Written By
Paul Tracy
Updated November 4, 2020

What is Reaganomics?

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

How Does Reaganomics Work?

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.

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Why Does Reaganomics Matter?

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.

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