Reaganomics

Used to describe President Ronald Reagan's economic policies, which came to be known as "Voodoo Economics".

Reaganomics is a derogatory term used by George H.W. Bush before becoming Vice President of the U.S. to describe President Ronald Reagan's economic policies, which came to be known as "Voodoo Economics".

ronald reagan

Ronald Reagan was the 40th U.S. President (1981-1990). The economic policies of Ronald Reagan aimed at reducing taxes, reduction of inflation by controlling the money supply to the market, and reduction in government spending to improve the country's economy.

In 1980, before George H.W. Bush was appointed as Ronald Reagan's vice president, he argued that supply-side policies of Reagan would not be able to rejuvenate the country's economy but would drastically increase the national debt of the country.

The policies during Reaganomics were introduced due to a stretched period of economic stagflation, having started under President Gerald Ford in 1976.

Theoretically, Reaganomics or Voodoo Economics aims to encourage spending and boost investment in the economy. It refers to the neo-liberal economic policies promoted by Ronald Reagan, the 40th U.S. President.

Such policies are commonly linked and referred to as trickle-down economics, supply-side economics, or voodoo economics, as named by opponents. But Reagan and his associates preferably referred to it as free-market economics.

cityscape

Reaganomics: A Brief History

The United States was experiencing a high rate of unemployment and high inflation (stagflation) before Ronald Reagan's administration. The attacks on Philips Curve and Keynesian economic orthodoxy grew.

The expansion of the money supply was favored by political pressure. The wage and price controls of President Richard Nixon were phased out.

Ronald Reagan intended to lower taxes, and his approach was completely different from his predecessors. He subsequently lowered the marginal tax rates and simplified the income tax codes.

reaganomics

Before George H.W. Bush, also known as Bush Sr., became Ronald Reagan's vice-president, he did not favor his running economic policies. 

In the year of 1976, the economic stagflation that began under President Gerald Ford continued in Ronald Reagan's power for a prolonged period. 

In response to this economic stagflation, he ordered numerous tax cuts, lowering expenditure of government, inflation reduction by tightening the supply of money, and regulation reduction of domestic markets.

The economic policies of Ronald Reagan are based partially on the principle of supply-side economics, which in itself is a macroeconomic theory stating that economic growth is possible if taxes and inflation are reduced. 

According to Reagan's beliefs, a tax reduction would ultimately result in increased revenue for the government. He believed that the savings generated by companies from a reduction in corporate tax would eventually trickle down into the rest of the economy, resulting in growth.

He also believed that the companies would pay more corporate tax in return for boosting the government's coffers, as a healthy economy will always be better.

The idea was that because of the cheaper goods, consumers will be benefited, and in return, there will be a decrease in unemployment.

More money will come into the consumer's wallet due to the reduction of corporate tax, which will be used to stimulate business growth which will increase hiring and decrease unemployment. A larger tax base is the result of more revenue for the government.

The policy is also called trickle-down economics as reduced taxes on business, and the wealthy people will increase investments by stimulating business growth, and its benefits will trickle down to the rest of the underdeveloped economy.

The policies of Reagan were a drastic change from that of Presidents Johnson and Nixon, who had the same decision to increase the role of government in the economy.

President Reagan thought of adopting a more laissez-faire approach, ultimately resulting in reducing the role of government. 

uncle sam doll

In 1980, George H.W. Bush described the policies of Ronald Reagan as "Reaganomics" or "Voodoo Economics." 

According to Bush Sr., supply-side policies were not enough for the economy's growth, which ended up increasing the national debt.

After George H.W. Bush was appointed as the vice-president of Ronald Reagan, he changed his opinion firstly by denying that he called Reagan's policies "voodoo" and then saying that he was "joking" about the whole voodoo term used.

How Does Reaganomics Work?

The country suffered several years of stagflation, where the high rate of unemployment was accompanied by high inflation. The Federal Reserve Board was increasing the short-term interest rate to fight the high inflation rate, which was at its peak in 1981.

Ronald Reagan put forward a four-pronged economic policy or four pillars of success to reduce inflation, stimulate growth, and increase employment. They are:

1. Reduction in Government Expenditures: 

The expenditures of the government grew but at a slower pace than before. Ronald Reagan reduced or cut funding to various domestic welfare programs, including education, food stamps, social security, and employment training programs.

Any unwanted social expenditure was cut and re-routed towards military and defense expenditures. 

It focused on expenditures on national defense, as Reagan believed that the US was exposed to the Soviet Union and their nuclear weapons, referred to as the "Window of Vulnerability." 

Due to the focus on defense and military expenditures, the US benefited and became one of the strongest countries in the world with advanced and high-power technology along with a strong and well-trained military force.

soldiers

2. Reduction in Tax: 

A bulk reduction in tax was made for the high earners of the society. The top bracket income taxes were reduced from 70% to 28%, and the corporate taxes were reduced from 48% to 34%.

Taxes were exempted for poor and low-income people by increasing the excise duty rates and deducting taxes from income which led to more savings and investments.

