How the Deficits of the 1980s Contributed to the Prosperity of the 1990s - Term Paper Example

How the deficits of the 1980s contributed to the prosperity of the 1990s The 1980s posted significant economic deficits. The two terms of PresidentRonald Reagan was marked with significant tax cuts and budget deficits. These tax cuts and budget deficits eventually led to the economic prosperity experienced by the United States in the 1990s. This paper shall discuss the economic policies of the Reagan administration which created a large deficit in our budget and our economy, and it shall then relate this deficit to the prosperity that was experienced by the United States in the 1990s. Reagan’s term adopted four major economic policies. These are: (1) to reduce the growth of government spending, (2) to reduce the marginal tax rates on income from both labor and capital, (3) to reduce regulation, and (4) to reduce inflation by controlling the growth of the money supply” (Niskanen, “Encyclopedia”). These changes reduced taxes for most wage earners, and most of the poor were actually exempted from taxes. Reagan also eliminated price controls on oil and natural gas, long distance telephone service, and ocean shipping. As reported by the Joint Economic Committee in April of 2000, Reagan’s polices resulted in the largest peacetime economic boom in American history. It also resulted to 35 million jobs for many Americans. The committee reports, “[i]n 1981, newly elected President Ronald Reagan refocused fiscal policy on the long run…these were fundamental changes that proved the foundation for the Great Expansion that began in December 1982” (Sperry, “Issues”). At the beginning of the 1990s when Reagan’s tax rate cuts were set in place, tax payers who earned more were taxed more, and those who earned less were taxed less. This gave a chance for those in the lower rungs of the economic ladder to recover from their difficult economic situation. The reductions in income tax for those who had lower income were so dramatic because President Reagan doubled the personal exemption; he also increased the standard deduction, and he tripled the earned income tax credit. Earned income tax credit gave net cash to single-parent families with children at the lowest income levels. Reagan’s economic policies practically took from the rich and took less from the poor, and this gave the lower income group in American society a chance to recover and improve their lives. The eventual manifestations of improved life were later seen in the 1990s. The stimulants for growth in the 1990s can be traced back to the economic measures and policies which were implemented during the 1980s. “Lower tax rates coupled with monetary policy acting to reduce and stabilize inflation, pushed up growth” (Antle III, 2003). And with better economic growth, more revenues came in to bring down budget deficits and stabilize the debt and GDP ratio. The prosperity experienced in the 1990s which were stimulated by budget deficits in the 1980s prove that the economy benefits most if government revenues are collected through less harmful ways and allocated among essential government programs. “The surge in economic growth and government revenues over the past five years provides an opportunity for the federal government to invest in sustained growth, both of the economy and government revenues by reducing tax rates” (Antle, III, 2003). By doing so, federal surpluses projected over the next ten years have a chance to remain intact. Reagan’s legacy is a successful economic policy that is actually felt to this day. Many critics and political oppositionists criticize his economic policies as nonsensical and ineffective, however on closer inspection, Reagan actually paved the way for the prosperity experienced in the 1990s. “His tax reforms triggered an economic expansion that continues to this day. His investments in national security ended the Cold War and made possible the subsequent defense spending reduction that are largely responsible for the current federal surpluses” (Antle, III, 2003). And through his efforts to reduce the expansion of the federal government, he helped limit the increase in domestic expenditure which manifested in the 1990s. Through Reagan’s economic policy, 18.6 million new jobs were created and unemployment rates fell from 7.1 percent in 1980 to 5.3 percent in 1989 (Fuelner, p. 2). At the beginning of his term, he refused to give in for political calls on him to resort to short-term solutions to the economic recession. He asked for the American public to ‘stay the course’, and when they did, the US was awarded with a 15 year economic boom. And the end of the Cold War benefitted not just the 1990s, but the years that followed and will follow as well. “The end of the Cold War has meant the opening up of world markets to American companies, contributing to an unprecedented surge in the Dow Jones average from around 800 in 1982 to around 7,500 today” (Dionne, 1997). Political analysts credit two factors for debt reductions experienced in the 1990s. The first factor is the continued legacy of the Reagan boom, which is a great source of revenue for the US treasury. The second is that America is “spending around $100 billion less each year on defense than at the height of the Cold War era” (Dionne, 1997). They emphasize that great credit must be given to Reagan for his efforts to reduce deficits and spending during the 1980s that led to years of prosperity in the 1990s. Reagan’s economic policies, also known as supply-side economics or Reaganomics in some circles, concerned itself with more than just the current economy, but it focused more on what present sacrifices could do for the people and the country in the future. A former member of Reagan’s economic team mentioned that “when the tax burden on the upper income bracket is lifted, the rich and not-rich alike all benefit, eventually” (Laffer, as quoted by The Onion, “News”). Senator Edward Kennedy also commented that he initially thought that Reagan’s economic policy was just a way for Reagan to further enrich his wealthy supporters, but after two generations he was now seeing Reaganomics in action, and he liked the impact it is now having on many people, even if it took a little longer than it was supposed to (as quoted by The Onion “News”). Reagan’s economic policies in the 1980s restored the United States as an economic, political, and military power. “He acted swiftly to