Economic Policy in Recent U.S. History

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 Ð''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 15Ð'Ð... 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 Ð''trickle down' economics to accomplish their goal of bringing the country out of this recession and stimulating new growth.

The economic policy of this time was known as Ð''Reaganomics', and it emphasized using monetary policy to combat inflation, and lower marginal tax rates to restore the reward for work, saving and investing and to boost productivity and growth. Many demand side advocates predicted that this would only increase inflation, unemployment, and lead to a general decline in the economy.

Contrary to these predictions the economy recovered at a rate even faster than the Reagan administration had predicted.

The major problem with the policy at this time was that the congress was still led by demand-side liberals. They said that these tax-cuts would produce a budget surplus and instead of using this surplus to offset the revenue loss from taxes, they just increased their spending, which caused the national debt to increase from one to four trillion dollars from 1981 to 1986. Another problem with this supply side ideology was that it was seen as giving the rich more of an advantage, because they were getting more of a tax break than less wealthy peoples. However this was the whole point of the trickle down idea. If you can increase the benefits to the people at the top then those benefits should trickle down to the lower classes, and stimulate economic growth throughout the economy.

Throughout this period monetary policy, implemented by the independent Federal Reserve Board, commonly known as the Fed, was used to try to fine tune the short term economic situation by manipulating the interest rate, and the money supply, through it's control over the banking system. With the Keynesian system, the Fed would want to increase the money supply by lowering interest rates and reserve requirements to increase the buying power of the people and increasing demand. The problem with this is that it causes inflation. It was not seen in the seventies that an excess of money caused inflation, because it was blamed on the oil crisis of that time period. With the success of the Reagan administration, it was seen that monetary policy must only be used to maintain the value of our currency and not as another instrument to fine-tune the economy.

After Reagan left office, his vice president, George Bush took over. Instead of holding with the supply-side ideas of his predecessor,