Political economy concepts and analysis

¶ … Reagan era economics and uses the economic era as a foundational support for the economic boom of the 1990's. The writer explores various published works regarding the Reagan Economic era including discussions about the trickle down theory and voodoo economics to lay the building blocks to explain the boom of the 1990's.

The economic boom of the 1990's brought America to heights it had not seen in many years. People were able to purchase what they wanted, when they wanted and in the quantity they wanted. The housing market soared and the quality standard of life seemed to improve more many Americans. It was a decade of self-discovery, and a decade of exciting stock, housing, auto and other economic avenues to explode. It lasted long enough for residents of this nation to become comfortable spending and that comfort drove the spending up. This in turn drove the economy forward and for the 1990's it felt that there was never going to be an end. But there was, and today the nation's economy remains in the slump it has been in since the latter part of the decade. There are many factors that led to the economic boom of the 1990's but perhaps the strongest one was the economic strategy of the Reagan era. The economic policies while President Ronald Regan was at the helm included something that was called the Trickle down theory. The Trickle down theory set the groundwork for the economic boom that followed. Whether one was for or against the economic policies of Reagan and Regan's cabinet there is no doubt that those policies set the stage for one of the most active and successful financial booms of the century.

The simplest explanation of the theory Regan promoted was the pie slice theory. According to the president at the time and his advisors, everybody in America gets a slice of the nations financial pie (ASK SOMEONE ABOUT THE REAGAN YEARS AND YOU'RE LIABLE TO HEAR A VARIETY OF ANSWERS... (http://members.tripod.com/~BluEyedMan/).If the pie were made larger than everybody's share would also increase in size. It was a theory that excited the nation at the time. Those who were struggling imagined the ease of their life if their share of the pie were made larger (ASK SOMEONE ABOUT THE REAGAN YEARS AND YOU'RE LIABLE TO HEAR A VARIETY OF ANSWERS... (http://members.tripod.com/~BluEyedMan/).Those who were already doing well believed that a larger pie would mean larger wealth for them as well. All in the entire plan sounded like a win-win situation. The entire economic plan was built in small steps with the eventual outcome being a bigger pie. That bigger pie was served up during the 1990's and served as a springboard for the boom that created a more comfortable standard of living for virtually millions of Americans.

The economic policies worked to strengthen the economy from the inside out and at all levels. It solidified the expansion of the financial strength of millions while setting the nation up to explode with economic success for the following decade (ASK SOMEONE ABOUT THE REAGAN YEARS AND YOU'RE LIABLE TO HEAR A VARIETY OF ANSWERS... (http://members.tripod.com/~BluEyedMan/).

The boom allowed workers to reap the financial benefits which in turn made retailers and service providers able to increase their sales and their production (Rising B2). It was a circle that began during the tail end of Reaganomics and lasted for a decade. In the mid-decade the employment rate for high school drop pouts was higher than it had been in many years (Rising B2). The boom was so explosive and successful following the Reagan era that the only recession experienced was the most mild and short lived since the Civil War recession (Rising B2). "Does Mr. Reagan deserve credit for economic activity occurring a decade after he left office? Absolutely. He had the political fortitude to "stay the course," withstanding the relentless political and editorial attacks directed his way while the Fed pursued the wrenching process of restoring sound money to the economy. He knew that sound money, deregulation and lower taxes were the keys to long-term growth with low inflation. And he understood that even if the tide floated a few yachts along the way, that was no reason to keep it from reaching smaller boats too (Rising B2)."

While many critics of the Reagan era claim the Trickle Down method only uploaded the wealth of the nation to the wealthy further studies by one would conclude the trickle down methods applied to most residents of America. Research has concluded that 60% of the wealth that was increased did in fact go to the wealthy, however, hat has been the slice of pie since the beginning of economic theory. The wealthy have always received a larger portion of the pie than the poor (Tax pp B04). Regan economics did not set out to hurt the wealthy or to take away part of the pie slice that they had always received. Reagan and his advisors were honest from the beginning that the goal was to increase the size of the entire pie, thereby increasing the income of just about everybody in the nation proportionate to their usual percentage pie slice. The low tax rates and increases generated by the Reagan administration worked to increase the income abilities and spend able income of Americans during the 1990's. "In other words, the low tax rates enacted during the evil Reagan administrations resulted in a much fairer distribution of income than the high tax rates of the sainted Carter administration (Tax pp B04). "

