Wikipedia Deep Dive

Reaganomics

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In October 1981, President Ronald Reagan stood at a press conference and quoted a fourteenth-century Arab scholar. "In the beginning of the dynasty," Reagan said, paraphrasing Ibn Khaldun, "great tax revenues were gained from small assessments. At the end of the dynasty, small tax revenues were gained from large assessments." It was an unusual historical reference for an American president, but it captured something essential about Reagan's economic philosophy: the idea that governments could actually collect more money by asking for less of it.

This counterintuitive notion would become the intellectual foundation of what radio commentator Paul Harvey dubbed "Reaganomics"—a portmanteau that stuck, for better or worse, to the economic policies that reshaped American capitalism.

The Problem Reagan Inherited

To understand Reaganomics, you first need to understand the economic nightmare of the 1970s.

Economists had long believed in a tradeoff between inflation and unemployment. High inflation typically meant low unemployment, and vice versa. This relationship, called the Phillips Curve, suggested policymakers could choose their poison. Want more jobs? Accept higher prices. Want stable prices? Accept fewer jobs.

Then the 1970s broke the model entirely. America experienced something that wasn't supposed to be possible: high inflation and high unemployment at the same time. Economists called this "stagflation," a word as ugly as the condition it described. Prices kept rising while jobs kept disappearing. The standard Keynesian playbook—named after British economist John Maynard Keynes, who advocated government spending to stimulate demand—offered no good answers. Spend more to create jobs, and you'd fuel inflation. Tighten the money supply to fight inflation, and you'd destroy jobs.

By 1980, inflation had hit 13.5 percent. Unemployment stood at 7 percent. The "misery index"—simply inflation plus unemployment—reached 19.33. For context, anything above 10 is considered painful. Americans were miserable, and they were ready for something different.

The Supply-Side Revolution

Reagan offered a diagnosis and a cure, both rooted in what became known as supply-side economics.

Traditional economics focused heavily on demand—how much people wanted to buy. Stimulate demand through government spending or tax cuts, and the economy would grow. Supply-siders flipped this emphasis. They argued that the real constraint on growth wasn't demand but supply—the willingness and ability of businesses and workers to produce goods and services.

What was strangling supply? Taxes, primarily. When the government took 70 cents of every additional dollar earned by top earners—which was the marginal tax rate when Reagan took office—why would anyone work harder, take risks, or invest in new ventures? The incentives pointed toward leisure, tax shelters, and moving money offshore.

Here's where the Laffer Curve enters the story. Arthur Laffer, an economist who would serve on Reagan's Economic Policy Advisory Board, made a simple observation that has since become famous. If the government sets tax rates at zero percent, it collects no revenue. Obviously. But if it sets rates at 100 percent, it also collects nothing—because nobody would bother earning money just to hand it all over. Somewhere between zero and 100 percent lies an optimal rate that maximizes revenue.

The crucial question was: which side of that peak was America on?

Supply-siders believed the country had climbed too high up the curve. Rates were so punishing that cutting them wouldn't reduce revenue—it would increase it, by unleashing productive activity that taxes had suppressed. Critics called this wishful thinking. George H.W. Bush, running against Reagan for the 1980 Republican nomination, memorably dismissed the theory as "voodoo economics."

Reagan won anyway.

The Four Pillars

Reaganomics rested on four main pillars, each designed to attack what Reagan saw as government overreach.

First, cut income taxes dramatically. The Economic Recovery Tax Act of 1981 slashed the top marginal rate from 70 percent to 50 percent and reduced the bottom rate from 14 percent to 11 percent. It was one of the largest tax cuts in American history. Five years later, the Tax Reform Act of 1986 went further, dropping the top rate to just 28 percent while eliminating many deductions and loopholes. The goal was a simpler, flatter tax code with lower rates but fewer escape hatches.

Second, reduce regulation. Reagan believed government rules had become a wet blanket smothering entrepreneurship. One of his first acts as president was eliminating price controls on domestic oil, which had been in place since the Nixon administration. The theory was straightforward: let markets set prices, and supply would respond naturally to demand.

Third, slow the growth of government spending. Note the careful phrasing—slow the growth, not cut spending. Under Reagan, federal outlays actually increased, but at a slower pace than before. The inflation-adjusted growth rate of federal spending dropped from 4 percent under Jimmy Carter to 2.5 percent under Reagan, the slowest since Dwight Eisenhower.

