Domestic Policy of The Ronald Reagan Administration - "Reaganomics" and The Economy - Economic Record

Economic Record

President Reagan's tenure marked a time of economic prosperity for many Americans. However, the number of Americans below the poverty level increased from 29.272 million in 1980 to 31.745 in 1988, which means that, as a percentage of the total population, it remained almost stationary, from 12.95% in 1980 to 13% in 1988. The number of children, ages 18 years and younger, below the poverty level increased from 11.543 million in 1980, 18.3% of children, to 12.455, 19.5%, in 1988. In addition, the situation of low income groups was affected by the reduction of social spending. Inequality also increased. The share of total income received by the 5% highest-income households grew from 16.5% in 1980 to 18.3% in 1988 and the share of the highest fifth of income increased from 44.1% to 46.3% in same years. In contrast, the share of total income of the lowest fifth of households fell from 4.2% in 1980 to 3.8% in 1988 and the second poorest fifth from 10.2% to 9.6%.

After negotiations with the Republican-controlled Senate and the Democratic-controlled House, in August 1981, President Reagan signed the bipartisan largest tax cuts in American history into effect at his California ranch. This lowered income taxes significantly, with the top personal tax bracket dropping from 70% to 28% during the course of seven years. Due to a recession in 1982, unemployment rose to over 10%, only to drop during the rest of Reagan's terms, averaging 7.5%, while the gross domestic product (GDP) growth recovered and grew at a rate of 3.4% annually. Inflation significantly decreased, falling from 13.6% in 1980 (President Carter's final year in office) to 4.1% by 1988. Sixteen million new jobs were created as well. The net effect of all Reagan-era tax bills resulted in a 1% decrease of government revenues (as a percentage of GDP), with the revenue-shrinking effects of the 1981 tax cut (-3% of GDP) and the revenue-gaining effects of the 1982 tax hike (~+1% of GDP), while subsequent bills were more revenue-neutral.

During the Reagan Administration, federal receipts grew at an average rate of 8.2% (2.5% attributed to higher Social Security receipts), and federal outlays grew at an annual rate of 7.1%.

Reagan's administration is the only one not to have raised the minimum wage by its conclusion.

Along with these, Reagan reappointed Paul Volcker as Chairman of the Federal Reserve, as well as the monetarist Alan Greenspan to succeed him in 1987. He preserved the core New Deal safeguards, such as the United States Securities and Exchange Commission (SEC), Federal Deposit Insurance Corporation (FDIC), the GI Bill and Social Security, while rolling back what he viewed as the excesses of 1960s and 1970s liberal policies.

The policies were labeled by some as "Trickle-down economics," due to the facts that the combination of significant tax cuts and a massive increase in Cold War related defense spending caused large budget deficits, the U.S. trade deficit expansion, as well as the stock market crash of 1987, and contributed to the Savings and Loan crisis. The ultimate cost of the Savings and Loan crisis is estimated to have totaled around US$150 billion, about $125 billion of which was consequently and directly subsidized by the U.S. government. John Kenneth Galbraith called it "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time." In order to cover new federal budget deficits, the United States borrowed heavily both domestically and abroad, raising the national debt from $997 billion to $2.85 trillion, and the United States moved from being the world's largest international creditor to the world's largest debtor nation. Reagan described the new debt as the "greatest disappointment" of his presidency.

Reagan's support for an increased defense budget at the height of the Cold War was supported by Congressional Democrats and Republicans. However, Congress was reluctant to follow Reagan's proposed cuts in domestic programs. In accordance with Reagan's less-government intervention views, many domestic government programs were cut or experienced periods of reduced funding during his presidency. These included Social Security, Medicaid, Food Stamps, and federal education programs. Though Reagan protected entitlement programs, such as Social Security and Medicare, in one of the most widely criticized actions of the administration, the administration attempted to purge tens of thousands of allegedly disabled people from the Social Security disability roles, who the administration alleged were not truly disabled. Funding for government organizations, including the Environmental Protection Agency, were also reduced. He cut the EPA's budget by 22%, and his director of the EPA, Anne M. Burford, resigned over alleged mismanagement of funds. Tax breaks and increased military spending resulted in an increase of the national budget deficit and led Reagan and Congress to approve two tax increases, aiming to preserve funding for Social Security, though not as high as the 1981 tax cuts.

Speaking of Reagan himself, Donald Regan, the President's former Secretary of the Treasury, and later Chief of Staff, criticized him for his supposed lack of understanding of economics: "In the four years that I served as Secretary of the Treasury, I never saw President Reagan alone and never discussed economic philosophy or fiscal and monetary policy with him one-on-one.... The President never told me what he believed or what he wanted to accomplish in the field of economics." However, Reagan's chief economic adviser Martin Feldstein, argues the opposite: "I briefed him on Third World debt; he didn't take notes, he asked very few questions.... The subject came up in a cabinet meeting and he summarized what he had heard perfectly. He had a remarkably good memory for oral presentation and could fit information into his own philosophy and make decisions on it.