Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Reaganomics

What it is:

Reaganomics is a reference to U.S. president Ronald Reagan's economic policies between 1981 and 1989.

How it works (Example):

Also called voodoo economics, Reaganomics is an idiomatic expression used in reference to the trickle-down and supply-side economic policies of U.S. president Ronald Reagan's administration between 1981 and 1989. In an effort to stimulate the U.S. economy following the credit crisis that plagued the country in the previous decade, President Reagan introduced an aggressive policy agenda chiefly characterized by tax incentives for businesses, significant tax reductions on the wealthiest Americans, increased military expenditures, and large cuts in social programming.

Based on trickle-down economics in conjunction with supply-side macroeconomic theory, President Reagan's economic policies expressed his position that by eliminating a large portion of social programming, taxes could be reduced in critical areas of industry and production. Consequently, fewer taxes were levied on companies based on the assumption that levying taxes would reduce expenses and result in an increase in the overall bottom line. Companies would then invest this freed-up capital in expansion and product development. Tax reductions for the wealthy would free-up funds on the consumer side to allow for increased spending and capital market investment in the aforesaid growing companies. The synergy between tax breaks combined with industrial development and consumer spending and capital market investment, it was believed, would lead to a reduced price level from greater output. The consequent prosperity would then "trickle down" to the average income-earner.

[InvestingAnswers Feature: The Most Important Tax Changes to Know Before Filing Your Tax Return]

Why it Matters:

Reaganomics was successful in substantially reducing the high interest rate levels brought about by the stagflation and credit crisis of the 1970s. Equally as important, Reaganomics stabilized prices and minimized the inflation rate. Many historians point out that cuts in social spending during this time had dire consequences for millions of American families who had depended on social support programs in order to survive. In addition, though consumer spending did increase, tax cuts on the wealthiest Americans failed to have the desired effect as additional funds saved from the lower tax rates were saved and not invested as originally planned.

[InvestingAnswers Feature: How to Avoid an IRS Audit]

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...