# Reaganomics: Definition, Policies, and Impact

![Reaganomics: The economic policies instituted by former President Ronald Reagan in the 1980s.](https://www.investopedia.com/thmb/NhJYusKg9deXNixaU8QKURnvids=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Reaganomic_Sketch_final-ce78e2399b29435fbc460833919dbef9.png)

*— Michela Buttignol / Investopedia*

> **Definition**
>
> Reaganomics refers to the economic policies instituted by President Reagan that included tax cuts, decreased social spending and market deregulation.

## What Is Reaganomics?

Reaganomics refers to the economic policies of Ronald Reagan, the 40th U.S. president who served from 1981 to 1989. His economic policies called for widespread tax cuts, decreased social spending, increased military spending, and the [deregulation](https://www.investopedia.com/terms/d/deregulate.asp) of domestic markets. These policies were introduced in response to a prolonged period of economic [stagflation](https://www.investopedia.com/terms/s/stagflation.asp) that began under President Gerald Ford in 1976.

### Key Takeaways

*   Reaganomics refers to the economic policies instituted by President Ronald Reagan.
*   President Reagan instituted tax cuts, decreased social spending, increased military spending, and implemented market deregulation.
*   Reaganomics was influenced by the trickle-down theory and supply-side economics.
*   Marginal tax rates decreased Under President Reagan’s administration.
*   Tax revenues increased, inflation decreased, and the unemployment rate fell.

## How Reaganomics Worked

The term “Reaganomics” was used by both supporters and detractors of Reagan’s policies. It was based on the principles of supply-side economics and the [trickle-down theory](https://www.investopedia.com/terms/t/trickledowntheory.asp). Reaganomics proposed that decreases in [taxes](https://www.investopedia.com/terms/t/taxes.asp), especially for corporations, would stimulate economic growth. The savings would then “trickle down” to the rest of the [economy](https://www.investopedia.com/terms/e/economy.asp), spurring overall growth, if the expenses of corporations were reduced.

Reagan believed that individuals would be incentivized to invest, innovate, and generate economic growth if the tax burden on individuals and corporations was reduced. This approach was rooted in the belief that a strong [private sector](https://www.investopedia.com/terms/p/private-sector.asp) would ultimately benefit all levels of society. Reagan also pursued deregulation across various industries, believing that reducing government intervention would spur competition, innovation, and efficiency.

## Objectives of Reaganomics

The country suffered through several years of stagflation as Reagan began his first term. High inflation was accompanied by high unemployment. The [Federal Reserve Board](https://www.investopedia.com/terms/f/frb.asp) increased the short-term interest rate to fight high inflation, reaching a peak in 1981. Reagan proposed a four-pronged [economic policy intended to reduce inflation](https://www.investopedia.com/terms/v/voodooeconomics.asp) and stimulate economic and job growth:

*   Reduce government spending on domestic programs
*   Reduce taxes for individuals, businesses, and investments
*   Reduce the burden of regulations on business
*   Support slower money growth in the economy

## Measures Introduced by Reaganomics

Reagan was a proponent of [supply-side economics](https://www.investopedia.com/terms/s/supply-sidetheory.asp). He regarded government intervention as a damper on economic growth that reduced economic incentives and distorted market signals. He introduced several measures to reduce government interference and spur the free market.

### Domestic program spending cuts

Reagan cut or reduced funding to multiple domestic welfare programs to curtail government intervention. They included Social Security, Medicaid, food stamps, education, and job training programs. He also ordered the Social Security Administration to tighten enforcement on disabled recipients in a deeply controversial move, ending benefits for more than a million recipients.

Reagan ordered government spending cuts to domestic programs but he increased defense spending by 35% at a pace of 7% a year for five years. He aimed to achieve "peace through strength" in his opposition to Communism and the Soviet Union.

### Reduced corporate, individual, and investment taxes

Reagan [lowered](https://www.investopedia.com/articles/tax/10/concise-history-tax-changes.asp) taxes significantly in the first year of his presidency. Income taxes at the top marginal tax bracket dropped from 70% to 50% in 1982 along with sharp cuts to corporate and estate taxes.

The unemployment rate was at 6.6% in December 1986. The [gross domestic product (GDP)](https://www.investopedia.com/gdp-growth-by-president-8604042) stood at 3.46%. Reagan cut the tax rate to 38.5% in 1987 and unemployment fell to 5.7%.

The goal of these reforms wasn't only to reduce tax burdens but to simplify the tax code as well. Some of Reagan’s reforms eliminated write-offs, exceptions, and other loopholes for favored businesses. They also changed the way companies accounted for expenditures, encouraging them to invest in equipment.

### Decreased government regulation

Reagan removed price controls on oil and gas, reduced restrictions on the financial services industry, and relaxed enforcement of the Clean Air Act. The Department of the Interior opened large areas of public land for oil drilling.

Congress passed the Garn-St. Germain Depository Institutions Act in 1982. It helped savings and loan banks to deal with rising inflation and interest rates by further deregulating deposit rates.

### Tight monetary policy

President Reagan encouraged the Federal Reserve to tighten the money supply as Federal Reserve Chairman Paul Volcker steadily raised the federal funds rate to 20% by 1980. These high interest rates helped end double-digit inflation. The Reaganomics monetary policy was developed to complement the Federal Reserve’s policy of raising interest rates to reduce borrowing and spending.

> **Important**
>
> Some of the deregulation and monetary reforms associated with Ronald Reagan were initiated under President Jimmy Carter. They're generally included with Reaganomics to the extent that these policies were consistent with Reagan’s worldview.

## Advantages and Disadvantages of Reaganomics

“From December 1982 to June 1990, Reaganomics created over 21 million jobs—more jobs than have been added since,” wrote Arthur Laffer whose work heavily influenced Reagan’s tax cuts. The top marginal tax rate on individual income was slashed from 70% to 28% and the corporate tax rate was reduced from 46% to 34%. [Inflation](https://www.investopedia.com/terms/i/inflation.asp) was reduced to 3.2% and the unemployment rate fell to 5.2% in March 1990.

The [Dow Jones Industrial Average (DJIA)](https://www.investopedia.com/terms/d/djia.asp) grew nearly 14-fold from 1982 to 2000. Nobel laureate Paul Krugman downplayed the success of Reagan’s policies, however.

“Yes, there was a boom in the mid-1980s, as the economy recovered from a severe recession,” Krugman wrote for _The New York Times_. “But while the rich got much richer, there was little sustained economic improvement for most Americans. By the late 1980s, middle-class incomes were barely higher than they had been a decade before and the poverty rate had risen.”

Reagan reduced the economic regulation that began under President Jimmy Carter and eliminated price controls on oil and natural gas, long-distance telephone services, and cable television but critics argue that the deregulation of the financial services industry during the Reagan administration played a part in the [Savings and Loan Crisis](https://www.investopedia.com/terms/s/sl-crisis.asp) as well as the [financial collapse of 2008](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp).

Pros

*   The inflation level decreased significantly.
    
*   Individual, corporate, and investment taxes were reduced.
    
*   Deregulation encouraged a more open and free market.
    

Cons

*   Public and social programs were curtailed.
    
*   Both the national deficit and national debt increased.
    
*   The divide increased between the wealthy and middle and lower classes.
    

## What Did Reaganomics Do?

Reaganomics reduced taxes on individuals and businesses and cut federal regulations and domestic social programs.

## What Were the Goals of Reaganomics?

Reaganomics sought to reduce the cost of doing business by reducing tax burdens, relaxing regulations and price controls, and cutting domestic spending programs. [Reagan also sought to reduce inflation](https://www.investopedia.com/us-inflation-rate-by-president-8546447) by tightening the money supply.

## What Were the Major Parts of Reaganomics?

The four main pillars of Reaganomics were tax cuts, deregulation, cuts to domestic social spending, and reducing inflation.

## Did Reagan Ever Say "Trickle Down?"

There's no record of President Reagan using the phrase “trickle down” but his economic philosophy was closely aligned with the idea that business-friendly policies would ultimately benefit the entire economy. Reagan hoped that the benefits of reducing taxes on the wealthy would “trickle down” in the form of increased employment and business activity.

## Does Trickle-Down Economics Really Work?

Economists remain divided on various elements of Reaganomics but the suggestion that [wealth](https://www.investopedia.com/terms/w/wealth.asp) would “trickle down” has so far remained unrealized. Economic studies have found that tax cuts such as those enacted by Reagan tend to increase economic inequality rather than reduce it.

## The Bottom Line

Reaganomics was regarded as a common sense approach to the perception of stagflation and over-regulation that prevailed at the end of the Carter presidency. President Reagan hoped to incentivize economic activity and reduce dependence on the government by reducing government spending and taxes and making it easier to do business.

These policies garnered reduced inflation, lower unemployment, and an entrepreneurial revolution that later became synonymous with the 1980s. Detractors of Reagan’s policies claim that federal deficits grew, however, and that the increased wealth gap increased the divide between the rich and the poor.

> **Article Sources**
>
> 1.  The Miller Center. "[Ronald Reagan: Domestic Affairs](https://millercenter.org/president/reagan/domestic-affairs)."
>     
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>     
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>     
> 4.  The Miller Center. "[Ronald Reagan: Foreign Affairs](https://millercenter.org/president/reagan/foreign-affairs)."
>     
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>     
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>     
> 10.  Federal Reserve History. "[Garn-St Germain Depository Institutions Act of 1982](https://www.federalreservehistory.org/essays/garn-st-germain-act)."
>      
> 11.  Federal Reserve History. “[Volcker’s Announcement of Anti-Inflation Measures](https://www.federalreservehistory.org/essays/anti_inflation_measures).”
>      
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> 13.  The Wall Street Journal. “[Reaganomics: What We Learned](https://www.wsj.com/articles/SB10001424052748704364004576132473777840938).”
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