Reaganomics Totally Explained

Everything about Reaganomics totally explained

Reaganomics (a portmanteau of "Reagan" and "economics") refers to the economic policies promoted by United States President Ronald Reagan. The four pillars of Reagan's economic policy were to:

reduce the growth of government spending,
reduce marginal tax rates on income from labor and capital,
reduce government regulation of the economy,
control the money supply to reduce inflation. In attempting to cut back on domestic spending while lowering taxes, Reagan's approach was a departure from his immediate predecessors.

Reagan became president during a period of high inflation and unemployment (commonly referred to as stagflation), which had largely abated by the time he left office. It continues to be a matter of debate to what extent this was caused by Reagan's fiscal policies and to what extent it was due to other factors, such as the inflation-fighting monetary policies of the Federal Reserve under Paul Volcker and a large decline in oil prices caused by the resolution of supply shocks in the Middle East.

Historical context

Prior to the Reagan Administration was a roughly ten year period of economic stagnation and inflation, known as stagflation. Political pressure favored stimulus resulting in an expansion of the money supply. Nixon's wage and price controls were abandoned. Under Ford the problems continued, but policy was more prudent. The federal oil reserves were created to ease any future short term shocks. Carter started phasing out price controls on petroleum, but created the department of energy. Much of the credit for the resolution of the stagflation is given to two causes: a three year contraction of the money supply by the Federal Reserve under Paul Volcker, initiated in the last year of Carter's presidency, and to long term easing of supply and pricing in oil during the 1980s oil glut. By the time Reagan took office, stagflation was near its end and for the remainder of his presidency the economy performed well. There was a renewed emphasis on prudent macroeconomic policy; Nixon's price controls and similar heavy handed species of government intervention had fallen out of favor, while subtler forms such as prudent monetary policy gained favor.

Policies

The Reagan era was marked by cuts to social programs, and large-scale deficit spending on the military. Reaganomics had its roots in two of Reagan's campaign promises: lower taxes and a smaller government. Reagan reduced income tax rates, with the largest rate reductions on the highest incomes; in a time of battling inflation, Reagan raised deficit spending to its highest level (relative to GDP) since World War II. As a result, there has been endless debate on whether the economic trends of the Reagan years actually came from the free market, or from government stimulus of the kind advocated by Keynesian theorists.
   He lifted remaining domestic petroleum price and allocation controls on January 28 1981 and lowered the Oil Windfall profits tax in August 1981, helping to end the 1979 energy crisis. He ended the Oil Windfall profits tax in 1988 during the 1980s oil glut.
   With the Tax Reform Act of 1986, Reagan and Congress sought to broaden the tax base and reduce perceived tax favoritism. In 1983, Democrats Bill Bradley and Dick Gephardt had offered a proposal to clean up/broaden the tax base; in 1984 Reagan had the Treasury Department produce its own plan. The eventual bipartisan 1986 act aimed to be revenue-neutral: while it reduced the top marginal rate, it also partially "cleaned up" the tax base by curbing tax loopholes, preferences, and exceptions, thus raising the effective tax on activities previously specially favored by the code. Economists of most affiliations favor cleaning up the tax code, since tax preferences and exceptions distort economic decisions.
Nobel Prize-winning economist Milton Friedman has pointed to the number of pages added to the Federal Register each year as evidence of Reagan's anti-regulation presidency (the Register records the rules and regulations that federal agencies issue per year). The number of pages added to the Register each year declined sharply at the start of the Ronald Reagan presidency breaking a steady and sharp increase since 1960. The increase in the number of pages added per year resumed an upward, though less steep, trend after Reagan left office. In contrast, the number of pages being added each year increased under Ford, Carter, George H.W. Bush, Clinton, and others.
   The question of how much of the overall trend of deregulation can be credited to Reagan remains contentious. The economists Raghuram Rajan and Luigi Zingales point out that many of the major deregulation efforts had either taken place or begun before Reagan (note the deregulation of airlines and trucking under Carter, and the beginning of deregulatory reform in railroads, telephones, natural gas, and banking). They argue for this and other reasons that "the move toward markets preceded the leader [Reagan] who is seen as one of their saviors." Economist William Niskanen, a member of Reagan's Council of Economic Advisers and later chairman of the libertarian Cato Institute, writes that deregulation had the "lowest priority" of the items on the Reagan agenda and that Reagan "failed to sustain the momentum for deregulation initiated in the 1970s." The apparent contradiction with Friedman's data may be resolved by seeing Niskanen as referring to statutory deregulation and Friedman to administrative deregulation. In sum, a large study by economists Paul Joskow and Roger Noll concludes that the changes in economic regulation

"simply don't reflect a sudden ideological change in federal executive branch views....many of the significant changes in economic regulation began during the Carter administration and were initiated by liberal Democrats.... it isn't particularly productive to refer to a generic deregulation movement or to think of it as a consequence of the election of Ronald Reagan."

Economic record

During Reagan's tenure, income tax rates of the top personal tax bracket dropped from 70% to 28% in 7 years, while payroll taxes increased as well as the effective tax rates on the lower two income quintiles. Real Gross Domestic Product (GDP) growth recovered strongly after the 1982 recession and grew during Reagan's remaining years in office at an annual rate of 3.4% per year, slightly lower than the post-World War II average of 3.6%. Unemployment peaked at over 10.7% percent in 1982 then dropped during the rest of Reagan's terms, and inflation significantly decreased. A net job increase of about 16 million also occurred (about the rate of population growth).
The policies were derided by some as "Trickle-down economics," due to the facts that the combination of significant cuts in the upper tax brackets. There was a massive increase in Cold War related defense spending caused large budget deficits, the U.S. trade deficit expansion, as well as the stock market crash of 1987. In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion, and the United States moved from being the world's largest international creditor to the world's largest debtor nation. Reagan described the new debt as the "greatest disappointment" of his presidency. However, Reagan's chief economic advisor Martin Feldstein, argues the opposite: "I briefed him on Third World debt; he didn't take notes, he asked very few questions....The subject came up in a cabinet meeting and he summarized what he'd heard perfectly. He had a remarkably good memory for oral presentation and could fit information into his own philosophy and make decisions on it."

Tax receipts

According to a United States Department of the Treasury non-partisan economic study, the major tax bills enacted under Reagan, as a whole, significantly reduced (~-1% of GDP) government tax receipts. Separated out, however, it's clear that the Economic Recovery Tax Act of 1981 was a massive (~-3% of GDP) decrease in revenues (the largest tax cuts ever enacted), while other tax bills had neutral or, in the case of the Tax Equity and Fiscal Responsibility Act of 1982, significant (~+1% of GDP) government revenue-enhancing effects:

Further Information

Get more info on 'Reaganomics'.

External Link Exchanges

Do you know how hard it is to get a link from a large encyclopaedia? Well we're different and will prove it. To get a link from us just add the following HTML to your site on a relevant page:

<a href="http://reaganomics.totallyexplained.com">Reaganomics Totally Explained</a>

Then simply click through this link from your web page. Our crawlers will verify your link, extract the title of your web page and instantly add a link back to it. If you like you can remove the words Totally Explained and embed the link in article text.
As long as your link remains in place, we'll keep our link to you right here. Please play fair - our crawlers are watching. Your site must be closely related to this one's topic. Any kind of spamming, dubious practises or removing the link will result in your link from us being dropped and, potentially, your whole site being banned.