Ronald Reagan is the president most notably associated with the rejection and full displacement of Keynesian economics in the United States, primarily through his economic policies known as Reaganomics.
The Shift Away from Keynesianism
Keynesian economics, which advocates for government intervention in the economy through fiscal and monetary policies to stabilize business cycles, held significant influence in the post-World War II era. However, by the late 1970s and early 1980s, facing issues like stagflation (high inflation coupled with high unemployment), there was a growing movement toward alternative economic theories.
Precursors to Change: Jimmy Carter's Role
While Ronald Reagan championed the complete departure, the groundwork for this shift began prior to his presidency. President Jimmy Carter initiated a significant move in the direction of monetarism, an economic theory emphasizing the role of money supply in controlling inflation. This was particularly evident with his 1979 appointment of Paul Volcker as Chairman of the Federal Reserve. Volcker implemented stringent monetary policies to combat inflation, setting the stage for a new economic philosophy.
Reaganomics: The Full Displacement
Upon taking office in 1981, President Ronald Reagan introduced a new set of economic policies known as Reaganomics. These policies were rooted in supply-side economics and monetarism, fundamentally rejecting the Keynesian approach.
Key components of Reaganomics included:
- Reduced Government Spending: Although actual spending increased due to defense outlays, the stated goal was to cut non-defense federal spending.
- Lower Income and Capital Gains Taxes: Significant tax cuts were implemented to incentivize investment and production.
- Reduced Government Regulation: Deregulation was a key tenet, aiming to reduce burdens on businesses.
- Controlled Money Supply: The Federal Reserve, under Paul Volcker, continued its tight monetary policy to curb inflation.
These policies marked a decisive shift from the demand-side management advocated by Keynesian economics to a supply-side focus, believing that reducing taxes and regulations would stimulate economic growth, ultimately displacing Keynesianism as the dominant economic paradigm in U.S. policymaking.
Comparing Economic Philosophies: Keynesianism vs. Reaganomics
To better understand the rejection, it's helpful to compare the core tenets of the two economic schools of thought:
| Feature | Keynesian Economics | Reaganomics (Supply-Side/Monetarist) |
|---|---|---|
| Core Belief | Government intervention can stabilize the economy. | Free markets and limited government intervention drive growth. |
| Primary Focus | Aggregate demand; using fiscal policy (spending, taxes) to manage demand. | Aggregate supply; incentivizing production through tax cuts and deregulation. |
| Role of Government | Active in managing economic cycles (e.g., stimulus during recessions). | Limited; focus on reducing taxes, regulation, and controlling money supply. |
| Approach to Inflation | Can be addressed by controlling demand or income policies. | Primarily addressed by controlling the money supply. |
| Approach to Unemployment | Addressed by stimulating demand through government spending. | Addressed by fostering business growth through supply-side incentives. |
By implementing Reaganomics, President Ronald Reagan effectively moved the U.S. economy away from its long-standing Keynesian foundations toward a more market-oriented, supply-side approach.
