Was the Reagan Era All About Greed? Reagan Economics Policy

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• published: 23 Jun 2012
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Prior to the Reagan administration, the United States economy experienced a decade of rising unemployment and inflation, (known as stagflation). Political pressure favored stimulus resulting in an expansion of the money supply. President Richard Nixon's wage and price controls were abandoned. The federal oil reserves were created to ease any future short term shocks. President Jimmy Carter started phasing out price controls on petroleum, while he created the Department of Energy. Much of the credit for the resolution of the stagflation is given to two causes: a three year contraction of the money supply by the Federal Reserve Board under Paul Volcker, initiated in the last year of Carter's presidency, and long term easing of supply and pricing in oil during the 1980s oil glut. In his stated intention to increase defense spending while lowering taxes, Reagan's approach was a departure from his immediate predecessors. Reagan enacted lower marginal tax rates in conjunction with simplified income tax codes and continued deregulation. During Reagan's presidency the annual deficits averaged 4.2% of GDP after inheriting an annual deficit of 2.7% of GDP in 1980 under president Carter. The rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan. GDP per working-age adult, which had increased at only a 0.8% annual rate during the Carter administration, increased at a 1.8% rate during the Reagan administration. The increase in productivity growth was even higher: output per hour in the business sector, which had been roughly constant in the Carter years, increased at a 1.4% rate in the Reagan years. Before Reagan's election, supply side policy was considered unconventional by the moderate wing of the Republican Party. While running against Reagan for the Presidential nomination in 1980, George H. W. Bush had derided Reaganomics as "voodoo economics". Similarly, in 1976, Gerald Ford had severely criticized Reagan's proposal to turn back a large part of the Federal budget to the states. Reagan's policies have since become widely accepted by many Republicans. In his 1980 campaign speeches, Reagan presented his economic proposals as merely a return to the free-enterprise principles that had been in favor before the Great Depression. At the same time he attracted a following from the supply-side economics movement, formed in opposition to Keynesian demand-stimulus economics. This movement produced some of the strongest supporters for Reagan's policies during his term in office. The contention of the proponents, that the tax rate cuts would more than pay for themselves, was influenced by a theoretical taxation model based on the elasticity of tax rates, known as the Laffer curve. Arthur Laffer's model predicts that excessive tax rates actually reduce potential tax revenues, by lowering the incentive to produce; the model also predicts that insufficient tax rates (rates below the optimum level for a given economy) lead directly to a reduction in tax revenues. According to William Niskanen, former chairman of the Cato Institute, the Reagan years left three major adverse economic legacies. First, privately held federal debt increased from 22% to 38% of GDP, despite a long peacetime expansion. Second, failure to address the savings and loan problem early led to an additional debt of about $125 billion. Third, trade barriers increased drastically -- the share of U.S. imports subject to trade restrictions increased from 12% in 1980 to 23% in 1988. http://en.wikipedia.org/wiki/Reagonomics