Impact of Reagan's Leadership & Reaganomics

Supporting standards comprise 35% of the U. S. History Test 10 (B)

Supporting Standard (10)The student understands the impact of political, economic, & social factors in the U. S. role in the world from the 1970s through 1990. The Student is expected to: (B) Describe Ronald Reagan’s leadership in domestic & international policies, including Reaganomics & Peace Through Strength

Supporting Standard (10)The student understands the impact of political, economic, & social factors in the U. S. role in the world from the 1970s through 1990. The Student is expected to: (B) 1 Describe Ronald Reagan’s leadership in domestic & international policies, including Reaganomics

Reaganomics, the conflating of the two words Reagan & economics, is attributed to ABC radio broadcaster Paul Harvey & refers to the economic policies promoted by President Reagan during the 1980s. These policies are commonly associated with supply-side economics, referred to as trickle-down economics (due to the significant cuts in the upper tax brackets) by political opponents and free market economics by political advocates. Reaganomics, the conflating of the two words Reagan & economics, is attributed to ABC radio broadcaster Paul Harvey & refers to the economic policies promoted by President Reagan during the 1980s. These policies are commonly associated with supply-side economics, referred to as trickle-down economics (due to the significant cuts in the upper tax brackets) by political opponents and free market economics by political advocates.

The four pillars of Reagan’s economic policy were to reduce the growth of government spending, reduce the federal income tax and capital gains tax, reduce government regulation, and tighten the money supply in order to reduce inflation. The four pillars of Reagan’s economic policy were to reducethe growth of government spending, reduce the federal income tax and capital gains tax, reduce government regulation, and tighten the money supply in order to reduce inflation.

Prior to the Reagan administration, the United States economy experienced a decade of rising unemployment and inflation (known as stagflation). Political pressure favored stimulus resulting in an expansion of the money supply. President Nixon’s wage & price controls were phased out. Prior to the Reagan administration, the United States economy experienced a decade of rising unemployment and inflation (known as stagflation). Political pressure favored stimulus resulting in an expansion of the money supply. President Nixon’s wage & price controls were phased out. The federal oil reserves were created to ease any future short term shocks. President Carter had begun phasing out price controls on petroleum, while he created the Department of Energy. Much of the credit for the resolution of the stagflation is given to two causes: a three-year contraction of the money supply by the Federal Reserve Board under Paul Volcker, initiated in the last year of Carter's presidency (and continued during the Reagan presidency), and long-term easing of supply and pricing in oil during the 1980s oil glut. The federal oil reserves were created to ease any future short term shocks. President Carter had begun phasing out price controls on petroleum, while he created the Department of Energy. Much of the credit for the resolution of the stagflation is given to two causes: a three-year contraction of the money supply by the Federal Reserve Board under Paul Volcker, initiated in the last year of Carter's presidency (and continued during the Reagan presidency), and long-term easing of supply and pricing in oil during the 1980s oil glut.

In his stated intention to increase defense spending while lowering taxes, Reagan’s approach was a departure from his immediate predecessors. Reagan enacted lower marginal tax rates in conjunction with simplified income tax codes and continued deregulation. During Reagan’s presidency the annual deficits averaged 4.2% of GDP after inheriting an annual deficit of 2.7% of GDP in 1980 under Carter. In his stated intention to increase defense spending while lowering taxes, Reagan’s approach was a departure from his immediate predecessors. Reagan enacted lower marginal tax rates in conjunction with simplified income tax codes and continued deregulation. During Reagan’s presidency the annual deficits averaged 4.2% of GDP after inheriting an annual deficit of 2.7% of GDP in 1980 under Carter.

The real (inflation adjusted) rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan. GDP per working-age adult, which had increased at only a 0.8% annual rate during the Carter administration, increased at a 1.8% rate during the Reagan administration. The increase in productivity growth was even higher: output per hour in the business sector, which had been roughly constant in the Carter years, increased at a 1.4% rate in the Reagan years. The real (inflation adjusted) rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan. GDP per working-age adult, which had increased at only a 0.8% annual rate during the Carter administration, increased at a 1.8% rate during the Reagan administration. The increase in productivity growth was even higher: output per hour in the business sector, which had been roughly constant in the Carter years, increased at a 1.4% rate in the Reagan years. While running against Reagan for the Presidential nomination in 1980, George H. W. Bush had derided Reaganomics as “voodoo economics.” Similarly, in 1976, Gerald Ford had severely criticized Reagan’s proposal to turn back a large part of the Federal budget to the states. Reagan’s policies have since become widely accepted by many Republicans. While running against Reagan for the Presidential nomination in 1980, George H. W. Bush had derided Reaganomics as “voodoo economics.” Similarly, in 1976, Gerald Ford had severely criticized Reagan’s proposal to turn back a large part of the Federal budget to the states. Reagan’s policies have since become widely accepted by many Republicans.

