President Ronald Reagan's Economic Policies

How Reagan Ended the 1980s Recession

Ronald Reagan giving a speech

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Ronald Wilson Reagan was the 40th U.S. president, serving from Jan. 20, 1981, to Jan. 20, 1989. His first task was to combat the worst recession since the Great Depression. 

Reagan promised the "Reagan Revolution," focusing on reducing government spending, taxes, and regulation. His philosophy was, "Government is not the solution to our problem. Government is the problem."

Reagan was an advocate of laissez-faire economics. He believed that a free market and capitalism would solve the nation's woes. His policies matched the "greed is good" mood of 1980s America.

Reagan's Early Years

Ronald Reagan was born on Feb. 6, 1911. He studied economics and sociology at Eureka College in Illinois, then he became a radio sports announcer and an actor, starring and appearing in 53 films. As president of the Screen Actors Guild, he became involved in rooting out Communism in the film industry. That led to him developing more conservative political views. He became a TV host and spokesman for conservatism, then served as Governor of California from 1966 to 1974.

Reagan was nominated as the Republican presidential candidate in 1980. George H.W. Bush was the nominee for vice president. Reagan defeated Jimmy Carter to become the 40th president of the United States.

Reagan's Salary

Reagan's salary as president was $200,000. Reagan's net worth was estimated at $10.6 million before he became president and $15.4 million at the time of his death in 2004.

1980-1981: The Recession

Reagan inherited an economy mired in stagflation, a combination of double-digit economic contraction and double-digit inflation. He aggressively cut income taxes from 70% to 50% for the top tax bracket to combat the recession. He cut the corporate tax rate from 46% to 34%. He promised to slow the growth of government spending and to deregulate business industries. At the same time, he encouraged the Federal Reserve to combat inflation by reducing the money supply.

Reaganomics and Tax Cuts

Congress cut the top tax rate from 70% to 50% in 1982. This helped spur growth in gross domestic product for the next several years. The economy grew 4.5% in 1983, 7.2% in 1984, and 4.1% in 1985.

Economic growth reduced unemployment for the next several years. It was 8.5% in December 1981. The minimum wage was $3.35 an hour. Congress passed the Job Training Partnership Act in 1982, establishing job training programs for low-income people. The unemployment rate rose to 10.8% by December 1982, then it fell to 8.3% in 1983, 7.3% in 1984, and 7% by December 1985. Reagan cut the tax rate again, to 38.5% this time, in 1987.

Growth was a healthy 3.463% by the end of 1986, but the unemployment rate was 6.6%. It was still higher than the natural rate of unemployment. Reagan cut taxes again to 28%. Growth remained at a similar rate at 3.46% in 1987 and rose to 4.18% in 1988. Unemployment fell to 5.7% in 1987 and then fell to 5.3% in 1988.

The Policies of Reaganomics

Reagan based Reaganomics on the theory of supply-side economics. This theory proposes that tax cuts encourage economic expansion enough to broaden the tax base over time. The increased revenue from a stronger economy is supposed to offset the initial revenue loss from the tax cuts.

According to the Laffer Curve, this only works if the initial tax rates are high enough to fall in the “Prohibitive Range.” Reagan's first tax cuts worked because tax rates were so high. The 1986 and 1987 tax cuts weren't as effective because tax rates were already reasonable at that time.

Reagan also offset these tax cuts with tax increases elsewhere. He raised Social Security payroll taxes and some excise taxes, and he cut several deductions.

Reagan cut the corporate tax rate from 46% to 34%, but the effect of this break was unclear. He changed the tax treatment of many new investments. The complexity meant that the overall results of his corporate tax changes couldn't be measured.

Reagan and Deregulation

Reagan was applauded for continuing to eliminate Nixon-era price controls. They constrained the free-market equilibrium that would have prevented inflation. Reagan removed controls on oil and gas, cable television, and long-distance phone service. He further deregulated interstate bus service and ocean shipping.

Reagan deregulated banking in 1980 and Congress passed the Garn-St. Germain Depository Institutions Act in 1982. The Act removed restrictions on loan-to-value ratios for savings and loan banks. Reagan's budget cut also reduced regulatory staff at the Federal Home Loan Bank Board. As a result, banks invested in risky real estate ventures. Reagan's deregulation and budget cuts contributed to the savings and loan crisis of 1989. The crisis ushered in the 1990 recession.

Reagan did little to reduce regulations affecting health, safety, and the environment. In fact, he reduced these regulations at a slower pace than the Carter administration did.

Reagan's enthusiasm for the free market did not extend to international trade. Instead, he raised import barriers. Reagan almost doubled the number of items that were subject to trade restraint from 12% in 1980 to 23% in 1988.

Government Spending

Despite campaigning on a reduced government role, Reagan wasn't as successful with this as he was with tax cuts. He cut domestic programs, but he increased defense spending to achieve "peace through strength" in his opposition to Communism and the Soviet Union.

Though the Soviet Union didn't dissolve until 1991, he helped end the Cold War with famous quotes like, "Mr. Gorbachev, tear down this wall." Reagan wound up increasing the defense budget by 35% to accomplish these goals.

He did not reduce other government programs. He expanded Medicare and increased the payroll tax to ensure the solvency of Social Security.

Government spending still grew, just not as fast as under President Jimmy Carter. Reagan increased spending by 9% a year, according to the Office of Management and Budget's historical tables. It grew from $678 billion at Carter's final budget in fiscal year (FY) 1981 to $1.14 trillion at Reagan's last budget for FY 1989. Carter increased spending by 16% a year, from $409 billion in FY 1977 to $678 billion in FY 1981.

Under Reagan, defense spending grew faster than general spending. It increased 11% a year, from $154 billion in FY 1981 to $295 billion in FY 1989.

Reagan and the Debt

Reagan's first budget was for the fiscal year 1982. As the chart below reveals, he incurred substantial deficits for each year of his presidency. As a result, debt also increased each year. Reagan's budgets tripled the national debt from $998 billion at the end of Carter's last budget to $2.9 trillion at the end of Reagan's last budget.

Check the chart below to see how that debt contributed to the deficit as it related to GDP.

Fiscal Year Deficit Debt (billions) Deficit/GDP Event
1981 $78 $997 2.46% Reagan tax cut
1982 $127 $1,142 3.82% Reagan's 1st budget
1983 $207 $1,377 5.72% Increased defense spending
1984 $185 $1,572 4.59%  
1985 $212 $1,823 4.89%  
1986 $221 $2,125 4.83% Tax cut
1987 $149 $2,350 3.08% Black Monday crash
1988 $155 $2,602 2.96% Fed raised rates
1989 $152 $2,857 2.71% S&L crisis

Beating Inflation

Reagan captured the mood of voters when he said, "Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hitman." The inflation rate was 13.5% in 1980 and 10.3% in 1981. It fell to 6.1% in 1982. Inflation remained below 5% for the remaining years of Reagan's presidency.

But Reagan can't take all the credit for combating inflation. Federal Reserve Chairman Paul Volcker steadily raised the fed funds rate to 20% in 1980. High-interest rates ended double-digit inflation, but this also triggered the recession.

The Council of Economic Advisers

During his eight-year term, Reagan brought many well-known economists to the Council of Economic Advisers. New chairmen included Murray Weidenbaum, Martin Feldstein, and Beryl Sprinkel. The Council also included William Niskanen, Jerry Jordan, William Poole, Thomas Gale Moore, and Michael Mussa. Niskanen was one of the architects of Reaganomics. The staff included Nobel Prize winner and New York Times columnist Paul Krugman and Harvard professor Larry Summers. Summers later became President Obama's Director of the National Economic Council.