How Did Reagan's Policies Affect The Economy

When president Reagan entered the oval office in 1981, his first priority was to stimulate economic growth for generations to come. Reagan’s plan consisted of four economic pillars, they are as follows: to reduce the growth of government spending, to reduce the marginal tax rates on income from both labor and capital, reduce regulation, and to reduce inflation by controlling the money supply (Niskanen, 2002). Reagan’s policies created an economic boom during 1983, however, it is argued that Reagan’s policies increased the national debt for years to come and widened the gap between the rich and the poor (ushistory.org, 2016). Reagan helped America escape the stagflation it faced through most of the 1970’s through four major policy changes (Niskanen,

During this period, inflation was high and economic growth was low (Niskanen, 2002). To close a recessionary gap, you must increase aggregate demand. Reagan believed that through his trickle-down theory he could achieve this. However, not everyone agreed, though. Congress wearily accepted a 25% tax cut during Reagan’s first term (ushistory.org, 2016). It was Reagan’s hope that because the marginal tax rate on income from labor and capital was lower, corporations would increase their investment, in turn increasing aggregate demand. You could also argue that because of the lower tax rate, you were more likely to try to raise your income by either furthering education or taking a risk to start a company (Mandel, 2004). Starting a company increases investment spending which also increases aggregate

Stagflation means the economy is stagnant in addition to having high inflation. In an effort to pull the economy out of stagflation and try to strengthen it for years to come, Reagan developed his Reaganomics economic plan. If Reagan failed to make a change, inflation would have continued to skyrocket making the average citizen spend less, consequently, businesses would invest less into their businesses and employees. According to the classical the classical theory, the economy would eventually stabilize because wages are flexible and output can’t get any higher (Clifford, 2016). Reagan’s plan was based partly on the Classical theory, nevertheless, he thought the economy would stimulate its growth because although the government wasn’t spending money, the rich were reinvesting their tax cut back into their businesses and the