Reaganomics is a term that describes the economic policies established by President Ronald Reagan. Four major policy points contained in his economic framework include reducing government spending and its growth, marginal tax rates, regulation, and inflation, the latter through strict management of the nation’s money supply. The success of Reaganomics carries much debate when analyzed through the annals of time. Successes include lower marginal tax rates and inflation. Other issues, however, such as the savings and loan problem, size of federal government, and tax revenue did not see much change.
President Reagan was a strong believer in free economic enterprise. His beliefs of lower taxes and less regulation of business were two significant tentpoles of Reaganomics. The reduction of marginal tax rates allowed individuals to keep more of their money. The president’s belief most certainly came from Adam Smith’s view of individual self interest, as defined in Smith’s text A Wealth of Nations. By limiting taxation, it allowed for individuals and businesses to reinvest their capital, resulting in a higher GDP than the previous presidential administration.
Placing restraints on the regulation of business helped spur new growth in the American economy. Classic economic theory defines government regulation as an external factor against business growth. Reaganomics heavily supported the idea of limited Congressional action in private industries. A result was the creative destruction that often defines capitalism, where one industry dies and another emerges. For example, the typewriter industry was taken over by the personal computer firms.
The limited restraints on the economy were one factor that may have led to the savings and loan crises of the 1980s. Because Reaganomics did not believe in heavy-handed government intervention, banks were allowed to grow through any means necessary. This led to unstable financial institutions that eventually failed, causing an economic crisis in the late 1980s. Earlier Congressional intervention may have had an impact on stopping this problem or prevented it altogether.
Another issue related to Reaganomics was the increase in trade barriers. While free market capitalists typically believe in free trade among countries, the Reagan Administration increased these barriers in an attempt to improve the American economy. Though internal economic growth increased, no one is sure of the exact cause-and-effect relationship of these policies. In some cases, re-regulation of trade may have limited the overall economic growth of the country. The growth experienced may have been higher through the increase in competition and advancement of outside suppliers from international countries.