The term reaganomics was coined to refer to liberal economic policies. carried out by Ronald Reagan in the eighties.
Therefore, we are facing a word that is formed by the contraction of two. On the one hand, Reagan, which is the last name of the former president of the United States (USA) and on the other, economic or economy. Thus, he refers to the economic policies of his legislature.
Keep in mind that Ronald Reagan belonged to the conservative or liberal Republican party. Therefore, we are facing economic policies that are based on the reduction of taxes or public spending and the reduction of regulation in the markets.
Historical situation of reaganomics
Ronald Reagan was president of the USA from 1981 to 1989. In the previous legislature Gerald Ford (1976) governed and the country had a series of problems related to unemployment, high inflation and the lack of growth, the so-called stagflation.
In this way, the former president based his speech on a different path than his predecessors. His proposal was to lower taxes and public spending to fuel growth. All this accompanied by deregulation plans. Thus, the promise was fulfilled, but only partially.
Economic theory and reaganomics
The economic policies proposed by Ronald Reagan have support in the liberal schools of economics. These are in favor of non-intervention in the markets and reductions in public spending and revenue to promote growth.
The economic reasoning is as follows. In the first place, by lowering taxes, this will result in higher disposable income and would allow consumption and savings (investment) to increase. Both are necessary for economic growth measured by GDP.
On the other hand, the deregulation of the market would allow greater efficiency and productivity in companies. They no longer have the need to devote enormous effort in time and money to comply with regulations that are too often unnecessary, according to this school.
The public debt problem
Reaganomics managed, in the eight years of the legislature, to fulfill its two main promises. But, at the same time, it increased public military spending, due to the confrontation with the Soviet Union and Reagan’s interest in prevailing in this conflict.
In the end, there was a contradictory effect to some extent. While taxes and expenses were lowered, the public debt increased. In order to place this debt on the market, interest rates were increased.
This caused a “crowding out” effect and private investment was displaced by that public debt, now more interesting for investors. In the end, it ended up having an impact on growth, causing it to slow down. Once again, economics shows that it is a complex science.
Criticisms of Reaganomics
To finish and as a summary, let’s see some criticisms of the policies carried out in the Reagan era. Some we have already mentioned.
- First, public spending did drop, but only for a while. In fact, the ratio of government spending to GDP reached its highest level since World War I.
- Some authors defend that perhaps the growth came from the increase in aggregate demand via public debt and not from the measures implemented.
- Between 1981 and 1982 there was a recession that some authors liken to the Great Depression, with unemployment shooting up to almost 11%. All this was caused by an unprecedented rise in interest rates as a way of curbing inflation.
- The increase in military spending, together with the reduction in taxes, caused many social expenses to be neglected.
- We can mention that there was economic growth and increased productivity under Reaganomics. But perhaps that military spending could cause unwanted situations that even nullified the effects of these improvements, according to some experts.