Reaganomics Flashcards
What is supply side economics?
What is seen as its polar opposite?
-A theory that maintains that increasing the supply of goods and services is the engine for economic growth. It advocates tax cuts as a way to encourage job creation, business expansion, and entrepreneurial activity.
-Supply-side economics may be seen as the polar opposite of Keynesian economics, or demand-side economics, which asserts that boosting demand for goods and services is the key driver of economic growth.
What is trickle down economics?
What were the objectives of Reaganomics?
-The theory that tax breaks and benefits for corporations and the wealthy will trickle down and eventually benefit everyone.
-The objectives of Reaganomics were;
- Reduce government spending on federal programmes
- Reduce taxes
- Deregulation
- Planned control of the money supply to keep inflation down while expanding the economy
- Reduce the deficit
What immediate action did Reagan take?(4)
Did they have huge impacts?
- Sacked many WH staff members
- Put federal government hiring freeze in place
- Told all departments there was a freeze on office furnishing and equipment and that they had to cut their travel expenses by 15%
- Used a series of executive orders to set up new advisory groups, reporting directly to him on how to cut down big govt.
-They were not really impactive.
What was the argument for cutting taxes?
(1970s?) painter analogy?
- High tax rates were the reason productivity fell in the 70s
- A banker wants his house painted. He asks a painter for a price and works out how many hours he has to work to pay the painter after tax
- When the tax rates are high, he might have too work quite a few hours, so might decide to paint the house himself
- If the banker paints the house himself, the government loses on two levels: the banker does not do extra work (productivity does not rise), and he does not employ the painter (her productivity does not rise, and she pays no tax for she did not get the job)
- If the banker was paying less tax, he would be more likely to employ her and his wealth would trickle down to her.
What was so different about Reagan’s budget he presented to congress, in comparison with his predecessors?
Were departments involved in budget planning?
What was the implication of Reagan presenting his whole budget policy through to 1984 as a single bill?
Why was it easier to push through the budget and tax bills?
-Presidents usually just outline budget plans, sent to Congress over several years as a series of bills, but Reagan wanted to present his whole budget policy through to 1984 as a single bill when Congress met on 18 Feb, as well as presenting a tax bill in the same session.
-No - usually they would draft budgets, discuss with the President and re-draft.
-Congress had to vote on the whole package of spending cuts, so the administration would have approval for all its measures and control over the timetable up to 1984
-Republican majority in the Senate, and the White House only needed to win the support of 26 Democrats in the House
When was the Omnibus Budget Reconciliation Act passed?
What was it?
Why was the tax bill harder to get through the House?
How did Reagan try and counter this?
-August 1981
-Omnibus Budget Reconciliation Act made large cuts of $35 billion in domestic, welfare programmes and increased defence spending significantly. Reagan hoped to cut federal spending in over 300 organisations.
-Democrats felt they had been manipulated over the budget and saw the tax bill as a fight over control of the House, making significant changes to the bill
-Offered tax concessions to some Democrats to swing the vote, but the Democrats counter-offered incentives in areas they controlled and there process became an undignified scramble over concessions
What did the Economic Recovery Tax Act 1981 do?(5) (Marginal tax?) (What were tax bands linked to?) (What did the highest income tax band fall to?) (What did the lowest fall to?)
Changes to IRAs? (2)
- Cut marginal tax income by 23% over three years
- Linked tax bands to inflation
- Highest income tax band rate fell from 70% to 50%
- Lowest income tax band rate fell from 14% to 11%
- Allowed all working taxpayers to set up untaxed.
-IRAs; - Business tax rates cut, various tax breaks offered, skewed to favour small, innovative businesses
-Businesses could refuse their depreciation costs
What did Reagan’s executive order on 2 March 1981 do?
What did Reagan’s executive order on 16 June 1981 do?
How much was taken out of federal spending by the ORA(Omnibus Reconciliation Act)?
-Set up the EAB economics experts from outside the government advising directly to the President, as well as the Council of Economic Advisers (CEA).
-Set up the President’s Commission on Housing, to investigate all aspects of housing, including how it should be financed, but mainly to find ways of saving money on federal low-cost housing schemes.
-$35bn
What did the Tax Equity and Financial Responsibility Act 1982 do?
