Reaganomics

Reaganomics, or as George H.W. Bush called it “voodoo economics,” was a theory which President Reagan adhered to as a response to the stagflation which had started earlier under President Gerald Ford. Key aspects of Reaganomics included ending the growth of government spending on domestic programs, cutting taxes, reducing regulations on businesses, and reducing inflation. It was based upon trickle-down theory and supply-side economics.

Trickle-down theory is more of a general idea than a specific economic policy. It is defined as any policy which is intended to overly benefit wealthy businesses or individuals in the short term with the long term goal of boosting standard of living for all people. For example, during the financial crisis in 2008 where major banks were bailed out by the government, the immediate beneficiaries were the banks with the end goal of helping everyone, not just the banks. Trickle-down theory took shape during the Reagan administration mainly in the form of enormous tax cuts, such as cutting the tax rate of the highest individual income bracket from 70 to just 28 percent and cutting the tax rate of corporations from 48 to 34 percent.

But then how did the government tax revenue actually increase from $517 billion to $909 billion during Reagan’s presidency? This can be explained by the Laffer Curve, a theory developed by Arthur Laffer, an economic advisor to Reagan. This curve modeled the government’s tax revenue as a bell curve. At a 0% tax rate, the government would, of course, receive no money. At a 100% tax rate, individuals would have no reason to make money so the government would also make no money. Somewhere in between, there was a spot where the government could maximize tax revenue. If the tax was increased past that spot, the government would make less because people and businesses would be less incentivized to make money. A business would be more likely to figure out ways to protect itself from taxation or would try to move parts of its assets overseas, rather than attempting to grow. Individuals would see a larger and larger portion of their paycheck taken away the harder they worked. Businesses would also have less money to reinvest. With more money, businesses could hire more workers and expand, which would benefit the economy overall.

Reagan was largely successful at hitting his four original goals, although less so in some areas compared to others. Government spending still increased even with reduced domestic program spending because of increased military spending, however the growth rate of government spending was reduced. Tax cuts were far and away the largest move Reagan made in pursuit of Reaganomics. Reagan eliminated controls on oil and gas and deregulated cable TV, long-distance telephone, and other industries. However, he did keep in place health, safety, and environmental regulations. Stagflation was ended, albeit after a recession in 1981 and 1982, with inflation and unemployment hitting 4% and 6% respectively.

Overall, the economy certainly improved during Reagan’s presidency. Whether that was due to his “voodoo economics” or due to outside factors is still widely debated. During the period of Reagan’s presidency came the end of stagflation and from 1982 to 2000 the Dow Jones Industrial Average increased by a factor of 14 while the economy added 40 million jobs.

https://www.investopedia.com/terms/r/reaganomics.asp
https://www.investopedia.com/terms/t/trickledowntheory.asp
https://www.investopedia.com/terms/l/laffercurve.asp
http://www.ushistory.org/us/59b.asp
https://www.thebalance.com/reaganomics-did-it-work-would-it-today-3305569