A large part of the Republican platform for the past few decades, the Reaganomic policy has been forced upon the American government. Though a seemingly simple policy that many seem to enjoy and believe in, the true intentions and working of the policy are lost upon many who preach its affectiveness. The true horror of this, is that these same people are in fact the ones running the American government. But what is Reaganomics? How does it work? Where does it fail?
Reaganomics is simply a newer rendition of traditional supply-side economic policy that focuses highly on the trickle-down economic theory. Following the Laffer Curve, supply-side economics refers to an idea that by lowering the taxes on economic participants, companies/corporations, these participants are then allowed higher specialization, economic efficiency, and economic expansion. Though lowering taxes does increase deficits, proponents of this theory argue that the persistent budget deficits would force the government to reduce spending. The trickle-down theory, considered the father of the supply-side theory, explains that the increased freedom for the rich corporations will allow them to hire more and increase the salary of those already under their employ.
A highly successful policy, Reaganomics aided the economy drastically during the recession. The GDP rose over 4%, which resulted in a 1.6% drop in unemployment. The federal deficit dropped from 6% to 2.9%. Growth of federal spending fell from 4% to 2.5%.
With the recession leading up to the end of 1982, the economy was deeply depressed, with the worst unemployment rates since the Great Depression. In such a time, there was a lot of room to grow. The expansions under Reaganomics, however, were much closer to the workings of the Keynesian or demand-side economic theory. With high inflation before the recession, a policy of higher interest rates applied to the Federal Reserve. Once inflation had stabalized at 4.1%, interest rates were lowered to promote economic growth.
Though successful under Reagan, this policy has had many failings in its time and has had damaging effects on the economy. The policies of supply-side economics are purely based on what can only be described as a lack of understanding of the economy. These policies are based on short-term solutions or quick, but small boosts in the economy.
Lowering the taxes of companies does give them more room to expand. This does, however, have a limit. The higher specialization allows a small increase to the resources required by these corporations. Specialization, however, is a policy that is always followed, which means the slight and temporary increase in demand for these resources is miniscule in scope. The ability to increase efficiency also allows for easier and simpler production. This also completely counters the idea of expansion, with more efficient ways to create products less workers are required.
The idea that these corporations will expand is understandable to a small point. With more capital available, more goods can be made by hiring more workers to make them. However, the simple rules of supply and demand prove the theory quite lacking. With lower supplies there is higher demand and vice versa, this results in a point where there is a stabalization of supply and demand called equilibrium. All companies are forced to reach this equilibrium or lose money, and all but the newest did a long time ago. Though they may have the ability to grow, without an increase in demand there is no reason to as it would only reduce profit. Even with more specialization, new goods would only reduce the demand of old goods and allow a simple shift in production without having to expand. The only companies that do expand are small or under extreme duress, a small boost that is almost completely unnoticeable.
A deficit forcing the government to reduce spending is a puzzling idea. The policies in supply-side economics would always force a deficit as long as it is followed. This in turn continually reduces the government's spending more, ultimately leading to the government doing absolutely nothing or collapsing altogether. Without decreases in government spending, however, the government would have to borrow money to pay off the deficits and increase the national debt. This happened under Reagan as he increased spending, raising the national debt from $997 billion to $2.85 trillion.
tl;dr: It's a quick boost that the Republicans love because it fixed a recession by following another theory