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Ronald Reagan's administration was a very controversial one in terms of the issues and the impact that it gave the American economy. It is public knowledge that before Reagan's term, there was an existing severe economic problem such as the recession in 1980-1982. These were the main goals of the Reagan administration. He promoted Reaganomics which includes: (1) reduce the growth of government spending to properly balance the nation's budget, (2) reduce the marginal tax rates on income from both labor and capital to significantly increase savings, investment, work, and economic efficiency, (3) reduce regulation, and (4) reduce inflation and stabilize the value of money by controlling the growth of the money supply. This economic policy created many supporters as well as many critics. In this paper, the contribution of Reaganomics to the economic boom in the 1990's was investigated using reliable statistics from economists that performed previous case studies about the topic. The statistics will not lie. Studies of the Reagan economic administration reveals many important points that led to the economic boom in the 1990's. Examination of some of these important points strengthens the fact that indeed, the Reagan economic policy contributed the most to the economic successes in the 1990's.
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Reaganomics is the economic policy that was introduced and pursued by the 40th president of the United States, Ronal Reagan. It is also known as the "supply-side economics". It is about focusing on the supply-side (production) of the economy. The main idea promoted here is that supply would create demand. Thus, this way of thinking promoted that the supply-side of the economy - economic activity, production, etc. - should be stimulated and be allowed to grow to produce more wealth for the economy. Reagan thought that the best way to put it into action is to cut the marginal tax rates on personal incomes. Cutting the marginal tax rates will encourage economic activity and stimulate growth, investment, risk-taking and saving in the economy (Braekel, 2005). Ronald Reagan's radical views on the economy created huge factions in the society. Some loved it. Some did not. However, many economists believe that Reaganomics created success that was never seen before in the history of American economics. In the 1990's, US economy boomed like it was never going to stop. The people experienced prosperity in the sense that what they want, they can buy anytime, anywhere and in any amount. Americans experienced a seemingly lasting economic prosperity. However, economy today is on the verge of breaking down, it remains in a puddle of mud, swimming its way to the top. There were many factors that led to the economic boom in the 1990's; it was believed that the strongest force was the economic policies that Reagan implemented. In this paper, the extent of how Reaganomics helped in the economic boost of 1990's in the United States will be discussed point per point.
Brief History of the US Economic Status in 1960's to Early 1980's
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The 1960's in the US marked a history of changes. In this period, "new nations have emerged around the world, insurgent movements sought to overthrow existing governments, established countries grew to become economic powerhouses that rivaled the United States, and economic relationships came to predominate in a world that increasingly recognized military might could not be the only means of growth and expansion" (Conte and Carr, n.d.). President John F. Kennedy promoted acceleration of economic growth through increasing government spending and cutting taxes. He also promoted the American Space Program such that after his death, the American Space Program has already surpassed the Soviet's achievements (Conte and Carr, n.d.).
After Kennedy's death, his successor, Lyndon Baines Johnson (1963-1969) pursued economic policies that ensured the spread of successful US economy to more citizens. In Johnson's time, federal spending increased dramatically. The government launched new programs for the benefit of many such as Medicare - health care for the elderly, food stamps - food assistance for the poor, and many educational incentives and assistance. Military spending also increased dramatically; however, these efforts on wars created only short-term prosperities. In the end of the 1960's, the government was not able to generate taxes to pay for this increase in government spending and led to accelerating inflation (Conte and Carr, n.d.). In 1973-1974, there was an oil restriction that was promoted by members of the Organization of Petroleum Exporting Countries (OPEC). This led to the rapid acceleration in energy prices and creation of shortages. Even after the end of the oil embargo, the energy prices did not go down. Inflation soared and unemployment rates rose. Furthermore, "Federal budget deficits grew, foreign competition intensified, and the stock market sagged." (Conte and Carr, n.d.). In the early 1970's, "America's trade deficit swelled as low-priced and frequently high-quality imports of everything from automobiles to steel to semiconductors flooded into the United States." (US Department of State). 1970's in the US was described in one word: Stagflation. Accelerating inflation continued along with the stagnation in business and employment rates. People bought more goods than the amount of what they need because they expected the prices to go higher; however, this way of thinking brought forth higher and higher prices. This increasing demand pushed the prices to the top. This led to the demand for higher wages. The government needed funds thus, brought an increasing and swelling budget deficit and greater government borrowing. Furthermore, this increased the costs for businesses and interest rates soared the more. Due to energy and price hike, business industries suffered and unemployment reached uncomfortable levels (Conte and Carr, n.d.). In the time of Jimmy Carter (1977-1981), steps to combat these negative economic statuses were made such as "increasing government spending, and he established voluntary wage and price guidelines to control inflation". However, these steps were both not successful in combating economic depression and unemployment. Finally, the most important element in the combat of inflation was the Federal Reserve Board. It refused to supply the money needed by the inflation-stricken economy and this caused interest rates to go higher. The end result is that the "consumer spending and business borrowing slowed abruptly" and the economy fell into a deep recession (Conte and Carr, n.d.).
