Macroeconomic Policy Essay, Research Paper
Economic Policy in Recent U.S. History
In the highly materialistic world that we live in, success is generally measured in financial terms. The same is true in politics, where the success of a politician, especially the President, is measured by how well the economy did during his term in office. It is specifically measured by how well they bring down unemployment, grow the economy and fight inflation. Two basic modes of thought on the subject have pervaded public policy since World War II: supply-side and demand-side economics.
Demand-side economics is generally known as Keynesianism, named after the English economist John Maynard Keynes. He believed that governments should force interest rates down by printing money and lending it from the central bank at a discount. This would put more money in consumers’ hands and encourage them to spend and consume more, thus creating an incentive for investment. This helped to solve some of the problems, but in the long run it is extremely inflationary, because with the increase of the money supply it becomes devalued. Keynesianism also calls for the government to spend more to try to help the economy grow. Keynesianism was a short-term solution to the problem and could only do so much for the economy before inflation caught up with it, and took it into recession.
On the other hand we have supply side economics, which works on more of a long-term basis. It basically attempts to stimulate economic growth, which would reduce inflation, and raise the standard of living. Supply side proponents say that by reducing government regulations and taxation, this will stimulate more economic growth, and market equilibrium will be reached on it?s own, without government impositions.
Keynesianism was popular until the late 1970?s during a period of ?stagflation?, where both unemployment and inflation were rising together. Policymakers realized that they could not solve this problem with Keynesian ways of thought. When Reagan came into his Presidency he was faced with an economy that was in recession; the prime interest rate was 15? percent, the unemployment rate was over 7 percent and inflation was running close to 14 percent a year. Reagan and his advisors took a conservative approach to solving the problem and looked to supply-side, or ?trickle down? economics to accomplish their goal of bringing the country out of this recession and stimulating new growth.
The economic policy of this time was known as ?Reaganomics?, and it emphasized using monetary policy to combat inflation, and lower marginal tax rates to restore the reward for work, saving and investing and to boost productivity and growth. Many demand side advocates predicted that this would only increase inflation, unemployment, and lead to a general decline in the economy.
Contrary to these predictions the economy recovered at a rate even faster than the Reagan administration had predicted.
The major problem with the policy at this time was that the congress was still led by demand-side liberals. They said that these tax-cuts would produce a budget surplus and instead of using this surplus to offset the revenue loss from taxes, they just increased their spending, which caused the national debt to increase from one to four trillion dollars from 1981 to 1986. Another problem with this supply side ideology was that it was seen as giving the rich more of an advantage, because they were getting more of a tax break than less wealthy peoples. However this was the whole point of the trickle down idea. If you can increase the benefits to the people at the top then those benefits should trickle down to the lower classes, and stimulate economic growth throughout the economy.
Throughout this period monetary policy, implemented by the independent Federal Reserve Board, commonly known as the Fed, was used to try to fine tune the short term economic situation by manipulating the interest rate, and the money supply, through it?s control over the banking system. With the Keynesian system, the Fed would want to increase the money supply by lowering interest rates and reserve requirements to increase the buying power of the people and increasing demand. The problem with this is that it causes inflation. It was not seen in the seventies that an excess of money caused inflation, because it was blamed on the oil crisis of that time period. With the success of the Reagan administration, it was seen that monetary policy must only be used to maintain the value of our currency and not as another instrument to fine-tune the economy.
After Reagan left office, his vice president, George Bush took over. Instead of holding with the supply-side ideas of his predecessor, he increased taxes and government spending and the economy went into a recession. As Bill Clinton was running for president, the economy was in a recession with an enormous debt attributed to
failed trickle down economics. He proposed the use of government spending in areas that were hoped to stimulate economic growth. He increased taxes and got the economy out of the recession. To this point the economy is doing much better than it was in recent history, but the economic growth is still not nearly as high percentage-wise as it has been. The upswing in the economy has been attributed to the increase in high-tech industries, and the continued success of the stock market, and the increasing propensity for Americans to invest their money in the market.
Another factor that has helped the economy in the recent past is the increased in international trade, and international trade regulations such as the General Agreement on Tariffs and Trade (GATT). With the economic idea of gains from trade, a nation should choose to import products that other nations can produce more efficiently, and export those things that they can produce more efficiently. After World War II, the United States had the most powerful economy in the world, and they looked to increase their trade with other countries, so as to become more efficient at production of certain goods, and to promote a true world economy with globalized trading. GATT was formed to try to reduce tariffs and relax quotas, and especially to open the American market to foreign goods. Since it?s inception U.S. tariffs have dropped from over 30% in 1947 to less than 3% today.
Although increased global trading has helped the economy in general, it has helped to lower the average wages earned by U.S. workers. Trade with less developed countries with low-wage workers has greatly increased competition for American workers, and has made for a greater inequality in the wages of executives and low-skill workers.
With the highly partisan political arena in the United States, we have seen each of the economic policies implemented by a new administration change on party lines. Before Reagan came into office the blame for the state of the economy was placed on the liberal, Democratic policy of Keynesianism. When the conservative, Republican idea of Supply-side economics worked for Reagan it was seen as a victory for that party, until the depression of the early nineties with Bush. Since Clinton came into office and implemented his neo-liberal ?enterprise economics? policies, and helped the economy get back onto it?s feet, the Democratic Party has got all of the credit for resurrecting the economy.
In the past twenty years, the U.S. economy has went through two major depressions as well as some of the most successful times that it has experienced. The guiding forces behind these events were the economic policies, and the ideologies behind them. Today, the economy is doing very well, although the policies that have got it to this point have changed from one side of the spectrum to the other. The trend of economic theories completely overriding the previous one will surely continue with the changing economy, and the changing government.