The Economy in the 1980s

United States History

President Reagan's domestic program was rooted in his belief that the nation would prosper if the power of the private economic sector was unleashed. A proponent of "supply side" economics, a theory which holds that a greater supply of goods and services is the swiftest road to economic growth, Reagan sought large tax cuts to promote greater consumer spending, saving and investment. Supply-side economists argued that a tax cut would lead to increased business investment, increased earnings and -- through taxes on these earnings -- increased government revenues. Despite only a slim Republican majority in the Senate and a House of Representatives controlled by the Democrats, President Reagan succeeded during his first year in office in enacting the major components of his economic program, including a 25-percent tax cut for individuals to be phased in over three years. The Reagan administration also sought and won significant increases in defense spending to modernize the nation's military and counter what it felt was a continual and growing threat from the Soviet Union.

A recession marked the early years of Reagan's presidency, hitting almost all sections of the country. Real gross national product (GNP) fell by 2.5 percent in 1982, as the unemployment rate rose above 10 percent and almost one-third of America's industrial plants lay idle. Throughout the Midwest, major firms like General Electric and International Harvester released workers. The oil crisis contributed to the decline. As gains in U.S. productivity slowed, economic rivals such as Germany and Japan won a greater share of world trade. American consumption of goods produced by other countries rose sharply.

Farmers also suffered hard times. The number of farmers declined, as production became concentrated in the hands of a smaller number. During the 1970s, American farmers had helped India, China, the Soviet Union and other countries suffering from crop shortages, and had borrowed heavily to buy land and increase production. Then the rise in oil prices raised farm costs and a worldwide economic slump in 1980 reduced the demand for farm products. Farmers had major difficulties making ends meet.

But the deep recession throughout 1982 -- combined with falling oil prices -- had one important benefit: it curbed the runaway inflation that had started during the Carter years. Conditions improved for some segments of the economy in late 1983; by early 1984, the economy rebounded and the United States entered one of the longest periods of sustained economic growth since World War II. Japan agreed to impose a voluntary quota on its car exports to the United States. Consumer spending increased in response to the federal tax cut. The stock market climbed as it reflected the optimistic buying spree. Over a five-year period following the start of the recovery, GNP grew at an annual rate of 4.2 percent. The annual inflation rate remained between 3 and 5 percent from 1983 to 1987, except in 1986 when it fell to just under 2 percent -- the lowest level in decades. The nation's Gross National Product grew substantially during the 1980s; from 1982 to 1987, the U.S. economy created more than 13 million new jobs.

However, an alarming percentage of this growth was based on deficit spending. Under Reagan the national debt nearly tripled. Furthermore, virtually all the growth in national wealth took place in the highest income group. Many poor and middle-class families actually lost ground, as low- and semi-skilled jobs were eliminated from the economy, or failed to keep pace with the rest of society.

Steadfast in his commitment to lower taxes, Reagan signed the most sweeping federal tax-reform measure in 75 years during his second term. This measure, which had widespread Democratic as well as Republican support, lowered income tax rates, simplified tax brackets and closed loopholes, taking an important step toward taxing low-income Americans more equitably. Still, serious problems remained. The chronically poor failed to benefit as the economy improved. Farmers continued to suffer, and serious droughts in 1986 and 1988 compounded their distress.

The increased military budget -- combined with the tax cuts and the growth in government health spending -- resulted in the federal government spending far more than it received in revenues each year. Some analysts charged that the deficits were part of a deliberate administration strategy to prevent further increases in domestic spending sought by the Democrats. However, both Democrats and Republicans in Congress refused to cut such spending. From $74 thousand million in 1980, the deficit soared to $221 thousand million in 1986 before falling back to $150 thousand million in 1987. A stock market crash in late 1987 dramatized doubts about the stability of the economy.

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Source: U.S. Department of State