Fiscal policies in the 1960's and 1970's explain the cause of the downfall of the US economy that time. According to the US Department of State, there was a big attachment to the Keynesian theories in the 1960's. The government and its people felt that there was something wrong in the economic policies that led to the examination and revision of the US fiscal policies (Conte and Carr, n.d.). In 1964, a tax cut was enacted supposedly to stimulate economic growth and reduce unemployment. After the tax cut, President Johnson (1963-1969) and the Congress enacted a series of programs to alleviate poverty. The large government programs and the strong consumer spending promoted the demand for goods and services beyond what the economy can produce. Rising wages and prices became a cycle and inflation soared (Conte and Carr, n.d.). Keynes argued that when periods of excess demands are present, the government should reduce spending or raise taxes to avert inflation. However, it is a fact that anti-inflation fiscal policies are difficult to sell politically. Regardless, the government resisted shifting to them (Conte and Carr, n.d.). In the early 1970's, international oil and food prices rose. The economy was struck by these problems and this became a huge problem for the US policy makers. Analysis of the conventional anti-inflation strategy was that it would restrain demand by cutting federal spending or raising taxes. However, this strategy would have drained income from an economy already suffering from higher oil prices. The result would have been a sharp rise in unemployment. On the other hand, if the government chose to counter the loss of income caused by rising oil prices, they would have had to increase spending or cut taxes. In the end, neither policy can increase the supply of oil and food. Furthermore, boosting the demand with unchanging supply would only mean an increase in the prices (Conte and Carr, n.d.). In President Carter's time (1973-1977), he promoted fiscal policies that geared towards fighting unemployment. This allowed the federal deficit to swell and established countercyclical jobs programs for the unemployed. Furthermore, he fought inflation using a program of voluntary wage and price controls but these strategies did not worked well. And by the end of 1970's, the country suffered from high unemployment and severe inflation.
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Many Americans saw that this "stagflation" was evidence that the Keynesian theories of the economy did not work well. At these times, deficits were a common issue. It emerged as one of the economic concerns in the stagnant economy of the 1970's (Conte and Carr, n.d.).
According to the US Department of State, the nation endured deep recession in 1982. Huge bankruptcies took place, agricultural exports declined, crop prices fell, and interest rates rose (Conte and Carr, n.d.). It was reported that the recession that took place in the 1980's was the most severe and the most significant in terms of the economic policy of the post-World War II recessions (Watkins, n.d.). According to the Bureau of Labor Statistics of the U.S. Department of Labor, there were four clear points that were evident in examination of the statistics in the economic figures during the late 1970's and the early 1980's: (1) there was a perceptible rise in the unemployment rate in 1980, (2) the unemployment rate rose along with the period of no growth in output assisted by the growing labor force, (3) the peak unemployment rates persisted after the economy began to grow again in 1983 because of the backlog of unemployed workers that had accumulated during the period of no growth, and (4) after the recovery of growth the unemployment rate stayed at a higher level than it had been at before the recession (Watkins, n.d.). By 1983, inflation had eased, the economy had rebounded, and the United States began a sustained period of economic growth (Conte and Carr, n.d.). This was attributed to the economic policies pursued by President Reagan.
What is Reaganomics?
