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Reaganomics - Change through continuity
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Reagan v. Roosevelt
Hausarbeit (Hauptseminar), 2006
10 Seiten, Note: 1,3 (A-)
Politics - International Politics - Region: USA
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In this paper I argue that the anti social liberalism critique of the 1980s did not live up to its strong rhetoric. This is due to a number of reasons. First and foremost, during Reagan’s presidency the Democratic majority in Congress had the power to block any means going beyond their accepted limits. Second, Reagan and his fellow Republicans knew very well that Americans had become very attached to certain aspects of the post-New Deal welfare state, especially health care and unemployment benefits. Other aspects, such as the support of labor unions, had a weaker standing in the general population and thus were more open for debate.
Reagan pushed for deregulation to solve a situation that was in some aspects similar to that of the 1930s – the economy was stagnating, unemployment rose, inflation was threateningly high. Yet, in other ways the 1980s were, of course, completely different. The middle class had gotten used to an ever increasing living standard in the previous four decades. New technologies had become widely available, economic ills had been almost absent for a vast number of white working and middle class people for the longest period ever in the history of the United States. The fear of economic deprivation was rooted deeply in the American people, yet America was far from the desparation of the Great Depression. When Reagan promised a “morning in America” many voters gladly turned to this cheerful, persuasive former Hollywood actor. It also helped that Reagan predecessor Carter did not seem to have any means to stop the recession and that independent candidate John Anderson split the vote in the 1980 election.
2.1. Roosevelt’s New Deal and the Resulting Policy Shift
During his presidency, Franklin D. Roosevelt made use of the radio to address the American people in his so-called Fireside Chats. In the 2nd Fireside Chat of 1934, which is the main basis for discussion in this chapter, Roosevelt turned to the national economy and talked about the government intervention that had been taken to get the American economy back on track after the years of the Great Depression.
Before Roosevelt begins to explain the single steps taken by the government, he makes a strong point giving the reason why he thinks he must proceed in the way that he does:
Men may differ as to the particular form of governmental activity with respect to industry and business, but nearly all are agreed that private enterprise in times such as these cannot be left without assistance and without reasonable safeguards lest it destroy not only itself but also our processes of civilization.
This statement shows very clearly that without government intervention Roosevelt does not only consider the national economy at risk, but ultimately the existence of the entire American nation. According to his speech, this is due to the grown market and its mechanisms combining many different tasks and different people, which makes an organization necessary to keep the economy from developing into chaos. Milestones that are now considered self-evident were taken by the National Recovery Administration when they abolished child labor, introduced minimum wages and set standards for a shorter work week. These measures put millions of workers back into employment in a very short time. Roosevelt explains the quick economic successes with the fact that increased wages or, in case of the formerly unemployed, wages at all create a certain wealth that in return helps the industries thrive because of the people’s ability to consume their goods.
In Roosevelt’s further speech it becomes obvious that the National Recovery Administration is not laid out as a static branch of government, but rather a dynamic organization based on what could be called a trial and error approach: “We shall watch carefully the working of this new machinery for the second phase of N.R.A., modifying it where it needs modification.” He continues to address his critics who point to England where they consider government less interfering with the industries. Roosevelt claims that England did not let “nature take her course,” but that they also supported their economy by government measures like abolishing the gold standard and lowering interest rates for war bonds. Social security was in fact more advanced in England than in the United States in the early 1930s.
Roosevelt concludes his speech by assuring the population that government intervention would only happen related to specific needs and issues at a particular time: “I prefer and I am sure you prefer that broader definition of liberty under which we are moving forward to greater freedom, to greater security for the average man […].” This is to say that progressivism indeed was meant to strengthen the American democracy instead of weakening it with exaggerated government interference, which could be identitfied as socialist by critics. Capitalism has indeed remained stable in the US in the following decades and for a long time nobody really questioned the legitimacy of basic economic regulations and the existence of social security – until the recession of the late 70s/ early 80s hit and caused the system to become unbalanced and the costs for welfare to rise beyond the money raised into the programs.
