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Last Updated: Saturday, 5 June, 2004, 21:26 GMT 22:26 UK
Reagonomics or 'voodoo economics'?

Wall Street traders
Reagan wanted a new economic dawn for America

Ronald Reagan's presidency was dogged by controversy over its economic policy almost from the beginning.

Mr Reagan believed that getting the government out of the lives of its citizens as much as possible would boost economic growth.

He pushed for tax cuts, especially for the rich, on the grounds that giving them greater incentives would stimulate risk-taking and entrepreneurship.

His advisers believed that the additional economic activity would actually boost tax revenues.

However, his parallel commitment to fight communism led him to propose a vast increase in military spending, draining the public purse.

The result was a burgeoning budget deficit which worried conservative Republicans as much as Democrats.

Pressure on industry

The main worrier was the then head of the Federal Reserve Bank, Paul Volcker, who raised interest rates sharply to stop the deficit from fuelling inflation.

The result was the "Reagan recession", as opponents called it, or the "Volcker recession", as the president's supply-side supporters said.

Margaret Thatcher
Margaret Thatcher: A fellow pioneer of radical policy
Another result of high interest rates was a soaring dollar, which made US exports uncompetitive.

The ensuing trade deficit put pressure on many basic American industries, like steel and cars, and led to calls for protectionist legislation, especially against Japan.

Although Mr Reagan was rhetorically a free-trader, he backed many of the protectionist measures passed by Congress

These included the still-controversial Super 301 provision which allowed the president to impose trade sanctions against named countries.

Chasm between rich and poor

The dollar was eventually stabilised by one of the few examples of successful currency coordination among major industrial countries, the Plaza and Louvre Accords.

Homeless person
Many were poverty-stricken during the "Reagan recession"
The tax cuts for the rich boosted their income, especially from stocks. Unskilled workers, meanwhile, saw their jobs disappear, reinforcing the widening of inequality which was so evident in the Reagan era.

Average hourly earnings for manual workers actually fell, while average household income was only maintained because more women went out to work.

Benefit levels for the poor, already low, were frozen, although Mr Reagan's policies on welfare were not as radical as his speeches implied.

Paradigm shift

It was left to later Republicans to "end welfare as we know it". The social security system of retirement benefits was actually strengthened by a bi-partisan report which called for higher taxes and a later retirement age.

George Bush
"Voodoo": George Bush scorned Reagan's ideas
George Bush senior famously called Mr Reagan's ideas "voodoo economics" before he became vice-president of the United States. While challenging Mr Reagan in the Republican presidential primaries, he said he did not believe that supply-side reforms like ending regulation would be enough to rejuvenate the economy.

Like his friend Margaret Thatcher, the UK prime minister of the time, Ronald Reagan was determined to change the paradigm under which economic policy was conducted.

Controversial legacy

He was not distracted by initial difficulties or disappointments although, like Mrs Thatcher, he was prepared to be more moderate in his practice than his rhetoric.

For his supporters, the current robust state of the US economy is the long-term legacy of his policies.

George W Bush
George W Bush has taken Reagan's economic baton
But Ronald Reagan's most controversial economic legacy was the size of the federal budget deficit. After his term in office ended, the issue dogged American politics for more than a decade. It took two government shutdowns before a bi-partisan agreement on taxes and spending cuts could be reached.

Today, Reagan's heir, George W Bush, has followed his fellow Republican's conservative economic policies. He introduced $40bn of tax cuts for the American people, though his critics have claimed that most of these have been targeted on the wealthiest.

And, on a worldwide scale, both traditional tax-and-spend policies and big-spending governments are in retreat. Low inflation with sustainable growth are the watchwords of nearly every economy. That may be Ronald Reagan's most enduring legacy of all.

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