In his 1980 campaign speeches, Reagan presented his economic proposals as a return to the free enterprise principles, free market economy that had been in favor before the Great Depression & FDR’s New Deal policies. At the same time he attracted a following from the supply-side economics movement, which formed in opposition to Keynesian demand-stimulus economics. This movement produced some of the strongest supporters for Reagan’s policies during his term in office. In his 1980 campaign speeches, Reagan presented his economic proposals as a return to the free enterprise principles, free market economy that had been in favor before the Great Depression & FDR’s New Deal policies. At the same time he attracted a following from the supply-side economics movement, which formed in opposition to Keynesian demand-stimulus economics. This movement produced some of the strongest supporters for Reagan’s policies during his term in office.

The contention of the proponents, that the tax rate cuts would more than cover any increases in federal debt, was influenced by a theoretical taxation model based on the elasticity of tax rates, known as the Laffer Curve. Arthur Laffer’s model predicts that excessive tax rates actually reduce potential tax revenues, by lowering the incentive to produce; the model also predicts that insufficient tax rates (rates below the optimum level for a given economy) lead directly to a reduction in tax revenues. The contention of the proponents, that the tax rate cuts would more than cover any increases in federal debt, was influenced by a theoretical taxation model based on the elasticity of tax rates, known as the Laffer Curve. Arthur Laffer’s model predicts that excessive tax rates actually reduce potential tax revenues, by lowering the incentive to produce; the model also predicts that insufficient tax rates (rates below the optimum level for a given economy) lead directly to a reduction in tax revenues.

SUPPLY SIDE ECONOMICSIn early 1980’s in the United States, a novel strategy to deal with stagflation offered to approach inflation by cutting cost of production: specifically, the cost imposed on businesses by government in the form of taxes and regulations. The Reagan administration sought to cut taxes and regulations for that purpose. The policies appear to have been successful but they have resulted is large budget deficits. SUPPLY SIDE ECONOMICSIn early 1980’s in the United States, a novel strategy to deal with stagflation offered to approach inflation by cutting cost of production: specifically, the cost imposed on businesses by government in the form of taxes and regulations. The Reagan administration sought to cut taxes and regulations for that purpose. The policies appear to have been successful but they have resulted is large budget deficits.

LAFFER CURVEThe Laffer curve shows that government revenues increase if tax rates are either increased from 0% or reduced from 100%. A hypothetical reduction of tax rates from very high rates may result in increased revenues. Thus, the tax cut of supply side economics was defended. The increasing budget deficits do not seem to have fully verified the Laffer curve proposition. LAFFER CURVEThe Laffer curve shows that government revenues increase if tax rates are either increased from 0% or reduced from 100%. A hypothetical reduction of tax rates from very high rates may result in increased revenues. Thus, the tax cut of supply side economics was defended. The increasing budget deficits do not seem to have fully verified the Laffer curve proposition.

