We studied Reaganomics last semester and it was quite interesting. Reagan’s plan tried to fix several huge economic problems. The economy was terrible when Reagan took office. Unemployment and inflation were high, and the country was deeply in debt. Here are some highlights to impress your friends with:
One thing that was destroying the economy was inflation. Reagan wanted to reduce inflation rates, so he restricted access to money. The Federal Reserve made interest rates so high that people couldn’t take out loans for cars or homes, and businesses could not expand. The idea was that if people couldn’t afford things, then the cost of those things would have to go down. It was incredibly painful to the economy early on. However, the plan worked. In 1983, when they finally lowered interest rates, the economy rocketed back up.
Reagan believed that deficit spending—spending money the government didn’t actually have—caused the country’s economic problems. His administration decided that best way to solve this problem was to reduce the amount of money the government spent. He cut or reduced several programs, but increased the military budget and canceled out much of the cuts. He did not manage to reduce government spending enough to offset the rest of his ideas.
The cornerstone of his presidential legacy, known as supply-side economics, was a reduction in the federal income tax and capital gains tax. The idea was that by taxing companies lessand, therefore, increasing their supply of money, they would put that money back into their businesses via expansion that added more jobs as well as improvements to production and service so that products were cheaper to purchase. By not taking as much money from individuals, the assumption was that they would able to spend more and contribute to economic growth. Individuals would earn more, and pay taxes on that extra money, thereby replacing the government’s loss from lowering taxes. This is a controversial idea and opinions on the results are mixed. The general consensus is that any tax cuts need to also be reciprocated by reduced government spending in order to be completely effective.
Reagan also reduced government regulation. The goal was for thegovernment to take a backseat. He deregulated phone, gas and cable companies with the goal being “healthy competition”. Under his Presidency, the government also backed off from overseeing Savings and Loans companies. This gave those companies much more leeway in what loans they gave and what interest they could charge, savings and loan businesses could make incredibly risky investments. Many see this as what set the stage for the recent real estate crisis.
His policies were drastic and in some ways very effective at getting the economy headed in the right direction. Many herald him as a great economist who made the tough choices to get this country out of the worst economic downturn since the Great Depression.
I find it incredibly interesting that some of his policies were not nearly as effective as he wanted them to be, had what could be considered a questionable lasting impact, and yet there are people who completely swear by his presidency.