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Reaganomics: Success, Failures & Effects

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  • 0:07 Understanding Reaganomics
  • 1:08 Successes of Reaganomics
  • 2:36 Combating Poverty
  • 3:15 Failures of Reaganomics
  • 4:58 Lesson Summary
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Lesson Transcript
Instructor: Adam Richards

Adam has a master's degree in history.

'Reaganomics' represented President Ronald Reagan's attempt at energizing the inert American economy following the 1970s. Learn about the program, as well as its successes and failures, in this lesson.

Understanding Reaganomics

Upon entering office in 1981, Reagan called for a 'new morning in America;' that is, a reformed economic system that focused primarily on tax reduction. The idea of tax reduction belonged to an economic school of thought known as supply-side economics. Simply put, supply-side economics encouraged the reduction of obstacles, such as taxes, to allow the consumer to spend more money and stimulate the economy. Reagan believed that this program was specifically needed because the 1970s proved to be a period of stagflation.

Reagan championed several strategies under his economic program. First, he contended that the power of the federal government needed to be reduced. This, in turn, led to the reduction of federal welfare programs all in an attempt to reduce government spending. Second, Reagan supported severe tax reduction on incomes and on corporations. The more money Americans had in their pockets, the more likely they were to spend and help the economy rebound. Third, he encouraged the Federal Reserve Board to keep interest rates high and control the money supply. Finally, Reagan pursued moderate deregulation.

Successes of Reaganomics

Reagan's overhaul of the American tax system under the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986 was the most substantial accomplishment of his economic program. The highest earners in the United States witnessed a drastic reduction in the income tax bracket. In fact, the tax rate fell close to 40% during Reagan's tenure. Similarly, Reagan approved of the reduction, and in some cases, complete elimination, of taxes for individuals who fell into the poverty bracket of the tax code.

Reagan addressed the corporate tax code by reducing the corporate income tax rate by 14%. He also approved of incentive packages for businesses that increased substantially between 1981 and 1986. Reagan also reduced the obstacles surrounding investing and capital gains tax. The reduction of taxes on corporations allowed for sizeable expansion in manufacturing and the purchase of needed equipment.

Reagan's monitoring of the Federal Reserve Board and its impact on interest rates and money growth was another successful aspect of his economic program. Reagan actively participated in reducing money growth as well as maintaining high interest rates, which led to a noticeable decrease in inflation. He also managed to maintain the stability of the American dollar on the international market. Reagan's close handling of money growth, coupled with his tax program, yielded impressive results in the business sector. For instance, the growth of productivity within the United States grew to almost four percent annually (the rate under President Jimmy Carter was roughly 2.8%).

While deregulation was not a foremost priority for Reagan, he did manage to reduce economic controls on a number of organizations and resources. For example, the price controls on oil and natural gas that were established by President Carter were essentially eliminated. Regulations on cable television and shipping were also severely reduced. Reagan revised many anti-trust laws to encourage business competition.

The Reagan Administration also achieved admirable results in lowering the unemployment rate as well as the inflation rate. During his tenure, Reagan successfully dropped the unemployment rate 2.5%. The inflation rate, which hovered around ten percent at the end of the Carter Administration in 1980, was reduced by roughly six percent.

Failures of Reaganomics

With success comes failure, and no American president has been able to avoid setbacks regarding their respective economic programs. The biggest failure of Reagan's economic program was his inability to reduce the federal deficit and control spending. While Reagan championed the reduction of federal spending on social welfare programs, he ultimately spent an equivalent amount of money on defense buildup during his renewed Cold War offensive.

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