William MinorAmerican Government 12/19/17Reaganomics Born in Tampico, Illinois, on February 6, 1911, Ronald Reagan chose a career in film. While in Hollywood, he worked as president of the Screen Actor’s Guild and met his future wife, Nancy. He then served two terms as the governor of California.
He has been featured in many Hollywood classics and has won a Golden Globe. Reagan ran for the president as a Republican and won two terms, beginning in 1980. He later became a conservative icon for the next decade and future generations. Reaganomics is the term used to refer to the economic policies of Ronald Reagan which called for the deregulation of domestic markets, increased military spending, decreased social spending, and nation wide tax cuts.
These economic policies were introduced in response to a longer period of economic depression than what began under President 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. While Reagan reduced domestic spending, it was made up for by increased military spending, creating a net deficit throughout his two terms. The highest marginal tax rate on individual income was cut from 70% to an astonishingly low 28%.
The corporate tax rate, a tax on the earnings of corporations, was reduced to 48% from 34%. Reagan followed the reduction of economic regulation plan that began under President Jimmy Carter and eliminated price controls on oil, natural gas, and many more day-to-day necessities in an American’s life. In his second term, Reagan backed a monetary policy that solidified and stabilized the U.S. dollar against other foreign national currencies.
At the end of President Reagan’s second term in office, tax revenues received by the government increased to $909 billion in 1988 from $517 billion in 1980. To top off these incredible statistics, Reagan was able to lower inflation to 4%, and the unemployment rate to 6%. These numbers are quite extraordinary and are a desirable accomplishment for any U.S. President. However, economists and politicians still continue to argue over the effects of Reaganomics. Despite the criticism, it ushered in one of the longest and strongest periods of prosperity in American history.
In the time between 1982 and 2000, the Dow Jones Industrial Average grew nearly 14 times over. The economy added a whopping 40 million new jobs, and managed to President Reagan deliver on all of his four major policy goals. Inflation was low, but it was thanks to Reagan’s monetary policy plan, not his fiscal policy. Reagan’s tax cuts successfully endedthe recession; however, government spending wasn’t lowered.
The result of this was that the federal debt almost tripled from $997 billion in 1981 to $2.857 trillion in 1989. Today’s conservatives lump Reaganomics into the make America great again. President Donald Trump and other Republicans advocate it as the solution the economy needs.
The theory behind Reaganomics reveals why what worked in the 1980s could harm growth today, and can be explained by the Laffer Curve. Economist Arthur Laffer developed this curve in 1979. The curve showed the world how tax cuts could stimulate the economy to the point where the tax base expanded. It showed how the Reaganomics could work. Tax cuts reduce the federal budget; plus, these same tax cuts have a ripple effect on economic growth. Tax cuts have the potential to put money in the consumers’ pockets, which, in theory, they will spend.
This stimulates business and economic growth, and more hiring resulting in a larger 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 certain point. Once at this point, there is not much more the Reaganomics plan can do.
Once taxes get low enough, cutting them will only decrease revenue instead of stimulating more growth. Cuts only worked during Reagan’s presidency because the highest tax rate was 70 percent. The American people were begging for him to cut taxes.
This plan was a home run at the time but is now a very risky venture. The policy has a much weaker effect when tax rates drop below 50 percent. Currently we are walking the line on this policy, and whether or not it should be fully implemented through Trump’s Presidency. All in all, President Ronal Reagan began the experiment of Reaganomics in the early 1980’s. Since then it has been a topic of criticism, and has been tired or used many times in politics. Some may call it a failed plan, others many not. However, they may not call it anything but genius.