Reaganomics
Ronald Reagan inherited a struggling economy with high inflation and high unemployment. He sought to revive the economy, based on a handful of key assumptions. Among his assumptions were that the defense sector was a key economic driver; that demand could be stimulated by lowering taxes; that increasing the wealth at the top-end of the economic ladder would see benefits trickle down to the lowest rungs; and that inflation could be controlled by freeing up the supply of oil.
Reagan's strategy included lifting price and supply controls on oil. He lowered taxes for the wealthy, increased them for the working class, and instituted payroll taxes. He borrowed heavily, turning the U.S. from the world's largest creditor to the world's largest debtor.
These policies represented a break from those of previous administrations in several key ways. First, the boost in defense spending rapidly increased foreign debt. The U.S. had been a net lender to the world and was now a borrower. Many previous regimes had not considered the impact of oil in the U.S. economy - that notion had only been around for less than a decade when Reagan came to power. In addition, the shifting of the tax burden to the working class had never been administered in such a large-scale way before.
Reaganomics achieved short-term gains, but was overall not a successful approach to the American economy. The emphasis on high defense spending and high foreign debt created an illusory effect. In more recent times, it has become apparent that the economy is now dependent of defense-oriented deficit spending, which unfortunately is not sustainable in the long run. In freeing up the oil supply, an opportunity was missed to reduce American dependence on a cheap and free-flowing oil. In doing so, Reaganomics set the stage for the economic issues we are having today and will likely have for years to come as the oil supply dwindles and demand soars.
Sources:
Faragher, John Mack et al. Out of Many: a History of the American People. 5th ed. Vol. 2:
Since 1865. Upper Saddle River NJ: Pearson/Prentice Hall, 2006.
