On March 30, 1981, Reagan was shot underneath his arm by a man outside the Washington Hilton Hotel. The would-be assassin was John Hinckley, a mentally disturbed young man from Colorado. Ironically, Hinckley hadn't shot Reagan for political reasons or even for personal ones. Rather, he tried to assassinate Reagan in order to impress actress Jodie Foster, who had recently starred in the popular film Taxi Driver. Reagan was rushed to the hospital where he managed to meekly tell the surgeons on duty, "Please tell me you're Republicans" before being put under the knife. He managed to pull through quickly and returned to the Oval Office even more popular than ever.

Shortly after the assassination attempt, Reagan faced another crisis, albeit one not so personal in nature. In August 1981, 13,000 air-traffic controllers went on strike. Although these workers were members of their own employment union to protect their rights, they were also highly skilled workers in high demand on the payroll of the US Government. Because these workers were so badly needed, President Reagan ordered the air-traffic controllers to end the strike and return to work. When they refused, Reagan fired all of them, hired scabs to replace them, and "busted" their union. For a time, the airline industry faced severe economic hardships.

Reagan's conservative agenda was not particularly helpful to black Americans and women. The Reagan administration opposed abortion and, as mentioned previously, cut many programs to assist mothers, children, and minorities. Reagan's own administration and a large majority of those he appointed to other government positions were primarily white males. Reagan did appoint Sandra Day O'Connor to the Supreme Court during his tenure in office in an attempt to increase his popularity with female voters, but this single act hardly made up for his previous years of neglect.

Many Americans were also displeased with Reagan's denial of the drug abuse problems in the country and with the AIDS epidemic that was spreading rapidly throughout the US. President Reagan viewed these problems with a moralistic lens; he figured that these problems reflected what he believed was the overall decline of American morals rather than a social problem that government could help solve.

During the late 1970s and most of the 1980s, the country was in a deep recession. Energy prices peaked, inflation was high, and many Americans were out of work. As a result, Americans wanted change. President Reagan entered his presidency with clear goals to make those changes. Tired of decades of liberal social policy, Reagan wanted to reduce both the size and role of government in the United States. His domestic policy agenda focused on cutting taxes, balancing the budget, withdrawing support from social welfare programs, and returning some powers to the state governments. Reagan believed that if the US could accomplish these goals, the federal government could save billions of dollars and stimulate the economy at the same time.

Reagan's economic policies were based on the works of economist Arthur Laffer who argued that cutting taxes for the businesses and wealthier quarter of American citizens would encourage spending and put more money into the economy as a whole. The money in turn would then eventually "trickle down" or find its way into the middle and poorer classes of Americans making everyone better off. Reagan reasoned that if these tax cuts at the top of society could trickle down and make everyone richer, the government could stop many of its social welfare programs involving transfers of payments to the poor. Laffer's theory was generally referred to as supply-side economic theory or, more colloquially, Reaganomics, because Reagan promoted the policies.

Reganomic principles went against everything that liberal Keynesian economic principles had taught. According to Keynesian theory, the economy could be stimulated by government spending. Supply-side economic theory sounded good in theory, but many economics believed it wouldn't accomplish much to stimulate the economy. As noted earlier, George Bush once referred to supply-side theory as voodoo economics for this very reason. Many economists doubted that tax cuts for the wealthy would ever generate spending let alone a trickle-down effect.

True to his word, Reagan cut funding from many social welfare programs including food stamp programs, and various programs to assist for struggling mothers and children. During Reagan's first few years in office, the government cut welfare program spending by over $20 billion a year. He also succeeded in slashing taxes to a point where the government was barely collecting any income revenue. Americans loved the tax cuts, but it was not necessarily good for them. Without tax revenues, the government was unable to pay for the services it provided. Worse, even though Reagan dramatically reduced tax rates, he actually dramatically increased total government spending, particularly in the areas of defense, and ironically, social welfare programs. Although Congress cut billions of dollars a year from the social welfare agenda, the rate of spending was still increasing. The American President Biography series noted that social welfare spending increased between 1980 and 1988 from $313 billion a year to $533 billion a year.

Because government revenue (taxes) did not equal government spending, the government was forced to borrow money each year. The national debt skyrocketed to unprecedented levels, almost $1 trillion. As a result, people in all sectors lost their jobs and inflation soared. The economic hardships of the time became evident in the stock market crash of 1987, one of the worst stock market crashes since the crash of 1929. Many historians and economists blame Reagan's 'voodoo economic' policies and extreme deficit spending for the crash and economic hardships, although that conclusion is debatable.