Critics of the Reagan economic era allege the boom of the 1990's was a recovery actually spawned by the end of the Reagan economic era (Economics pg). "While Reagan supporters love to say that under his eight-year reign, more than 3 million new jobs were created, they fail to note that almost half of those were government jobs; jobs paid for with tax dollars that were no longer there because of hefty tax cuts to the wealthy, only adding to the deficit (Economics pg). "

There were many critics to the policy that Reagan instilled and many who believed it would drag the economy down in stead of creating a boom that would last an entire decade (Frank pp). " When deficits and the federal debt soared, Congressional conservatives seized the opportunity to castigate not Reagan, but "tax-and-spend" Democrats. Dozens of books and articles appeared decrying the debt's "burden on future generations." New York's Times Square sported an electronic billboard that flashed the per capita debt minute by minute (Frank pp). The long-term result was to hamstring the American political system for two decades, making it impossible even to broach the topic of new federal spending programs (Frank pp). For supply-- siders, tax cuts have always been the means to a larger end - shrinking the size and mandate of the federal government, and shifting it away from the aim of promoting social welfare. Deficits make the job easier, providing a rationale to cut programs that the public wants (Frank pp). " These are the opinions that have been shared by skeptics but there are economists who believe that the Reagan era economics actually framed the house that became one of the greatest economic recoveries and booms in the history of the nation (Frank pp).

Many economists studied the supply side policies that the Reagan administration implemented (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html).Studies were conducted that assessed the policies by comparing the nations' economic performance in the Reagan years and the years immediately before and after the era. The study concluded that the economic policies did in fact contribute to the major recovery and explosion of the 1990's. The 1990's were set up and created because of the Reagan era. The study tested eight out of ten variables of economics while examining the American economy against those variables. The end result was conclusive evidence that the Reagan economic era actually provided the backdrop for the 1990's economic success (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html).

On 8 of the 10 key economic variables examined, the American economy performed better during the Reagan years than during the pre- and post-Reagan years (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html)." There were many factors that contributed to this boom including real and measurable economic growth that was seeded by the Reagan economic era. The fertile economic ground was planted and hoed by the Reagan administration and it prepared the nation for huge advances during the 1990's. There were several important factors that contributed to Reagan's policies which turned the economy upward for a decade. These factors included:

Real economic growth averaged 3.2% during the Reagan years versus 2.8% during the Ford-Carter years and 2.1% during the Bush-Clinton years.

Real median family income grew 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.

Interest rates, inflation, and unemployment fell faster under Reagan than they did immediately before or after his presidency.

The only economic variable that was worse in the Reagan period than in both the pre- and post-Reagan years was the savings rate, which fell rapidly in the 1980s. The productivity rate was higher in the pre-Reagan years but much lower in the post-Reagan years (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html).

There were four key elements to the era which is now referred to as Reaganomics. These factors were the foundation for the rest of the policy and included:

restrictive monetary policy designed to stabilize the value of the dollar and end runaway inflation;

25% across-the-board tax cut enacted (The Economic Recovery Tax Act of 1981) designed to spur savings, investment, work, and economic efficiency;

promise to balance the budget through domestic spending restraint;

an agenda to roll back government regulation (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html).

All of these factors worked in tandem to set the stage for the coming decade. "A common ploy of Reagan's critics is to measure the economy's performance from 1979 to 1989 and falsely describe the record over this period as "the Reagan years." For example, in 1991 the Democrats on the Joint Economic Committee of Congress released a report entitled "Falling Behind: The Growing Income Gap in America," which purportedly proves that the victims of Reaganomics were the least affluent Americans. The report concluded that "families in the lowest forty percent of the income distribution actually had lower real incomes on average in 1989 than they did in 1979." Upon closer inspection, however, what the income data really show is that when Jimmy Carter's economic policies were in effect, family incomes plummeted by 9%, but that after Reagan's economic policies took effect (1982-89), family incomes rose by 11% (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html).In the Joint Economic Committee report, Reaganomics is blamed for the poor performance of the economy under Carter. Ronald Reagan had many seemingly magical qualities, but his policies were never able to influence the economic direction of the nation at least two years before they took effect. Some of Reagan's supporters, on the other hand, define the Reagan years as only the seven years of economic expansion, 1983-89, while conveniently omitting the recession years of 1981 and 1982(SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html)."

The Reagan era has been argued for years as to when it officially started and ended. " Again, Reagan's political foes often describe the entire 12 years of the Reagan and Bush administrations as the "Reagan years (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html)." [7] At first blush this seems logical: two Republican administrations in succession would normally suggest a continuation of policy from one to the other. Yet the real and dramatic shift in economic policy in Washington occurred not in 1993, with the start of the Clinton administration, but rather in 1990, with George Bush's repudiation of his "no new taxes" pledge that 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. [8] Indeed, the Clinton economic program in most respects has been closest to that of George Bush, particularly with respect to the direction of fiscal policy (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html)."