Fourth, support the Federal Reserve's fight against inflation. This was less a policy Reagan implemented than one he tolerated. Paul Volcker, the Federal Reserve chairman appointed by Carter, attacked inflation by dramatically tightening the money supply. Interest rates spiked to unprecedented levels—the prime rate hit 20.5 percent in August 1981. This monetary shock treatment was brutal. It triggered a severe recession in 1981-82, with unemployment climbing to 9.7 percent. But it broke inflation's back.

The Defense Exception

There was one major exception to Reagan's spending restraint: the military.

Defense spending exploded, rising from $267 billion in 1980 to $393 billion in 1988, measured in constant dollars. As a share of the economy, military spending jumped from 4.9 percent of gross domestic product to 5.8 percent. As a share of federal spending, it grew from 22.7 percent to 27.3 percent. These were levels not seen since the Vietnam War.

Reagan viewed this buildup as essential to winning the Cold War with the Soviet Union. Whether the spending actually hastened Soviet collapse remains debated by historians. What's clear is that it complicated the fiscal picture dramatically. You cannot slash taxes, boost military spending, and balance the budget simultaneously. Something had to give.

What gave was the deficit.

The Deficit Problem

Here lies the most uncomfortable truth about Reaganomics: it produced enormous deficits.

When Reagan took office, the national debt stood at $997 billion. When he left, it had nearly tripled to $2.85 trillion. The deficit peaked at 6 percent of gross domestic product in 1983—a level that would have been considered scandalous in earlier eras. The public debt as a share of the economy rose from 26 percent to 41 percent.

America went from being the world's largest creditor nation to its largest debtor. Reagan himself called this "the greatest disappointment" of his presidency.

What happened to the Laffer Curve's promise that lower rates would generate higher revenues? Federal revenue as a share of GDP actually fell, from 19.6 percent in 1981 to 17.3 percent in 1984, before recovering somewhat to 18.4 percent by 1989. The tax cuts did not pay for themselves, at least not in any straightforward accounting sense.

Reagan did agree to some tax increases along the way—notably in 1982 and 1984, which together constituted what tax historian Joseph Thorndike called "the biggest tax increase ever enacted during peacetime." He also raised payroll taxes for Social Security and Medicare in 1983. These increases undid roughly a third of the original 1981 cuts. But they weren't enough to close the gap opened by the combination of rate cuts and defense spending.

The Good News

So did Reaganomics work? That depends entirely on which metrics you examine and which you ignore.

The case for success starts with inflation. The misery index that stood at 19.33 when Reagan took office had fallen to 9.72 when he left—the biggest improvement since Harry Truman. Inflation dropped from 13.5 percent to 4.1 percent. This was largely Volcker's doing at the Federal Reserve, but Reagan deserves credit for giving Volcker political cover during the painful recession his policies caused.

Economic growth picked up. Real gross domestic product grew at an average 3.5 percent during the Reagan years, compared to 2.9 percent in the preceding eight years. This expansion, which continued well into the 1990s, became one of the longest peacetime growth periods in American history.

Unemployment fell, eventually. After peaking at 9.7 percent during the 1982 recession, the rate declined steadily, reaching 5.4 percent when Reagan left office. The economy added 16.1 million nonfarm jobs during his presidency.

Productivity improved. Output per worker grew at 1.5 percent annually under Reagan, compared to 0.6 percent in the previous eight years. Private sector productivity growth nearly doubled, from 1.3 percent to 1.9 percent.

And there were gains across income levels, at least by some measures. The percentage of households earning less than $10,000 annually, adjusted for inflation, shrank from 8.8 percent to 8.3 percent. The percentage earning over $75,000 grew from 20.2 percent to 25.7 percent. More Americans were reaching the upper middle class.

The Bad News

Critics point to a different set of numbers.

Income inequality widened dramatically. While growth returned, its benefits flowed disproportionately upward. Income growth for middle and lower classes actually slowed during the Reagan years, falling from 2.4 percent to 1.8 percent. For the upper class, it accelerated from 2.2 percent to 4.83 percent. The rich got richer faster while everyone else's progress stalled.

