Reaganomics and the American Economy

President Reagan's tenure marked a time of economic prosperity for many Americans. After negotiations with the Republican-controlled Senate and the Democratic-controlled House, in August 1981, President Reagan signed the bipartisan largest tax cuts in American history into effect at his California ranch. This lowered income taxes significantly, with the top personal tax bracket dropping from 70% to 28% during the course of seven years. Due to a recession in 1982, unemployment rose to over 10%, only to drop during the rest of Reagan's terms while the gross domestic product (GDP) growth recovered and grew at a rate of 3.4% annually. Inflation significantly decreased, falling from 13.6% in 1980 (President Carter's final year in office) to 4.1% by 1988.[ Sixteen million new jobs were created as well.[ The net effect of all Reagan-era tax bills resulted in a 1% decrease of government revenues (as a percentage of GDP), with the revenue-shrinking effects of the 1981 tax cut (-3% of GDP) and the revenue-gaining effects of the 1982 tax hike (~+1% of GDP), while subsequent bills were more revenue-neutral.

Along with these, Reagan reappointed Paul Volcker as Chairman of the Federal Reserve, as well as the monetarist Alan Greenspan to succeed him in 1987. He preserved the core New Deal safeguards, such as the United States Securities and Exchange Commission (SEC), Federal Deposit Insurance Corporation (FDIC), the GI Bill and Social Security, while rolling back what he viewed as the excesses of 1960s and 1970s liberal policies.

The policies were labeled by some as "Trickle-down economics," due to the facts that the combination of significant tax cuts and a massive increase in Cold War related defence spending caused large budget deficits, the U.S. trade deficit expansion, as well as the stock market crash of 1987, and contributed to the Savings and Loan crisis. The ultimate cost of the Savings and Loan crisis is estimated to have totalled around US$150 billion, about $125 billion of which was consequently and directly subsidized by the U.S. government. John Kenneth Galbraith called it "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time." In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $700 billion to $3 trillion, and the United States moved from being the world's largest international creditor to the world's largest debtor nation. Reagan described the new debt as the "greatest disappointment" of his presidency.

Reagan's support for an increased defense budget at the height of the Cold War was supported by Congressional Democrats and Republicans. However, Congress was reluctant to follow Reagan's proposed cuts in domestic programs. In accordance with Reagan's less-government intervention views, many domestic government programs were cut or experienced periods of reduced funding during his presidency. These included Social Security, Medicaid, Food Stamps, and federal education programs. Though Reagan protected entitlement programs, such as Social Security and Medicare , in one of the most widely criticized actions of the administration, the administration attempted to purge tens of thousands of allegedly disabled people from the Social Security disability roles, who the administration alleged were not truly disabled. Funding for government organizations, including the Environmental Protection Agency, were also reduced. He cut the EPA's budget by 22%, and his director of the EPA, Anne M. Burford, resigned over alleged mismanagement of funds. Tax breaks and increased military spending resulted in an increase of the national budget deficit and led Reagan and Congress to approve two tax increases, aiming to preserve funding for Social Security, though not as high as the 1981 tax cuts

Speaking of Reagan himself, Donald Regan, the President's former Secretary of the Treasury, and later Chief of Staff, criticized him for his supposed lack of understanding of economics: "In the four years that I served as Secretary of the Treasury, I never saw President Reagan alone and never discussed economic philosophy or fiscal and monetary policy with him one-on-one.... The President never told me what he believed or what he wanted to accomplish in the field of economics." However, Reagan's chief economic adviser Martin Feldstein, argues the opposite: "I briefed him on Third World debt; he didn't take notes, he asked very few questions.... The subject came up in a cabinet meeting and he summarized what he had heard perfectly. He had a remarkably good memory for oral presentation and could fit information into his own philosophy and make decisions on it.

At the beginning of his presidency, Reagan ended the price controls on domestic oil which had been started by Richard Nixon; they had contributed to both the 1973 Oil Crisis and the 1979 Energy Crisis. The price of oil subsequently dropped, and the 1980s did not see the gasoline lines and fuel shortages that the 1970s had. Reagan also attempted to make good on his 1980 campaign promise to repeal the "Windfall Profit Tax" that Carter and Congress enacted in 1980 on domestic oil production; he was able to do so in 1988, when Congress agreed that it had increased dependence on foreign oil. The tax was not a tax on profits, but an excise tax on the difference between a statutory "base price" and the market price.

Some economists assess that Reagan's tax policies invigorated America's economy such as Nobel Prize winner Milton Friedman, who wrote that the Reagan tax cuts were "one of the most important factors in the boom of the 1990s." Similarly, fellow Nobel Prize winning economist Robert A. Mundell wrote that the tax cuts "made the U.S. economy the motor for the world economy in the 1990s, on which the great revolution in information technology was able to feed." Other economists argue that the deficits slowed economic growth during the following administration and was the reason that Reagan's successor, George H.W. Bush, reneged on a campaign promise and raised taxes. Nobel prize winning economist Robert Solow stated, "As for Reagan being responsible [for the 1990s boom], that's far-fetched. What we got in the Reagan years was a deep recession and then half a dozen years of fine growth as we climbed out of the recession, but nothing beyond that." Some economists are now of the opinion that it was this deregulation and freedom which has directly led to the current economic situation which has affected the global economy.

Another Reagan legacy was the expansion of Alternative Minimum Tax from a law for untaxed rich investors to one refocused on middle class Americans. When Ronald Reagan signed the Tax Reform Act of 1986, the AMT was expanded to target middle class deductions related to having children, owning a home, or living in high tax states. In 2006, the IRS's National Taxpayer Advocate's report highlighted the AMT as the single most serious problem with the tax code. The advocate noted that that the complexity of the AMT leads to most taxpayers who owe AMT not realizing it until preparing their returns or being notified by the IRS.

In 1981, to protect domestic auto sales the Reagan administration signed an agreement with Japan that it would not import more than 1.67 million cars into the United States, which would be one in four cars sold in America.

Only a short time into his administration, Federal air traffic controllers went on strike, violating a regulation prohibiting Government unions from striking. Reagan announced that the situation had become an emergency as described in the 1947 Taft Hartley Act, and held a press conference on August 3, 1981 in the White House Rose Garden regarding the strike. Reagan stated that if the air traffic controllers "do not report for work within 48 hours, they have forfeited their jobs and will be terminated."

Two days later, on August 5, Reagan fired 11,359 striking air traffic controllers who had ignored his order to return to work, notwithstanding the fact that the strike was illegal under federal law. The breaking of the strike had a significant impact on labor-management relations in the private sector. Although private employers nominally had the right to permanently replace striking workers under the National Labor Relations Act, that option was rarely used prior to 1981, but much more frequently thereafter. Reagan's actions essentially broke the striking union.

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