Reaganomics: economic policies and effects

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.