New directions in economic policy: the impact of Reagan’s policies on…

The idea

Reagan’s economic programme, often called supply-side economics, cut the top marginal income tax rate from 70% to 28% and reduced federal spending on social programmes. For workers, this meant weaker trade unions after the 1981 air-traffic controllers’ strike, stagnant real wages for many and a shift to lower-paid service jobs. For families, cuts to welfare and childcare support increased hardship, though middle-class families gained from lower taxes. Tax cuts without matching spending cuts widened the budget deficit, while high consumer demand and a strong dollar produced a large trade deficit. Bush broke his ‘no new taxes’ pledge in 1990, agreeing a budget deal that raised taxes to reduce the deficit, which angered conservatives and contributed to his 1992 defeat.

What earns the marks

• Explains how supply-side tax cuts affected workers: reduced union power after the 1981 PATCO strike, slower wage growth and growth of low-paid service employment.
• Explains the impact on families: cuts to welfare, food stamps and childcare support increased poverty for poorer families, while wealthier families benefited from lower tax rates.
• Analyses the budget deficit: tax cuts plus increased defence spending under Reagan produced large annual deficits and a rapidly rising national debt.
• Analyses the trade deficit: strong dollar and high consumer spending drew in imports, producing persistent trade deficits and pressure on manufacturing jobs.
• Evaluates the significance of Bush’s 1990 tax rise: it split the Republican coalition, broke a key pledge and weakened Bush before the 1992 election.

Common mistakes and how to put them right

• Treating Reagan’s tax cuts as benefiting all workers equally.

  Put it right: Distinguish between top-rate cuts, which mainly helped the wealthy, and payroll tax rises, which hit lower earners.

• Confusing the budget deficit with the trade deficit.

  Put it right: The budget deficit is the gap between government spending and tax revenue, while the trade deficit is the gap between imports and exports.

• Assuming Bush’s tax rise was a minor event.

  Put it right: It was a major breach of his 1988 pledge and a significant cause of conservative alienation in 1992.

Exam tips

• Link each economic policy to a specific group, such as industrial workers, single-parent families or defence contractors, rather than discussing ‘the economy’ in general.
• Use precise figures where you can, for example the fall in the top tax rate from 70% to 28%, to support analysis of who gained and who lost.
• When assessing Bush’s tax rise, weigh its economic rationale against its political cost, and connect it to the wider theme of Republican dominance and its opponents.