There are several strong changes that occurred during Reagan economics that prompted the explosive boom of the 1990's. One was the economic growth that occurred. "The average annual growth rate of real gross domestic product (GDP) from 1981 to 1989 was 3.2% per year, compared with 2.8% from 1974 to 1981 and 2.1% from 1989 to 1995. The 3.2% growth rate for the Reagan years includes the recession of the early 1980s, which was a side effect of reversing Carter's high-inflation policies, and the seven expansion years, 1983-89(SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html).During the economic expansion alone, the economy grew by a robust annual rate of 3.8%. By the end of the Reagan years, the American economy was almost one-third larger than it was when they began That rate was higher in the 1980s than in the 1950s and 1970s but was substantially lower than the rapid economic growth rate of more than 4% per year in the 1960s. The Kennedy income tax rate cuts of 30% that were enacted in 1964 generated several years of 5% annual real growth (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html)."

The economic growth that affected working adults was also noted by leading economists. The adult workforce between 20 and 64 years of age had vast improvements in their standard of living because of increased income and income opportunities. This continued into the 1990's riding on the coat tails of the 1980's which the Reagan administration implemented. "When we adjust the economic growth rates to take account of demographic changes, we find that the expansion in the Reagan years looks even better and that the 1970s' performance looks worse. GDP growth per adult aged 20-64 in the Reagan years grew twice as rapidly, on average, as it did in the pre- Regan years (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html)."

The 1990's boom has been touted in history books already but it actually began during the Reagan era and continued. Reagan had inherited an enormous debt and financial stagnation and had to work to get it turned around. He was successful with his trickle down policy as well as the supply side policies, and the benefits began before he left office. However it was not until the 1990's that the true benefit of his economic policies showed themselves. He straightened the economy out, set it on the right track and the nation enjoyed the next decade of strengthened financial gains. The actual beginning of the 1990 recovery was started in the 80's. The analysts are quick to discuss the ramifications and benefits that led the 1990's into history economically, however the beginning upward swing began under the watchful eye of Reaganomics. Evidence of the Regan policies "Real median household income rose by $4,000 in the Reagan years -- from $37,868 in 1981 to $42,049 in 1989. This improvement was a stark reversal of the income trends in the late 1970s and the 1990s: 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 (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html)."

There were 17 million new jobs created through the use of Reaganomics, which translated into an approximate 2 million jobs per year. The 1990 employment rate was assisted by the work of the Reagan administration. Reagan walked into his job with an inherited unemployment rate of 7.6%. It peaked at 9.7% during the 1982 recession. For the next seven years the unemployment rate fell steadily which lead the nation into the next decade in which economic success was made. "This reduction in joblessness was a clear triumph of the Reagan program." It also set the nation up to enjoy the following decade of economic success and booms. According to studies that have been done on the Reagan administration policies and how they affected the 1990s and several things have been concluded including the fact that under "Reagan, productivity grew at a 1.5% annual rate (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html).This was lower than in the 1950s, 1960s, and 1970s but much higher than in the post-Reagan years. Under Clinton, productivity has increased at an annual rate of just 0.3% per year -- the worst presidential performance since that of Herbert Hoover." Reagan inherited a tremendous debt in many areas of this country's financial stage. The previous administration had given him 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. "In 1980 the consumer price index (CPI) rose to 13.5%. By Reagan's second year in office, the inflation rate fell by more than half to 6.2%. In 1988, Reagan's last year in office, the CPI had fallen to 4.1%" (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html).

Supply side advocates had predicted that the savings rate would rise during the administration, however it did not happen. The actual rate fell from eight percent to six point five percent during the 1980's but the problems with the saving rate was actually due to the demographic factors of the nation, namely the baby boomers.

First, the drop in the savings rate was partly a natural response to demographic changes in America -- namely, the baby boomers entering their peak spending years. Second, the savings rate data fail to account for real gains in wealth, which clearly are an important form of savings. The real value of capital assets and property doubled from 1980 to 1990. The Dow Jones Industrial Average nearly tripled from a low of 884 in 1982 to 2,509 in 1989. 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 (SUPPLY-SIDE TAX CUTS AND THE TRUTH ABOUT THE REAGAN ECONOMIC RECORD by William A. Niskanen and Stephen Moore (http://www.cato.org/pubs/pas/pa-261.html)."