Reaganomics vs. New Deal Which Really Helped Term Paper

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Reaganomics vs. New Deal

This paper compares the New Deal and Reaganomics. The economic conditions of the Great Depression and the early 1980s recession were dramatically different, but so too were the policy responses. The New Deal expanded social programs as a means of setting the stage for economic recovery, while Reaganomics focused on tax cuts. This paper will analyze the two and come to a determination of which was more effective.

The Great Depression was the deepest and broadest economic slowdown of the 20th century. The U.S. GDP declined 27% from 1929 to 1932 and industrial production dropped 46% (Aiginger, 2010). Gross domestic investment dropped from $16 billion to $1 billion and stocks declined to just 15% of their peak value (Edsforth, 2000). Unemployment is believed to have risen to upwards of 25%. The New Deal was President Franklin Roosevelt's policy response to the Great Depression. It represented an expansion of federal government programs, reshaped Presidential power and the role of the federal government in the economy. Among the New Deal programs were social security, federal unemployment benefits, federal deposit insurance and farm price supports. The objective of these policies was to increase federal spending as a means to spur demand in the economy, but also to provide a baseline of support for Americans to avoid the worst human toll of economic downturn.Download full Download Microsoft Word File
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TOPIC: Term Paper on Reaganomics vs. New Deal Which Really Helped Assignment

The social safety net aspects of the New Deal are generally considered to have been successful. These safety nets provided the basis for strong economic growth after World War Two in particular. In addition, they staunched the poverty that was leading to chronic unemployment. Monetary expansion by the Fed increased liquidity and created a strong investment climate. While unemployment remained high, many other economic indicators recovered under the New Deal, even if not directly attributable to New Deal policies (Cole & Ohanian, 2009). However, other aspects of the New Deal have been criticized for slowing the pace of recovery. In particular, the National Industrial Recovery Act of 1933, which featured price setting, wage setting was noted for its poor impacts, which included providing disincentive for firms to hire and increased costs for consumer goods (Bandyk, 2008). In addition, this law also has been determined to have restricted industrial output and placing quotas on investment, constricting productivity increases (Cole & Ohanian, 2009).

The fact that many elements of the New Deal directly contradicted market forces skewed the recovery. It has been calculated that without the New Deal, recovery would have been much faster, with the economy more or less back to normal by 1935 (Cole & Ohanian, 2009). This is one of the key measures of an economic platform -- performance against the expected mean. By that standard, the New Deal did not succeed. Without NIRA, many economists would concede that the rest of the New Deal would have succeeded more effectively; or alternately Hoover's platform may have succeeded as well. One area where the New Deal did succeed was in laying the foundation for faster recoveries from future crises. While New Deal protections for workers had during the Depression created a disconnect between wages and industrial output, these were curtailed with later legislation (Cole & Ohanian, 2009). The social security net, however, allowed future recessions to avoid the catastrophic decline in consumption that comes with high unemployment, for example. It is also worth considering that the Great Depression was much deeper from the outset than any other downturn since, so the FDR was forced to take much more dramatic measures than future presidents in order to address the crisis in the economy.

One of those future presidents was Ronald Reagan, who was voted into power in 1979 during a much smaller recession. Reagan's economic platform aimed to restore a balanced budget and bring down the size of government. His platform contained four key principles: lower taxes, control of spending, reduction of regulation and lowering inflation (Brokaw & Thompson, 2004). This supply-side economics aimed to create more wealth in general, which would then be dispersed around the economy. The underlying theory was that the private sector should be the distributor of wealth rather than the government. This economic platform became known as Reaganomics.

Many of Reagan's plans failed. Spending was not controlled, as it ballooned from 21.6% of GNP in 1980 to 24.3% in 1984; federal spending as a percentage of private investment rose from 31.1% to 34.3% during this time, despite an increase in private spending being a core tenet of Reaganomics. Nor did Reagan reduce the deficit. Carter's last deficit was $74 billion and by 1984, when Reagan had promised to deliver a balanced budget, the deficit was $200 billion. Reagan's attempt at tax cuts lowered the marginal rates in upper tax brackets but increased them in the lower brackets. Social security taxes increased as well, delivering a net increase in taxes. Overall, Reagan failed to implement effectively most of his own economic platform (Rothbard, 2004).

As with the New Deal, Reaganomics must be measured as well for what it did actually achieved in the economy, versus what could have been achieved. Going into Reagan's first term, unemployment rates were around 7-8% and the economy had reached a state known as stagflation, characterized by high inflation and stagnant GDP growth. Reagan believed that by reducing the role of government new economic growth could be spurred. Much of the economic restructuring and deregulation that succeeded in spurring this growth was Carter-era legislation that was implemented during Reagan's early years, but was not a part of Reaganomics (Rothbard, 2004). The inflation rate was cut in half during Reagan's administration, however, and the economy began to grow again. These successes were immediate and can be credited to a combination of the Carter-era deregulation and Reagan-era spending. While Reaganomics itself did not generate much economic success, the dramatic defense spending increases during Reagan's tenure did spark renewed economic growth and confidence.

While Reagan did enjoy some short-term success in restoring the economy, it was not by virtue of his economic policies that this occurred. His tax cuts and failure to reign in government spending paved the way for the large deficit and debt that persist today, where they create a drag on the economy. That said, his defense spending and other work on the Cold War eventually helped to open the Eastern European economies. His free trade agreement with Canada sparked the current age of free trade agreements and globalization, which has led to dramatic growth in the U.S. economy.

The comparison between Reaganomics and the New Deal is interesting. While the Reagan administration as a whole enjoyed a far faster recovery and greater economic success, there is little evidence to support the contention that Reaganomics itself was a success. Only half of the plan was implemented in a meaningful way, and the half that was not likely sparked just as much economic recovery as the tax cuts. Deregulation was largely a Carter-era program and Reagan's greatest long-term economic success of sparking the end of the Cold War and ushering in the modern era of globalized free trade were not part of the Reaganomics program.

Similarly, the New Deal made some strong contributions to economic recovery, but ultimately undermined itself by placing restrictions on market impacts on wages, price and industrial output. While FDR implemented more of his program, on the whole his program was only moderately successful. In the long run, both Reaganomics and the New Deal have contributed to U.S. success in different ways. It is also worth considering that while Reaganomics, such as it was implemented, enjoyed more success in terms of restoring GDP growth and cutting inflation, the challenge was not nearly so great. The stagflation that Reagan faced was nowhere near as deep an economic crisis as the Great Depression, and furthermore it was… [END OF PREVIEW] . . . READ MORE

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