“The basic reasoning behind the so-called “Laffer curve” is plain, uncontroversial, and by no means was discovered by Arthur Laffer. There is nothing to tax if no one produces anything. But taxes affect the return and therefore the motive to supply labor to economic production. An increase in the tax rate can reduce the pool of wealth to tax — the tax base — by reducing the supply of labor. No taxes, no revenue. Also, 100 percent tax rates, no revenue. Somewhere in between — exactly where depends on, among other things, the responsiveness of labor supply to after-tax wages — there will be a point at which an increase in rates delivers a decrease in revenue. If the tax rate is already past that point, a tax cut delivers more revenue.‘Labor supply is just one of many ways in which an increase in tax rates may reduce the effective tax base. In addition to working less, individuals may alter their savings and investment patterns, bargain to shift more of their labor compensation to untaxable perks and benefits, move to a different tax jurisdiction, consume more tax-deductible goods, or simply hide income from the tax authorities.”As Laffer’s model shows, at certain tax rates, a tax cut will lead to an increase in tax revenue. So how can policy makers be sure whether the United States is currently at a point on its Laffer curve that an increase in taxes won’t result in a decrease in tax revenue? “The basic reasoning behind the so-called “Laffer curve” is plain, uncontroversial, and by no means was discovered by Arthur Laffer. There is nothing to tax if no one produces anything. But taxes affect the return and therefore the motive to supply labor to economic production. An increase in the tax rate can reduce the pool of wealth to tax — the tax base — by reducing the supply of labor. No taxes, no revenue. Also, 100 percent tax rates, no revenue. Somewhere in between — exactly where depends on, among other things, the responsiveness of labor supply to after-tax wages — there will be a point at which an increase in rates delivers a decrease in revenue. If the tax rate is already past that point, a tax cut delivers more revenue.‘Labor supply is just one of many ways in which an increase in tax rates may reduce the effective tax base. In addition to working less, individuals may alter their savings and investment patterns, bargain to shift more of their labor compensation to untaxable perks and benefits, move to a different tax jurisdiction, consume more tax-deductible goods, or simply hide income from the tax authorities.”As Laffer’s model shows, at certain tax rates, a tax cut will lead to an increase in tax revenue. So how can policy makers be sure whether the United States is currently at a point on its Laffer curve that an increase in taxes won’t result in a decrease in tax revenue? President’ Reagan’s “Boy Genius,” David Stockman, Director of the Office of Budget & Management

Reagan significantly increased public expenditures, primarily the Department of Defense, which rose (in constant 2000 dollars) from $267.1 billion in 1980 (4.9% of GDP and 22.7% of public expenditure) to $393.1 billion in 1988 (5.8% of GDP and 27.3% of public expenditure); most of those years military spending was about 6% of GDP, exceeding this number in 4 different years. Reagan significantly increased public expenditures, primarily the Department of Defense, which rose (in constant 2000 dollars) from $267.1 billion in 1980 (4.9% of GDP and 22.7% of public expenditure) to $393.1 billion in 1988 (5.8% of GDP and 27.3% of public expenditure); most of those years military spending was about 6% of GDP, exceeding this number in 4 different years. In 1981, Reagan significantly reduced the maximum tax rate, which affected the highest income earners, and lowered the top marginal tax rate from 70% to 50%; in 1986 he further reduced the rate to 28%. The federal deficit under Reagan peaked at 6% of GDP in 1983, falling to 3.2% of GDP in 1987 and to 3.1% of GDP in his final budget. The inflation-adjusted rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan. In 1981, Reagan significantly reduced the maximum tax rate, which affected the highest income earners, and lowered the top marginal tax rate from 70% to 50%; in 1986 he further reduced the rate to 28%. The federal deficit under Reagan peaked at 6% of GDP in 1983, falling to 3.2% of GDP in 1987 and to 3.1% of GDP in his final budget. The inflation-adjusted rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan.

The most substantial change was in the tax code, where the top marginal individual income tax rate fell from 70.1% to 28.4%, and there was a “major reversal in the tax treatment of business income,” with effect of “reducing the tax bias among types of investment but increasing the average effective tax rate on new investment.” The most substantial change was in the tax code, where the top marginal individual income tax rate fell from 70.1% to 28.4%, and there was a “major reversal in the tax treatment of business income,” with effect of “reducing the tax bias among types of investment but increasing the average effective tax rate on new investment.” Spending during Reagan’s two terms (FY 1981–88) averaged 22.4% GDP, well above the 20.6% GDP average from 1971 to 2009. In addition, the public debt rose from 26% GDP in 1980 to 41% GDP by 1988. In dollar terms, the public debt rose from $712 billion in 1980 to $2.052 trillion in 1988, a roughly three-fold increase. The unemployment rate rose from 7% in 1980 to 10.8% in 1982, then declined to 5.4% in 1988. The inflation rate declined from 10% in 1980 to 4% in 1988. Spending during Reagan’s two terms (FY 1981–88) averaged 22.4% GDP, well above the 20.6% GDP average from 1971 to 2009. In addition, the public debt rose from 26% GDP in 1980 to 41% GDP by 1988. In dollar terms, the public debt rose from $712 billion in 1980 to $2.052 trillion in 1988, a roughly three-fold increase. The unemployment rate rose from 7% in 1980 to 10.8% in 1982, then declined to 5.4% in 1988. The inflation rate declined from 10% in 1980 to 4% in 1988.

