Reaganomics: Economic Transformation, Fiscal Challenges, and Lasting Impact Essay (Critical Writing)

Introduction

During his governorship, Reagan worked closely with serious economists of the time: M. Friedman, M. Anderson, M. Feldstein, and A. Laffer. Upon becoming president of the United States, R. Reagan created an economic council chaired by M. Feldstein. The council members were representatives and proponents of neoclassical and monetarist economic theory, supporters of deregulation of the economy, and opponents of big government and excessive government spending.

Conflicting Economic Goals and the Birth of Reaganomics

The president’s advisers tried to reconcile the hard reconciliation: reduce the tax burden, increase defense spending, and fight the budget deficit. They failed to recognize that lower taxes and higher defense spending are causing budget deficits and driving up inflation. In addition, inflation was out of control, and unemployment rose. These postulates of neoclassicism were called “Reaganomics.”

Reagan criticized the ideas of J. Galbraith, who promoted planned economic regulation. Reagan saw it as turning the federal government into a giant monster. In his opinion, the previous administrations of F. Roosevelt and D. Kennedy used abstract and not applicable to reality economic models. Reagan criticized Keynesian development models, even though they had shown effectiveness in leading the state out of crisis states.

Theoretical Underpinnings and Criticism of Reaganomics

Reagan’s advisers gravitated toward abstract economic thinking, building their neoclassical free-market models. According to academician W. Leontiev, these models have nothing to do with reality. The admirers of Reaganomics built their assumptions on the principles of non-interference in the economy. They believed that market and monetary regulation would help build a powerful state.

The Deficit Reduction Act of 1984 and Key Tax Changes

DEFRA, or the Deficit Reduction Act of 1984, was a federal law passed in the United States in 1984. The Tax Reform Act of 1984 was revised and reintroduced (Crumbley et al., 1985). It was united with the Senate version in its final form after the House of Representatives’ passage. It was signed into law by President Ronald Reagan on July 18, 1984, as the Deficit Reduction Act of 1984. The Office of Tax Analysis of the United States Treasury Department characterized the tax adjustments as follows:

• removing the intended 15% net interest rate exclusion;
• a decrease in the advantages of income averaging;
• reduced tax benefits for tax-exempt groups leasing property;
• the federal excise tax on telephone service has been temporarily extended;
• increased the real estate depreciation term from 15 to 18 years (Crumbley et al., 1985).

Impact of Reagan’s Economic Policies on the Nation

The main results of Reagan’s economic policies were to instill faith and pride in the people of the United States and make them realize they were a great nation. Reagan’s economic policies significantly reduced tax burdens, inflation, and unemployment. Fiscal and monetary policy was focused on achieving growth over the long term. Reagan significantly reduced all federal taxes, deregulated, and focused all his energies on fighting inflation. The president set out to stimulate entrepreneurial initiative and increase investment spending.

From Inflation Control to Supply-Side Stimulus

Before Reagan, economists had insisted that it was necessary to control inflation and strive for price stability, keeping unemployment low. It was suggested that inflation be controlled by raising the tax burden. All of these measures resulted in an unstable economy. Reagan based his policy on monetarist principles, emphasizing price stabilization. Only this could promote sustained long-term growth and low unemployment.

Promoting Investment and Rational Resource Use

The Reagan administration focused on creating a supportive environment for entrepreneurship and investment growth. It was widely believed that investment activity would significantly increase the nation’s savings rate, rationalize resource consumption, minimize unemployment, and revitalize the entire economic system. A policy was adopted to stimulate the supply of services and goods. This was planned to be facilitated by private investment. Investment in industries was supposed to reconfigure the material and technical production base, increase the competitiveness of the industrial sphere, and make energy consumption rational.

Welfare Reform and Budget Cuts

The reform took place in four stages; as early as 1981, social spending was significantly reduced. The budget law significantly reduced the Aid to Families with Dependent Children and Food Stamps programs. The federal budget savings from the above items alone amounted to $1.2 billion in 1982 (Crumbley et al., 1985).

Food stamps were no longer available to 1 million Americans, which resulted in budget savings of $6 billion (Crumbley et al., 1985). This happened in the next six years. Reagan eliminated the “Negative Income Tax” program, under which people received public assistance for some time after getting a job. The reason for the success of the welfare reforms was primarily the belief of the people of America that cutting welfare programs was necessary since such spending was the cause of increased inflation.

Political Tensions and Public Reactions

Democrats and lobbyists took advantage of the situation and began rallying those dissatisfied under their banners. Americans, for the most part, favored cuts in military spending rather than in social programs. Despite public pressure and conflicts between Republicans and Democrats, Reagan did not reverse his course. He argued that the 1983 budget deficit was to be solved by reducing social spending.

Reagan was showing the public that he was trying to achieve national renewal. Having rid the budget of a considerable social burden, Reagan decided to put some of it into private business and urged it to fight poverty. The president gave fiery speeches and agitated everyone to join in this effort to make donations to the poor.

Economic Growth, Deficits, and International Consequences

Economic growth in the U.S. during the Reagan administration was made possible by a growing budget deficit. During this period, tax revenues declined, and government spending grew, causing the state’s domestic debt to grow. During the Reagan administration, the U.S. military-industrial complex flourished, and the state guaranteed the sales of military goods. In 1985, there was a trade deficit, which caused the international value of the national currency to drop.

“Reaganomics, despite some positive achievements, outlined the economic problems of the period. Among these, supply theorists and R. Reagan’s advisers identified the following:

• inadequate productivity growth;
• insufficient investment;
• slowed innovation;
• loss of competitiveness in international markets.

The Reagan administration took appropriate steps to solve these problems. However, more was needed to achieve the full economic effect. General measures could not cope with structural economic distortions. Reducing the tax burden is impossible to lift ailing industries and strengthen the competitive environment. Only systemic reforms can contribute to the recovery of the entire economic system.

Conclusion

The legacy left by Ronald Reagan could be more evident. His economic policies brought both positive and negative results. The most positive results of Reaganomics are low inflation, long-term economic growth, a dramatic change in the labor market, job creation, a lowering of the tax burden, a shift away from protectionism and encouragement of foreign investment, state bureaucratic reform, and a higher quality of life. Despite this, the new course led to a relentless growth of the budget deficit and public debt, industrial products were not competitive enough compared to goods from other countries, the foreign trade deficit persisted, the poor became even more impoverished, and wealthy citizens became richer.

Reference

Crumbley, L., Billings, A., & Jensen, H. (1985). Significant Developments in C Reorganizations. The Tax Executive, 244–256.