The goal was not only to simplify tax codes but also to reduce taxes.

calculations

3. Reduction in Government Regulation:

To restore the unstable economy, Ronald Reagan removed the price controls on the US oil and gas prices implemented by President Nixon.

He relaxed the restrictions of the Clean Air Act and reduced the usage of the financial service industry. 

He also lowered the usage of shipping by ocean, interstate bus service, cable, and telephone service. Large areas for oil drilling were also opened up by the Department of the Interior

As a result of the reduction in government regulations, imports decreased whereas exports increased.

government

4. Slower growth of money to reduce inflation:

After being elected as president, Ronald Reagan encouraged the tightening of the money supply by the Federal Reserve, which had started during Carter's presidential term as a three-year-long contraction.

The contract was intended to reduce inflation which stood at double-digit figures by the start of Ronald Reagan's presidency.

cash

Free Excel Crash Course

Sign Up for our Free Excel Modeling Crash Course

Begin your journey into Excel modeling with our free Excel Modeling Crash Course.

Learn More

Contribution To The Different Sections of Society And The Economy

The overall result of Reaganomics or voodoo economics was positive. People's standard of living increased drastically. There was a decrease in unemployment and a massive improvement in economic conditions. 

According to some economists, Reagan's economic policies played the most important part in bringing the third most longtime peaceful economic era in U.S. history. 

During the presidential term of Reagan, the average growth rate of gross domestic product was 3.5%, which was only 2.9% in the previous eighteen years. 

There was a massive fall in the misery index (inflation rate added to unemployment rate) from 19.33% to 9.72% under the administration of Reagan. This was the greatest improvement in employment after Harry S. Truman

Harry Truman

Let us see how Reaganomics contributed to the different sections of society and the economy:

Employment: The rate of jobs grew by 2% annually during the presidency of Reagan, while it was 3.1% under Carter, 2.4% under Clinton, and 0.6% under George H.W. Bush.

office

The growth of jobs under the presidential term of Reagan averaged 168,000 per month, while it was 216,000 per month for Carter, 55,000 per month for H.W. Bush, and 239,000 per month for Clinton. 

According to some commentators, over one million jobs were created in a single month, i.e., September of 1983. 

Wages: Due to the high rate of inflation, there was a decline in wages. The average real hourly wage for production and workers continued to decline since 1973, but at a slower rate and was below the pre-Reagan level in every Reagan year. 

exploitation

The critics of Ronald Reagan argued that his neoliberal policies were responsible for the same and led to the stagnation of wage rates over a few decades.

family

Level of Poverty: The percentage of the population below the poverty line increased from 13% in 1980 to 15.2% in 1983 and again fell to 13% in 1988. Homelessness was a significant problem during the first term of Ronald Reagan. 

Ronald Reagan told David Brinkley that the homeless people make their own choice to stay on the streets, and according to him, there were enough shelters in the city for their stay. 

Income tax and Payroll tax levels: The federal receipts of the fiscal year increased from $599 billion to $991 billion, whereas the federal outlay of the fiscal year drastically increased.

tax return

According to the report of the Joint Economic Committee of the United States Congress in 1996:

During the two presidential terms of Ronald Reagan and 1993, an increased share of income taxes was paid by the top 10% of taxpayers to the Federal government, while a reduced share of income tax revenue was paid by the 50% of lowest taxpayers.

Criticism and Validation

  • Mostly everyone criticized George H.W. Bush for characterizing Ronald Reagan's (his then political rival) political policies as "Reaganomics." Many viewed his spiteful words as a way to discredit Reagan as he ran against him in the Republican primary.

  • According to the general belief, motivating the wealthy people would enhance expenditure and increase confidence among the lower class people as their salaries grew and the economy was brought out of recession. 

  • It was also believed that less government expenditure would help in boosting the financial industry. Though all the expectations did not hit the mark, some were extremely fruitful, giving the needed boost to society and the economy.

globe

  • During the first two terms of Reagan's presidency, there was a decrease in the rate of unemployment, the rate of income rose, and inflation was under control.

  • The growth of jobs under the presidential term of Reagan averaged 168,000 per month, while it was 216,000 per month for Carter, 55,000 per month for H.W. Bush, and 239,000 per month for Clinton. 

  • Many criticisms of Ronald Reagan's policies were validated. His policies contributed to the doubling of the national debt due to increased military and national expenditure.

  • There was an expectation that the decreased taxes on wealthy people of society and business would result in increased expenditure on their parts of services and goods, but that also failed to succeed.

  • Due to the high rate of inflation, there was a decline in wages. The critics of Ronald Reagan argued that his neoliberal policies were responsible for the same and led to the stagnation of wages over a few decades.

  • The percentage of the population below the poverty line increased from 13% in 1980 to 15.2% in 1983 and again fell to 13% in 1988. Homelessness was a notable problem during the first term of Ronald Reagan.

FAQs

LBO Modeling Course

Everything You Need To Master LBO Modeling

To Help You Thrive in the Most Prestigious Jobs on Wall Street.

Learn More

Researched and Authored by Ananya Dutta | LinkedIn

Reviewed and Edited by Parul Gupta | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: