The large, across the board tax cuts initiated by Reagan at the start of his administration were based on principles from supply side economics. This was contrary to the demand side economics of traditional Keynesianism, which tries to bring the economy to its existing full capacity by means of increasing demand, primarily through fiscal policy. In the 1970s, many on the right became critical of Keynesianism, which they claimed brought higher inflation without any gains in employment. However, true Keynesianism, which called for deficit spending during recessions and surplus spending during periods of prosperity, was rarely implemented in its totality in American politics, usually because political considerations overshadowed fiscal policy.
The Tax Reform Act of 1986, which had broad bipartisan support, partly implemented the principles of supply-side economics. It drastically cut the top tax rate, which Congressional Democrats criticized because it seemed to benefit only the most wealthy Americans. It also simplified the tax code and eliminated tax loopholes, which had the support of Congressional Democrats.
Part of what Reagan implemented was in fact not supply side economics, but rather his own version of Keynesianism. Reagan advocated initiating deep tax cuts and simultaneous increases in military spending, while at the same time claiming that the Federal deficit would be erased. Critics argued that while Keynesian economics promoted the idea of consumers creating jobs by increasing the demand for goods and services, Reaganomics relied on giving more money to producers by giving tax cuts especially to the wealthiest citizens, who would then create jobs that would somehow find a demand. This type of economic theory has also been referred to derisively as "trickle-down economics."
The belief of Reaganomics that the tax cuts would more than pay for themselves was influenced by the Laffer Curve, a theoretical taxation model that was particularly in vogue among some American conservatives during the 1970s. Laffer's model predicts that excessive tax rates actually reduce potential tax revenues, by lowering the incentive to produce. The rise, rather than fall, in government deficits during the Reagan era caused many to question the validity of the Laffer curve. In addition, although the Laffer curve was used to justify tax cuts, its main emphasis was on showing how to maximize government revenues through fiscal policy; because this conflicted with the aim of conservatives to reduce spending as well as revenues, the Laffer curve has more recently been deemphasized by conservatives in recent years. Nonetheless, Federal Government tax revenues did increase significantly following the tax cuts of the Reagan years; it was the dramatic increase in spending that produced the budget deficits of that era.
Before Reagan's election, Reaganomics was considered extreme by the liberal wing of the Republican Party. While running against Reagan for the Presidential nomination in 1980, George Bush had derided Reaganomics as "voodoo economics", a term that held currency long after the recession ended. Similarly, in 1976, Gerald Ford had severely criticized Reagan's proposal to turn back a large part of the Federal budget to the states. After the Reagan election, however, most Republicans endorsed Reaganomics, including Bush, who became Reagan's Vice President.
A study from the Cato Institute (a Libertarian think tank, which supports many of the premises that lie behind Reaganomics) said:
The disinflation had been initiated by Fed chairman Volcker before Reagan assumed office. (A more stable money supply program had been begun by Fed Chair Volcker in the latter days of the Carter administration, but inflation was still near a historical peak around the time of the 1980 elections.)
Much of the liberalization (telecoms, break up of AT&T, air travel etc.) that many claim helped to reinvigorate the American economy was initiated in the 1970s and received broad bipartisan support. (The deregulation of the Airlines was intiated under the leadership of Alfred Kahn in 1978. But the real explosion in economic growth did not occur until effective marginal tax rates came down post 1982.)
Reagan's tax policies were accused of pushing both the current account and the federal budget into deficit and led to a significant increase in public debt. However, the tax cuts did lead to higher tax receipts as claimed by advocates of the Laffer Curve and the deficits were actually caused by an increase in government spending.
A recession occurred in 1982, his second year of office, after some of his economic policies had already been initiated. On the principle that a president is just as responsible for the economic good news that happens on his watch as the economic bad news, then Reagan must take responsibility for that recession. However, it can be argued that the recession of 1982 was the peak of a recession that began in 1978.Support
Criticism