overwhelming economic problems that had been
growing for almost two decades. These problems re-
sulted in towering inflation, interest rates that ap-
proached 20 percent, and widespread unemploy-
ment. During his run for the presidency against
incumbent Jimmy Carter, Reagan, who considered
runaway inflation the nation’s most salient economic
problem, proposed a revolutionary plan for dealing
with the economy.
This plan, based largely on the economic theories
of Arthur Laffer, a University of Chicago professor of
economics, emphasized lowering taxes to stimulate
the economy. Laffer had gained his tenured profes-
sorship at Chicago by claiming to hold a Ph.D. in
economics, which he did not hold. Laffer took seri-
ously the pronouncement of the eighteenth century
French philosopher Baron de Montesquieu that the
government that overtaxes will eventually erode the
sources of its revenue. Reagan, who majored in eco-
nomics at Eureka College, was under considerable
pressure to promote new ideas for dealing with the
nation’s economic problems. Laffer’s theories in-
trigued him.
During his run for the presidential nomination,
Reagan articulated a revolutionary economic policy
based largely on Laffer’s model. He reasoned that
money from tax reductions, once released, would
encourage people to save (thereby creating new cap-
ital) and to use that capital to invest, which, in turn,
would lead to corporate growth
and to an improved and much
strengthened economy, as would
permitting corporations to accel-
erate their depreciation credits.
Prior to Reagan’s nomination,
George H. W. Bush, who also
sought the party’s nomination for
the presidency, labeled Reagan’s
views “voodoo economics.” Bush
subsequently became Reagan’s
vice president, but he was not
comfortable with Reagan’s brand
of “supply-side” economics. David
Stockman, who became Reagan’s
budget director, also had strong
reservations about Reaganomics.
He knew what the numbers indi-
cated as he worked through the
complexities of a huge budget that
in many aspects was too complex
to be fully comprehensible. Stockman expressed his
reservations forthrightly in an article in the Decem-
ber, 1981, issue ofThe Atlantic Monthlyin which he
contended, before it was ever sent to the Capitol
for congressional approval, that Reagan’s economic
plan would not work.Three Salient Elements of Reaganomics The fun-
damental aspects of Reaganomics had considerable
public appeal, because they appeared, superficially
at least, to offer hope of improving the economy
painlessly. Contradictions inherent within the three
elements of Reagan’s proposed reforms were over-
looked or ignored by many in the administration
who examined them. Reagan outlined his plan to
the American people in a presidential address on
February 18, 1981, less than a month into his presi-
dency.
To begin with, Reagan called for a significant
reduction in the rates at which individuals and cor-
porations were to be taxed. He reasoned that such
reductions would increase the average person’s dis-
posable income and would put more money into cir-
culation. Corporations, released from the impedi-
ment of high taxation, would plow more money into
expansion, thereby creating jobs and helping to alle-
viate unemployment. Reagan called for a 30 percent
tax cut across the board, 10 percent per year over
three years.810 Reaganomics The Eighties in America
President Ronald Reagan explains his plan to cut taxes during a televised address in
July, 1981.(Ronald Reagan Presidential Library)