Manufacturing employment declined by 582,000 jobs—a reversal from the 363,000 jobs gained in the previous eight years. The industrial heartland began its long, painful transformation into what some would later call the Rust Belt.

Job creation, while substantial in absolute terms, actually lagged previous administrations on a percentage basis. Jobs grew at 2.0 percent annually under Reagan, compared to 3.1 percent under Carter. The monthly average of new jobs—168,000—was lower than Carter's 216,000.

The Reagan administration was the only one not to raise the minimum wage, allowing its purchasing power to erode with inflation. Combined with the tax changes that benefited upper incomes most, this contributed to what critics described as "an atmosphere of greed."

And then there was the debt. Tripling the national debt in eight years represented, in the view of many economists, a massive intergenerational transfer—borrowing from future Americans to finance current consumption and military spending. It reversed the post-World War II trend of shrinking debt relative to the economy.

The Philosophical Divide

The debate over Reaganomics has never really been settled because it reflects a deeper philosophical divide about the proper role of government in the economy.

Supporters see the Reagan era as proof that markets work when government gets out of the way. They point to the entrepreneurial revolution that followed—the explosion of venture capital, the rise of Silicon Valley, the dynamism that made America the world's technology leader. They argue that even the deficits served a purpose, "starving the beast" of big government by making future spending increases politically difficult.

Critics see the Reagan era as the beginning of America's inequality crisis. They argue that "trickle-down economics"—the idea that benefits to the wealthy eventually flow down to everyone else—was always a myth. The wealth created during the Reagan boom didn't trickle down; it pooled at the top. Meanwhile, the debt burden was passed to future generations, and essential government services were starved of funding.

Reagan himself framed his policies in moral terms. Economic freedom wasn't just efficient; it was right. Free markets aligned with American values of liberty and individual initiative. Government intervention, no matter how well-intentioned, ultimately constrained human potential.

His opponents saw moral dimensions too—but different ones. They asked: What kind of society allows its rich to grow richer while its poor stay poor? What kind of government borrows from its grandchildren to fund tax cuts for millionaires?

The Long Shadow

Four decades later, Reaganomics still shapes American political economy.

The top marginal tax rate, which stood at 70 percent when Reagan took office, has never returned to that level. Even after increases under subsequent presidents, it remains far below its pre-Reagan peak. The assumption that lower taxes promote growth has become Republican orthodoxy, with every GOP presidential candidate since Reagan promising tax cuts as economic medicine.

The national debt, which Reagan called his greatest disappointment, has continued climbing, now measured in tens of trillions rather than billions. The deficits that once shocked observers have become routine. Reagan proved that Americans would accept large deficits without political punishment, a lesson both parties have internalized.

The income inequality that began widening in the 1980s has continued widening ever since. Whether this is a consequence of Reagan's policies, broader technological and global forces, or some combination remains hotly contested. But the trend line is clear, and it starts in the Reagan years.

Most fundamentally, Reagan changed the terms of economic debate. Before him, the question was often: How can government solve this problem? After him, the question became: Is government the problem itself? His famous declaration that "government is not the solution to our problem; government is the problem" crystallized a worldview that remains potent in American politics.

What Ibn Khaldun Actually Said

It's worth returning to that fourteenth-century Arab scholar Reagan quoted.

Ibn Khaldun was writing about the rise and fall of dynasties, not modern tax policy. His observation was part of a larger theory about how civilizations decay. When dynasties are young and vigorous, he argued, they tax lightly because they don't need much revenue—their power comes from solidarity and shared purpose. As they age and grow corrupt, they tax heavily to fund luxuries and armies, but the heavy taxation destroys the productive capacity that generated wealth in the first place.

It's a cyclical theory, deeply pessimistic about human institutions' ability to sustain themselves. Reagan extracted from it only the part that supported his agenda: lower taxes can mean higher revenues. He ignored the part about inevitable decline.

Perhaps that selective reading was appropriate for a president whose greatest gift was optimism. Reagan genuinely believed America's best days lay ahead, that the nation could restore its economic vitality through the simple act of trusting its people more than its government.

Whether that optimism was justified—whether Reaganomics was a necessary correction or a fateful wrong turn—depends on which America you see when you look around today. The debate continues, four decades on, with no resolution in sight.