Reaganomics is the economic policy pursued by President Ronald Reagan (1981-1989). It is basically an economic policy geared towards a "supply-side" economics. It consists of four major policies: (1) reduce the growth of government spending to properly balance the nation's budget, (2) reduce the marginal tax rates on income from both labor and capital to significantly increase savings, investment, work, and economic efficiency, (3) reduce regulation, and (4) reduce inflation and stabilize the value of money by controlling the growth of the money supply (Niskanen, 1988). A "supply-side" economy is rooted in the central concept that believes that tax cuts result into economic growth. Tax cuts allow companies and investors to save or invest their tax cut saving; therefore, creating higher productivity and more jobs and profits and stimulating of government growth (THE RISE OF SUPPLY-SIDE ECONOMICS, n.d.).
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There is a simplest explanation for the theory behind Reaganomics. It is the pie slice theory. Basically, the idea promoted by the Reagan administration is that everybody should have a slice of the country's financial pie. Most of the people were excited and happy about the thought of a larger pie. From business people, industries and common people, they all hoped for the best. The economic policies were built step by step and it eventually grew into a larger pie. The larger pie was accessible to the American people during the 1990's and continued to serve millions and millions of Americans. It provided a more comfortable life for everybody in the US. The descriptive timeline of the economic history starting with Reaganomics in 1981 includes:
(1) The economic plan and strategy of Reagan proved to be important in the strengthening of all of the aspects of the economy. It allowed the expansion of financial strength of everyone, industries and citizens alike that led to the economic boom in the following decade.
(2) The economic success provided workers best financial capabilities that led to the growth of goods and services industries. Furthermore, the employment rate for high school drop-outs was higher than it has ever been in many years. In addition, the only recession experienced in the Reagan era was the most mild and short-lived of all the recessions that took place since the Civil War recession (The Rising Tide, 1999). However, this economic success was not free from personal political agendas and criticisms. Reagan was subjected to persistent political and editorial attacks about his economic plans and agenda. He did not falter and thus, continued with his plan and strengthened belief that the key to a long-term economic growth is sound money, deregulation and lower taxes (The Rising Tide, 1999).
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(3) The many critics of the Reagan economic strategy argued that his strategy only makes the wealthy wealthier. Research shows that indeed, 60 percent of the increasing nation's financial pie was allocated to the wealthy (REAGAN TAX CUTS WERE FAIR TO EVERYONE, 1994). Reagan's administration clarified that the goal of the economic strategies was to enlarge the nation's financial pie, thereby enlarging the income and spending capacity of everyone in the US. The economic strategy does not include extra budget allocation for the poor. It aims to provide the same proportional size of the financial pie for everybody.
(4) Many critics suggested that the economic policies of Reagan only worsen the economy instead of creating a boom in the next decade. Much propaganda against the economic strategy was put into action. In books, billboards, and newspaper articles stressed that Reagan's economic policies will only burden future generations. On the other hand, Supply-side economists and supporters believe that tax cuts are necessary for growth of the economy. Furthermore, many economists believe that Reagan's economic strategy paved the way for one of the greatest economic recoveries and boom in the history of the United States (Frank, 2001).
Many studies were conducted to assess the economic policies by comparison of the nation's economic performance in Reagan's administration and the administrations immediately before and after the era. The studies concluded that indeed, the Reagan economic policies helped in the major recovery and boom in the 1990's. According to the study, 8 out of 10 economic variables examined, the Reagan economic administration performed better than during previous- and after- Reagan years. There are several important substantiations that were seen in the studies which are attributed to the contribution of the Reagan economic policies to this successful economic boom in the following decade (Niskanenm and Moore, 1996). These include:
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(1) Real economic growth garnered an average of 3.2 percent during the Reagan years versus 2.8 percent during the Ford-Carter years and 2.1 percent during the Bush-Clinton years (Niskanenm and Moore, 1996).
(2) Real median family income was projected to have increased by $4,000 during the Reagan period after experiencing no growth in the pre-Reagan years; it experienced a loss of almost $1,500 in the post-Reagan years (Niskanenm and Moore, 1996)
(3) Interest rates, inflation, and unemployment fell faster under Reagan than they did immediately before or after his presidency (Niskanenm and Moore, 1996).
The only economic variable that was not successful in the Reagan economy was the savings rate. There was a rapid decrease in the 1980's. Furthermore, the productivity rate of the pre-Reagan years was higher compared to a much lower productivity rate in the post-Reagan years (Niskanenm and Moore, 1996).
