"Reaganomics" and the economy
When Reagan entered office, the American economy's
inflation rate stood at 11.83%, and
unemployment at 7.1%. Reagan implemented policies based on
supply-side economics and advocated a
laissez-faire philosophy, seeking to stimulate the economy with large, across-the-board
tax cuts. He aimed to reduce the growth of domestic government spending, cut back on excess regulation, and institute a sound currency policy which would end inflation. In attempting to cut back on non-defense spending, significantly increase defense spending, while at the same time lowering taxes, Reagan's approach was a departure from his immediate predecessors. The economic policy, dubbed "
Reaganomics", was the subject of debate, with supporters pointing to improvements in certain key economic indicators as evidence of success, and critics pointing to large increases in federal budget deficits and the national debt. His policy of "
peace through strength" resulted in a record peacetime defense buildup, including a 40% real increase in defense spending between 1981 and 1985.
During Reagan's tenure, income tax rates were lowered significantly, with the top personal tax bracket dropping from 70% to 28% in seven years, although effective payroll tax rates increased. Real
Gross Domestic Product (GDP) growth recovered strongly after the 1982 recession and grew during Reagan's eight 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 9.7% percent in 1982 then dropped during the rest of Reagan's presidency, while employment increased by 16 million, and inflation significantly decreased.
Reagan's economic policies proposed that economic growth would occur when marginal tax rates were low enough to spur investment, which would then lead to increased economic growth, higher employment and wages. Critics called this "
trickle-down economics" — the belief that tax policies that benefit the wealthy will create a "trickle-down" effect to the poor. The net effect of all Reagan-era tax bills resulted in a 1% decrease of government revenues representing, with the revenue-shrinking effects of the
1981 tax cut (-3% of GDP) and the revenue-gaining effects of the
1982 tax hike (~+1% of GDP), while subsequent bills were more revenue-neutral.
The administration's stance toward the Savings and Loan industry and reluctance to take action as problems arose contributed to the
Savings and Loan crisis. It is also suggested, by a minority of Reaganomics critics, that the policies partially influenced the
stock market crash of 1987, but there is no consensus regarding a single source for the crash. In order to cover newly-spawned 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.
He reappointed
Paul Volcker as
Chairman of the Federal Reserve, and in 1987 appointed monetarist
Alan Greenspan to succeed him. Some economists, such as
Nobel Prize winners
Milton Friedman and
Robert A. Mundell, argue that Reagan's tax policies invigorated America's economy and contributed to the economic boom of the 1990s. Other economists, such as Nobel Prize winner
Robert Solow, argue that the deficits were a major reason why Reagan's successor,
George H.W. Bush,
reneged on a campaign promise and raised taxes.