2.2. Reagan’s Critique of Social Liberalism
The key points of Reagan’s critique of the then prevalent policy and political practice can be identified in rather short sentences:
1. Government is not the solution to our problem; government is the problem. This was Reagan’s favorite aphorism that he used quite often. Of course he did not mean to create some kind of anarchy, it was rather a way to say that big government created too high costs and took economic responsibility as well as economic chances from the American people. It is important to confine this liberal view to economic issues, regarding moral issues Reagan was a strict conservative, who also depended on the vote of the radical religious right that had become a rather influential group by the 1980s .
2. Government has grown beyond the consent of the governed. This is a strong point that in my view Reagan does not elaborate very well, except through repeatedly claiming that people do not want to pay for unnecessary administration where they could help themselves in private organizations (like churches or local networks) or even on their own by saving tax money.
3. A growing deficit will create tremendous social, cultural, political, and economic upheavals. In other words: If the United States cannot stop the deficit from growing by deregulation, the economic effects could, in the worst case, put democracy at risk at some point in the future.
4. Achievement must not be punished by high taxes. This sentence could be identitfied as the smallest common denominator of all conservative groups and even a Democrat would find it hard to disagree. The weakness of this point becomes evident when one looks at the deficit. Where would the government raise money from, if not the tax payers?
Reagan addressed all these points in his First Inaugural Address of 1981 and, of course, in the earlier election campaign. At the time of the 1980 election, double-digit inflation threatened the national economy. The middle class experienced a decline in income due to rising interest rates for prospective home owners as well as financial tax burdens. In the State of the Union Address of 1984, Reagan stresses the “indignity of taxes that reduced reward for hard work, thrift, and risk.taking.” He goes on to say that government has grown beyond the consent of the governed with an “ever-growing web of rules and regulations.” These quotes suggest that Reagan and the conservative powers in the US did not want to abolish welfare altogether, but rather simplify the laws and institutions that manage the benefits and thus cut costs and taxes.
This point is further underlined in another quote from the 1984 State of the Union Address where Reagan presents the outcome of measures taken during his first years of presidency: “We have reduced the growth of Federal regulations by more than 25 percent and cut well over 300 million hours of government-required paperwork each year.” These numbers, according to Reagan, would save $150 Billion tax payers money in a ten-year period without actually cutting any welfare benefits. Yet, dispite these claims of rather easy successes, Reagonomics with their focus on tax cuts and increased military spending did not quite work as its inventor had hoped.
2.3. Reagan’s Rhetoricv. Action
Lately it has been very easy to learn about Reagan’s political agenda and its consequences, as there were numerous carefully prepared obituaries published after his death in 2004. The Washington Post article “Actor, Governor, President, Icon” gives a concise review of Reagan’s achievements and flaws. It mentions that his aim to balance the budget failed because tax cuts and increased military spending created new debt that could not be paid by economic growth alone.
While the nation prospered after emerging from a 1981-82 recession, the Reagan budgets produced record deficits and a near tripling of the national debt. Toward the end of his term, Reagan called the federal budget deficit "one of my greatest disappointments" and blamed it on congressional reluctance to cut domestic spending, even though the budget proposals he submitted to Congress had not been balanced. […] Reagan also left an economic legacy of low inflation that was maintained by his successors.
Commenting on Reagan’s image the Washington Post reveals links that one probably would not expect of the conservative president, who repeatedly claimed that government was the problem:
Reagan, a former Democrat who had voted three times for FDR and admired him, adapted the bully pulpit to television. He sometimes borrowed directly from FDR. A refrain that became a frequent punch line of Reagan's 1980 campaign speeches -- "Are you better off today than you were four years ago?" -- was a variant of an FDR comment in a 1934 fireside chat.
 Franklin D. Roosevelt, Second Fireside Chat of 1934.
 Ronald Reagan, State of the Union Address (1984).
 Lou Cannon, “Actor, Governor, President, Icon.” In: The Washington Post. June 6, 2004. Page A01.
