Transcript From the 50s to 2000 II – the changing face of the US economy

 Corporate raiders
 Evil empire
 Arthur Laffer
 Dot-com bubble
 Black Monday
 Phrase – “read my lips: no new taxes”
doc. Ing. Tomáš Dudáš, PhD.
Economic situation in 1980
 The rise of inflation of the 1970s had resulted in an
enormous increase in tax burden
 Social security tax and Medicare had also increased
the personal tax burden.
 31 million jobs had been destroyed between 1978 and
1982.
 Fully one-third of all private sector jobs that existed in
1978 had disappeared by 1982.
Reaganomics
•Attempts to solve the economic malaise that was continuing in the
late 1970’s were largely unsuccessful
•Reagan proposed a new idea to address the economic stagflation (lack
of growth)
•Reagan believed that the root of the problem for the economy was:
•Intrusive government regulations of business and industry
•Expensive government social programs that offered “handouts” to
non-productive citizens
•High taxes
•Deficit spending
Reagan’s Solution – Supply Side Economics
•Tax cuts, rather than government spending, will create economic
growth
•Arthur Laffer suggested that at some point rising tax rates discourage
people from participating in taxable activities such as investing
•This is known as the point of diminishing returns – where a policy
provides benefits only to a certain point – the effort/expense no
longer produces a sufficient amount of desired outcome to be
worthwhile
•If profits from investing are taken away by taxes, what is the point
of investing?
Reagan’s Solution – Supply Side Economics Continued
•If investment is reduced, the economy slows
•Even though tax rates remain high, the government collects less
money because the economy is slower (50% of 100 = 50 vs. 25%
of 300 = 75- a lower tax rate produces more tax revenue)
•Reagan believed that lower taxes would encourage people to
buy products and invest, creating an overall benefit to the
economy
•The benefits of the growing economy would “trickle down” to
the rest of society
Reagonomics - Results
 Income tax rates of the top personal tax bracket
dropped from 70% to 28% in 7 years, while social
security and Medicare taxes increased
 GDP growth recovered strongly after the 1982 recession
and produced five straight quarters of growth
averaging 8.4%
 The GDP grew during Reagan's remaining years in
office at an annual rate of 3.4% per year, slightly lower
than the post-World War II average of 3.6%
Reagonomics - Results
 Despite the tax cuts of 1981, federal tax revenues nearly
doubled in the Reagan years.
 Real inflation-adjusted manufacturing output rose to
its highest point of the post-WWII period.
 Domestic-based manufacturing employment fell from
20.3 million in 1980 to 19.2 million in 1990, a decline of
6%, probably as a result of productivity gains.
 U.S. exports of manufacturing goods grew by 90%
between 1986 and 1992, compared with 25% for the
rest of the OECD countries.
Reagonomics - Results
 More than 18 million new jobs were created in the
1980s in the U.S.—this was more than Japan, Britain,
and Germany combined.
 82% of the jobs created were high-pay, high-skill
managerial and technical positions. 12% were low-skill
service jobs.
 While real wages declined from $11.41 per hour in 1978
to $10.02 per hour in 1990, workers’ total compensation
increased as workers demanded increased benefits.
 Reaganomics did not gut social welfare programs. In
fact, social welfare spending was the largest cause of
the budget deficits of the Reagan administration.
Reagan and the World
•Reagan believed that a substantial military build up was the best
way to counter communism
•This included the Strategic Defense Initiative (SDI) which was
labeled “Star Wars”
•This was a space-based missile defense shield that would,
ostensibly, shift the balance of power in favor of the USA
•The use of nuclear weapons would no longer be deterred by
“Assured Mutual Destruction”
Black Monday
 Black Monday refers to Monday, October 19, 1987,
when stock markets around the world crashed,
shedding a huge value in a very short time
 The crash began in Hong Kong, spread west through
international time zones to Europe, hitting the United
States after other markets had already declined by a
significant margin. The Dow Jones Industrial Average
(DJIA) dropped by 508 points to 1738.74 (22.61%)
 The Black Monday decline was the largest one-day
percentage decline in stock market history
 It caused no great recession
Clintonomics
 Between 1980-1992 America had undergone twelve years of
conservative policies implemented by Ronald Reagan and
George Herbert Walker Bush
 Economic recession in 1991-1992
 Bill Clinton ran on the economic platform of balancing the
budget, lowering inflation, lowering unemployment, and
continuing the traditionally conservative policies of free
trade
 In 1992, Bill Clinton was elected president of the United
States of America. During Clinton’s presidency (1993 to
2001), the economic policies he put into place for the U.S.
were termed Clintonomics
Clintonomics
 Clinton failed to push through an ambitious proposal
to expand health-insurance coverage
 Clintons main goal – balanced budget
 In 1998, the government posted its first surplus in 30
years, although a huge remained
 Record surplus of the budget in 2000
 Continuing deregulation of the economy
 Strong economic performance in the USA – 8 years of
strong economic growth between 1992-2000
GDP growth in USA between 1992-2000
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
Unemployment in USA between 1992-2000
8
7
6
5
4
3
2
1
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
CPI in USA between 1992-2000
3.5
3
2.5
2
1.5
1
0.5
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
Dot-com bubble
Creation of the Bubble
 The "dot-com bubble“ was a speculative bubble covering roughly
1998–2001 (with a climax on March 10, 2000 with the NASDAQ
peaking at 5132.52) during which stock markets in Western
nations saw their equity value rise rapidly from growth in the
more recent Internet sector and related fields
 The period was marked by the founding (and, in many cases,
spectacular failure) of a group of new Internet-based companies
commonly referred to as dot-coms
 The venture capitalists saw record-setting rises in stock
valuations of dot-com companies, and therefore moved faster
and with less caution than usual, choosing to mitigate the risk by
starting many contenders and letting the market decide which
would succeed.
Creation of the Bubble
 The low interest rates in 1998–99 helped increase the
start-up capital amounts.
 Although a number of these new entrepreneurs had
realistic plans and administrative ability, many more of
them lacked these characteristics but were able to sell
their ideas to investors because of the novelty of the
dot-com companies
 According to dot-com theory, an Internet company's
survival depended on expanding its customer base as
rapidly as possible, even if it produced large annual
losses
Aftermath of the Dot-Com Bubble
 The dot-com bubble crash wiped out $5 trillion in
market value of technology companies from March
2000 to October 2002.
 Many dot-coms ran out of capital and were acquired or
liquidated
 Several companies and executives accused or convicted
of fraud for misuse of shareholders money
 Citigroup and Merrill Lynch fined millions by SEC for
misleading investors
 Huge layoffs of technology experts