Reagonomics – A Flashback

These days’ people are still thinking or hesitating to take some major economics steps like tapering, increasing interest rates etc… By seeing and analyzing the current scenario I remembered a strong head economist cum politician, former U.S. president, Mr. Ronald Reagan.

The economic policies which he used are popularly known as Reagonomics. He had a simple, but specific plan, of which he spoke often during the campaign: cut taxes, get control of government spending and get the government out of the way so that the entrepreneurial spirit of the American people could be unleashed. Some skeptics derisively called his plan “Reaganomics,” but President Reagan was undeterred.

Many economist and many leaders, across the globe, was amazed and surprised by the way he carried out the economic policies, administration and put U.S. economy on track in short span.

It was the most serious attempt in U.S. to change its economic policy of administration since the New Deal. "Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy."

His program (in 1981) of Economic recovery had four major policy, they are

1. reduce the growth of government spending,
2. reduce the marginal tax rates on income from both labor and capital,
3.  reduce regulation, and
4.  reduce inflation by controlling the growth of the money supply.

He believed that this in turn will increase savings and investment, increase in economic growth, balance the budget, restore healthy financial markets, reduce inflation and also interest rates..

In August 1981, President Reagan signed the Economic Recovery Tax Act of 1981, which brought reductions in individual income tax rates, the expensing of depreciable property, incentives for small businesses and incentives for savings. So began the Reagan Recovery. A few years later, the Tax Reform Act of 1986 brought the lowest individual and corporate income tax rates of any major industrialized country in the world.

The numbers tell the story. Over the eight years of the Reagan Administration:

• 20 million new jobs were created
• Inflation dropped from 13.5% in 1980 to 4.1% by 1988
• Unemployment fell from 7.6% to 5.5%
• Net worth of families earning between $20,000 and $50,000 annually grew by 27%
•  Real gross national product rose 26%
•   The prime interest rate was slashed by more than half, from an unprecedented 21.5% in January 1981 to 10% in August 1988

During a G7 Economic Summit, the West German Chancellor asked him to “tell us about the American miracle” (Before two years, when he outlined his economic recovery plan these group of world leaders were unconvinced) As President Reagan observed with a wry smile, “I could tell our economic program was working when they stopped calling it Reaganomics”

Today many economist and politicians are more skeptics about taking some bold steps while economy is still quivering.  No doubt current scenario and situation may not be same; but taking decisions boldly can send a right signal to the economy to the take it to the next level.  This is where I admire Reaganomics.  Let us wait and watch how the policy makers do take decisions in coming days.

Sources: 

1. http://www.econlib.org/library/Enc1/Reaganomics.html
2. http://www.reaganfoundation.org/economic-policy.aspx