Reaganomics

The term Reaganomics, a portmanteau of Reagan and economics, was used to describe, and decry, the economic policies of U.S. President Ronald Reagan during the 1980s. Reagan assumed office during a period of high inflation and unemployment, and his economic theories are claimed by his supporters to have eventually led to a strong recovery.

History

The large, across the board tax cuts initiated by Reagan at the start of his administration were based on principles from supply side economics or the trickle down effect. This was contrary to the demand side economics of traditional Keynesianism, which tries to bring the economy to its existing full capacity by means of increasing demand, primarily through fiscal policy. In the 1970s, many on the right became critical of Keynesianism, which they claimed brought higher inflation without any gains in employment. However, true Keynesianism, which called for deficit spending during recessions and surplus saving during periods of prosperity, was rarely implemented in its totality in American politics, usually because political considerations overshadowed fiscal policy.

Related Topics:
Supply side economics - Trickle down effect - Demand side economics - Keynesianism - Fiscal policy - 1970s

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The early Reagan tax cuts of August 1981 embodied Reagan's supply-side economics. Economist Robert J. Gordon writes in his textbook Macroeconomics (9th ed. 2003, p. 392) that this was "the most dramatic shift in fiscal policy of the postwar era not related to the financing of wars."

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The Tax Reform Act of 1986, which had broad bipartisan support, partly implemented the principles of supply-side economics in a more moderate way. It simplified the tax code and eliminated tax loopholes.

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Part of what Reagan implemented was in fact not supply side economics, but rather his own version of Keynesianism. Reagan advocated initiating deep tax cuts and simultaneous increases in military spending, while at the same time claiming that the Federal deficit would be erased. Critics argued that while Keynesian economics promoted the idea of consumers (including the poorest) creating jobs by increasing the demand for goods and services, Reaganomics relied on giving more money to producers by giving tax cuts especially to the wealthiest citizens, who would then create jobs that would somehow find a demand. This type of economic theory has also been referred to derisively as "trickle-down economics."

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The belief by some proponents of Reaganomics that the tax cuts would more than pay for themselves was influenced by the Laffer curve, a theoretical taxation model that was particularly in vogue among some American conservatives during the 1970s. Arthur Laffer's model predicts that excessive tax rates actually reduce potential tax revenues, by lowering the incentive to produce. The rise, rather than fall, in government deficits during the Reagan era caused many to question the validity of the Laffer curve. In addition, although the Laffer curve was used to justify tax cuts, its main emphasis was on showing how to maximize government revenues through fiscal policy; because this conflicted with the aim of conservatives to reduce spending as well as revenues, the Laffer curve has more recently been deemphasized by conservatives. Nonetheless, Federal Government tax revenues did increase significantly following the tax cuts of the Reagan years; it was the dramatic increase in spending that produced the budget deficits of that era.

Related Topics:
Laffer curve - Arthur Laffer's

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Before Reagan's election, Reaganomics was considered extreme by the liberal wing of the Republican Party. While running against Reagan for the Presidential nomination in 1980, George Bush had derided Reaganomics as "voodoo economics", a term that held currency long after the recession ended. Similarly, in 1976, Gerald Ford had severely criticized Reagan's proposal to turn back a large part of the Federal budget to the states. After the Reagan election, however, most Republicans endorsed Reaganomics, including Bush, who became Reagan's Vice President.

Related Topics:
Republican Party - 1980 - George Bush - 1976 - Gerald Ford

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