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Difficulty: MediumReaganomics and Domestic Policy under Reagan and Bush

Read the excerpt below and answer the question that follows.

"The deficit is a growth-inhibiting cancer on our economy... This budget agreement is a balanced package of substantial spending cuts and revenue increases. Now, I have never liked taxes, and I still do not. But we cannot continue to borrow from our children’s future to fund current spending. The size of this federal deficit requires a bipartisan solution that includes both spending restraint and new tax revenues."
— President George H. W. Bush, Address to the Nation on the Federal Budget Agreement, October 2, 1990

Which of the following historical developments during the 1980s most directly contributed to the fiscal situation described in the excerpt?

  1. A
    The transition from supply-side economic policies to demand-side Keynesian stimulus programs
  2. B
    The dramatic expansion of Great Society social programs under the Reagan administration
  3. A significant increase in military spending combined with tax cuts that reduced federal revenueAnswer
  4. D
    The nationalization of major financial institutions following the Savings and Loan crisis

Answer

A significant increase in military spending combined with tax cuts that reduced federal revenue
The correct option is correct because the massive federal deficits of the late 1980s and early 1990s were primarily the result of the Reagan administration's supply-side fiscal policies, which combined significant income tax cuts with a large peacetime buildup of military spending. This combination reduced federal revenue relative to gross domestic product while driving up overall federal spending, resulting in a tripling of the national debt and forcing the subsequent Bush administration to compromise on tax policy.

Step-by-Step Solution

1
Analyze the stimulus to identify the core issue being addressed by President George H.W. Bush.
The issue is a severe federal deficit requiring a budget compromise of spending cuts and new tax revenues.
This establishes the historical context of the fiscal crisis in 1990.
2
Connect the 1990 deficit crisis to the domestic and fiscal policies of the preceding decade (the 1980s).
The Reagan administration implemented massive tax cuts (such as the Economic Recovery Tax Act of 1981) while simultaneously increasing defense spending to contest the Cold War.
This explains the structural gap between federal revenue and federal expenditure during the 1980s.
3
Evaluate the options to identify which development matches this fiscal trajectory.
The option identifying military spending increases alongside tax cuts directly explains the growing deficit that George H.W. Bush had to address.
This confirms the correct option while eliminating choices that mischaracterize social spending, economic theory shifts, or the government's response to financial crises.

Key Concept

Reaganomics and domestic policy under Reagan and Bush
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Reaganomics and Domestic Policy under Reagan and Bush

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