Policies Based on
supply-side economics, President Reagan implemented his economic policies in 1981. The four pillars of the policies were to: •
Reduce marginal tax rates on income from labor and capital. •
Reduce regulation. • Tighten the
money supply to reduce inflation. • Reduce the growth of
government spending. By reducing or eliminating decades-long
social programs, while at the same time lowering taxes and marginal tax rates, the President's approach to handling the economy marked a significant departure from that of many of his predecessor's
Keynesian policies.
Milton Friedman, the monetarist economist who was an intellectual architect of free-market policies, was a primary influence on Reagan. When Reagan took office, the country faced the highest rate of
inflation since 1947 (average annual rate of 13.5% in 1980), and
interest rates as high as 13% (the
Fed funds rate in December 1980). These were considered the nation's principal economic problems and were all considered components of "
stagflation". Reagan sought to stimulate the economy with large, across-the-board
tax cuts. The expansionary fiscal policies soon became known as "
Reaganomics", One of the Reagan administration's strategies to reduce government spending was
privatization of government functions, paying contractors to do work that government agencies had formerly done.
Economic record President Reagan's tenure marked a time of expanded economic prosperity for many Americans. The
misery index sank to 9.72 from a high of 19.33, the greatest improvement record for a President since
Harry S. Truman left office. In terms of American households, the percentage of total households making less than $10,000 a year (in real 2007 dollars) shrunk from 8.8% in 1980 to 8.3% in 1988 while the percentage of households making over $75,000 went from 20.2% to 25.7% during that period. However, the number of
Americans below the poverty level did not decline at all. The number of children, ages 18 years and younger, below the poverty level increased from 11.543 million in 1980, 18.3% of children, to 12.455, 19.5%, in 1988. Also, the situation of low income groups was affected by the reduction of social spending, and inequality increased. The share of total income received by the 5% highest-income households grew from 16.5% in 1980 to 18.3% in 1988 and the share of the highest fifth of income increased from 44.1% to 46.3% in same years. In contrast, the share of total income of the lowest fifth of households fell from 4.2% in 1980 to 3.8% in 1988 and the second poorest fifth from 10.2% to 9.6%. In August 1981, after negotiations with the Republican-controlled Senate and the Democratic-controlled House, Reagan signed the largest marginal tax cut in American history into law at his
California ranch. However, the 1981 marginal cuts were partially offset by
bracket creep and increased Social Security rates the following year. Unemployment hit a low of 5.3% in 1988 after peaking at over 10% in 1982.
Real GDP growth recovered throughout Reagan's term, averaging +3.5% per year, with a high of +7.3% in 1984. The average annual GDP growth during Reagan's presidency was the fifth highest since the Great Depression and the highest of any Republican president. Inflation decreased significantly, falling from 13.6% in 1980 to 4.1% by 1988, and 16 million new jobs were created. The net effect of all Reagan-era tax bills resulted in a 1% decrease of government revenues (as a percentage of GDP), 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. However, tax revenue itself nominally increased massively by 103.1% from 1981 through 1989, largely as a result of more loopholes abolished than tax rates lowered. During the Reagan Administration, federal receipts grew at an average rate of 8.2% (2.5% attributed to higher Social Security receipts), and federal outlays grew at an annual rate of 7.1%. Reagan's administration was the only one to have not raised the minimum wage until
Donald Trump's first term. Along with these, Reagan reappointed
Paul Volcker as
Chairman of the Federal Reserve, as well as the monetarist
Alan Greenspan to succeed him in 1987. He preserved the core New Deal safeguards, such as the
United States Securities and Exchange Commission (SEC),
Federal Deposit Insurance Corporation (FDIC), the
GI Bill and
Social Security, while rolling back what he viewed as the excesses of 1960s and 1970s liberal policies. These policies were labeled by some as "
trickle-down economics", though others argue that the combination of significant tax cuts and a massive increase in
Cold War related defense spending resulted in large budget deficits, an expansion in the U.S. trade deficit, The ultimate cost of the Savings and Loan crisis is estimated to have totaled around US$150 billion, about $125 billion of which was consequently and directly subsidized by the U.S. government.
John Kenneth Galbraith called it "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time". In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $997 billion to $2.85 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. Reagan's support for an increased defense budget at the height of the
Cold War was supported by Congressional Democrats and Republicans. However, Congress was reluctant to follow Reagan's proposed cuts in domestic programs. In accordance with Reagan's less-government intervention views, many domestic government programs were cut or experienced periods of reduced funding during his presidency. These included
Social Security,
Medicaid,
Food Stamps, and federal education programs. Though Reagan protected entitlement programs, such as Social Security and
Medicare, in one of the most widely criticized Funding for government organizations, including the
Environmental Protection Agency, were also reduced. He cut the EPA's budget by 22%, and his director of the EPA,
Anne M. Burford, resigned over alleged mismanagement of funds. Tax breaks and increased military spending created a larger budget deficit, which led Reagan to approve two tax increases, aiming to preserve funding for Social Security. By 1988, it was reported that funding for the social safety net was down by 6 percent compared to two years prior. Speaking of Reagan himself,
Donald Regan, the President's former
Secretary of the Treasury, and later
Chief of Staff, criticized him for his lack of understanding economics: "In the four years that I served as Secretary of the Treasury, I never saw President Reagan alone and never discussed economic philosophy or fiscal and monetary policy with him one-on-one. … The President never told me what he believed or what he wanted to accomplish in the field of economics." However, Reagan's chief economic adviser
Martin Feldstein, argued the opposite: "I briefed him on Third World debt; he didn't take notes, he asked very few questions. … The subject came up in a cabinet meeting and he summarized what he had heard perfectly. He had a remarkably good memory for oral presentation and could fit information into his own philosophy and make decisions on it."
Oil policy At the beginning of his presidency, Reagan ended the
price controls on domestic
oil which had been started by
Richard Nixon; they had contributed to both the
1973 Oil Crisis and the
1979 Energy Crisis. The price of oil subsequently dropped, and the 1980s did not see the gasoline lines and fuel shortages that the 1970s had. The tax was not a tax on profits, but an
excise tax on the difference between a statutory "base price" and the market price. Reagan also stopped aggressive pushing of new auto efficiency standards by the Carter administration, descended on alternative energy researches started by Carter administration.
Legacy Some economists believe that Reagan's tax policies invigorated America's economy. For instance,
Nobel Prize winner
Milton Friedman wrote that the Reagan tax cuts were "one of the most important factors in the boom of the 1990s". Similarly, fellow Nobel Prize–winning economist
Robert A. Mundell wrote that the tax cuts made the U.S. economy the motor for the world economy in the 1990s, on which the great revolution in information technology was able to feed. Other economists argue that the deficits slowed economic growth during the following administration and was the reason that Reagan's successor,
George H. W. Bush,
reneged on a campaign promise and raised taxes. Nobel Prize–winning economist
Robert Solow stated, "As for Reagan being responsible [for the 1990s boom], that's far-fetched. What we got in the Reagan years was a deep recession and then half a dozen years of fine growth as we climbed out of the recession, but nothing beyond that. Another Reagan legacy was the expansion of the
alternative minimum tax. When Ronald Reagan signed the
Tax Reform Act of 1986, the AMT was expanded to target middle class deductions related to having children, owning a home, or living in high tax states. In 2006, the IRS's National Taxpayer Advocate's report highlighted the AMT as the single most serious problem with the tax code. The advocate noted that the complexity of the AMT leads to most taxpayers who owe AMT not realizing it until preparing their returns or being notified by the IRS. ==Environment==