Chris Leibl APUSH 09 Mr. Davisson 5/26/09 Reaganomics The 1970’s were a period of a deep economic recession. During the 1970’s the United States experienced a period of stagflation. Stagflation is a term in economics that refers to an economy that is both stagnant and is experiencing inflation. Jimmy Carter’s administration during the late 70’s tried to alleviate the economic recession and unemployment by having additional government spending. This additional government spending slightly increased the national debt. Carter also tried to increase wages and loosen the restrictions on a number of industries, including the transportation industry (Conte and Carr). These new policies failed miserably, and only brought the United States further into an economic depression. Inflation was also a main economic problem of the late 70’s and action was taken against it by the Federal Reserve. The Federal Reserve began to stop printing money in order to bring the rate of inflation down. When Ronald Reagan was elected to office in 1981 he was confronted with all the problems Jimmy Carter had left him, as well an economy that was close to falling apart. Reagan’s political campaign focused mainly on the way to get the United States out of this deep relapse of the economy. Popular frustration with the economy was probably Reagan’s greatest ally in his election. “Soaring inflation and high interest rates—driven in large part by dramatic price increases in Middle Eastern oil—combined with stagnation and high unemployment to create an unusually sour political climate. The most memorable statement of the campaign was Reagan's question to the American people: ‘Are you better off today than you were four years ago?’” (Presidential Campaigns) This question presented by Reagan was his way of presenting the American public of a new way to look at the economy. Reagan, as well as American Citizens, had seen Jimmy Carters failures to try and get the economy going again. Regan solution to these problems was what is today called Reaganomics. Reaganomics pertains to the economic strategy that was used by Ronald Reagan in his presidency. Critics also called Reaganomics the “trickle-down effect,” because it advocated the theory that if you give relief to those at the top of the chain then the people on the bottom will also benefit. (Ellis-Christensen ) Reagan used tax cuts to relieve the upper classes. Reagan’s idea was if we were to give the wealthy more money to spend, then they would undoubtedly use that money to invest in other business. When businesses begin to get more money from investors, they in turn would begin to expand and hire more employees. This, in theory, would help both the unemployment rate and the overall economy. Reagan also supported the idea of less government intervention. A true republican, Reagan also believed the only way to expand the economy was to have less government intervention. Republicans view government intervention as “an intrusion that makes business less competitive and less efficient.” (Conte and Carr) Reagan also supported supply side tax cuts in new economic policies. Supply side economics are used to describe how changes in marginal tax rates influence economic activity. (Gwartney) Marginal tax rates are taxes that reveal how much money one owes to the government based on their income. If marginal tax rates are high then people will have less money to spend and this discourages income and efficiency of resource use. Reaganomics was by no standard a success in getting the United States out of an economic recession. After Reagan took office in 1981 the economy went into a deeper depression due to Carters policies. Although a rough start, when Reagan’s policies began to be implemented both the unemployment rate and inflation rate began to fall. During Jimmy Carter’s presidency the top marginal tax rate was as high as 70%. Through both the Economic Recovery Tax Act and The Tax Act of 1986, Reagan was able to lower this figure to 28%. The Economic Recovery Tax Act was first implemented in 1981 and was the first step in reducing marginal tax rates. The opposition to this act claimed this was a “giveaway to the rich” because their rates would drop significantly (Frenze). With these tax cuts in place the “rich” were able to have a 25% decrease in marginal tax rates. Eventually the opponents to this plan were Reagan’s economic policies were also shown that as a result the “rich” actually paid more taxes by the end of 1987. Persons earning $50,000 - $100,000 had in increase from 22% to 27%. (Van Braekel) These tax increase opposed the traditional view that if the government were to cut taxes then eventually the taxes would go down. Reagan was also successful in the areas of unemployment and inflation. In the area of unemployment Reagan was able to cut unemployment from 9.7% to 5.4%. (Van Braekel) Critics of Reaganomics also claimed that through Reagan’s Economic policies the national debt had exploded. In Reaganomics also affected the way future presidents would view the power of a changing economy. George H. Bush referred to Reaganomics as “voodoo economics.” George H. Bush continued on with some of the ideals of Reaganomics but changed many aspects of it. One of the aspects that George H. Bush continued was the policy of deregulation. “Economists suggest that Reaganomics was just one of several hallmark events over the past few decades that contributed to the current situation.” Reaganomics advocated the deregulation of domestic industries, something President Clinton would continue to advocate as well. After the presidency of Ronald Reagan economist’s claim there was a switch in policy toward economics. The previous policy before Reagan was for the government to regulate the economy and protect it from any falls. The new policy was to allow for the deregulation of many of the nations most vital industries. One of these vital industries was the banking industry. During the Clinton Administration, President Clinton began to deregulate the banking industry. The Clinton Administration passed the Gramm-Leach-Bliley Act on November 12, 1999. The Gramm-Leach-Bliley Act made it legal for banks and insurance companies to join together. The reason for this new act was because of controversy over the Glass-Steagall Act of 1932. The Glass-Steagall Act had prohibited banks and insurance companies from becoming one large corporation in order to protect the citizens from unfair practices. Citibank and Travelers Group insurance were one of the first two businesses to merge a bank and an insurance company. This company became known as Citigroup. This radical change in policy, from a very regulated infrastructure to a very deregulated one can be attributed to Reaganomics. Former President George W. Bush was also a strong supporter of Reaganomics. George W. Bush cut taxes three times during his first term as president and was rewarded with strong economic growth. The unemployment rate and the marginal tax rate both dropped in the first years of 2000’s, but similar to the Reagan Administration, the national debt significantly increased. Also similar to Reagan, Bush was critized for helping only the wealthy. The tax cuts showed that the average after tax income for the richest one percent had risen over 20%. This rise was the largest rise in nearly a twenty year period. Today, President Barrack Obama claims that the deregulation of the banking system caused both a housing and mortgage crisis has appeared. The Reaganomics philosophy of having as little government intervention as possible has created a society in which there are no restrictions on what one can do. The mortgage crisis was created because banks were giving out loans to people who were not capable of paying them back. These people were able to get loans because of the lax government restrictions on receiving loans. When enough of these faulty loans failed, mostly on houses, the housing bubble burst. There were too many faulty loans and not enough money in the American economy to cover them. Reaganomics is mostly known for its bias toward the upper classes, but is less known for its short term improvement of the overall economy. Reaganomics is one of the greater economic theories of the 20th century because of its short term success. Although Reganomics is not a completely unflawed economic plan, it uses many successful policies to promote growth by helping all social classes. Works cited Conte and Carr, "Stagflation in the 1970s." 20 May 2009 . Conte and Car, Laissez-faire Versus Government Intervention. 20 May 2009 . Ellis-Christensen , Tricia. "What was Reaganomics?." 2003. 20 May 2009 . Frenze, Christopher. "The Reagan Tax Cuts: Lessons for Tax Reform." JEC Report. April 1996. 20 May 2009 . Gwartney, James. "Supply-Side Economics." 2008. 26 May 2009 . "Presidental Campaigns ." Ronald Reagan. 20 May 2009 . Van Braekel, Luc. "Reaganomics, A success story." The Brussels Journal. 2005. 26 May 2009 .