The political economy of laissez-faire: analysis of Reaganomics

"Only by reducing the growth of government can we increase the growth of the economy" said Ronald Reagan in 1981. He wanted to change the course of U.S. economic policy giving more freedom to people. His program was based on four policy objectives: reduce the growth of government spending, reduce the marginal tax rates, deregulation and at the end reduce inflation by controlling the growth of the money supply. This economic program was called "Reaganomics". At first, the inflation-adjusted declined from 4% during the Carter administration to 2,5% during the Reagan administration, despite the increase of the defense spending. So, federal spending was 22,9% of GDP in 1981 and declined to 22,1% of GDP in 1989. As for the cut of taxes the result was brilliant: the top marginale rate on individual income was reduced from 70% to 28% and the corporate income tax rate was reduced from 48% to 34%. Moreover most of the poor were exempted form the individual income tax. So, the government approved a package of investment incentives and the combination of this measure reduced the federal revenue share of GDP from 20% in 1981 to 19,2% in 1989. As far deregulation, Reagan eased price controls on natural gas, oil, cabl TV and so on. The monetary policy was also very successful; Real GDP increased at a 1,8% rate during the Reagan administration (only 0,8% during Carter administration) and the increase in productivity growth was even higher: the output per hour in the business sector increased at a 1,4% in the Reagan years and it was costant during Carter administration. Remember also that productivity in the manufacturing sector increased at a 3,8% annual rate, a record. The unemployment rate declined from 7% in 1980 to 5,4% in 1988 and also the inflation rate declined from 10,4% in 1980 to 4,2%. This was an incredible result because proved that there is no long-run trade-off between the unemployment rate and the inflation rate. Another important result of Reaganomics was that the share of the income tax burden borne by the top 10% of taxpayers increased from 48% in 1981 to 57,2% in 1988 and the share of income taxes paid by the bottom 50% of taxpayers dropped form 7,5% in 1981 to 5,7% in 1988; so the criticism that with Reaganomics the tax payments of the rich taxpayers would fall, failed. Cutting taxes caused the growth of individual income tax revenues from $244 billion in 1980 to "446 billion in 1989. At the end of the Reagan administration, the U.S. economy had experienced the longest peacetime expansion ever and the period of stagfation and malaise of 1973-1980 was transformed by the Reaganomics into a sustained period of higher growth and lower inflation.