What Effect Did Reagan’s Economic Policies Have? Flashcards
(21 cards)
Reagan’s immediate action
In 3 days after inauguration, sacked White House staff members, put federal hiring freeze in place
Told all departments there was a freeze on office furnishing and equipment, had to cut travel expenses by 15%
Used series of executive orders to set up new advisory groups, reported directly to him, how to cut down ‘big government’
Made him look very active
What was reaganomics
Influenced by supply-side economic theories
4 parts, stressed importance of passing legislation quickly
- cutting federal deficit: accompanied by budget bill and proposal for cuts on domestic spending, budegt bill aimed to reduce deficit from 22% of GNP in 1981 to 19% in 1986, plan had lots of errors due to being put together hastily, said that $74 billion cuts ‘as yet unidentified’
- personal and business tax reductions: accompanied by economic recovery tax act of 1981
- deregulation: removing federal control in industry, state, and local government
- planned control of the money supply: keep inflation down whilst expanding the economy
Where were Reagan’s domestic spending cuts to come from
Mostly from federal grants for projects set up under LBJ’s ‘Great Society’ reforms
Included grants to local and state government bodies for slum clearance and highway repair
Induced local initiatives in education, housing, and provision of services such as Aid to Families with Dependent Children (AFDC) programme
Reagan presenting his plan
Reagan wanted to present his whole budget policy through to 1984 as a single bill when he met congress on 18th February ( usually would outline budget plan and sent to congress over several years as a series of bills)
Wanted to present tax bill at the same time
Council of Economic Advisers (CEA) had no time to follow usual procedure for budget planning
- couldn’t ask each department and debate plans, produce draft plan which would be discussed with Reagan and redrafted
Meant administration would have approval for all its measures and control over the timetable up until 1984
How was the legislation passed
Republican majority in the senate, almost republican majority in House of Representatives
White House needed to win support of 26 democrats in the house to pass legislation, easier to push budget and tax bills
Budget: senate passed it and sent to the house, after revision, passed and became law in august as Omnibus Reconciliation Act of 1981 (ORA)
Tax: senate passed with one change, cut personal tax reduction from 30% to 25%, in the house democrats felt they had been manipulated over the budget, made significant changes as a fight over control in the house, White House offered tax concessions to democrats to swing vote, reshaped bill passed and became law in august, economic recovery tax act 1981 (ERTA)
What did the ERTA do
Cut marginal income tax by 23% over 3 years, linked tax bands to inflation
Applied to all tax bands, those who paid more benefited most
Highest income tax band fell from 70% to 50%, lowest fell from 14% to 11%
Allowed all working taxpayers to set up untaxed IRAs (independent retirement accounts)
Business tax rates cut, businesses could revise their depreciation costs, calculated years in advance so suffered from inflation
Various business tax breaks offered, skewed to favour small, innovative businesses
Legislation March 1981
2 March: executive order set up president’s economic policy advisory board
- EAB set up with economic experts from outside the government, advised directly to president and CEA
Legislation June 1981
16 June: executive order set up presidents commission on housing
- to investigate all aspects of housing including how it should be financed
- found ways to save money on federal low-cost housing schemes
Legislation august 1981
13th august: economic recovery tax act (ERTA) and omnibus reconciliation act (ORA)
What did the ORA do
Proposes variety of tax cuts, to take $35 billion out of federal spending, initial bill presented by WH proposed $45 billion in cuts
Legislation 1982
3rd September: Tax equity and financial responsibility act (TEFRA)
- makes changes to budget in response to economic situation, tightened tax rules, especially for businesses
- temporarily raises taxes on cigarettes and the telephone service
Legislation April 1986
7 April: consolidated omnibus budget reconciliation act (COBRA)
- revises the budget in many minor ways to save federal government money and move costs to private or state bodies
- shifts responsibility for many healthcare payments from federal government to employer, most significant change
Reagan’s aims
Stop inflation, reduce unemployment, increase personal wealth, increase productivity, encourage personal saving and investing, encourage businesses and service providers to produce more
Reduce federal spending and deficit
How did Reagan try to stop inflation
Put pressure on Federal Reserve Board (FRB) to put tighter restrictions on the money supply
- it did this, tighter than Reagan suggested
Effect of Reagan’s actions to stop inflation
Restrictions on FRB not lifted when unemployment rose
Led to sharp rise in interest rates
- hurt industries that had to buy supplies on credit (cars and farming), or had loans with long pay-back period (construction), businesses hit
- recession deepened
Unemployment from 7.1% of population available to work in 1981 to 9.6% in 1983
Inflation: 11.3% in 1979, 13.5% in 1980, began to fall, 1982, 6.2%, by 1996 had never reached double figures again, mostly under 5%
Did Reagan’s policies increase personal wealth
Lots of debate around it
Tax cuts made people richer, however unsure which areas of the population were made richer
- some say rich got richer, cut in tax was deepest for rich, benefited the most
- some say tax cuts hurt the rich most and poor least, tax payments of the rich helped revival of the economy
Did Reagan’s policies encourage people to save and invest
Economy came out of recession at end of 1982, encouraged saving and investing as businesses did well again
Policies to reduce big government led to deregulation in the financial sector
- increased competition meant organisations took more dangerous risks to win customers
Late 1980s: crisis in savings and loans industry (government intervention stopped), stock market crash of 1987
- quicker recovery than Wall Street crash, FRB stepped in, encouraged banks to lend to each other and business/ personal investors not to panic
- crash soon over
Did Reagan’s policies reduce the deficit
1980: $59 billion, paying it off cost 9% of federal spending
1983: $208 billion, 14% of federal spending in loan interest payments
Why did Reagan fail in reducing the deficit
- increasingly funded by borrowing from abroad
- due to determination for Reagan to cut taxes, became clear supply-side arguments didn’t work
- federal departments resisted cuts whilst congress toned down many welfare cuts planned by the administration
Reagan said increased defence spending was necessary - didn’t manage to do this and reduce the deficit
- late 1960s and 70s defence spending was cut and Human Resources increased spending
- reagan reversed this, 1980: Human Resources took 28% of federal spending, 1987: 22%
- defence spending, 23-28% from 1980-87
What changed after Reagan
Bush promised to continue reagans policies but they were less popular as people saw the long-term effects and limitations
Democrats back in power in both houses of congress, harder
He instead raised taxes
Clinton supported low taxes, ‘new democrat’, low inflation, high employment, reduced deficit and no tariffs, increased welfare and medical care, ‘investing in people’
Reagan’s presidency
1981-89