Reaganomics - Change through continuity
2006, 20 pages
Reaganomics - Change through continuity
20 Seiten, Note: 1,0
Politics - International Politics - Region: USA
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Change Through Continuity
The election of Ronald Reagan in 1980 represents a decisive turning point in American political development of the twentieth century. America was said to have experienced a rather disappointing economic “malaise” during the previous decade and the general public mood was demanding that something had to be changed. By promising these changes Reagan claimed the people’s trust and occupied the White House. He inherited an economy with a relatively but not critically high unemployment rate, a modest budget deficit, and a small trade surplus. However, the nation was also saddled with double-digit inflation and interest rates, as well as a general depression caused by economic and non-economic factors. When President Reagan left office at the end of the eight years, the economy had witnessed both the longest peacetime expansion in history and the most severe economic crisis in the post-war period. Clearly the Reagan economic legacy is one of both major accomplishments and serious anomalies. When asking different people about what they think of or connect to the Republican administration during the 1980s, opinions vary. Some say the strict economic policies of retrenchment and monetarism, the effective shrinking of the government’s responsibilities in the economy, Reagan’s major tax cuts, and the increased armament spending contributed to the successful rescue of America as the world’s greatest economy and should be seen as a positive wind of change to the United States. To the contrary, some say that all these policies represented America’s shift towards the political right, the accelerating shift of power to private corporations and the rich, increasing inequality to unprecedented levels, and destroying the social fabric, which had been held together by an increasingly intense welfare state.
Praise and critique have been projected on to these certainly crucial political, social, and economic developments under the Reagan administration. And both sides have valid points. Ronald Reagan’s economic policies of retrenchment, tax cuts, budget deficits and monetarism, coined by the media as Reaganomics, had both positive and negative consequences, brought about change, and contributed to the enforcement and lasting continuity of conservative politics in the years to come. A Reagan Revolution arguably happened, which changed America’s fundaments. But does empirical data really show this fundamental change in the basic structure of the American economy, which would legitimate speaking of a revolution? To what extent were Reaganomic policies “successful”? And what consequences did they actually have, both in the short and in the long run?
This paper will focus on domestic policies introduced and tried to be introduced by the Reagan administration between 1980 and 1988, their success, and their consequences. The focus will be on taxation policies and retrenchment policies in government spending, particularly looking at the welfare state. First, the historical background and economic legacy of the 1960s and 1970s will be outlined in order to then analyze policies in the 1980s. A systematic three-step analysis will examine the goals, the actual measures, and the effects of policies within the fields of analysis. A concluding assessment will hopefully contribute to a clearer understanding of this important political era.
In order to analyze and understand economic policies under the Reagan administration, the state of the economy and its historical background faced by the new administration have to be examined.
“The 1960s and 1970s were decades of dramatic growth in legislation, government regulation, public sector spending, and bold policy initiatives in a host of social arenas. We have learned by now that we cannot solve social problems by throwing money at them. Too, we have reaped a harvest of rising inflation, waste, and inefficiency in government, and of declining productivity among workers. All this is vividly reflected in ever-increasing disenchantment with a distrust of the government. Special interests have come to prevail at the expense of the general interest.”
“Malaise” is the word of choice of many to describe the situation and condition America was and had been experiencing in and previous to 1980. Government intervention into the economy, suggested by the school of Keynesian economics, was reaching levels of inefficiency and increased spending, which were pushing the limit in various aspects. A high level of income taxation had become a general and very powerful source of resentment and opposition, and an ever-increasing rate of inflation combined with a soaring level of unemployment was the major concern of workers, capitalists, and politicians.
After the first oil shock in 1974 both inflation rate and unemployment rate reached some of the highest levels in post-WWII of the United States. The unprecedented phenomenon of stagflation – a parallel rise in both inflation and unemployment during stagnating growth– not only puzzled economists but was also costing millions of workers their jobs and their incomes, and thousands of employers their profits. Milton Friedman’s and other monetarists’ warnings were looking more realistic than the dominant school of Keynesian economics had been predicting. So wrote Tobin:
“No one foresaw in 1970 the main economic events of the decade or the formidable challenges those surprises would pose for macroeconomics and stabilization policy. We macroeconomists were caught unawares. It was not simply that our models, theoretical and econometric, now had to be applied to novel situations. Worse than that, the shocks of the 1970s required some fundamental rethinking and rebuilding.”
