What effects did Reagan's economic policies have?


Immediate action

  • Reagan domestic policies focused on the economy; the issue that brought him to power. Roosevelts New Deal had shifted from Republican laissez faire policies, increaing federal control and letting the federal go into as far into a deficit as needed and later administration felt obliged to keep up federal involvement in social welfare 
  • Reagan was clear that he wanted to control government spending, to reduce government involvemnet and to cut taxes 
  • Reagan swung into action as soon as he became presideny by sacking many white house staff 3 days after his inauguration and put a federal government hiring freeze in place 
  • He then told all departments there was a freeze on equipment and that they had to cut their expenses by 15% 
  • He also used a series of executive orders to set up new advisory groups reporting directly to him on how to cut down on big government which made him look very active. 

Supply Side Theory 

They economic theory emerged in the late 70s and argued that the economy was not driven by consumer demand but by keeping up production and encouraging savings and investment. They beleived restrains on prodcuts e,g High taxes should be removed. They argued that the better off would benefit but the benefits would trickle down to even the very poorest. 

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The plan for reform

  • At their first meeting with Congress about the budget presidents usually outline budget plans and they're sent to congress over several years as a series of bill. 
  • Reagan wanted to present his whole budget policy through to 1984 as a single bill when he met with Congress and wanted to present a tax bill in the same session 
  • His council of economic advisors had no time to follow usual procedures for budget planning and were not able to debate plans and produce a draft budget in time. 
  • However, it meant that Congress had to vote on the whole package of spending cuts, so the administration would have approval of its measures and control over the timetable up to 1984 
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Reaganomics. His plan was presented to congress on

  • Cutting the Federal Deficit : It was accompanied by a budget bill and a proposal for cuts on domestic spending. The budget bill aimed to reduce the federal deficit from 22% of the GNP to 19% between 1981 to 1986. This plan had been put together so hastility that it had significant number of errors 
  • Personal and business tax reductions : It was accompanied by the Economic Recovery tax of 1981 
  • Deregulation: (removing federal control) in industry, state and local government 
  • Planned control of the money supply:to keep inflation down while expanding the economy 
  • Getting the legislation passed 
  • For the first time in decades there was a Republican majority in Senate & almost a majority in the HOR and the White hosue only had to win support of 26 dems in the HOR to pass laws 
  • The senate passed the budget and after revision from the house, it became law as the ORA. 
  • The tax legislation was more of a battle and the senate passed it with only one change.It cut the tax for personal tax from 30% to 25%.In the house,the dems felt they've been manipulated over the budget and saw the tax bill as a fight for control
  • In the end, a reshaped bill was passed and became law as the ERTA at the same time as the budget. 
  • The act cut marginal income tax by 23%, reduced the highest income tax rate from 70% to 50 and the lowest fell from 14% to 11%. ERTA allowed all taxpayers to set up untaxed IRA's and business tax cut and tax rates were offered to favour small innovative businesses
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Did the policies stop inflation and unemployment

  • Reagans first aim was to stop inflation. While ORA and ERTA were going through Congress he put pressure on the FRB to put tight restrictions on the money supply
  • It put tighter restrictions than the White house asked for and unlike previous administrations it didnt ask the FRB to lift these restrictions when unempoyment rose 
  • The money supply restriction led to a sharp rise in interest rates and hurt industries that had to buy supplies on credit e.g farming or had long pay-back period loans 
  • Reagan came to power in the middle of a recession 
  • Unemployment rates wen from 7.1% of the population in 1980 to 9.6% in 1983. By 1988 the rate had gone down to 5.5%. Inflation fell and in 1982 it was down to 6.2% 
  • By 1996 it had never reached double figures again and epnt most of its time under 5%
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Did the policies increase personal wealth

  • Everyone agrees that the tax cuts made many people richer. In that sense they worked. The issues which sector of the population became richer?
  • Some historians say the answer is clear and the rich became richer and that the poor did not , that the tax bracket for the rich was the deepest and therefore they benefited the most
  • Whereas other argue that it wasnt as simple as that and that it hurt the rich the most and the poor the least and that the tax payments from the rich helped the revival fo the economy
  • The number of billionaires acording to Forbers magazine went from a haldful in 1981 to 26 in 1986 to 52 in the late 1988 
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Did the policies increase productivity

  • Productivity is a complicated thing to measure and various factors can be considerded
  • The most usual approaches are to calculate the output per worker per hour or to consider the GNP 
  • The Output per worker per hour went from 4.5 in 1983 to 1.5 in 1985  and back up to 3.0 in 1986
  • The GDP went from 4.5 in 1983 to an average of 3 in 1996 
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Did the policies encourage people to save and inve

  • As the economy came out of the recession and business began doing well again people began to save and invest 
  • However, policies to cut down big government led to deregulation in the financial sector 
  • Financial organisations took dangerous risks to win customers due to competition 
  • The personal savings and investments that the polices had been designed to encourgae took place in an unsafe enviroment 
  • This came to head in the late 1980's with people losing both savings and investments during a crisis in the savings and loan industry 
  • The FRB setepped in encouraging banks to lend to each other and business and individial investors not to panic 
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Did the policies reduce the deficit

  • In 1980 it was $59 Billion, and paying it off costed 9% of federal spending and in 1983 it was 208 billion taking 14% of federal spending in loan interest payments 
  • For the first time, the USA became a significant borrowing nation and not a lending nation
  • This failure was partly becase of Reagans determination to cut taxes 
  • Federal departments also resised cuts while Congress toned down many welfare cuts 
  • Worst of all was the defence budget. Reagan had always wanted to increase defence spending and all through the 70s and 60s the government had cut defence spending. In 1980 defence spedning was 23% and in 1988 it had risen to 28% 
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After Reagan

  • George Bush promised to continue Reagans policies, however, these policies were less popular as their limitations had became clear. 
  • The democrats were back in control of both houses of congress making life harder for his administration 
  • Bush was often forced to back down on promises- the most famous being when he raised taxes despite promising not to 
  • In 1992 Bill Clinton was elected and didnt swing back to old democratic policies. While Reagans economic policies had produced problems most voters still supported low taxes 
  • Clinton was a 'New Democrat' and and his campaign was economy focused and aimed to reduce the deficit and no tariffs to regulate business and trade 
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