Reaganomics ( ; a portmanteau of Reagan and economics attributed to Paul Harvey), or Reaganism, were the neoliberal economic policies promoted by Ronald Reagan, president of the United States from 1981 to 1989. These policies focused mainly on supply-side economics. Opponents (including some Republicans) characterized them as "trickle-down economics" or Voodoo Economics, while Reagan and his advocates preferred to call it free-market economics. The pillars of Reagan's economic policy included increasing defense spending, slowing the growth of government spending, reducing the federal income tax and capital gains tax, reducing government regulation, and tightening the money supply in order to reduce inflation. The effects of Reaganomics are debated. Supporters have pointed to the end of stagflation, stronger GDP growth, and an entrepreneurial revolution in the decades that followed. Critics have pointed to the widening income gap, what they described as an atmosphere of greed, reduced economic mobility, and the national debt tripling in eight years which ultimately reversed the post-World War II trend of a shrinking national US debt as percentage of GDP.
Historical context
Prior to the Reagan administration, the United States economy experienced a decade of high unemployment and persistently high inflation (known as stagflation). Attacks on Keynesian economic orthodoxy as well as empirical economic models such as the Phillips Curve grew. Political pressure favored stimulus resulting in an expansion of the money supply. President Richard Nixon's wage and price controls were phased out. The federal oil reserves were created to ease any future short term shocks. President Jimmy Carter had begun phasing out price controls on petroleum while he created the Department of Energy. Much of the credit for the resolution of the stagflation is given to two causes: renewed focus on increasing productivity and a three-year contraction of the money supply by the Federal Reserve Board under Paul Volcker. In stating that his intention was to lower taxes, Reagan's approach was a departure from his immediate predecessors. Reagan enacted lower marginal tax rates as well as simplified income tax codes and continued deregulation. During Reagan's eight year presidency, the annual deficits averaged 4.0% of GDP, compared to a 2.2% average during the preceding eight years. The real (inflation adjusted) average rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan. GDP per employed person increased at an average 1.5% rate during the Reagan administration, compared to an average 0.6% during the preceding eight years. Private sector productivity growth, measured as real output per hour of all persons, increased at an average rate of 1.9% during Reagan's eight years, compared to an average 1.3% during the preceding eight years. Federal net outlays as a percent of GDP averaged 20.27% under Reagan (01/20/1981 - 01/20/1989), compared to 21.14% during the preceding eight (01/20/1973 - 1/20/1981) years. During the Nixon and Ford Administrations, before Reagan's election, a combined supply and demand side policy was considered unconventional by the moderate wing of the Republican Party. While running against Reagan for the Presidential nomination in 1980, George H. W. Bush had derided Reaganomics as "voodoo economics". Similarly, in 1976, Gerald Ford had severely criticized Reagan's proposal to turn back a large part of the Federal budget to the states.
Policies Reagan lifted remaining domestic petroleum price and allocation controls on January 28, 1981, and lowered the oil windfall profits tax in August 1981. He ended the oil windfall profits tax in 1988. During the first year of Reagan's presidency, federal income tax rates were lowered significantly with the signing of the Economic Recovery Tax Act of 1981, which lowered the top marginal tax bracket from 70% to 50% and the lowest bracket from 14% to 11%. This act slashed estate taxes and trimmed taxes paid by business corporations by $150 billion over a five-year period. In 1982 Reagan agreed to a rollback of corporate tax cuts and a smaller rollback of individual income tax cuts. The 1982 tax increase undid a third of the initial tax cut. In 1983 Reagan instituted a payroll tax increase on Social Security and Medicare hospital insurance. In 1984 another bill was introduced that closed tax loopholes. According to tax historian Joseph Thorndike, the bills of 1982 and 1984 "constituted the biggest tax increase ever enacted during peacetime". With the Tax Reform Act of 1986, Reagan and Congress sought to simplify the tax system by eliminating many deductions, reducing the highest marginal rates, and reducing the number of tax brackets. In 1983, Democrats Bill Bradley and Dick Gephardt had offered a proposal; in 1984 Reagan had the Treasury Department produce its own plan. The 1986 act aimed to be revenue-neutral: while it reduced the top marginal rate, it also cleaned up the tax base by removing certain tax write-offs, preferences, and exceptions, thus raising the effective tax on activities previously specially favored by the code.
… excerpt ends here. Continue reading the full article.
