Understanding Ronald Reagan’s Reaganomics

Reaganomics is President Ronald Reagan’s conservative economic policy that dealt with the 1981- 82 U.S recession and stagflation. Stagflation is the stagnant nature of the economy within double-digit inflation.

Reagan differed from his predecessors President Lyndon B. Johnson and Richard Nixon on how the government should be involved in the economy of the country.

Ronald Reagan introduced reforms in- the growth of government spending; both income taxes and capital gains taxes; regulations on businesses; and the expansion of the money supply.

Graphics by Kanishk Srivastava

---

What is Reaganomics?

It is a type of policy based on the Laffer Curve Model, Economist Arthur Laffer developed it in 1979.

The laffer curve showed how tax cuts can increase the tax base. In simple terms, a reduced amount of taxes for corporates would lead to the expansion of corporates who would employ more Americans and create a bigger pool of tax-paying people.

Reaganomics is based on supply-side theory. It states that slashing corporate taxes is the best way to stimulate economic growth.

Given the domino effect of the policy as mentioned above, some called it “trickle-down effect” or “trickle-down economy”.

Did it work?

It’s debatable because Ronald Reagan did deliver on the four front of the policy but not up to the expectations of his supporters.

The recession did end and people started spending more it was thanks to monetary policy (A policy developed by the central bank of the country) rather than fiscal policy (A policy developed by the legislative) that came to the rescue.

William A. Niskanen, Policy-Advisor to Reagan and constructor of Reaganomics, he said that the government concentration shifted from domestic programs to defence.

The federal debt almost tripled, from $998 billion in 1981 to $2.857 trillion in 1989.

Tax Cuts

Reagan cut taxes considerably to stimulate demand. By Reagan’s last year in office, the top income tax rate was 28% for single people making $18,550.

Anyone making less paid no taxes. That was much less than the 1980 top tax rate of 70% for individuals earning $108,300 or more. Reagan indexed the tax brackets for inflation.

Reagan cut the corporate tax rates from 46% to 40% in 1987. But the effect of this break was unclear. Reagan changed the tax treatment of many new investments. The complexity meant that the overall results of his corporate tax changes couldn’t be measured.

Slow Spending Growth

Reagan increased government spending, second to former President Jimmy Carter’s spending. Reagan increased spending by 9% to Carter’s 16% every year. Carter’s last budget indicated spending of $678 billion in 1981. Reagan’s last budget for FY 1989 indicated spending of $1.1 trillion.

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 did not cut Social Security or Medicare payments since they were protected by the acts that created them. The entitlements as they call it in the United States.

Reduce Regulations

In 1981, Reagan eliminated the Nixon-era price controls on domestic oil and gas. It locked the free-market equilibrium that would have prevented inflation.

Reagan also deregulated cable TV, long-distance telephone service, interstate bus service, and ocean shipping. He eased bank regulations, but that helped create the Savings and Loan Crisis in 1989.

Reagan increased, not decreased, import barriers. He doubled the number of items that were subject to trade restraint from 12% in 1980 to 23% in 1988. He did not do enough to reduce other regulations affecting health, safety, and the environment. Carter had reduced regulations at a faster pace.

Inflation

Reagan campaigned on tackling the galloping inflation. Inflation is of three types- General, Galloping (double-digit inflation, 10%-99%), and hyperinflation (99%-999%).

In 1980 the inflation rate was 12.5%. These rates hurt the economy because money loses value too fast. Business and employee income can’t keep up with rising costs and prices.

Federal Reserve Chairman, Paul Volcker was already dealing with the galloping inflation in the economy.

In 1979, Volcker began raising the fed funds rate. By December 1980, it had reached 20%.

These high rates choked off economic growth. Volcker’s policy triggered the recession of 1981-1982. Unemployment rose to 10.1% and stayed above 10% for 10 months.

This painful solution was necessary to stop galloping inflation. If inflation had not been tackled in this way the economy would have been far worse.

Volcker’s policies knocked inflation down to 3.8% by 1983.

Would Reaganomics work in India?

Ever since Independence, India has never enjoyed the social securities present in the American economy. Indian economy given its size currently of nominal GDP is $2.9 trillion. The government has pretty ambitious plans of making it a $ 5 trillion economy by the end of 2024.

But, it would anyway happen because the consumption would grow. If consumption were to grow at a lower scale then by 2025 or 2026 India would become a $5 trillion-dollar economy, if it grows at a higher rate then by 2024 India would become a $ 5 trillion economy.

There is nothing new that the government is proposing.

Indian Finance Minister has to come to reality and acknowledge that a persistent slowdown exists in the economy and is eating jobs while increasing rates of daily supplies.

For too long, People in New Delhi have been lying to us. They say they are here to serve us, when in fact, they are serving themselves. And why? They are driven by their own desires to get re-elected. Their need to stay in power eclipses their duty to govern. The Indian Economy has failed you. Work hard? Play by the rules? You aren’t guaranteed success. Your children will not have a better life than you did.

Franklin D. Roosevelt ushered in an era of hope and progress when he proposed the New Deal. And at the time, his reforms were considered radical. But he once said, “This (The United States of America) country demands bold, persistent experimentation. It is common sense to take a method and try it. And if it fails, admit it frankly and try another. But above all, try something.”

Roosevelt would have understood better than anyone the necessity for trying something different. The New Deal succeeded for many years, but we must now try something newer before it fails us.

If India succeeds, we will reinvent the Indian dream. If we fail in our attempt, we will admit it frankly and try another. But above all, we must try something.

The Decade of a Financially Strong China and India’s Wait For The Turn