Big Government
Reagan claimed that federal government had become big government which would intervene to much in peoples lives through welfare and other benefits
Reagan’s beliefs
Was a strong Christian who believed in many things such as opposing abortion and homosexuality. A lot of his support came from the Christian right.
Supply-side economics
Trickle down theory whereby low taxes and government regulation will allow business to make more money which will ‘trickle down’ to the rest of the people
Initial actions reducing big government
- Freeze on federal hiring
- Had to cut travel expenses by 15%
- Despite making him look busy did not cause much financial savings
Reaganomics
Reagan presented his plan to congress in 1981 which had 4 main points
- Cut Federal Deficit: Budget cut domestic spending and had many errors. Due to its haste had $74 billion of yet undermined cuts
- Tax Reductions: Reductions made in the 1981 ERTA
- Deregulation: Had been started by Carter
- Planned control of money supply: To hold down inflation while economy grows
Passing bills
Was fairly easy for Reagan as Republicans had majority in senate and almost one in the house so only needed 26 Democrats support
OBRA
Omnibus Reconciliation Act of 1981 was passed through congress fairly easily with only minor changes
Had cuts worth $35 billion of federal spending
ERTA
Economic Recovery Tax Act 1981 was passed at the same time as the ORA but was fought harder in congress.
It cut taxes for higher income from 70% to 50% and for lower income 14% to 11%
Other taxes were also decreased
TEFRA
Tax Equity and Financial Responsibility Act of 1982 made changes to the budget due to financial downturn in 1982 and also temporarily raised some taxes
COBRA
Consolidated Omnibus Budget Reconciliation Act of 1986 further reduced federal spending on things by moving it to the state or private companies
Made the employer responsible for healthcare instead of the federal government
Tax Reform Act
Tax reform Act of 1986 reduced the number of tax brackets to reduced tax evasion and supposedly help the poorest people
Further lowered high end tax rates from 50% to 28%
Did polices stop inflation
Reagan put pressure on FRB to restrict money supply and didn’t ask to lift them when unemployment rose.
Inflation fell from 13.5% in 1980 to 6.2% in 1982 and remained around this figure and by 1996 it hadn’t reached double figures again
Did polices reduced unemployment
Money supply restriction caused high interest rates which badly affected many business. Reagan came to power during a recession and it worsened as unemployment rose from 7,1% in 1980 to 9.6% in 1983 however it did fall after this
Did polices increase personal wealth
Some say it made the rich richer and poor poorer.
However some disagree and say rich were affected most by tax cuts and the poor benefited as tax cuts on rich benefited economy.
Did polices encourage people to save and invest
Deregulation meant companies offered more risky interest rates on savings and for a while people did benefit
Didn’t last as stock crash in 1987 caused government to step in and provide massive bail out fund under Bush
Did polices reduce the deficit
Deficit did not decrease during Reagan’s presidency
- 1980 deficit was $59 billion
- 1983 deficit was $208 billion
big reasons include lower tax income and increased defence spending with it rising from 23% of federal spending in 1980 to 28% in 1987
Legacy of Reagan’s economic policies
George H. W. Bush tried to continue these policies however they were less popular and Democrats had control of Congress
He also raised taxes despite campaigning he would never do so
Bill Clinton did no revert to old democrat polices and kept low taxes as they were popular. He did however increase welfare spending on things like medical care
Actions reducing big government
- Deregulation: Removed 23,000 pages from an 87,000 page federal book of regulations
- This had brought down the price of petrol and heating
- Cut federal waste and fraud saving $2 billion in 6 months
- Replaced federal agencies with private ones
Problems with deregulation
- Big companies would buy smaller ones when they were struggling
- Emergence of conglomerates which set their own lower safety standards than federal standards
- Despite initial priced drops big companies would work together to ‘fix’ a price and raise them again
Savings and Loan Collapse
Through regulation S&Ls began competing with banks and would have to take more risks.
Many of them failed and government had to introduce legislation to bail them out. By 1988 S&Ls had lost $10 billion
In 1989 the property market collapsed and Bush had to sign the Financial Institutions Reform, Recover and Enforcement Act (FIRREA) which bailed out failing organisations. It cost $150 billion
Trade
Imports increased as their was less government restrictions on trade allowing cheaper foreign imports to compete with American goods
US also borrowed more than it leant out for the first time
Reasons for failure to reduce big government
- Congress would not pass deregulation on things such as pollution and working conditions
- State governments did not want to pay for things that the federal government was
- By the time Bush came to power people were less in favour of deregulation having seen its long term impact as companies tried to maximise their profits
Affect on the poor
The situation for the poorest Americans worsened during Reagan due to:
- OBRA cut spending to many projects for the poorest and introduced a cap to payments for many welfare
- Fewer people were eligible for government benefits
Workfare
- Changed welfare to workfare but requiring at least one parent to work
- Work provided pay poorly (less than minimum wage)
- Childcare was hard to get as despite government promises it was not increased
