Reagan's supply-side economics aimed to boost growth by cutting taxes and regulations. This approach, dubbed "Reaganomics," focused on increasing production and reducing barriers for businesses, with the belief that benefits would trickle down to all.

The Federal Reserve played a crucial role in shaping economic policy during Reagan's era. Under Paul Volcker and Alan Greenspan, the Fed used monetary policy to combat inflation and support growth, working in tandem with Reagan's fiscal policies to shape the economy.

Supply-Side Economics and Reaganomics

Principles of supply-side economics

• Focuses on increasing aggregate supply to stimulate economic growth by reducing barriers to production (taxes, regulations)
• Assumes lower taxes incentivize businesses to invest and expand, leading to increased output and employment
• Key goals: reduce inflation and unemployment, encourage economic growth and productivity, increase government revenue through broader tax base resulting from economic expansion
• Advocates for trickle-down effect, suggesting benefits of economic growth will eventually reach lower-income groups through increased employment and wages (rising tide lifts all boats)

Impact of Reagan's economic policies

• Economic Recovery Tax Act (ERTA) of 1981 reduced top marginal tax rate (70% to 50%), decreased capital gains tax, indexed tax brackets to inflation to prevent bracket creep
• Tax Reform Act of 1986 simplified tax code by reducing number of tax brackets (14 to 2), lowered top marginal tax rate (28%), eliminated many deductions and loopholes
• Deregulation policies lifted price controls (oil, natural gas), deregulated industries (transportation, telecommunications, finance), reduced environmental and workplace safety regulations
• Economic outcomes: GDP growth averaged 3.5% annually, unemployment rate decreased (7.5% in 1981 to 5.4% in 1988), inflation rate fell (10.3% in 1981 to 4.1% in 1988), national debt nearly tripled ($998 billion to $2.9 trillion)

Consequences of Reagan's domestic agenda

• Widening income inequality as tax cuts disproportionately benefited high-income earners, deregulation and weakening of labor unions contributed to stagnant wages for middle and lower-income workers
• Cuts to social welfare programs reduced funding (food stamps, subsidized housing, job training), tightened eligibility requirements for welfare benefits
• Increased defense spending nearly doubled military budget, contributed to growing national debt
• Political polarization: policies appealed to conservative voters, solidified Republican Party's shift towards supply-side economics, Democrats criticized policies for favoring wealthy and neglecting needs of vulnerable populations

The Federal Reserve and Economic Policy

Federal Reserve in Reagan era

• Paul Volcker's tenure as Federal Reserve Chairman (1979-1987) implemented tight monetary policy to combat inflation, raised federal funds rate (peak of 20% in 1981), contributed to 1981-1982 recession but successfully reduced inflation
• Alan Greenspan's appointment as Federal Reserve Chairman (1987-2006) continued Volcker's anti-inflationary policies, maintained relatively low interest rates to support economic growth, responded to 1987 stock market crash by providing liquidity to financial markets
• Coordination with Reagan administration's fiscal policy: monetary policy complemented supply-side fiscal policy, tight monetary policy in early 1980s helped control inflation while tax cuts stimulated growth, looser monetary policy in latter part of decade supported continued expansion