show our enemies that we would produce the necessary economic resources to do whatever it would take, for however long was necessary, to triumph over the Communist menace” (Kudlow, “Article”). And this move put much pressure on the Soviet Union which later led to the end of the Cold War. President Reagan deregulated oil prices, he launched US-Canadian free trade, he ended anti-growth union control on the private industry, he created individual retirement accounts and 401 (k)s launching the investor class, and he reduced social spending by decreasing domestic program levels by nearly $50 billion. As a result of his economic policies, inflation rates soon fell to 1 percent, at the end of his term and into the 1990s, unemployment rates dropped to 5.5%, interest rates also decreased and the stock market started to take full flight. New industries started to emerge during his term. “Brand-new industries arose in computing, software, communications, and the Internet – original endeavors that completely streamlined and transformed the American economy for the decades to come” (Kudlow “Article”). Many of Reagan’s critics emphasized that Reagan’s term earned large deficits in the budget, however, many economists point out that Reagan inherited a 2.5% deficit in the budget, and when he left office, such deficit stayed where it was. “His free-market prescription for economic growth relied on the creativity of ordinary people working in free enterprise rather than under government planning” (Kudlow, “Article”). Economists point out that his vision of America as a nation of freedom and democracy translated well in his actions, and his vision never faltered. Four economists assisted Reagan in coming up with his revolutionary economic plan. They pointed out to Reagan that high marginal taxes is a disincentive for the people to produce, to take risk, to invest and to save, and therefore, the more prudent move would be to reduce taxes. The Federal Reserve Chairman Paul Volcker “fought inflation through a tight monetary policy and high interest rates” (Braeckel, “Journal”). And the recession indeed got worse when he decreased monetary growth, however after inflation was defeated, the growth of the money resumed and the Reagan expansion was now set in motion. Reagan went against the known and much respected Keynesian economic principles. For the Keynesians, cutting the budget deficit would decrease spending and lose people their jobs, raise unemployment rates, decrease national income, and later produce less tax revenues. Reagan went the other way, his supply-side economy exhibited that tax rates affect goods and services and fewer taxes created incentives for the people to produce, to save and to invest. Decreased tax rates stimulated supply, not demand. “The broader tax base will compensate at least partially for the lost revenue caused by the tax cut” (Braeckel “Journal”). The increase in savings will eventually lead to increased investment and lower unemployment rates. His policies led to the longest period of economic growth for the Unites States. And as Reagan’s critics are harping on about Reagan’s budget deficit, other nations are taking note of the so-called Reaganomics. Belgium has even adapted it in its own economic governance. Germany also adapted supply-side economics after World War II, and as a result, Germany was able to rebuild itself at a remarkable pace after the war. Iceland and Ireland also applied supply side economics and it led to an annual 5% economic growth for Iceland and Ireland has now become one of the world’s fastest growing economies. In the year 2000, America reached an economic milestone when it reached the longest business cycle expansion in US history. Many politicians credit this expansion to Clinton and his economic policies, however, many economists and political analysts insist that this expansion is just a continuation of Reagan’s economic expansion that started in the 1980s. The turning point in the stock market, as pointed out by various analysts was during the 1980s, not the early 90s. Over 80 million Americans now own stocks and it is the workers who now own the means of production. Reaganomics has now given American industries control of the high-value information-age industry – computer software, telecommunications, and the internet and other major innovative industries. “The lesson of the past 20 years, hopefully learned for all times, is that when American entrepreneurs and workers are liberated from heavy-handed and intrusive fiscal policies, punitive tax rates, and destabilizing monetary policies, the U.S. economys growth potential is almost limitless (Kudlow & Moore, “Publication”). Reagan’s economic policy discredited many tried and tested economic policies. Through Reagan’s economic policy, he was able to prove that it is possible to control inflation through the Federal Reserve. He was also able to prove that price stability, described by Volcker as “inflation so low that it barely affected people’s decisions—was desirable and would promote a more stable and productive economy” (VanNuys, “Missives”). Reagan took a calculated risk in a democratic nation where his actions met a lot of resistance and in the end he was able to establish that it is worthwhile to take risks in order to enjoy long-term benefits. Works Cited Antle, James III. “Taxing Our Way to Prosperity: The Democrats’ strange version of fiscal responsibility” 16 June 2003. Enter Stage Right. 29 April 2009 Braeckel, L. “Reaganomics, a Success Story” 20 July 2005. Brussels Journal. 29 April 2009 Dionne, E. “Reagan vs. Clinton” 12 November 1997. Slate.com. 29 April 2009 Feulner, E. “Rewriting the Reagan years” September 1994. Find Articles.com. 29 April 2009 Kudlow, L. Reagan’s Link. 10 June 2004. National Review. 29 April 2009 Kudlow, L. & Moore, S. “Its the Reagan Economy, Stupid” 1 February 2000. Cato.org. 29 April 2009 Makin, J. “The Mythical Benefits of Debt Reduction” 1 September 2000. American Enterprise Institute for Public Policy Research. 29 April 2009 Niskanen, W. “Reaganomics” 1988. The Concise Encyclopedia of Economics. 29 April 2009 “Reaganomics Finally Trickles Down to the Area Man” 13 October 2007. The Onion. 29 April 2009 Sperry, P. “The Real Reagan Economic Record: Responsible and Successful Fiscal Policy” 1 March 2001. Heritage.org. 29 April 2009 VanNuys, S. “The Economic Genius of Ronald Reagan and Reaganomics” 20 December 2008. American Missive. 29 April 2009 Read More