Economic Policy

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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 15½ 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... ... middle of paper ... ...ngress in fact adopted the tax reductions, and a set of spending reductions was incorporated into the First Congressional Budget Resolution. The budget process for 1982 was never completed, however, and the 1981-82 recession intervened. The net result of these efforts has been that tax rates are lower now than in 1980, but not lower than rates in 1979. The reductions in aggregate federal expenditures relative to GNP, however, have not materialized. Indeed, during the first three years of the Reagan administration, federal spending as a percentage of GNP increased to historically high peacetime levels. Because the decline in the rate of growth of tax revenues has not been matched by a decline in the growth of expenditures, the government\\ 's budget deficit in real terms has also reached unprecedented peacetime levels. The 1983 deficit was almost 6 percent of GNP. Projected deficits for 1985 and 1986 exceed 4 percent of GNP. These levels are of the same order of magnitude as those reached during the Great Depression of the 1930s. Without a reversal of the tax reductions or significant real spending cuts, the projected deficits will not fall below 3 percent of GNP until 1989.
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