Reaganomics, put simply, is the economic policies promoted by US President Ronald Reagan in the 1980s. The four pillars of the said policy were to:
- Reduce the growth of government spending.
- Reduce the federal income tax and capital gains tax.
- Reduce government regulation.
- Tighten the money supply in order to reduce inflation.
In other words, the policy called for widespread tax cuts, decreased social spending, increased military spending and deregulation of domestic markets. Reaganomics was based partly on the principles of supply-side economics and trickle-down theory which decreases the taxes of the wealthy – particularly corporations – to stimulate economic growth. Basically, savings will “trickle down” to the rest of the economy which then drives growth.
Just like any other economic policy, Reaganomics had both supporters and detractors. What are the reasons for those who dissented and what do those who support it have to say?
List of Pros of Reaganomics
1. It reduced inflation.
When Reagan took office, the inflation rate was at 12.5%. When he left office, the rate was at 4.4%.
2. It was a catalyst for an increase in private wealth.
Because of Reaganomics, there was an 8% growth in private wealth experienced in the US.
3. It helped the economy reach different heights.
During the time of Reagan, the economy in the US was 1/3 larger than when he began. This fact is corroborated by a study performed by the Cato Institute, a libertarian think tank, in 1996. In that study, the American economy performed better during the Reagan years (which included two terms) on 8 of 10 economic variables than presidencies before and after.
Real median family income experienced growth under Reagan by increasing to $4,000 after experiencing no growth pre-Reagan. Post-Reagan, income experienced a loss of $1,500.
4. It lowered interest rates.
When Reagan was president, interest rates fell by six full points. But apart from interest rates, other economic variables such as inflation and unemployment fell faster during his administration than in presidencies before or after.
5. It created jobs.
The unemployment rate when Reagan stepped into office was 7.6% and peaked during the recession from 1981 to 1982. When he left office, the rate was 5.5%. Also, eight million jobs were created when he was in office.
List of Cons of Reaganomics
1. It increased the poverty level.
Ronald Reagan was in office from 1981 to 1989. From 1980 to 1988, the percentage of people living below the poverty line ranged from 13.0% in 1980 to 15.2% in 1983. Then again, these percentages dropped 1.2% during his administration and decreased by 3.3% from their high in 1983 to their low in 1988.
Homelessness was a big problem in the urban centers in the US during the first term of Reagan. Supporters of his policies believed that the decrease in poverty rates at the end of his tenure validated the need for tax cuts for the wealthy as it did “trickle down” to the poor. However, opponents shot back that poverty rates increased during the first year of his successor’s term, meaning the full effect of Reaganomics actually increased poverty rates.
2. It left the US in debt.
The debt held by the public increased from 25.2% GDP ($789 million) in 1981 to 39.3% GDP ($2,190 trillion) in 1989.