Anti-Inflationary Policy and Supply-Side Economics

Subject: Economics
Pages: 3
Words: 674
Reading time:
3 min

In the 1980s, the US experienced a recession that affected almost all sections of the country. The real national product (GNP) fell by 2.5% in 1982, and the level of unemployment rose above 10 percent. This led to the industrial section being idle. Most of the workers in the industrial farms were rendered jobless. The cost of oil was very high, thus making the cost of production very high.

Most farmers were also affected since there was no market for their farm produce. The rise in oil prices brought adverse inflation effects. The then US President Ronald Reagan believed that the economy would boom again if the power of the private sector was unleashed. He advocated for a greater supply of goods and services in order to boost economic growth. He also advocated for a high tax cut that would enable greater consumer spending and also increased savings and investment. These proponents were referred to as supply-side economics.

Supply-side economists believed that tax cuts would lead to improvement in business investment and more earnings that would eventually lead to increased government revenues. In this regard, President Reagan succeeded in implementing a 25% tax cut and also increased the spending on defense in order to modernize the nation’s military. Reagan left a record in the US economic history by initiating the largest economic boom in American history.

He deregulated the market and put forward sound monetary policies that would contain inflation. The big cuts in the marginal tax rate acted as an incentive to work and also highly stimulated economic growth that began in late 1982. During the Presidents Reagan regime, the government revenue increased even with the tax cuts, but the spending did not reduce. The rich paid more tax proportionately than they had done before the tax cut was implemented.

Critics of the Reagan policies argued that the tax cut reduced the savings of the US Treasury. The reality was that the total federal revenues doubled from over $517 billion in 1980 to more than $1 trillion in 1990. Spending in the US economy rose by a high percentage following the tax cut. The federal spending itself rose by 35.8%. The defense expenditure increased by 50% between 1980 and 1989 and fell by 15% as a result of the cold war between 1989 and 1993. In response to the deep recession of the late 1970s that was initiated by the tight monetary policies, the Reagan policies worked for the better of the US economy.

There was an economic boom that lasted for more than 92 months from late 1982 to mid-1990. This marked the longest sustained economic growth in the US. This growth in the US economy also boosted the economic growth of East and West Germany and also two-third of Japan’s economy. His tax policies had an effect on the incomes of the rich. The proportion of tax paid by the top one percent rose from 18 percent in 1981 to 28 percent in 1988. The tax cut favored the lower-income groups who paid less tax. The reduction of tax for the low-income groups was very high following the increased standard deduction, the increase in the personal exemption, and also tripled the earned income tax credit, which provided net cash for single parent families with children in the lowest income levels.

Despite the efforts by his critics to raise the taxes in order to cater to the budgetary deficit, Reagan went ahead to promote supply-side economics by advocating for free-market growth-oriented policies. He approached the leaders of the Soviet Union, arguing that there would be a possibility of more peaceful east-west relations if the soviets would alter their aggressive military. He also dealt firmly with the terrorist activities in Libya. He seeks to reduce the trade protectionism that had spread to Europe. He insisted on advocating trade services and solving problems such as the export subsidies and also the non-tariff barriers within the General Agreement on tariffs and trade.