The policies of President Ronald Reagan fundamentally changed the American economy. GDP historical data shows some growth during his presidency, but the period was far from stable. Reagan’s promises did manage to recuperate the economy, though not to the extent he and his supporters hoped for. Despite this, his economic ideas ended up shaping the last two decades of the twentieth century and they have influenced the decisions of every president who came after him.
1980–1984: Reagan is in charge. After a devastating period of slow growth and unemployment, economic experts are no longer supporting Keynesian theory, and politicians are pressing for an expansion of the money supply. While Reagan starts his presidency with the country deeply mired in stagflation, he quickly lowers income taxes from 70% to 28% for the top tax bracket. Corporate taxes are also reduced — from 48% to 34%.
In 1982, Reagan signs the Garn-St. Germain Depository Institutions Act, which allows banks to raise interest rates on savings deposits and reduce loan-to-value ratios.
1984–1987: The current US GDP remains steady. Throughout his presidency, Reagan brings four new policies intended to further stabilize the country:
- Reduction of domestic spending
- Reduction of taxes for businesses, individuals, and investors
- Reduction of regulations on business
- Support of slower money growth
Reagan believes that lower corporate taxes leave companies with more money, which they will use to hire more workers at higher wages. This is called “trickle-down theory,” and it hinges on the idea that the whole society benefits from the growth of big companies with plenty of resources. Rich Americans embrace the idea. For a while, the US nominal GDP is relatively stable.
The stock market hits a new crisis on October 19, 1987, when the Dow Jones Industrial Average drops by 22.61%. This happens because of a newly introduced bill proposing the elimination of the tax deduction for loans used to finance corporate takeovers. The bill is Congress’s way of regulating the market, but Wall Street is afraid and investors sell their stocks. People fear another recession, so the Federal Reserve pumps money into banks. After a short struggle, the market is stabilized.
There are more tax cuts in 1986 and 1987, but they aren’t very effective because taxes are already reasonable.
1988–1991: Reagan reduces bank regulations increases barriers to imports. Unemployment is at 5.3%, and US annual GDP grows by 3.7% in 1989.
George H.W. Bush takes office as the 1989 Savings & Loans crisis reaches its peak. Changing market conditions, Reagan’s deregulations, and corruption lead to instability in the S&L industry. Once the dust settles, a third of these institutions have fallen. It is revealed that five US senators put pressure on the Federal Home Loan Banking Board to overlook suspicious activities, and are now being accused of improper conduct.
Because of unsound real estate lending, the country ends up with a $160.1 billion debt, and $124.4 billion of that debt is repaid by US taxpayers between 1986 and 1996.
In 1990, the country enters another recession as the result of the crisis. GDP growth slows again.
1992–1994: The country is climbing out of recession, and the US GDP by year in 1992 is 3.5%.
The Reagan-Bush campaign to create the North American Free Trade Agreement finally comes to fruition. Canada, the United States, and Mexico join together to help North America become a more competitive force in the global marketplace. George H.W. Bush, Mexican President Salinas, and Canadian Prime Minister Brian Mulroney sign the agreement in 1992. The economic alliance is at least in part a response to the Maastricht Treaty that will later create the European Union.
In 1993, Bill Clinton comes into office. His first budget is the Omnibus Budget Reconciliation Act, also known as Deficit Reduction Act. It raises the top income tax rate from 28% to 36% for corporations that earn over $1 million and cuts down on the number of subsidies they get. By taxing the Social Security benefits of high-income earners, he manages to create the earned income tax credit for incomes under $30,000.
1995–1997: The US nominal GDP during this period has steady growth, but the Fed has to raise interest rates to slow down inflation. The country is relatively stable under Clinton, and in 1996, he introduces another reform, modifying the Temporary Assistance for Needy Families Act with an addendum called the Personal Responsibility and Work Opportunity Reconciliation Act. This addition states that recipients of the program must get a job within two years of receiving assistance and that they can receive payments for a maximum of five years. The new program builds on Reagan’s conviction that welfare creates a cycle of poverty, and that the government should provide jobs instead of money to families in need.
1998–1999: The US GDP by year is still steady at this point, but a crisis threatens to cause an imbalance when a hedge fund called Long-Term Capital Management almost goes bankrupt. Due to risky trade practices, this massive hedge fund loses almost all of its investors when its highly leveraged interests begin to fall apart. Since LTCM is a prominent hedge fund with a huge number of investors, the Federal Reserve steps in to prevent complete failure. The Fed spends $3.5 billion in return for 90% ownership of the fund.
In 1999, 1933’s Glass-Steagall Act repealed. It is meant to consolidate commercial and investment banks through financial holdings, but few banks take advantage of it because they don’t want additional supervision from the Fed. Banks that do, become “too big to fail.”