Soaring and accelerating inflation had become the number one problem for the American economy by 1980. The rise of the price level of consumer prices in 1979/1980 exceeded 12 percent. Compared to the 4 percent in the early 1970s and even less than 2 percent in the first half of the 1960s, this was a mounting problem causing insecurity and a loss of economic confidence. At the highest peacetime unemployment levels between 10 and 11 percent the public simply was not pleased.
To identify the reasons for the economic depression existent at the beginning of the 1980s is not the subject of this paper; however, it certainly was partly due or at least believed to be due to economic policies executed by the preceding administrations. Taxation had been continuously increasing over the previous decades. At the end of the 1970s marginal tax rates reached 49 percent for an individual with $25,000 of taxable income and exceeded 65 percent for taxpayers with incomes of $90,000 and above. The interaction of inflation with tax rules that did not distinguish between real and nominal interest incomes or real and nominal capital gains meant that many taxpayers (mainly the high income earner and especially wealthy capitalists) faced marginal tax rates over 100 percent on real interest or real capital gains. This generally high level of taxation has been argued to having reduced economic activity and motivation of workers, as well as investment incentives for financial actors and entrepreneurs.
Surely, one can argue – and not only Keynesian economists do so – that higher taxes are very likely to create higher tax revenue and, thus, greater ability of the government to inject money into the economy, leading to a multiplying effect in aggregate demand and, thus, to higher economic activity, growth, employment, and wealth. Well, for a lot of reasons (which cannot be discussed here) this was not the case by the end of the 1970s. Starting in the 1960s government spending had constantly been increased over the following decades up to 1980, but by that time public spending has been argued to be inefficient and even destructive to the laws of the free market economy. Government outlays as a percentage of GDP had increased from 19.3 percent in 1962 to 22.3 percent in 1980, representing large relative and absolute increases.
The greatest increase within the structure of public spending had been devoted to Social Security, Medicare, and related retirement, rising from 3.0 percent in 1962 to 6.9 percent in 1980. Entitlements and domestic discretionary also experienced a relative boost from 2.8 and 3.0 percent in 1962 to 4.1 and 4.9 percent in 1980 respectively. The welfare state was and continued to be a case of special importance.
As Feldstein summarizes: “the unusually high rate of inflation in the late 1970s and the rapid increase of personal taxes and government spending in the 1960s and 1970s had caused widespread public discontent. Ronald Reagan’s election in 1980 reflected this political mood and provided a president, who was committed to achieving low inflation, to lowering tax rates, and to shrinking the role of government in the economy.” The new president, his advisers, and the general public were convinced that something had to be done.
President Reagan took office in 1981 with a plan to “put the nation on a fundamentally different course – a course leading to less inflation, more growth, and a brighter future for all of our citizens.” In February 1981 the new administration unveiled its Program for Economic Recovery. The plan called for a stable and restrictive monetary policy, a reduction in federal spending, a reduction in personal and business taxes, and substantial regulatory relief. Each element of the program was designed to reduce the role of government in the economy. A more limited federal presence was advocated largely because of its perceived benefits for overall economic performance, and a fundamentally conservative social philosophy for the responsibilities of the government was embedded within this economic program. After the fight against high levels of inflation, taxation policies and retrenchment policies within government spending have arguably been the main concerns of economic policy making. The following section will analyze these two areas separately after having given a short insight into the monetary measures against inflation.
 Duignan/Rabushka 1980, 3
 Espinosa-Vega/Russell 1997, 18, quoting Tobin, 1980, 23
 Feldstein 1994, 4
 this was because the high rate of inflation was simply neglected in taxation accounting. See Feldstein 1994, 14
 Feldstein 1994, 1
 Presidential message to the Congress, February 18, 1981
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