What did the Consolidated Omnibus Budget Reconciliation Act (COBRA) 1986 do?
What did the Tax Reform Act of 1986 do?
-Made changes to the budget in response to the economic situation, tightening up tax rules, especially for businesses; it also temporarily raises taxes on cigarettes and the telephone service.
-Revised the budget in many minor ways to save the federal government money and to move costs to state or private bodies: the most significant change shifts the responsibility for many healthcare payments from the federal government to the employer.
-Revised the tax codes, reducing the number of tax brackets; it was supposed to close a lot of tax evasion loopholes and ease the pressure on poorer families.
What is GDP?
What is the marginal income tax?
What is per capita income?
What is real disposable personal income?
-Value of all goods and services produced in a country in a single year
-US income tax is organised into brackets (margins), with the amount of tax rising as you move from one bracket to a higher one. The higher tax is only paid on the income in the higher tax bracket.
-Per Capita income is the GDP divided by the population of a country.
-The amount of money people had left to spend or save after paying tax.
Did Reagan’s policies reduce inflation? (1980)(1982)(By 1996?)
Did Reagan’s policies stop unemployment?(What did money supply restriction lead to an increase in?) (What industries were hurt due to the restriction?) (how did the inherited recession effect businesses?)
What% of the population were unemployed in 1983?
What did this decrease to by 1988?
What % of the population is not included in the official unemployment figures?
-Yes inflation was; - 13.5% in 1980 - 6.2% in 1982 - by 1996 it never reached double figures again.
-Not particularly
-Money supply restriction led to a sharp rise in interest rates.
-Hurt industries that had to buy supplies on credit e.g. farming, or had loans with a long pay-back period e.g. construction.
-Many businesses badly hit: recession Reagan inherited deepened
-9.6% in 1983
-Decreased in the following years (5.5% in 1988) but the proportion in part-time work increased in the same period.
-35% of population not included on official unemployment figures.
Did Reagan’s policies increase personal wealth?
In 1988, how many Americans were millionaires by assets?
In 1980, how many Americans were millionaires by assets?
How many billionaires in 1981? 1987?
Wages stagnated through 1986, but was this a problem?(Did the share of federal income taxes paid by the rich rise? 1981-86)
-Yes.
-1.3 million
-570,000
-26 billionaires in 1981.
-49 in 1987
-Not necessarily, because evidence shows the tax burden shifted upwards.
-From 1981-86, the share of federal income taxes paid by the rich rose from 18.1% to 26.1% - a 44% increase, while the share paid by the bottom 50% fell from 7.5% to 6.4%
Did Reagan’s policies encourage people to save and invest?
(Deregulation?) (Competition?) (Financial environment?) (1987 loans industry?)
-Yes, but at a cost
- More people began to save and invest after 1982
- However, govt cuts led to deregulation in the financial sector
- Increased competition led companies to take more risks to win more customers
- Financial environment for personal savings and investments became increasingly unsafe
- Came to a head in 1987 - crisis in savings and loans industry
- People lost savings and investments - Stock Market crashed
- However recovery was quick.
Did Reagan’s policies reduce the deficit?
(Borrowing nation?) (Cost in 1980? 1983?) (Did the supply side work?)
-No:
- 1980 = $59bn - paying it off would cost 9% of govt budget
- 1983 = $208bn - 14% govt budget
- Increasingly funded from borrowing from abroad
- For the first time, the USA became a borrowing nation, not a lending one
- Due to Reagan’s determination to cut taxes, it soon became clear that supply-side arguments did not work
- Federal departments resisted cuts
- Congress toned down welfare cuts
- Reagan always said increased defence spending was necessary
- 60s + 70s - governments cut defence spending and increased spending on human resources
- HR took 28% of federal spending - by 1987 it took up 22%
- Defence rose from 23% to 28%
Why did Bush struggle to continue these policies?
What reforms did Clinton introduce?
- Unpopular - long-term effects now apparent
- He had only just won the election - media, political and public support was lukewarm
- Democrats controlled both Houses of Congress
- Bush backed down - raised taxes, despite promising in his campaign that it was something he’d never do.
Clinton; - Lower taxes still popular - “New Democrat” - campaign focused on low inflation, high employment, reduced deficit and no tariffs to regulate business and trade
- Increasing welfare, medical care and “investing in people”
