Transcript 10 The New Economy, Dr. Kevin Brady

The New Economy
Presentation by Dr. Kevin T. Brady,
AIHE President
What Was the Old Economy?
The Depression — 1930
• Herbert Hoover changed
the 1920s “hands-off”
policy to combat the
Depression by using the
federal government.
• Used the federal
government to finance
programs such as the
Boulder Dam
• Raised taxes and poured
money into the economy
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Response to 1929
He had the Fed resume credit
inflation (add $300 million
after crash in 1929).
• Asked companies not to cut
workers’ wages
• Cut taxes
• Increased government
spending
• Deliberately ran a big deficit
• Increase government’s
share of GNP from 16.4% in
1930 to 21.5% in 1931
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No Direct Aid — Unconstitutional
• Agricultural Marketing Act $600M to farmers
• Reconstruction Finance Corporation (9 point
program) December 1931. $3.8B by 1932
• More major work projects in Hoover’s four
years than in the 30 previous years
• San Francisco Bay Bridge, Los Angeles
Aqueduct, Hoover Dam, etc.
• Emergency Relief and Construction Act $3.9B
New Deal planner, Rexford Tugwell
• “We didn’t admit
it at the time, but
practically the
whole New Deal
was extrapolated
from programs
that Hoover
started.”
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Roosevelt: New Deal and First 100 Days
• New Deal tried to pump
large amounts of money
into the economy by
providing jobs.
• Roosevelt hoped this would
result in increased demand
of goods and services.
• Roosevelt attempted to
balance the budget.
• Roosevelt never fully
embraced the concept of
deficit spending.
After the War 1945-1973
John Maynard Keynes
• Keynesian economics
promotes a mixed economy,
primarily set in the private
sector, but with a major role
played by the government and
public sector. It served as the
economic model during the
Depression, World II and the
economic expansion from
1945 to 1973, and beyond …
up until 1981.
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After World War II
• No other
nation could
compete
against the
U.S.
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BOOM to BUST to BOOM
• From 1950 to 1973, real
economic growth in the U.S.
economy averaged 3.6
percent per year. There was
no competition.
• From 1973 to 1982, a period
of stagflation, it averaged
only 1.6 percent.
• The Reagan economic boom
brought back the more usual
growth rate. The economy
averaged 3.5 percent in real
growth from the beginning
of 1983 to the end of 1990.
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The Great Society
• War on PovertyWelfare
• Medicare and Medicaid
• ESEA Act of 1965
• PBS, NEH and NEA
• Higher Education Act
• Urban Transportation
Act
• Etc.
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1970s — Age of Stagnation
• High inflation
• High
unemployment
• Little or no
economic
growth
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Return to Hard Competition
• Business had to
downsize to compete
• Become more
competitive
• Unions decreased
• Calls for smaller, more
efficient government
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Major Change
Reaganomics
• Cut taxes
• Give money to the people to
invest
• Investment creates jobs
• Employed people buy more
produce
• Companies must hire even
more people to produce
• More people working equals
more tax income for the
government
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Basic Idea
• People will do better
taking care of
themselves.
• Big government
stagnates the economy
and individual lives.
• They have no real stake
in people’s failures and
successes.
• A buyer and a seller
both take a risk. They
determine prices.
• It’s the double “thank
you” transaction.
• A third party takes no
risk and pays no real
consequence for a bad
decision.
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IRAs, 401Ks, 403Bs
• Started in the 1970s,
people started investing
more into these funds
• Changes from
predetermined pensions
• More opportunities,
more risks (maybe)
• People feel more
comfortable to invest in
the stock market
• Low capital gains taxes
• People invest
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In 1900 only 1% of Americans owned stock.
In 1980 only 13% of Americans owned stock.
Now 52% of Americans own stock.
PERSONAL STOCK INVESTMENTS
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Effects of Reaganomics
1980
1990
$591 Billion
$1 Trillion
18.9%
18%
$244 Billion
$467 Billion
Total Federal Revenues
Federal Revenues as a %
of GDP (Gross Domestic
Product)
Federal Revenues from
Income Taxes
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Federal Spending Under Reagan
Federal Spending
Federal Spending as a
percentage of GNP
1980
1990
$591 Billion
$1.25 Trillion
21.6%
21.8%
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Federal Spending
• Defense spending increased 50%
from 1980 to 1989.
• It FELL 15% after the Cold War
from 1989 to 1993.
• Nevertheless, MEANS TESTED entitlements,
not counting Social Security and Medicare,
increased 102% between 1980 to 1993.
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Did Reaganomics Work?
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BIGGEST NON-WAR BOOM
in HISTORY
• This economic boom lasted 92
months without a recession …
from November 1982 to July
1990.
• This was the longest
peacetime period of sustained
growth and the secondlongest period of sustained
growth in U.S. history.
• The growth in the U.S.
economy lasted more than
100% longer than the average
period of other expansions
since World War II.
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BOOM
• The American economy
grew by about onethird in real inflationadjusted terms. This
was the equivalent of
adding the entire
economies of East and
West Germany or twothirds of Japan's
economy to the U.S.
economy.
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Andrew Mellon 1924
• “It seems difficult for
some to understand that
high rates of taxation do
not necessarily mean
large revenue to the
Government, and that
more revenue may often
be obtained by lower
rates.”
• 73% of Nothing =
Nothing?
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