Reaganomics is a term that is used to describe the economic policies that were instituted during the administration of President Ronald Reagan in the United States. Although all policies are included in the term, it is most commonly associated with the promotion of an unrestricted free-market economy that is combined with a reduction of tax responsibilities.
It applies to all individuals, but the theory is weighted toward businesses and wealthy individuals. Following the principles of trickle-down theory, the idea is that by giving the wealthiest entities more access to their wealth, they’ll be able to stimulate business investments and that creates more jobs, higher wages, and additional benefits for the rest of society.
The advantage of Reaganomics is that it can lead to higher levels of productivity and economic growth. Lower income taxes that apply to all income groups can improve the incentive people have to seek out employment opportunities, explore innovation, or create their own business opportunities. When increased profits are achieved, then the idea is that they can be reinvested to achieve more output, which results in more growth, and that means more money can be earned.
The primary disadvantage of Reaganomics is that it took wealth out of the country. Over time, as businesses and the wealthy class have had time to save, they’ve been able to store their money in off-shore accounts. This has helped those entities be able to avoid paying taxes on those amounts, which means only they get to benefit from the positive economic impacts of this policy.
Here are some of the other key points to consider when looking at the Reaganomics pros and cons.
List of the Pros of Reaganomics
1. Inflation effects could be reduced on a societal level.
The primary benefit that everyone experienced from Reaganomics was a reduction of the influences that inflation was having on the economy. This was combined with high interest rates. People could stash money in a bank and see it grow, but they had to use almost all their cash to meet their daily needs. By controlling the influences of inflation, many households were able to see a rise in their disposable income.
2. It lowered taxes for almost everyone.
When the first policies of Reaganomics where introduced to the American public, proposals to lower top tax rates first began. The top marginal rate in 1970 was 70%, while the top rate on capital gains was 28%. In 1982, when Reaganomics first began to make its impact, the top rate on regular income became 50%. It would eventually become 28%. At the same time, the top rate on capital gains went to 23.7%, and then 20%.
3. It encouraged legislators to follow good accounting practices.
Increased income almost always results in poor purchasing habits. The U.S. government was encouraged to spend money with additional wisdom because of Reaganomics as a way to promote fiscal responsibility. Extraneous programs were eliminated, unused services were stopped, and that helped to save on the amount of money the government required to function properly.
4. Investment opportunities were created.
Although Reaganomics targeted the wealthy class, everyone had the opportunity to get involved with investing thanks to their access to extra cash. Everyone could invest whatever wealth they had to create more wealth for themselves so that it could grow. The idea was that each socioeconomic class could improve its quality of life because the government was providing incentives to do less spending and more investing.
5. It created a support network for productivity.
Reaganomics also took a hard stance on drug use at the same time it was encouraging fewer restrictions on the free-market economy. According to The Atlantic, this helped to create a society that saw fewer violent crimes through strict drug policies. Interestingly enough, the added restrictions on drug use, including long mandatory sentencing guidelines, created cheaper drugs that more people could afford with their current levels of productivity.
6. Most people saw themselves as being better off.
By the end of his Presidency, the final approval ratings of Ronald Reagan were 68% for all 8 years he was in charge. 71% of people approved of how Reagan handled foreign relationships. 62% of people, according to a 1989 article by Steven Roberts in the New York Times, approved of the way that Reagan handled the economy. Even with a sampling error of 3%, at the time, those were the highest approval ratings for any President after World War II.
List of the Cons of Reaganomics
1. Inequality doesn’t lead to higher rates of economic growth.
The Organization for Economic Cooperation and Development, or OECD, has found that wealth inequality is steadily rising, especially since the Great Recession years of 2007-2009. That inequality, which is promoted by Reaganomics, has created lower levels of economic growth instead of higher levels of growth. In the United States, the impact on growth has created a GDP which is estimated to be almost 10% lower than it would have been without this policy.
2. High wealth earners have no incentive to share their earnings.
Reaganomics makes an assumption that high wealth earners will “do the right thing.” The only problem is that an unchecked free-market economy makes no requirement to share. Those with high incomes have a greater ability to accumulate wealth, which allows them to create an even higher income. That is why societies which use some version of Reaganomics see income inequality continue to grow. The wealth can reinvest their own dividends and profits for themselves, which is something the other classes cannot do.
3. It reduced income levels for a majority of Americans.
The total of income shares in the United States from 1979-2007 dropped nearly 10% for the lowest 80% of earners. At the same time, the top 1% of earners in the U.S. saw an almost equal rise in their income share. The households that fell into the top 20% were only able to break even with their income. When inflation is accounted for, the value of a household income today for the Middle Class is lower than what it happened to be before Reaganomics. Corporate profits in the U.S. have increased significantly, but real median incomes have seen no benefit from this increase at all.
4. Deficits and the national debt exploded under Reagan.
During the years of the Reagan administration, the annual deficits averaged 4.2% of GDP. This was after inheriting a deficit of 2.7% of GDP under the final year of the Carter Administration. The inflation-adjusted rate of growth fell from 4% under Carter to 2.5% under Reagan. Although productivity growth and GDP per working adult rose under Reagan, the national debt nearly tripled under the Reagan Administration. In 1981, the national debt of the U.S. was less than 1 billion. By 1988, the national debt was $2.6 billion. It has continued to rise ever since.
5. It changed the financial status of the United States.
Under the 8 years of Ronald Reagan, the U.S. went from being the largest creditor nation in the world to the largest debtor nation in the world.
6. Reagan had to raise taxes to save Reaganomics.
Near the end of his administration, Reagan ended up needing to raise taxes to shore up the shortfalls that were being experienced by the government. To stop the economy from going into a recession, more than 10 different tax increases were eventually implemented. When evaluating the Reaganomics pros and cons, it is important to remember what the initial response to the first policies of this economics theory happened to be. More asset sales became taxable, tax breaks were reduced, and base-broadening was implemented.
7. Reaganomics was never fully implemented either.
One of the ways Reagan suggested that his tax policies could be funded was to cut spending in certain departments, such as the Department of Education. More than $1 billion was eliminated in spending, but the requested totals never came to fruition. That also helped to contribute to a deficit that reached 6% at its peak during the Reagan Administration.
8. Reagan promoted additional spending in other departments.
Spending wasn’t cut across the board in the government. Certain departments saw dramatic increases in spending during the Reagan years, such as the Department of Defense. Under Reagan, the defense budget was increased no less than 6 times. That created a system of defense contracting throughout the country that was unprecedented outside of World War II. Over 50 active defense contractors were employed through Reaganomics. By the second term of Bill Clinton, that number had been reduced to just 5.
These Reaganomics pros and cons show an economics system which requires voluntary compliance to be successful. In a free-market economy, this goes against its very principles. Capitalism is about looking out for oneself above anyone else. Reaganomics implies that the wealthy class can improve their standing while helping others succeed too, but that’s why it doesn’t work.