Reaganomics Review and Analysis Term Paper

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Introduction

When Ronald Reagan was sworn in as the 40th President, he spent his two terms enacting a series of economic policies that were known as Reaganomics. The policies were a response to challenging economic conditions of the time, a strong mandate from voters, and a desire to test certain conservative economic ideas on a large scale. This paper will examine what these policies were, and whether or not they achieved their objectives.

The Backdrop

The post-war decades of the 50s and 60s saw steady economic gains, but this run was disrupted in the 1970s, in particular by shocks to oil prices. For an economy built on cheap oil, these price shocks created significant turmoil in all aspects of the economy. When Reagan was sworn in in 1981, the country was suffering through what was known as stagflation, a condition where inflation rates were high, accompanied by persistent high unemployment (Investopedia, 2017). After such a long run of low inflation and low unemployment, stagflation was not only unfamiliar to Americans but was also unacceptable. Reagan was swept into power over incumbent Gerald Ford, and this decisive election victory combined with the poor economic conditions he inherited gave Reagan the mandate to make significant changes to fiscal policy.

The Core Elements of Reaganomics

Reaganomics contained several key elements that were on the to-do list of conservative politicians and economists. Years of stagflation were essentially the shock needed to bring in this doctrine, as the American voters were apparently willing to test these theories out and break the apparently cycle of negativity. Poor outlooks on jobs and inflation made investing difficult, and if companies weren't investing, then they weren't creating jobs either.

Lower Taxes

The first element of Reaganomics was to lower taxes. The general philosophy behind lowering taxes was that this would create more incentive to invest; that the rich and corporations were being held back from investing because tax rates were too high. Lowering taxes was also thought to help lower unemployment if it helped increase business investment, and sparking growth would help reduce the rate of inflation (Blanchard, 1987). Lowering taxes became known as "trickle down" because in theory creating opportunities for the wealthy to invest more would mobilize more capital. Corporations and the wealthy would eventually spark economic growth because an uptick in investment would create jobs. Those jobs would lead to an increase in consumer spending, and that would create more jobs. In part, the doctrine of lowering taxes to spark economic growth was something conservatives had wanted for a long time, but in part it was a means of breaking the economic cycle that lead to stagflation. Just encouraging people to invest would in theory be enough to break the cycle.

At the time, most economists were against this plan. Samuelson (1984) instructs that the Laffer Curve shows us that tax receipts are near zero both when tax rates are near zero, and when they are near 100%. The general view behind Reaganomics was that tax rates were so high as to diminish tax revenue; lower rates would increase revenue. There was no evidence for this contention, and this ended up being the prevailing wisdom within the Reagan regime regardless of the lack of evidentiary support for lower taxes either before or after those rates were lowered.

Reduced Regulation

Regulation was seen as another barrier to investment, and one of the core ideas of Reaganomics was not even really fiscal policy, but a reduction of regulations that governed business. This is a fairly straightforward principle because regulations typically lead to higher costs on business, which will reduce both investment and profit. Reducing regulations, it was believed, would help spur economic growth that would counter the reduction in taxes. Combining different things that would spur growth would mean that the tax cuts would be accounted for by a much higher economic growth rate – the rate would be lower, but profits would be higher, and the tax cuts would ultimately pay for themselves. Regulations were reduced on a number of different fronts, including financial and environmental. In both 1982 and 1984, there were reductions in regulations surrounding mergers, reducing the power of the Clayton Act, in an attempt to spur more merger and acquisition activity. This was part of a greater vision of bringing the US economy into a more streamlined, efficient state going forward, something that was not intended so much for the short run as for the long run good of the American economy (Adams & Brock, 1988).

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Government Spending

To go along with reduced regulations, there were also cuts to government spending. Whether these were ever going to be sufficient to actually impact the economy, they were at least intended to signal that the Reagan government was committed to making it easier for American companies to do business Underlying this tenet is the idea that government spending is economically inefficient. More money in the hands of corporations and the wealthy would lead to more spending and investment, whereas more money spent by government would not have the same economic benefits.

It is worth noting that during Reagan's time, government spending actually increased, largely due to increases in military spending, showing that the rhetoric of wasteful government spending was ignored when the spending on was on the Department of Defense; it was not government spending being wasteful that was the issue, merely a shift in the priorities in government spending. With declining tax revenues, these military outlays and the borrowing that was required to pay for them ended up being the catalyst that pulled the economy out of recession (Peterson, 1988). It is worth considering this: Reagan increased military spending, but reduced government spending is part of Reaganomics. So Reagan did not strictly adhere to his own doctrine, and in failing to do so ended up helping the US economy where strict adherence to that doctrine was causing the economy harm.

Money Supply

Reagan wanted to tighten the money supply in order to reduce inflation. Instead, the government borrowed heavily, shifting from a creditor nation to a debtor nation, in order to pay for the rest of the Reaganomics plan, as the tax cuts did not in fact pay for themselves. This element of Reaganomics is interesting because inflation did decline even though the money supply increased, and increasing the money supply indeed was something that should have sparked some economic growth and reversed the course of the tightening that occurred prior to Reagan taking office.

As noted above, Reagan actually increased the money supply, contrary to what was actually a part of Reaganomics. It has been said that Reagan regretted the increase in the debt, but it is actually what helped pull the US out of recession; the tax cuts were not getting the job done. The increased military spending was the result of Cold War hawks seeking to strengthen against the USSR, not a recognition that increasing government spending could pull an economy out of recognition, as that latter point would run directly counter to Reaganomics or any other supply-side economics of the time.

Analysis of Reaganomics

One of the interesting elements of Reaganomics is that the tax cuts he enacted are largely still in existence. Hartmann (2014) argued that they need to be rolled back, that those tax cuts represent an effort by the wealthiest in society to gut the economic strength of the middle class, so by leaving in place reduced tax rates on the rich, and indeed today we see a continuation of this false narrative that the US is overly taxed, that the expected outcomes of those taxes still persist – an increasing wealth gap and economic stagnation for the middle class (Hartmann, 2014). George HW Bush is believed to have suffered the fallout from the Reagan tax cuts – as the deficit exploded he raised taxes, and many believe this cost him a second term (Ungar, 2012).

One of the other issues with the Reagan tax policy is that the fundamental principle is unusual. The premise that increased risk-taking and entrepreneurship would spark economic growth works a bit backwards. Economic growth sparks risk-taking and entrepreneurship. Otherwise, money sits on the sidelines waiting for the right opportunity. Who invests in a market going nowhere? And if the Reagan tax cuts did eventually, in combination with the other moves, succeed in creating economic growth, there is still the fact that the debt was created by these tax cuts, and the US has never recovered from the creation of that debt.

Reduced regulation had a similar fundamental principle – lower the cost of doing business and there will be an increase in risk-taking. This is certainly true in that there were junk bonds, leveraged buyouts and other such things in the 1980s that represented new ways to increase wealth, but these were not economically sustainable means of doing so. In….....

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