What Impact did the Reagan Presidency have? - Topic 5.1 Flashcards
The effect of Reagan's economic policies
What was Reagan’s immediate economic action when becoming President?
Reagan was clear that he wanted to control government spending, to reduce government involvement and to cut taxes. He was influenced by ‘supply-side’ economic theories and didn’t feel obliged to continue with Roosevelt’s New Deal’s policies from the Great Depression. In the first three days, he sacked many White House staff members and put a federal government hiring freeze in place. He then told all departments there was a freeze on office furnishing and equipment and that they had to cut their travel expenses by 15%. He used a series of executive orders to set up new advisory groups, reporting directing to him on how to cut down ‘big government’, making him look very active.
What was Reagan’s plan for reform?
Reagan wanted to outline his first term’s budget plans in one bill and wanted to present a tax bill in the same session. His Council of Economic Advisers (CEA) had no time to follow the usual precedure for budget planning. Congress had to vote on the whole package of spending cuts, so the administration would have approval for all its measures and control over the timetable up to 1984.
What were the main aspects of ‘Reaganomics’?
Reagan’s Program for Economic Recovery was presented to Congress and had four parts to it:
- Cutting the federal deficit - Accompanied by a budget bill and a proposal for cuts on domestic spending, the bill aimed to reduce the federal deficit from 22% of the GNP to 19% by 1986. There were many errors and aspects of spending TBC’d
- Personal and business tax reductions - Accompanied by the ERTA of 1981
- Deregulation - In industry, state and local government
- Planned control of the money supply - To keep inflation down while expanding the economy
The cuts in domestic spending would come from federal grants under LBJ’s ‘Great Society’ reforms, including grants to: state and local government bodies and local inititatives
How did Reagan get the legislation passed?
The Republicans finally rewon the Senate after decades of Democrat control and almost had a majority in the House. After some revision and a bit of convincing from some Democrat representatives, the Omnibus Reconciliation Act (ORA) of 1981 was passed.
Tax legislation was harder however, with the Democrats feeling that they had been manipulated over the budget and saw the tax bill as a fight over control of the House. The bill wanted to reduced personal tax from 30% to 25%. In the end, the White House offered concessions to the Democrats to swing the vote. The ERTA was passed at the same time as the ORA, being reshaped.
What entailed in the Economic Recover Tax Act of 1981?
The Act cut marginal income tax by 23% over 3 years and linked the tax bands to inflation, applying to all tax bands. The highest income rate fell from 70% to 50% and the lowest fell from 14% to 11%. The ERTA allowed all working taxpayers to set up taxed IRAs. Business tax rates were cut were offered tax breaks (skewed to smaller businesses), and businesses could revise their depreciation costs.
What was the timeline of Reagan’s economic legislation?
1981-1989
- 13th August 1981 - Both the ORA and the ERTA are passed
- 3rd September 1982 - Tax Equity and Financial Responsibility Act (TEFRA) is passed; makes changes to the budget in response to the situation, tightens tax rules and temporarily raises taxes on cigarettes and phone services
- 7th April 1986 - Consolidated Omnibus Budget Reconciliation Act (COBRA) is passed; revises the budget in minor ways to save federal money, and moves cost to state or private bodies, mainly over healthcare
- 22nd October 1986 - Tax Reform Act is passed; revises the tax codes, reducing the number of tax brackets and is supposed to close a lot of tax evasion loopholes and ease pressure on poorer families
Interpretations of Reagan’s economic policies:
Did the policies of Reaganomics stop inflation?
Reagan’s aim was to stop inflation. While trying to pass ORA and ERTA, he put pressure on the Federal Reserve Board (FRB) to put tighter restrictions on the money supply. The FRB put tighter restrictions than what Reagan had asked for, and they didn’t lift these restrictions when unemployment rose. The restriction led to a sharp rise in interest rates, hurting industries that had to buy supplies on credit or had loans with a long pay-back period. The recession deepened. Unemployment rose from 7.1% in 1980 to 9.6% by 1983. Inflation did drop however, from 13.5% in 1980 to 6.2% after two years.
Interpretations of Reagan’s economic policies:
Did the policies increase personal wealth?
All interpretations agree that tax cuts made many people richer. In that sense they worked. However, certain sections of society became richer; the rich became richer as their tax burden decreased more substantially than other brackets and tax breaks and reductions on businesses meant that they earnt more money than previously, widening the wealth gap. However, some argue that it wasn’t that simple, and that tax cuts hurt the rich most and the poor least, and that the tax payments of the rich helped revive the economy.
Interpretations of Reagan’s economic policies:
Did the policies increase productivity?
Most approaches to measure productivity is calculated by the output per worker per hour or to consider the GNP.
- In output per worker per hour: Excusing 1982, the output per worker per hour was positive every year, with the output reaching 4.5 in 1983 and over 4 in 1992. The average sits around 2 per worker per hour
- Real GNP growth: rate increased every year bar 1982, when the GNP decreased by 2%, continuing to grow into the presidencies of both Bush Snr. and Clinton, excusing 1991, when there was a small decrease in the growth rate. In 1984, the growth rate was over 7%, and the average growth rate was around 3.5% per year
From 1980 to 1996
Interpretations of Reagan’s economic policies:
Did the policies encourage people to save and invest?
With the economy coming out of recession, more people began to save and invest. However, deregulation led to increased competition in the financial sector. This increased competition led to problems, as financial organisations took increasingly dangerous risks to win more customers. The personal savings and investment that the polcies had been designed to encourage took place in an increasingly unsafe environment. The Savings and Loans disaster led to people losing both savings and investments and the stockmarket crashed in 1987. Although recovery was far more rapid, the FRB stepped in, encouraging banks to lend to each other and for business and individual investors not to panic. A significant number of individuals and businesses suffered.
Interpretations of Reagan’s economic policies:
Did the policies reduce the deficit?
The reduction of the deficit was one of Reagan’s most notable failures. In 1980, it was $59bn; paying it off cost the federal government 9% of the budget. In 1983, the deficit was $203bn, taking 14% of federal spending. The interest payments only increased as the US borrowed more from abroad and the US, for the first time, became a significant borrowing nation, not a lending one. Reagan’s determination to cut taxes led to this failure, despite supply-side policies becoming clear they didn’t work. Federal department resisted cuts, while Congress toned down many welfare cuts planned by the administration. The defence budget increased under Reagan because he said it was necessary. Despite defence cuts in the 1960s and ’70s, Reagan increased spending from 23% in 1980, to 28% by 1987, while human resources went from 28% to 22% in the same time period.
Interpretations of Reagan’s economic policies:
What happened to Reagan’s economic policies after his presidency?
H.W. Bush continued with Reagan’s policies, however they were less popular as their long-term effects were becoming clear. Bush had only just won the presidential election, so support was lukewarm. The Democrats were back in control of both houses of Congress, making life harder for Bush. He was often forced to backdown on promises - the most famous when he raised taxes, despite his famous “read my lips” statement.
Clinton, despite being a Democrat and Reagan a Republican, didn’t swing back to old Democrat policies. While Reagan’s economic policies had produced problems, most voters strongly supported low taxes - a return to high taxation was not on the cards. A ‘New Democrat’, his campaign was economically focused: low inflation; high employment, a reduced deficit; and no tariffs to regulate business and trade. Clinton still increased welfare, Medicare and Medicaid, as well as ‘investing in people’. A memo in his campaign offices were pinned up to hammer home to voters while campaigning:
- He would address medical care
- He would bring change
- “The economy, stupid”