These factors worked all together to set the stage for the following decade. However, many of Reagan's critics falsely describe the economic performance in 1979-1989 as the Reagan years. An example would be that in 1991, a report from the Democrats on the Joint Economic Committee of Congress suggested that the victims of Reaganomics are the least affluent Americans. The report concluded that families in the lowest 40 percent of the income distribution had lower average real incomes in 1989 than in 1979. However, deeper and critical study of the income data suggests that under Carter's economic policies, family incomes increased by 9 percent but that is after the administration of Reagan's economic policies wherein family incomes increased by 11 percent. The Joint Economic Committee Report blamed Reagan's economic era as the one who burdened the next administration (Carter's administration). Furthermore, the effects of Reagan's economic policies were not felt until the first 2 years of its implementation. That is why, the Reagan economic era was claimed to be in the 1983-1989 only. Reagan's supporters conveniently omitted the first 2 years of his administration (1981-1982). On the other hand, many Reagan political foes tried to define the Reagan years as a 12-year combination of Reagan and Bush administrations. It might seem logical for someone to conclude that a continuation of economic policies from one administration to another is possible because both administrations are republican. However, actual facts report that the real and dramatic shift in the economic policies happened in 1990 during the start of the Clinton's administration and not in 1993. This was the time when Bush rejected his proposed policy of "no new taxes". This led to both the enactment of a large anti-supply-side tax increase and a flurry of legislation--from the Clean Air Act amendments, to the Civil Rights Act of 1991, to the Americans with Disabilities Act--that began the reregulation of America in the 1990s. These programs testify that Clinton's economic policies are much closer to Bush's policies in terms of the direction of the fiscal policies. Therefore, this strengthens the fact that Reagan's era was during 1983-1989 only and that the economic boom in the 1990's is indeed attributed to the Reagan economic policies.
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There are several important changes in the US economy during the time of Reagan's economic policies that contributed in the economic boom of the 1990's. These include:
(1) The economic growth that occurred during and at the end of Reagan's years. Statistics showed that the average annual growth rate of real gross domestic product (GDP) from 1981 to 1989 was 3.2 percent per year, compared with 2.8 percent from 1974 to 1981 and 2.1 percent from 1989 to 1995. Furthermore, the 3.2 percent growth rate for the Reagan years includes the recession of the early 1980s. In addition, during the economic expansion alone, the economy grew by a robust annual rate of 3.8 percent (What's Happening with Real Wages, n.d.).
(2) Leading economists noted that the economic growth contributed much on the working adult class. It was reported that the adult workforce of ages 20 to 64 had so much improvements in their standard of living because of the increasing income and income opportunities (Niskanenm and Moore, 1996).
Economic Boom of the 1990's
The economic boom of the 1990's was written in history books without the accreditation of the Reagan era. Actually, the economic boom of the 1990's is to be attributed to the Reagan economic era. Every American can testify to the fact that the Reagan administration inherited severe problems such as enormous debt and financial stagnation from the previous administration. Reagan thought of a way to reverse the process and heal the ever-worsening US economy at that time. His economic policies' success did not show until the end of his term and in the early 1990's. He ironed the economy, set it on the right track and this was evident in the improvements that it created in the next decade. Economists argued that the actual beginning of the economic boom of the 1990's is in the late 1980's (Niskanenm and Moore, 1996). The evidences that the Reagan policies are:
(1) Real median household income rose by $4,000 in the Reagan years--from $37,868 in 1981 to $42,049 in 1989. It was suggested that this huge improvement was a reversal of the economic trends in the late 1970's. It was reported that the median family income was unchanged in the eight pre-Reagan years, and incomes have fallen by $1,438 in the anti-supply-side 1990s, following the 1990 and 1993 tax hikes (Niskanenm and Moore, 1996).
(2) Statistics show that there were approximately 17 million jobs that were created through the Reagan economic policies. This amounts to 2 million jobs per year during the Reagan administration. Furthermore, economists credit the 1990 employment rate to the Reagan administration. Reagan inherited an unemployment rate of 7.6 percent. Moreover, it peaked to a soaring 9.7 percent during the 1980 recession. And for the next seven years, in the Reagan administration, unemployment rates continue to decrease in a steady manner. This reduction of joblessness is a big step for the Reagan administration and the next decade of administration (Niskanenm and Moore, 1996).
