Reaganomics And Supply-Side Economics Essay, Research Paper

Reaganomics and Supply-Side Economics In the 1980 s, the ideas of supply-side economics quickly went from a campaign slogan to an actual economic policy. Ronald Reagan s 1980 presidential campaign was largely geared toward this theory. Supply-side economics were based upon the ideas that lower taxes would increase spending by consumers and also by producers for capital. Consequently, this tax cut would also increase tax revenues. The theory behind this was that if taxes were increased or left at their same rate, the amount of money brought into the government would be x. But if taxes are cut, GDP rises. The rise in GDP plus the lower taxes would be greater than x, causing an increase in tax revenues. This would push the supply curve to the right also increasing real Gross Domestic Product. The increase in real GDP would put downward pressure on the price level and reduce inflation. Supply-siders also believed that the budget deficit would not increase substantially as a result of the tax cut. Even if it did increase, it would be offset by increased saving due to the lower taxes. Many economic critics today and in the 1980 s questioned the effectiveness of Reagan s policies, also known as Reaganomics. Economists still argue whether Reagan s actions were helpful or harmful to the United States economy. They question whether it was Reagan s policies that pulled the United States out of the 1982 recession, or whether it was new money being poured into the economy by the Federal reserve. Also many people believe that Reagan s policies are having more effect on the economy today than they did during his presidency from 1980 to 1988. I feel that Reagan and his policies were extremely helpful to the economic status of our country then and now. I feel that even though his policies produced a large deficit, his other improvements, such as increased GDP, more jobs, and the exodus from recession, helped to make Reagan s time as president a success. Most economists and US citizens were pleased with President Reagan s performance as commander in chief. Though supply-side economics were gaining new status among economic theories, Reagan presented his ideas with great confidence. Reagan s idea for economic recovery is best stated by Gary Willis in Reagan s America. Supply-siders claimed, the answer to stagnation is not to give consumers money to buy with, but to give producers capital to produce withthrough lower taxes, faster depreciation , less regulation and other incentives. If the circular process was frictionless, perfect, the market constantly adjusting supply to demand by its own magic, it would not matter where you entered this chicken-and-egg sequence (364). Many believed that Reagan s history in acting gave him a stronger ability to share his ideology. All one had to sell was hopethe salesman s basic commodity, as Reagan s father knew. And Reagan would have to be the supreme salesman, confident as he sailed through the Symplegades of rocky traps closing behind as trouble spots developed, trusting to the resilience of the business community itself (Willis 366). The economic propositions by Reagan were extremely successful during his time. He cut taxes, lowered inflation, pulled the US out of a deep recession, and caused a dramatic increase in Gross Domestic Product. Although, there was a large deficit increase, only a portion of it can be attributed to Reagan. Carter, in the previous term, increased military spending by large sums, also largely contributing to the increased deficit. The Reagan tax cuts were not a primary cause of the eruption of the deficit in the 1980s. The two main causes were an unexpectedly sharp reduction in inflation in the early 1980s that led to large real increases in federal spending, and a nearly $1 trillion military build-up during the last phase of the cold war (Niskanen/Moore 12). Reagan was phenomenal at convincing the public to believe in him and his ideas, although there were still a few people who did not buy into Reaganomics. David N. Hyman is a strong opponent of Reagan. He has developed the idea that Reaganomics was a failure in that tax revenues did not increase, GDP did not increase by its expected level, and the deficit grew by a large amount. He argues that Reaganomics did not achieve what it was proposed to accomplish. In Macroeconomics, Hyman states,

How much of the reduction in inflation and increase in real GDP can be attributed to the supply-side policies? First, let s look at the results in the first half of the 1980 s: (1) Actual growth between 1981 and 1985 was 10.9%, well below the 19.1% predicted by Reagan economists. (2) The economy did not recover from the recession of 1982, but many economists attribute this recovery to the increase in the money supply and other policies implemented by the Federal Reserve. (3) There did not appear to be any significant increase in work effort as a result of the reduction in marginal tax rates. (4) There was little appreciable increase in saving. (5) Federal tax revenues did not increase as a result of the reduction in marginal tax rates. However, they did not decrease as much as non-supply-siders expected, indicating that the disincentive effects of high marginal tax rates are not negligible. Reductions in tax revenues and increases in federal spending combined to increase the federal budget deficit to over $200 billion by 1986 (393).Although the figures projected by the Reagan administration were not 100% accurate, the economy did still improve. I strongly disagree with Hyman. Inflation did decrease, GDP did rise, and the economy did pull out of recession. The only fall back to Reagan s method was the large increase in the deficit. Although Reagan left the eighties with large deficits, his policies to increase tax revenues are still working today. These earnings are a major factor in decreasing the deficit today. Both the White House and Congress are rushing to take credit for deficit reduction. Economists observe that credit should be given to the sound economic policies put in place by President Ronald Reagan during the 1980s. The economy — not recent activities in Washington — has brought record high revenues into the national treasury. According to the Congressional Budget Office (CBO), the deficit has fallen from $290 billion to $34 billion since 1992 due to a tidal wave of tax revenues (NCPA Reagan and Today s Economy). Many economists today believe that the effects of Reagan s presidency are not yet finished. Like with all other government policies, there is always time lag between enactment and first seen effects. This lag is the reason some people say that the Reagan era was a failure. It is also the reason many people say that we are still seeing the effects of Reagan s policies today. Like Reagan said, lower tax rates will extract the economy from recession. They believe that the economy today is still benefiting. Reagan’s tax cuts unleashed a flood of new capital which led to a 5.6 percent annual rate of new small business creation between 1981 and 1989 — and sent the Dow Jones Industrial Average from around 1,000 points to over 8,000 last month (NCPA-Reagan 1). In other ways we are not still profiting from Reagan s policies. Other areas of the government have gone down since Reagan left office. Since Reagan left office the nation is suffering in several areas. The major area of decline since the Reagan era is family incomes. Since 1989, the typical US household has lost 5% of it income a $2,100 loss in purchasing power (NCPA-Clinton 1). We are suffering from lower family incomes since Reagan left office. This is also causing for a decrease in GDP. With less money to consume, there is less need for businesses to produce which lowers the GDP. Though some may feel that the Reagan era was a complete waste of political energy, I feel that Reagan and his administration had full control of everything they enacted. Their policies followed through with their expected effects, maybe not to the exact number as projected but enough to have dramatic effect on the economy. For those who think that the 1980 s was not enough proof of Reagan s success as a president, they can also look at today. The plans instated by Reagan are so effective, we as a nation are still reaping the benefits of Reagan s rule. Though all the proof leans toward Reagan in a positive manner, some feel that numbers and figures are not enough. They continue to find flaws in Reagan.