President Ronald Reagan's Economic Policies

How Reagan Ended the 1980s Recession

Ronald Reagan
Ronald Reagan Gives A Speech In Washington. Photo By Dirck Halstead/Getty Images

Ronald Reagan was the U.S. president January 20, 1981 – January 20, 1989. He was the first conservative president in more than 50 years. But he was similar to President Obama in one respect. The first task of each was to combat the worst recession since the Great Depression.

That's where their paths differed greatly. Reagan promised the "Reagan Revolution." It's focused on reducing government spending, taxes and regulation.

His philosophy was "Government is not the solution to our problem, government is the problem." 

1980-1981 Recession

Reagan inherited an economy mired in stagflation. It's a combination of double-digit economic contraction with double-digit inflation. To combat recession, Reagan aggressively cut income taxes from 70 percent to 28 percent for the top income tax bracket. He cut the corporate tax rate from 48 percent to 34 percent. He also promised to reduce government spending and regulations. At the same time, he would reduce the money supply to combat inflation.

Reaganomics

Reagan's economic policies are known as Reaganomics. Reagan based his policies on the theory of supply side economics. This theory says 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. High taxes fall in the curve’s “Prohibitive Range.” Reagan's tax cuts worked because tax rates were so high in the early 1980s. 

Reagan and Deregulation

Reagan was applauded for continuing to eliminate the Nixon-era price controls.

These were blamed for constraining 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.

Bank regulations were eased. In 1982, Congress passed the Garn-St. Germain Depository Institutions Act. This 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. (Sound familiar?) Reagan's deregulation and budget cuts contributed to the Savings and Loan Crisis of 1989.

Contrary to Regan’s enthusiasm for deregulation, import barriers were increased. Reagan doubled the number of items that were subject to trade restraint from 12 percent in 1980 to 23 percent in 1988. Little was done in other regulations affecting health, safety and the environment. In fact, Reagan reduced regulations at a slower pace than the Carter administration. (Source: William A. Niskanen, "Reaganomics," The Concise Encyclopedia of Economics.)

Did Reagan Reduce Government Spending?

Despite campaigning on a reduced government role, Reagan wasn't as successful as he was at tax cuts.

During his first year, he cut domestic programs by $39 billion. But he increased defense spending to achieve "peace through strength" in his opposition to Communism and the Soviet Union. He was successful in ending the Cold War. That’s when he uttered his famous quote, "Mr. Gorbachev, tear down this wall." To accomplish these goals, Reagan wound up increasing the defense budget by 35 percent.

Reagan did not reduce other government programs. He expanded Medicare. He increased the payroll tax to insure the solvency of Social Security. Under Reagan, government spending increased 2.5 percent annually. By the end of Reagan's two terms, the national debt had more than doubled.

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 hit man." To combat inflation, Federal Reserve Chairman Paul Volcker steadily raised the fed funds rate to 20 percent.

That successfully ending double-digit inflation.

But it also triggered the resumption of recession, lasting from July 1981 to November 1982. This contractionary monetary policy reduced business spending. It resulted in a 10.8 percent unemployment rate. That’s the highest of any recession. Unemployment remained above 10 percent for almost a year.

Council of Economic Advisers

During his eight-year term, Reagan brought on board many well-known economists to the Council of Economic Advisers. New Chairmen included Murry 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 founders 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.

Reagan's Early Years

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

In 1980, Reagan was nominated as the Republican presidential candidate. George H.W. Bush was the nominee for vice president. Reagan beat Jimmy Carter to become the 40th President of the United States. (Source: "Ronald Reagan," The White House.) 

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