1. What new role did the Federal Reserve play in this policy approach? What personalities aided this role? At the same time that Reagan was cutting taxes and social spending and increasing military spending, Fed chairman Paul Volcker was raising interest rates to unprecedented highs.(posted 8014 days ago)The initial result was that the stagflation Reagan inherited became a much deeper and much more painful recession than anything we saw under Carter.
Higher interest rates meant businesses couldn't borrow to expand or modernize. It also meant that he US dollar was hitting unprecedented highs, so foreign goods became cheap by comparison and the economy slid further.
How much of the deepened recession is Reagan's fault and how much is volcker's fault and "was it worth it in the long run?" are questions scholars and talk radio pundits still argue today.
2. What economics conditions existed when "Reaganomics" became catchword for reform?
Reagan campaigned on the idea that Keynesian economics (taxes, deficits and gov't. spending to shift he demand curve up and to the right) is a short term fix that has terrible long term consequences.
Still, once he took office, his massive increase in military spending can only be described as having a Keynesian-like effect. For every scholar who says "the 80's prove supply-side works," there is another who says "the '80's were just more Keynesianism in disguise."
~Bob