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By reducing or eliminating decades-long social programs, while at the same time lowering taxes and marginal tax rates, Reagan's approach to handling the economy marked a significant departure from that of many of his predecessor's Keynesian policies. Milton Friedman, the monetarist economist who was an intellectual architect of free-market policies, was a primary influence on Reagan.[4]
When Reagan entered office, the country faced the highest rate of inflation since 1947 (average annual rate of 13.5% in 1980), and interest rates as high as 13% (the Fed funds rate in Dec. 1980). These were considered the nation's principal economic problems and were all considered components of "stagflation." Reagan sought to stimulate the economy with large, across-the-board tax cuts[5][6] The expansionary fiscal policies soon became known as "Reaganomics",[5] and were considered by some to be the most serious attempt to change the course of U.S. economic policy of any administration since the New Deal. His radical tax reforms, in combination with a curb on domestic social spending, harsh restraints applied by the Federal Reserve Board under Paul Volcker on the nation's money supply, and heavy government borrowing required to finance the budget and trade deficits, as well as military expenditures, produced significant economic expansion and reduced inflation. Inflation was reduced by more than ten percentage points, reaching a low of 1.9% annual average inflation in 1986.[7][8]
Economic record[edit]President Reagan's tenure marked a time of expanded economic prosperity for many Americans. The misery index, defined as the inflation rate added to the unemployment rate, shrunk from 19.33 when he began his administration to 9.72 when he left, the greatest improvement record for a President since Harry S. Truman left office.[9] In terms of American households, the percentage of total households making less than $10,000 a year (in real 2007 dollars) shrunk from 8.8% in 1980 to 8.3% in 1988 while the percentage of households making over $75,000 went from 20.2% to 25.7% during that period.[10]
However, the number of Americans below the poverty level increased from 29.272 million in 1980 to 31.745 million in 1988, which means that, as a percentage of the total population, it remained almost stationary, from 12.95% in 1980 to 13% in 1988.[11] The number of children, ages 18 years and younger, below the poverty level increased from 11.543 million in 1980, 18.3% of children, to 12.455, 19.5%, in 1988.[11] In addition, the situation of low income groups was affected by the reduction of social spending. Inequality also increased. The share of total income received by the 5% highest-income households grew from 16.5% in 1980 to 18.3% in 1988 and the share of the highest fifth of income increased from 44.1% to 46.3% in same years. In contrast, the share of total income of the lowest fifth of households fell from 4.2% in 1980 to 3.8% in 1988 and the second poorest fifth from 10.2% to 9.6%.[12]
After negotiations with the Republican-controlled Senate and the Democratic-controlled House, in August 1981, President Reagan signed the largest marginal tax cuts in American history into effect at his California ranch. This lowered income taxes significantly, with the top personal tax bracket dropping from 70% to 28% during the course of seven years.[13] However, the 1981 marginal cuts were offset for most American taxpayers by the inflationary bracket creep not being applied to exemptions, as well as large social security rises in the next year[14] Due to a recession in 1982, unemployment rose to over 10% dropping during the rest of Reagan's terms, to a low of 5.3% in 1988.[6][15][16]real Gross domestic product (GDP) growth recovered throughout Reagan's term, averaging 3.5% growth per year, with a high of 7.3% growth in 1984.[17] The average annual GDP growth during Reagan's presidency was the fifth highest of any presidency after the Great Depression and the highest of any Republican presidency.[17][18] Inflation significantly decreased, falling from 13.6% in 1980 (President Carter's final year in office) to 4.1% by 1988. Sixteen million new jobs were created as well.[19] The net effect of all Reagan-era tax bills resulted in a 1% decrease of government revenues (as a percentage of GDP), with the revenue-shrinking effects of the 1981 tax cut (-3% of GDP) and the revenue-gaining effects of the 1982 tax hike (~+1% of GDP), while subsequent bills were more revenue-neutral.[20] However, tax revenue itself nominally increased massively by 103.1% from 1981 through 1989, largely as a result of more loopholes abolished than tax rates lowered.[21]
During the Reagan Administration, federal receipts grew at an average rate of 8.2% (2.5% attributed to higher Social Security receipts), and federal outlays grew at an annual rate of 7.1%.[22][23]
