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Reaganomics

Updated on January 31, 2024
Article byPriya Choubey
Reviewed byDheeraj Vaidya, CFA, FRM

Reaganomics Definition

Reaganomics refers to a four-point economic program introduced by Ronald Reagan. Reagan was the 40th US president. In 1981, the US faced stagflation and recession. To alter the course of the US economy, Reagan implemented a partial blend of trickle-down theory and supply-side economics. As a result, the compound annual growth rate of the GDP rose by 3.6% during his tenure.

Reaganomics

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Reagan’s policies tried to curtail taxes, decrease government spending, reduce inflation, reduce unemployment, and deregulate industrial policies. The success of the policy is still debated. Reagan did manage to bring the US out of stagflation. On the other hand, Reaganomics economics is blamed for the 1986 savings and loan crisis.

Key Takeaways

  • Reaganomics is a set of conservative economic policies first implemented by America’s 40th President, Ronald Reagan. It was a response to the 1981 stagflation and recession faced by the US.
  • In hindsight, Reagan’s trickle-down effect failed. The tax savings offered to the rich did not lead to job creation. The savings were accumulated, and the rich became richer.
  • The policies created a wide divide between the wealthy and economically challenged sections of the US.

Reaganomics Explained

Reaganomics is a popular terminology referring to the economic policies curated by the former president of the United States Ronald Regan. The policies included cutting down taxes, reducing unemployment, market deregulation implementation, and increasing military spending.

The Reaganomics impact was such that the compound annual growth of the GDP in the US economy was up by 3.6% in his 8-year tenure, which accounted for a $2 trillion increase in the economy. The preceding 8 years only had a 2.7% growth. However, the policies are also believed to be major contributors to the savings and loan crisis in 1986.

In 1976 the United States of America faced stagflationStagflationStagflation is an economic scenario where stagnation coincides with inflation.read more under the presidentship of Gerald Ford. As a result, the nation was trapped in excessive unemployment, economic stagnation, and high inflation.

In 1981, Ronald Reagan took charge; he came up with Reaganomics—a unique four-point economic plan. The idea was to control stagflation by bringing down tax rates, relaxing government regulations over businesses, and curtailing government spending.

Many economists and politicians claim that Reaganomics can be applied to the present-day economy—to correct the recession. At the same time, the policy has its doubters. For starters, prevailing individual tax rates are already low (compared to 70% tax in the 1980s). It is difficult to lower it any further—which would lead to a decline in Federal revenue.

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Objectives

Let us understand the objectives behind curating the Reaganomics economics during turbulent times in the US economy through the explanation below.

  1. Cut Down Taxes: The rich and the high-income groups were allowed a relaxation on taxes—from 70%, it was brought down to 28%. Corporate taxesCorporate TaxesCorporate tax is a tax levied by the government on the profits earned by a company at a fixed rate each year and is calculated in accordance with specific tax regulations.read more were also brought down from 48% to 34%. But, at the same time, excise duty and social security payroll taxesPayroll TaxesPayroll taxes are statutory deductions made by the employer from an employee’s regular salary and wages, and usually, such withholdings mostly have both employer and employee equal contributions. These taxes are collected by tax authorities from respective employers and paid for human welfare schemes, infrastructure development.read more were raised—to offset losses.
  2. Reduce Government Spending: Reagan changed the pattern of government spending. Instead of funding the domestic programs, the government spent a significant sum on defense, nuclear power, and strategic defense initiatives.
  3. Decrease Regulations: Intending to establish a free-market equilibrium, Reagan waived off-price control over domestic gas and oil (a tax formerly levied by President Nixon). Moreover, Reagan deregulatedDeregulatedDeregulation is repealing existing industry-specific regulations in an advanced industrial economy. Removing inefficient laws reduces government control over the industries, allowing businesses to operate more freely in the international market.read more bus service, cable TV, ocean shipping, and long-distance telephone service. On the other hand, he reinforced import regulations.
  4. Slacken Inflation: Reagan implemented various contractionary monetary policiesContractionary Monetary PoliciesContractionary monetary policy is the type of economic policy that is basically used to deal with inflation and it also involves minimizing the fund’s supply in order to bring an enhancement in the cost of borrowings which will ultimately lower the gross domestic product and moderate or decrease inflation too.read more to reduce inflation. As a result, the Federal Reserve increased the fed fund rates. By 1988, inflation was brought down from 13.5% to 4.1%.

Effects

In the 1980s, Reagan’s economic program tried to rejuvenate the US economy. The results were had both positive and negative impacts. Let us discuss both ends of the spectrum of the Reaganomics impact through the discussion below.

#1 – Positive Impact

  • The government’s tax revenue rose from $517 billion in 1980 to $909 billion in 1988.
  • From 13.5%, inflation was brought down to 4.1%.
  • Twenty million new jobs were created in the US.
  • US GDP increased by 26%.
  • From 7.6%, unemployment was brought down to 5.5%.
  • From 21.5%, interest rates were brought down to 10%

#2 – Negative Impact

  • Rich became richer—lower tax liabilities.
  • The trickle-down effect was not seen—the affluent did not utilize tax savings to create more jobs.
  • Poverty increased in the US.
  • The policies did not improve the economic condition of the middle class.
  • The after-effects caused the 1986 savings and loan (S&L) crisis.

Significance

The significance of Reaganomics impact on the US economy is still hailed as one of the gutsiest sets of moves by any presiding president by a section of the society whereas, another section calls it ”VooDoo Economics”. Let us understand the significance of these policies keeping in mind the state of the economy when they came into implementation.

  • The Dow Jones Industrial Average (DJIA) grew 14 times during this period.
  • Over 40 million jobs were added to the economy which were linked to these policies.
  • The increase in interest rates initially resulted in a recession. However, due to the high-interest rates, the US Dollar strengthened internationally.
  • It is still hailed as one of the longest and strongest periods of growth in the history of the United States.
  • The volatility in the market had significantly reduced as citizens were motivated to invest more and stay put in the market for the long term.

Pros and Cons

As discussed in the sections above this article, Reaganomics economics had divided opinions and outcomes. While the economy grew out of stagflation, it also is believed to have caused the loan crisis shortly after. Let us discuss the intricate details of the concept through the pros and cons discussed below.

Pros

Cons

  • Reagan invested more into defense instead of domestic services—public welfare expenditure fell.
  • The US became the world’s largest debtor—which hindered its image.
  • On average, US income levels dropped—the middle class could not save much.
  • The annual deficit rose to 4.2% of the US GDP, and the national debt also went up tremendously.
  • High-income groups accumulated wealth—the rich-poor divide widened.

Frequently Asked Questions (FAQs)

What is Reaganomics?

It is a set of economic policies imposed by Ronald Reagan—the 40th President of the United States. It was an attempt to control America’s 1981 stagflation across-the-board. When Reagan took charge, the US faced high inflation, massive unemployment, and economic stagnation.

What did Reaganomics do?

Reaganomics implemented various corrective measures—tax reduction, curtailed government spending, decreased government regulations, and contraction of money growth (inflation).

Was Reaganomics successful?

The success of Reagan’s policies is heavily debated. The US experienced mixed consequences. On the one hand, the real GDP improved by 26% (above 1980 figures), from 13.5%, inflation was brought down to 4.1%, and unemployment dropped from 7.6% to 5.5%. But, on the opposite spectrum, the rich became richer. Tax savings were not used for job creation. Reagan’s trickle-down effect was unsuccessful.

This article has been a guide to Reaganomics & its Definition. We explain Reaganomics pros & cons. meaning, economics, failures, trickle-down effect, & policies. You can learn more about economics from the following articles –

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