Some economists have stated that Reagan’s policies were an important part of bringing about the second longest peacetime economic expansion in U.S. history, though the even longer 1990s expansion that began under George H. W. Bush in 1991 occurred after a rejection of the Reagan-era tax plan by Congress in November 1990 and continued through the Clinton administration, resulting in a 42% decrease in unemployment. Some economists have stated that Reagan’s policies were an important part of bringing about the second longest peacetime economic expansion in U.S. history, though the even longer 1990s expansion that began under George H. W. Bush in 1991 occurred after a rejection of the Reagan-era tax plan by Congress in November 1990 and continued through the Clinton administration, resulting in a 42% decrease in unemployment.

The misery index, defined as the inflation rate added to the unemployment rate, shrunk from 19.33 when he began his administration to 9.72 when he left, the greatest improvement record for a President since Truman left office. In terms of American households, the percentage of total households making less than $10,000 a year (in real 2007 dollars) shrunk from 8.8% in 1980 to 8.3% in 1988 while the percentage of households making over $75,000 went from 20.2% to 25.7% during that period, both signs of progress. The misery index, defined as the inflation rate added to the unemployment rate, shrunk from 19.33 when he began his administration to 9.72 when he left, the greatest improvement record for a President since Truman left office. In terms of American households, the percentage of total households making less than $10,000 a year (in real 2007 dollars) shrunk from 8.8% in 1980 to 8.3% in 1988 while the percentage of households making over $75,000 went from 20.2% to 25.7% during that period, both signs of progress.

But not all observers were quite so positive about the progress

Supporting Standard (10)The student understands the impact of political, economic, & social factors in the U. S. role in the world from the 1970s through 1990. The Student is expected to: (B) 2 Describe Ronald Reagan’s leadership in domestic & international policies, including Peace Through Strength

PAX ROMANA “Peace through strength” is an ancient phrase and concept implying that strength of arms is a necessary component of peace. The phrase is quite old; it has famously been used by many leaders from Roman Emperor Hardian in the first century AD, to Ronald Reagan in the 1980s. The concept has long been associated with Realpolitik. The phrase and concept date to ancient times. Roman Emperor Hadrian (76-138 AD) said that he sought “peace through strength, or failing that peace through threat.” Hadrian’s Wall was a symbol of this policy.

“Peace Through Strength” is the title of a book about a defense plan by , a former World War II adviser to President Franklin D. Roosevelt, published by Farrar, Straus and Young in 1952.

President Reaganused the phrase in political campaigning during his election challenge against Jimmy Carter in 1980, accusing the incumbent of weak, vacillating leadership that invited enemies to attack the USA and its allies. Reagan later considered it one of the mainstays of his foreign policy as U. S. President. In 1983, he explained it thus: President Reagan used the phrase in political campaigning during his election challenge against Jimmy Carter in 1980, accusing the incumbent of weak, vacillating leadership that invited enemies to attack the USA and its allies. Reagan later considered it one of the mainstays of his foreign policy as U. S. President. In 1983, he explained it thus: “We know that peace is the condition under which mankind was meant to flourish. Yet peace does not exist of its own will. It depends on us, on our courage to build it and guard it and pass it on to future generations. George Washington’s words may seem hard and cold today, but history has proven him right again and again. ‘To be prepared for war,’ he said, ‘is one of the most effective means of preserving peace.’ Well, to those who think strength provokes conflict, Will Rogers had his own answer. He said of the world heavyweight champion of his day: ‘I've never seen anyone insult Jack Dempsey.’” “We know that peace is the condition under which mankind was meant to flourish. Yet peace does not exist of its own will. It depends on us, on our courage to build it and guard it and pass it on to future generations. George Washington’s words may seem hard and cold today, but history has proven him right again and again. ‘To be prepared for war,’ he said, ‘is one of the most effective means of preserving peace.’ Well, to those who think strength provokes conflict, Will Rogers had his own answer. He said of the world heavyweight champion of his day: ‘I've never seen anyone insult Jack Dempsey.”

The approach was credited by many for forcing the Soviet Union to lose the arms race and end the Cold War. “Peace Through Strength” is the official motto of the Nimitz-class nuclear-powered aircraft carrier, USS Ronald Reagan (CVN-76). The approach was credited by many for forcing the Soviet Union to lose the arms race and end the Cold War. “Peace Through Strength” is the official motto of the Nimitz-class nuclear-powered aircraft carrier, USS Ronald Reagan (CVN-76).

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Impact of Reagan's Leadership & Reaganomics