Ronald Reagan's Domestic Policy



Ronald Reagan's Domestic Policy

Introduction

This paper analyses controversial issues in Ronald Reagan's Domestic Policy. It critically analyzes domestic policy issues and prepares summary for policy makers. The issue paper will focus on Ronald Reagan's domestic policy of supply side economics. This approach is generally termed as 'Reaganomics'. Reaganomics was the best strategy in the era of Ronald Reagan. This strategy made it possible for the United States to come out of the rising inflation and overcome the challenges of foreign affairs.

Background

In supply side economics, government encourages investors and entrepreneurs through incentives. These incentives may be in the form of reducing taxes, flexible rules & regulations and reducing interest rates. Reduced interest rates allow investors to borrow from commercial banks in a way that covers their cost of production and yields a good return on investment. This approach believes that the overall economy will grow due to 'trickle down effect'. Companies will produce more goods and provide quality and extended services to consumers. Increase in economic activity will strengthen macroeconomic variables, and bring prosperity and development to the country. Supply side economics has its foundation on three pillars; tax policy, monetary policy, and regulatory policy. The central idea behind all these pillars is that production is the main determinant of the economic growth. The more production of goods and services, the greater would be the economic prosperity (Tucker, 2010).

Supply-side economists believe that demand, ability and willingness of customers to purchase products are irrelevant. The supply of goods and services create its own demand. For tax policy, supply-siders argue that lower tax rates will persuade businesses to produce more output. It will also increase productivity. When productivity and employment increases, tax base will also increase. Hence government will not lose its tax revenue due to increase in the revenue base and revenue generation. For regulatory policy, supply-siders argue that government should have limited control over the affairs of the market. Free market is the essence of capitalism and the market should be allowed to create its own path and growth curve. For monetary policy, supply-siders do not encourage printing of dollars to meet the expenses of the government. They are strong contenders of low inflation and printing of dollars increase the level of inflation. Paper currency should have production and gold reserves at its back. If this is not the case, there will be more dollars looking for fewer products that will increase inflation. Supply side economic policy is founded on the idea of the Laffer curve. In 1979, an economist Arthur Laffer presented this idea. He states that reduction in tax rates affects people in two ways. First is the arithmetic effect. Every dollar reduction in the tax rate results in dollar reduction in tax revenue. The other is the economic effect. When tax rate decreases, taxpayers receive more money. Taxpayers' spending of this extra money enhances business activity. Companies hire new staff to complete their tasks. This increased spending and additional earning persons broaden the tax base, which ...