Printable Version
Reaganomics Previous Next
Digital History ID 3367

 

When President Reagan took office, he promised to rebuild the nation's defenses, restore economic growth, and trim the size of the federal government by limiting its role in welfare, education, and housing. He pledged to end exorbitant union contracts to make American goods competitive again, to cut taxes drastically to stimulate investment and purchasing power, and to decontrol businesses strangled by federal regulation. Even though his policies trimmed little from the size of the federal government, failed to make American goods competitive in the world market, and led to increased consolidation rather than competition, many Americans believed that he had improved the country's economic situation.

Reagan blamed the nation's economic ills on declining capital investment and a tax structure biased against work and productive investment. To stimulate the economy, he persuaded Congress to slash tax rates. In 1981, he pushed a bill through Congress cutting taxes 5 percent in 1981 and 10 percent in 1982 and 1983. In 1986, the administration pushed through another tax bill, which substantially reduced tax rates of the wealthiest Americans to 28 percent, while closing a variety of tax loopholes.

In August 1981, Reagan dealt a devastating blow to organized labor by firing 15,000 striking air-traffic controllers. Union leaders condemned the firings, but in an anti-union atmosphere, most Americans backed Reagan. His popularity ratings soared.

To strengthen the nation's defenses, the Reagan administration doubled the defense budget--to more than $330 billion by 1987. Reagan believed that a militarily strong America would not have been humiliated by Iran and would have discouraged Soviet adventurism.

Reagan expanded the Carter administration's efforts to decontrol and deregulate the economy. Congress deregulated the banking and natural gas industries and lifted ceilings on interest rates. Federal price controls on airfares were lifted as well. The Environmental Protection Agency relaxed its interpretation of the Clean Air Act; and the Department of the Interior opened up large areas of the federal domain, including offshore oil fields, to private development.

The results of deregulation were mixed. Bank interest rates became more competitive, but smaller banks found it difficult to hold their own against larger institutions. Natural gas prices increased, as did production, easing some of the country's dependence on foreign fuel. Airfares on high-traffic routes between major cities dropped dramatically, but fares for short, low-traffic flights skyrocketed. Most critics agreed, however, that deregulation had restored some short-term competition to the marketplace. Yet in the long-term, competition also led to increased business failures and consolidation.

Reagan's laissez-faire principles could also be seen in his administration's approach to social programs. Convinced that federal welfare programs promoted laziness, promiscuity, and moral decay, Reagan limited benefits to those he considered the "truly needy." His administration cut spending on a variety of social welfare programs, including Aid to Families with Dependent Children; food stamps; child nutrition; job training for young people; programs to prevent child abuse; and mental health services. The Reagan administration also eliminated welfare assistance for the working poor and reduced federal subsidies for child-care services for low-income families. Symbolic of the Reagan social service cuts, an attempt was made by the Agriculture Department in 1981 to allow ketchup to be counted as a vegetable in school lunches.

Reagan left office while the economy was in the midst of its longest post-World War II expansion. The economy was growing faster, with less inflation, than at any time since the mid-1960s. Adjusted for inflation, disposable personal income per person rose 20 percent after 1980. Inflation fell from 13 percent in 1981 to less than 4 percent annually. Unemployment was down to approximately 5 percent.

Critics, however, charged that Reagan had only created the illusion of prosperity. They denounced the massive federal budget deficit, which increased $1.5 trillion during the Reagan presidency--a deficit that was three times the debt accumulated by all 39 of Reagan's presidential predecessors. His critics decried the growing income gap between rich and poor. They also criticized the expensive consequences of reduced government regulation, namely, cleaning up federal nuclear weapons facilities, and especially, bailing out the nation's savings and loans industry.

Previous Next

 

Copyright 2016 Digital History