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Reaganomics (a portmanteau of Reagan and economics attributed to Paul Harvey[1]) refers to the economic policies promoted by the U.S. President Ronald Reagan during the 1980s. The four pillars of Reagan's economic policy were to:[2]

In his stated intention to increase defense spending while lowering taxes, Reagan's approach was a departure from his immediate predecessors. Reagan enacted lower marginal tax rates in conjunction with simplified income tax codes and continued deregulation.

William A. Niskanen, one of the architects of Reaganomics, summarizes the policy as "Reagan delivered on each of his four major policy objectives, although not to the extent that he and his supporters had hoped", and notes that the most substantial change was in the tax code, where the top marginal individual income tax rate fell from 70% to 28%, and there was a "major reversal in the tax treatment of business income", with effect of "reducing the tax bias among types of investment but increasing the average effective tax rate on new investment." Roger Porter, another architect of the program, acknowledges that the program was weakened by the many hands that changed the President's calculus, such as Congress.[2][3] The effect was primarily a change in the composition of tax revenue, towards payroll and new investment, and away from higher earners and capital gains on existing investments, with comparatively small effect on overall tax revenue: the changes "reduced the federal revenue share of GDP from 20.2 percent in fiscal 1981 to 19.2 percent in fiscal 1989," a 1% reduction.


Historical context

Prior to the Reagan administration, the United States economy experienced a decade of rising unemployment and inflation, known as stagflation. Political pressure favored stimulus resulting in an expansion of the money supply. President Nixon's wage and price controls were abandoned.[4] The federal oil reserves were created to ease any future short term shocks. President Carter started phasing out price controls on petroleum, while he created the Department of Energy. Much of the credit for the resolution of the stagflation is given to two causes: a three year contraction of the money supply by the Federal Reserve under Paul Volcker, initiated in the last year of Carter's presidency,[4] and long term easing of supply and pricing in oil during the 1980s oil glut. The Keynesian interpretation of Reaganomics is that the economic expansion is primarily or entirely due to these factors, and not due to Reagan's policies.[citation needed] Another real factor is that the 1980s (through 2000s) were the peak years for the US demographic window, as the baby boomer generation came to dominate the workforce.[citation needed]

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