What are the long-term effects of Reaganomics?


Quick Answer

According to About.com, Reaganomics, an economic policy promoted by President Ronald Reagan during the 1980s, helped to curb inflation and end the current recession, bringing on an era of economic growth that extended beyond Reagan's presidency. However, it also tripled the United States national debt from $997 billion in 1981 to $2.857 trillion in 1989 and led to an overall increase in national poverty.

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Full Answer

The Reaganomics plan had four key factors. Reagan proposed to cut federal income taxes, cut federal spending, decrease government regulation and reduce inflation by controlling money supply growth. Tax cuts put spending money in the hands of workers and also put money to expand businesses and hire more workers in the hands of business owners. However, during Reagan's presidency, federal spending was not actually reduced but was diverted from domestic programs to defense. Regulations on many businesses such as gas, oil, telephone service, bus service and others were reduced, but at the same time import barriers were raised. Money was controlled by an unusually high Fed funds rate.

Politicians and economists disagree over the efficacy of using Reaganomics as an economic policy. Its "trickle-down theory" stipulates that those in the upper-income brackets benefit first from lower taxes and that this advantage gradually moves downward. Because people keep more money, they have more to spend and contribute in taxes. A theory called the Laffer curve, used to justify Reaganomics, shows how tax rates affect government revenue. However, it does not take into account factors such as the rate of economic growth, the type of tax system, the current level of taxation, the productivity level of the economy, the ease of tax loopholes and illegal non-taxable activity.

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