureaucracy that Reagan was on record as wanting to shrink became larger. Audiences that attended his public appearances and listened to his speeches spurred the president on in his efforts to increase defense spending. His charisma and personal charm allayed many of the fears people might have harbored about his economic policies.

Whenever Reagan called for stronger armed forces in his speeches, he elicited cheers and applause from his audiences. Whereas his economic advisers tried to convince him of the stark realities associated with uncontrolled overspending, an adoring and largely uninformed public gave him the impetus to continue the policies he was pursuing against the better judgment of those who were dealing at first hand with numbers that simply did not add up.

Impact

The immediate impact of Reaganomics was devastating to the poorer members of American society. Whereas affluent citizens and corporations benefited from the newly imposed economic policies, many of the poor suffered greatly. Reagan’s most strident critics accused him of being indifferent to the problems of the poor.

The cuts he made in welfare programs designed to help poor people and those incapable of helping themselves led to a great increase in poverty, particularly in the nation’s large cities. Thousands of people who needed custodial care were forced onto the streets, resulting in a staggering increase in homelessness that continued well into the twenty-first century.

Bread lines and soup kitchens resembling those seen during the Great Depression of the 1930s began to spring up throughout the country. Thousands of people slept in public parks, beneath highway bridges, or wherever they could find shelter. In extreme weather, many people died from exposure, even though efforts were made through such charitable agencies as the Salvation Army and the Red Cross to provide them with shelter from extreme heat and cold.

Because a fundamental tenet of Reaganomics was to reduce governmental regulation of big business, many environmental regulations imposed by earlier administrations were relaxed through the connivance of Reagan and his secretary of the interior, James G. Watt. The administration approved measures that promoted the corporate use of federal lands for drilling, mining, and harvesting timber. A quarter century after Ronald Reagan left the presidency, many results of his economic policies—Reaganomics—were still evident.

Bibliography

Campagna, Anthony C. The Economy in the Reagan Years: The Economic Consequences of the Reagan Administration. Westport, Conn.: Greenwood Press, 1994.

Hartmann, Thom. "Reaganomics Killed America’s Middle Class." Salon, 29 Apr. 2014. http://www.salon.com/2014/04/19/reaganomics‗killed‗americas‗middle‗class‗partner/. Accessed on 30 Nov. 2016.

Johnson, Dary. The Reagan Years. San Diego, Calif.: Lucent Books, 2004.

Nester, William R. A Short History of American Industrial Policy. New York: St. Martin’s Press, 1998. Chapter 6, “Reaganomics Versus Clintonomics, 1981-2000,” is particularly relevant. A compelling contrastive consideration.

Smith, Roy C. Comeback: The Restoration of American Banking Power in the New World Economy. Boston: Harvard Business School Press, 1993. Chapter 1, “Reaganomics: Vision or Voodoo?,” gives objective overviews of the economic policies of the Reagan administration.

Stockman, David A. The Triumph of Politics: The Inside Story of the Reagan Revolution . New York: Avon, 1987. Reagan’s former budget director explains the pitfalls of Reaganomics and exposes the inherent weaknesses of the economic policy.

Strobel, Frederick R. Upward Dreams, Downward Mobility: The Economic Decline of the American Middle Class. Savage, Md.: Rowman & Littlefield, 1992. An interesting, although neither detached nor objective, view of the topic is found in chapter 8, “Reaganomics: A Wolf in Sheep’s Clothing.”