(3) Productivity rate of the Reagan era was projected to be 1.5 percent annually. This was lower than in the 1950s, 1960s, and 1970s but much higher than in the post-Reagan years. Definitely, it is better than the Clinton era where only 0.3 percent of increase in productivity rate was projected (Niskanenm and Moore, 1996).
(4) Another point is that, again the Reagan administration inherited three years of double-digit inflation. The administration worked to send the inflation rate downward and provide the nation with a climate of economic growth that was controlled and successful. Studies of the Consumer Price Index (CPI) will strengthen the point that the Reagan era was a major contribution in the 1990's economic boom. In 1980, the CPI rose to 13.5 percent while during Reagan's first two years in office, CPI dropped to almost half - 6.2 percent - of the 1980 ratings. Furthermore, at the end of Reagan's term in office, CPI dropped to 4.1 percent (Niskanenm and Moore, 1996).
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The only problem that was worse in the Reagan administration is the savings rate. Supply-side advocates expected that the savings rate would go up during the Reagan administration but it did not happen. During the 1980's, the actual savings rate from 8 percent to 6.5 percent, the problem with the savings rate is to attributed to the demographic factors of the country, specifically the baby boomers (Niskanenm and Moore, 1996).
(1) The baby boomers entered their peak spending years which in turn produced a drop in the savings rate.
(2) The savings rate data fail to account for real gains in wealth, which are the actual true form of savings. Furthermore, statistics show that the actual value of capital assets and property doubled from 1980 to 1990. Also, the Dow Jones Industrial Average nearly tripled from a low of 884 in 1982 to 2,509 in 1989. In addition, These increases in the value of stocks, bonds, homes, businesses, and so forth added to Americans' balance sheets hundreds of billions of dollars of wealth that are not accounted for in the savings rate statistics (Niskanenm and Moore, 1996).
Effects of Reaganomics
The federal revenues increased significantly between 1980 and 1990. Evidences are: (1) Total federal revenues doubled from just over $517 billion in 1980 to more than $1 trillion in 1990. In constant inflation-adjusted dollars, this was a 28 percent increase in revenue. (2) As a percentage of the gross domestic product (GDP), federal revenues decreased only slightly from 18.9 percent in 1980 to 18 percent in 1990. (3) Revenues from individual income taxes increased significantly from just over $244 billion in 1980 to nearly $467 billion in 1990. In inflation-adjusted dollars, this amounts to a 25 percent increase (Sperry, 2001).
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Despite the steep recession that took place in the early 1980's, the Reagan administration managed to induce an unimaginable economic growth. (1) The economic boom lasted 92 months without a recession, from November 1982 to July 1990. Moreover, it the longest period of sustained growth in a time without wars; and the second-longest period of sustained growth in U.S. history. The growth in the economy lasted more than twice as long as the average period of expansions since World War II. (2) The American economy grew by about one-third in real inflation-adjusted terms. And (3) from 1950 to 1973, real economic growth in the U.S. economy averaged 3.6 percent per year. From 1973 to 1982, it averaged only 1.6 percent. The Reagan economic boom restored the more usual growth rate as the economy averaged 3.5 percent in real growth from the beginning of 1983 to the end of 1990 (Sperry, 2001).
"The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." (Ronald Reagan 1911-2004)
The start of Reagan's time is an economic downfall of the government. Reagan inherited multiple economic problems from the previous administrations. It is proven that he did his best to provide a better economy and future for all the Americans. He promoted an economic plan that is so successful that lasted for the next decade. He had many political critics and they aimed to bring him down. However, the truth that the economy flourished because of his strategy cannot be contained from the public. The public have felt all the improvements and opportunities that were paved for them by Reagan. No matter how hard the opponents try to rewrite history, "Ronald Reagan's record of fiscal responsibility continues to stand as the most successful economic policy of the 20th century." (Sperry, 2001) Ronald Reagan's economic legacy endures. Reaganomics provided the major contribution in the economic boom of the 1990's.