Reaganomics is the term used for the economic policy based on the supply-side of economic theory pursued by the 40th President of the United States, Ronald Reagan (1911-2004). The concept was a controversial issue and sparked a national debate.
In his 1981 Program for Economic Recovery, Reagan pointed out that "only by reducing the growth of government, can we increase the growth of the economy." Reaganomics outlined four major policy objectives: reduction of the growth of the government's spending; massive tax cuts meant to stimulate investments; downsizing the government regulation and control over the money supply in order to curb inflation. These measures aimed to boost savings and investments, fuel economic growth, cut inflation and interest rates. Tax cuts for the rich were meant to give them incentives and encourage entrepreneurship.
Reagan won the United States presidential elections as a candidate of the Republican Party and remained in office from 20 January 1981 to 20 January 1989. He stepped in as president, immediately promising economic recovery and the reduction of reliance upon the government. The Reagan administration introduced the Reaganomic measures to address the so-called stagflation, or the strong rise in unemployment and inflation amid slack economic growth, which plagued the economy from 1973 to 1980.
Thanks to these government policies, the annual rise in inflation-adjusted federal spending slid to 2.5 percent under the rule of Reagan from 4 percent during the term of office of his predecessor, Jimmy Carter. In 1981 federal spending stood at 22.9 percent of the gross domestic product, whereas in 1989 it amounted to 22.1 percent of the GDP. Military spending surged to record peacetime levels during Reagan's first mandate. Amid the Cold War, he boosted public defense expenditure to USD 393.1 billion in 1988 from USD 267.1 billion eight years earlier. The share of defense in GDP rose to 5.8 percent from 4.9 percent.
Reagan's taxation policy was much more consistent and successful. Between 1981 and 1986, his administration cut the top income tax rate to 28 percent from 70 percent. The corporate income tax fell to 34 percent from 48 percent. Many low-income workers were exempted from income tax. The Reagan administration also reduced oil taxes in order to tackle the energy crisis that started in 1979. In spite of the cost-cutting measures, the administration raised the social security tax, excise taxes and cut or removed certain deductions.
Deregulation was another pillar in Reagan's economic policy. The deregulation trend started under the rule of Carter. However, Reagan stepped up the process, removing price control over oil and gas prices, cable TV, long-distance telephone offers and ocean shipping. The new rules enabled banking groups to invest in a variety of assets. Furthermore, the anti-trust rules were relaxed. In this backdrop, Reagan raised the import duties by a considerable amount and was criticized for failing to lay a stronger emphasis on deregulation.
The Reagan administration's monetary policy has also been defined as controversial. On the one hand, Reagan's efforts led to a significant cut in inflation and interest rates but this policy resulted in severe recession in the early 1980s. Critics accuse Reagan of hiding information from the general public.
Reagan's supporters believe that his economic policy has produced favorable results, including a steep decrease in marginal tax rates and inflation. Government measures led to economic growth, an increase in output, a decline in the unemployment rate to 5.4 percent in 1988 from 7 percent in 1980. Inflation fell to 4.2 percent in 1988 from 10.4 percent in 1980. This policy also led to the creation of millions of new jobs and a considerable growth in private wealth.
His critics insist that the Reaganomic measures came short of promises in terms of outcome. The Reagan administration's policy is also criticized for leaving a burden for its successors. For instance, privately held federal debt grew to 38.1 percent from 22.3 percent. The federal deficit was still high at 2.9 percent in 1989. Furthermore, despite deregulation measures, the government created a number of barriers to trade, which increased trade restraints on a number of United States imports. Some economists believe that Reagan contributed to the expansion of the gap between the rich and the poor.