Political fallout

The recession was nearly a year old before President Ronald Reagan finally admitted on October 18, 1981, that the economy was in a "slight recession".

The "Reagan recession," coupled with budget cuts (which were enacted in 1981 but began to take effect in 1982), led many voters to believe that Reagan was insensitive to the needs of average citizens. Reagan's approval ratings sank. In January 1983, Reagan's popularity rating fell to 35%—approaching levels experienced by Richard Nixon and Jimmy Carter at their most unpopular moments.Although his approval rating did not fall as low as Nixon's during Watergate, Reagan's reelection seemed unlikely.

Pressured to counteract the increased deficit caused by the recession, Reagan agreed to a corporate tax increase in 1982. However, he refused to raise income taxes or cut defense spending. The Tax Equity and Fiscal Responsibility Act of 1982 instituted a three-year, $100 billion tax hike—the largest tax increase since World War II.

The 1982 mid-term Congressional elections were largely viewed as a referendum on Reagan and his economic policies. The election results proved to be a major setback for Reagan and the Republicans. The Democrats gained 26 House seats, which at the time was the most for the party in any election since the "Watergate year" of 1974. However, the net balance of power in the Senate was unchanged..