The "Reagan Revolution," combined with the tight money policies of the Federal Reserve System, initially dismayed those who hoped for a reversal of the economic stagnation of the 1970s. Although high interest rates helped cut inflation from more than 12% in 1980 to less than 7% in 1982, unemployment rose from 7% to 11% - the highest rate since 1940 - and the annual federal deficit soared to $117 billion, almost twice as high as it had ever been. The United States experienced its worst recession since the 1930s. Beginning in 1983, however, the economy rebounded sharply. By the end of 1986, 11 million new jobs had been created, the consumer price index had dropped from 13.1% in 1979 to just 4.1%, and the Dow-Jones average had climbed to an all-time high.
The Reagan recovery did little for rural America or for the declining industrial regions of the Midwest. In the first half of the 1980s, 8.4 million people joined the ranks of the poor, an increase of 40%. Nearly 33 million Americans - one out of every seven - were reported as living below the poverty line. But the bulk of middle-class America, buoyed by low inflation and its own prosperity, gave the president high marks for his economic program. Conservatives were pleased with his appointments to the federal bench, his declarations of faith in traditional values, and his proud patriotism.
In practice, and often in response to congressional pressure, Reagan balanced his ardent anti-Communist rhetoric with generally restrained foreign-policy actions. He denounced the USSR as an "evil empire" but ended the embargo on grain sales to the Soviets imposed by President Carter after the invasion of Afghanistan. While presiding over the largest peacetime military buildup in U.S. history, he observed the still-unratified SALT II arms control treaty negotiated by his predecessor. He sent American troops to Lebanon as part of a peacekeeping force but withdrew them after 241 marines were killed in a bomb attack in October 1983.
Only in Central America and the Caribbean did the president's actions match his rhetoric. To quash a Communist revolt in El Salvador, Reagan committed military advisors and furnished financial aid to the Salvadoran government. Determined to oust Nicaragua's pro-Communist Sandinista government, he gave covert aid to antigovernment rebels - known as the contras - in defiance of a congressional ban on such aid. In 1983 he used military force to topple a pro-Cuban regime on the Caribbean island of Grenada.
Reagan and his running mate, George Bush, easily defeated their Democratic opponents, Walter Mondale and Geraldine Ferraro, in 1984, but the Democrats maintained control of Congress and the president offered fewer domestic initiatives during his second term. Partisan wrangling over what parts of the budget to cut in order to reduce the staggering federal deficit led to passage of the Gramm-Rudman Act (1985), which mandated automatic, across-the-board spending cuts over a period of years. The Supreme Court declared the automatic cuts unconstitutional in 1986, however, and repeated failure by the president and Congress to agree on budget reductions kept the deficit at record levels. Disputes over the control of trade policy also worsened the imbalance of imports over exports, which rose to $161 billion in 1987.
Tax reductions and defense spending, however, kept the economy booming. Reagan boosted defense spending 35% above the 1980 level, and in 1986 he secured congressional approval for a major income tax reform law that further cut taxes on corporations and wealthy individuals.
At the end of Reagan's tenure the GOP could boast that his administration had helped create 16.5 million new jobs, bring down the unemployment rate to a 17-year low, cut double-digit inflation down to about 4%, and raise the gross national product by one-third. Democrats, on the other hand, could criticize "Reaganomics" for promoting prosperity at the expense of the poor and the nation's future well-being. The number of people below the poverty line rose by 8 million, and their lot was made worse by cuts of nearly $50 billion in social welfare programs. Reductions in subsidized housing from $30 billion in 1981 to $7 billion in 1988 made homelessness part of the national lexicon, and the number of Americans without any health-care insurance rose to 37 million. By borrowing rather than taxing to rearm, Reagan mortgaged the financial future. The cost of servicing the national debt rose from 8.9% of all federal outlays in 1980 to 14.8% in 1989. Moreover, persistent trade and budget deficits made the country a debtor nation for the first time since 1914.
During its eight years in office the administration had a significant impact on the composition of the federal judiciary. President Reagan appointed three conservatives to the Supreme Court and elevated conservative William Rehnquist to chief justice. Overall, he filled about half of the 700 federal judgeships, most of them with conservative appointees.
A major scandal of Reagan's second term was the Iran-contra affair, in which national security advisor John M. Poindexter, Marine Lt. Col. Oliver North, and other officials were involved in a secret scheme to sell arms to Iran, diverting some of the proceeds to the contra rebels in Nicaragua. Investigation by Congress in 1987 led to the prosecution of Poindexter and North and damaged the administration's image.
Ironically, developments in foreign affairs during Ronald Reagan's second term led this most anti-Communist of presidents into a new, harmonious relationship with the Soviet Union and to sign the first superpower treaty that actually reduced nuclear armaments. Soviet leader Mikhail Gorbachev, determined to relax tensions with the West, met with Reagan in 1985 and 1986; in 1987 they signed the Intermediate Nuclear Forces Treaty, and in 1988 a triumphant Reagan traveled to Moscow for a fourth summit and further arms-reduction talks.