In August 1981, Reagan signed his Recovery Act into law.
He promised to find additional cuts to balance the budget, which
had a projected deficit of $80 billion -- the largest, to that date, in
U.S. history. That fall, the economy took a turn for the worse. To fight inflation, running at a rate of 14 percent per year, the Federal Reserve Board had increased interest rates. Recession was the result. Blue-collar workers who had largely supported Reagan were hard hit, as many lost their jobs. The United States was experiencing its worst recession since the Depression, with conditions frighteningly reminiscent of those 50 years earlier.
By November 1982, unemployment reached nine million, the highest rate since the Depression; 17,000 businesses failed, the second highest number since 1933; farmers lost their land; and many sick, elderly, and poor became homeless.
The country lived through the recession for a full year before Reagan finally admitted publicly that the economy was in trouble. His budget cuts, which hurt the poor, and his tax cuts, which favored the rich, combined with the hardships of a recession, spawned the belief that Reagan was insensitive to his people's needs. (Although it was a 25% across-the-board tax cut, those people in the higher income brackets benefited the most.)
As economic hardship hit American homes, Reagan's approval rating hit rock bottom. In January 1983, it was estimated at a dismal 35 percent. Having failed in his promise to deliver economic prosperity, Reagan's reelection in 1984 seemed unlikely. With a failing economy, hopes for a balanced budget vanished.
While Reagan finally agreed to a moderate tax increase on businesses, he steadfastly refused to raise income taxes or cut defense spending, despite a growing negative sentiment toward the buildup. In January 1983, with his approval rating at an all-time low, the economy slowly began to right itself. Unemployment, as high as ten percent in 1982, had improved enough by 1984 for his popularity to be restored, and
by the November presidential election, it was hard to believe that a second term was ever in doubt.