CHAPTER SEVEN - Fiscal Policy

Abstract

This chapter presents the consequences of President Reagan's decision against altering course on his economic policy of large budget cuts and drastic tax reductions in 1982. The Wall Street Journal reported on January 28, 1982, that despite intense pressure from increasingly nervous congressional Republicans—and top officials of his own administration—Mr. Reagan forcefully decided against altering course on his economic policy of large budget cuts and drastic tax reductions. With his sweeping New Federalism proposal, the President seeks to push even further his Reagan revolution to diminish the size and the power of the federal government. The huge budget deficits envisioned in the President's policy could intensify fears in the financial markets of a new round of hyperinflation and high interest rates born of the federal government's future borrowing needs. These risks reflect the delicate state of the nation's economy and the paucity of simple ways to restore its health. Of the dangers in the President's course, one of the largest is the potential for a widening political split among congressional Republicans stemming from the prospect of big deficits. Many Republicans, particularly in the Senate, had been urging the President to raise taxes by at least two times the relatively modest $24 billion package of increases that Mr. Reagan finally settled on.