What factors led to the economic prosperity of the Reagan years? To what extent did the president's economic policies help solve underlying economic problems?

 

During Reagan's presidency, there was realized a great economic recovery from the recession of the early 1980s. There emerged confidence in the economy, bolstered by key tax cuts, a decline in interest rates and lower inflation. The stock market surged, unemployment declined and the gross national product went up by almost 10%.

All this success was attributed to the President's economic policies, also known as Reaganomics, and he was indeed applauded for such. After inheriting a recessed economy in 1981, Reagan favored the Laissez-Faire economics and introduced his own policies. Reagan based Reaganomics on the theory of supply-side economics. This theory proposes that tax cuts encourage economic expansion enough to broaden the tax base over time. The increased revenue from a stronger economy is supposed to offset the initial revenue loss from the tax cuts. According to the Laffer Curve, this only works if the initial tax rates are high enough to fall in the "Prohibitive Range." Reagan's first tax cuts worked because tax rates were so high. The 1986 and 1987 tax cuts were not as effective because tax rates were already reasonable at that time. Reagan also offset these tax cuts with tax increases elsewhere. He raised Social Security payroll taxes and some excise taxes, and he cut several deductions. Reagan cut the corporate tax rate from 46% to 40%, but the effect of this break was unclear. He changed the tax treatment of many new investments. The complexity meant that the overall results of his corporate tax changes couldn't be measured. Economic growth was a healthy at 3.463% by the end of 1986, but the unemployment rate was 6.6%. It was still higher than the natural rate of unemployment. Reagan cut taxes again to 28%. Growth remained at a similar rate at 3.46% in 1987 and rose to 4.1% in 1988. Unemployment fell to 5.7% in 1987 and then fell to 5.3% in 1988.