Term Paper: Economic Events: 1980-1989 the Decade

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[. . .] At the time the article was written, the United States was struggling through its latest recession while facing huge budget deficits.

Supply-side economics had been Ronald Reagan's method of dealing with the first major political/economic event of his administration - the recession that lasted from second quarter of 1980 through the first quarter of 1983 (Case & Fair 880). Tied up in this recession were a host of other related economic problems that also need to be mentioned at this point. In the discussion of the data above this recession was characterized (as one would expect) by higher unemployment. But there was also the issue of the high inflation rate. So there were, technically, three economic issues/events during this time period: recession, unemployment and inflation.

Reagan's response was to attack the problem through the tax code. He managed to reduce taxes in 1981 (and later in 1986) for both the individual and businesses (Case & Fair 596). But this was the direct cause of higher deficits according to Kuttner (see above). And Case & Fair (596) seem to agree: "One legacy of the massive tax cuts has been a large increase in the federal budget deficit." Even Paul Kennedy seems to share this negative view of Reagan's policies "But the decisions taken by the Reagan administration in the early 1980s - i.e. large-scale increases in defense expenditures, plus considerable decreases in taxation... have produced extraordinary rises in the deficit..." (527).

Kennedy touches on another of the main political events of this decade when he mentions the increase in defense expenditures. Reagan had promised to do away with the evil Soviet empire and his defense expenditures represent a fiscal policy in this regard. Because of their size they can't help but play a part in the economic debate of this decade. In fact this issue was important enough that in 1986 Congress passed the Gramm-Rudman-Hollings bill to address the "considerable public outcry about the ballooning federal deficit." (Case & Fair 704).

The final event that occurred toward the end of the decade was the Wall Street Crash of 1987. Although it initially devastated the market and investor psychology in general it turned out to be a mere blip as far as the economy was concerned. Initial warnings about an impending recession did not materialize. The Fed adopted an easier monetary policy (see data above) and stocks managed to recover fairly quickly (Case & Fair 901).

For the most part "supply side policy is just a special case of fiscal policy." (Case & Fair 596). This much should be obvious from the discussion above. But what of monetary policy? In the case of the Crash of 1987, the response of the Fed was clearly monetary. But the Fed was active throughout the 1980's. The discussion of the data in the first section of this paper indicated the extent of the easing in the money supply as well as the lowering of the key rates controlled by the Fed (the discount rate went from a high of 14% in 1981 to a low of 5.5% in 1986 to just cite one example).

Important Events of the 1980s - The Positive Spin

When considering the 1980's decade, the main argument clearly centers on the issue of supply side economics and whether it worked or not. The negative spin, represented above by Kuttner and Kennedy, indicates that the lasting repercussion of Reagonomics was the huge budget deficit. But there are two sides to every issue. Jude Wanniski of Polyconomics, Inc. provides his opposing interpretation of this situation.

According to Wanniski, neither Reaganomics nor the Democrats spending policies were responsible for the large deficits that appeared to result from the tax cut put in place in 1981. Instead, the cause should probably be laid on Richard Nixon who removed the U.S. dollar from the gold standard. This decision let to a "tidal ware of inflation that fed on itself as it produced the 'bracket creep' in the progressive tax system." From this point-of-view, the Reagan tax cut saved the country because workers were not artificially forced into higher tax brackets.

So it was not lower taxes or liberal Democrat spending that caused the deficits. First of all, as for higher spending by Democrats "[t]ransfer payments as a percentage of GNP stayed fairly constant throughout the 1980s." (Case & Fair 702). So one cannot blame the liberals. Instead the government was making purchases for defense and all other things it bought at high nominal costs because of the huge inflation since the gold standard was dropped. After all, the price of gold went from $35 in 1971 to "$850 on February 1, 1980 and was still over $600 when Reagan was elected." (Wanniski).

Conclusion

The stagflation of the 1970s confounded orthodox economists of all types and they failed to offer any clear-cut solution to the problems facing the country. The field then was open for the likes of the supply-side economists to try their hand. Their approach was fresh and different and the country was willing to consider that Keynesian demand-side economics might have its limits. Did it work? This is a complex question and the answer will vary depending on which side of the aisle one sits on. Clearly the experiment did bear some fruit as the current president, George Bush proposed a Reagan-like tax cut soon after he arrived in office. However the extent of opposition to this tax cut has been such that the country has clearly not come firmly down on the side of supply. If nothing else, it is but one additional tool in the economist's arsenal, ready to be applied when the political winds blow the right way.

References

Barone, Michael. "The loyal opposition." U.S. News and World Report. 13 June 2003. 14

March 2003 http://www.usnews.com/usnews/opinion/baroneweb/mb_020613.htm.

Case, Karl E., and Ray C. Fair. "Principles of Economics." Prentice Hall, Inc. Englewood

Cliffs, NJ 1992.

Civilian unemployment rate, 1948-96: Table B - 40." Council of Economic Advisers,

Economic Report of the President, Feb-97 http://w3.access.gpo.gov/usbudget/fy1998/econrpt/b040.wk1.

Consumer Price Index, All Urban Consumers - (CPI-U), U.S. city average, All items 1982-

84=100." U.S. Department of Labor, Bureau of Labor Statistics. 14 March 2003 ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt.

Current-Dollar and 'Real' Gross Domestic Product (Seasonally adjusted annual rates)."

Bureau of Economic Analysis. 14, March 2003 http://www.bea.doc.gov/bea/dn/gdpchg.xls.

Dickson, Paul. Timelines. Addison-Wesley Publishing Company, Inc., 1990

Federal budget receipts, outlays, surplus or deficit, and debt, as percent of Gross Domestic Product, fiscal years 1934 -- 98 [Percent; fiscal years], Table B-77." Council of Economic Advisers, Economic Report of the President, Feb-97-14 March 2003

http://w3.access.gpo.gov/usbudget/fy1998/econrpt/b077.wk1

Federal receipts, outlays, surplus or deficit, and debt, selected fiscal years, 1929 -- 98

Billions of dollars; fiscal years], Table B-76." Council of Economic

Advisers, Economic Report of the President, Feb-97-14 March 2003

http://w3.access.gpo.gov/usbudget/fy1998/econrpt/b076.wk1

Foreign exchange rates, 1970 -- 96 [Currency units per U.S. dollar, except as noted], Table B-

108." Council of Economic Advisers, Economic Report of the President, Feb-97 14

March 2003 http://w3.access.gpo.gov/usbudget/fy1998/econrpt/b108.wk1

Gross domestic product deflator, Consumer Price Index, education price indexes, and federal budget composite deflator: 1919 to 2001, Table 35." National Center for Education

Statistics. 14 March 2003 http://nces.ed.gov/pubs2002/digest2001/tables/dt035.asp.

Historical Changes of the Fed Fund and Discount Rate: (1971-Present)." Federal Reserve Bank of NY. 14 March 2003 http://www.ny.frb.org/pihome/statistics/dlyrates/fedprint.html.

Kennedy, Paul. "The Rise and Fall of the Great Powers." Random House, NY 1987.

McKenzie, Richard B. "America: What Went Right." Cato Policy Analysis No. 172. 1… [END OF PREVIEW]

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