During his 1980 campaign, Ronald Reagan promised to end the economic and hostage crises that had plagued Jimmy Carter's administration. The hostage crisis was solved for him when, only hours after he was sworn in, Iran's Ayatollah Khomeini released the captive Americans. With one victory under his belt, Reagan dedicated himself to making good on his other promise. The American people trusted him to do so.
In February 1981 Reagan presented the Economic Tax Recovery Act to Congress, calling for massive personal and corporate tax cuts, reductions in government spending, and a balanced budget. The program was based on supply side economics: Tax cuts, the theory went, would allow people either to spend more on goods and services, thus giving the economy a boost, or to invest in businesses, thus leading to economic growth. The economic expansion, supply side theorists argued, would generate enough revenue to cover the shortfall resulting from the initial cut in tax rates.
In an effort to balance the budget, Reagan "propose[d] budget cuts in virtually every department of government." While he cut back social programs, including school-lunch programs and payments for people with disabilities, he refused to touch Social Security and Medicare. He also advocated deregulation of certain industries in an effort to reduce the government's role in the economy, and proposed such a massive military buildup that Pentagon spending would reach $34 million an hour during his administration.
At first some Republicans were skeptical and most Democrats were hostile toward the Recovery Act. To overcome opposition, Reagan lobbied hard in Congress and used his skills as the "Great Communicator" to persuade the country. One after another, Congressmen began to line up behind Reagan’s program. Feeling for Reagan swelled after John Hinckley, Jr.'s, assassination attempt on March 30, 1981. Perhaps his rapid, dramatic recovery was seen as emblematic of what the country could achieve under his leadership. By July 1981, Reagan’s economic program won the support of two-thirds of the American public and was approved by enough Democrats to get it through Congress.
When, in August 1981, Reagan signed his Recovery Act into law at Rancho del Cielo, his Santa Barbara ranch, he promised to find additional cuts to balance the budget, which had a projected deficit of $80 billion -- the largest, to that date, in U.S. history. That fall, the economy took a turn for the worse. To fight inflation, running at a rate of 14 percent per year, the Federal Reserve Board had increased interest rates. Recession was the inevitable result. Blue-collar workers who had largely supported Reagan were hard hit, as many lost their jobs.
The United States was experiencing its worst recession since the Depression, with conditions frighteningly reminiscent of those 50 years earlier. By November 1982, unemployment reached, nine million, the highest rate since the Depression; 17,000 businesses failed, the second highest number since 1933; farmers lost their land; and many sick, elderly, and poor became homeless.
The country lived through the recession for a full year before Reagan finally admitted publicly that the economy was in trouble. His budget cuts, which hurt the poor, and his tax cuts, which favored the rich, combined with the hardships of a recession, spawned the belief that Reagan was insensitive to his people's needs. (Although it was a 25% across-the-board tax cut, those people in the higher income brackets benefited the most.)
As economic hardship hit American homes, Reagan's approval rating hit rock bottom. In January 1983, it was estimated at a dismal 35 percent. Having failed in his promise to deliver economic prosperity, Reagan's reelection in 1984 seemed unlikely.
With a failing economy, hopes for a balanced budget vanished. Even David Stockman, Reagan's Budget Director and an advocate of supply side economics, fearing future deficits "as high as $200 billion," urged the president to cut taxes.
While Reagan finally agreed to a moderate tax increase on businesses, he steadfastly refused to raise income taxes or cut defense spending, despite a growing negative sentiment toward the buildup. In January 1983, with his approval rating at an all-time low, the economy slowly began to right itself. Unemployment, as high as ten percent in 1982, had improved enough by 1984 for his popularity to be restored, and by the November presidential election, it was hard to believe that a second term was ever in doubt.
The harsh economic medicine of the Federal Reserve Board, backed by Reagan, squeezed inflation out of the American economy and set the nation on the right economic course. During Reagan’s second term America prospered. Although the budget deficit continued to grow -- arguably the price tag of ending the Cold War -- the United States experienced the longest sustained peacetime prosperity in its history.
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