The effect of Reagan's economic policies

• Reaganomics

  Reagan hoped to solve the problem of 'stagflation'.
• Reagan's aims

  In the 1980 campaign, Reagan had proposed to cut taxes and domestic spending but increase military spending. He claimed he would be able to reduce the budget deficit with the increased revenue that would pour in from a rejuvenated economy. He also wished far less government interference in economic matters.
• Reaganomics in action

  E.g.

  • The Economic Tax Recovery Tax Act (1981) decreased taxes. This mainly benefited the wealthy
  • In 1981, the administration recommended budget cuts of $35.2 billion. These were aimed mainly at welfare programmes.
  • Given the increase in defence spending, Reagan's administration instead expenditure, thereby massively increasing the national debt.
• Problems in 1981-82

  In 1982, the government deficit nearly doubled to $110.6 billion and the total national debt went above $1 trillion. Reagan's response was the Tax Equity and Fiscal Responsibility Bill (1982), which reversed some of the 1981 tax concessions to business and increased taxes on cigarettes and airline tickets. The USA suffered a recession as many Americans lost their jobs. 'Stay the course' was Reagan's slogan.
• Success?

  By 1983, Reagan's measures seemed to be having some success

  • A decline in world oil prices led to inflation falling below 2%
  • Unemployment began to fall. Many new jobs were created by Reagan's increase in defence spending
• Tax reform

  In 1986, Congress supported Reagan's proposal for tax simplification by passing a comprehensive Tax Reform Act - the first major revamping of the federal income tax system for 40 years. This:

  • Reduced the number of tax brackets from 14 to 2
  • Reduced tax rates
  • Exempted millions of low-income families from tax payment.
• The positive situation by 1989

  1983-89, the USA created 18 million new jobs. There was far less unemployment. There was no longer an inflation problem. These were huge achievements.
• The negative situation by 1989

  During the Reagan years there were mounting deficits in the balance of trade which weakened the dollar and turned the USA into a debtor nation for the first time since 1914.

  By 1986, the National Debt had doubled from $1 trillion to $2 trillion. Paying interest on the debt became the third largest item in the federal budget.