The New EconomyPresentation by Dr. Kevin T. Brady,

AIHE President

What Was the Old Economy?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 1929He 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 DaysRoosevelt: 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 1945-1973After 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 Poverty- Welfare

• 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

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• High inflation• High

unemployment• Little or no

economic growth

Return to Hard Competition 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 IdeaBasic 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, 403BsIRAs, 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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PERSONAL STOCK INVESTMENTSPERSONAL STOCK INVESTMENTS

In 1900 only 1% of Americans owned stock.In 1980 only 13% of Americans owned stock.Now 52% of Americans own stock.

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Effects of Reaganomics

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1980 1990

Total Federal Revenues$591 Billion $1 Trillion

Federal Revenues as a % of GDP (Gross Domestic Product)

18.9% 18%

Federal Revenues from Income Taxes $244 Billion $467 Billion

Federal Spending Under ReaganFederal Spending Under Reagan

1980 1990

Federal Spending $591 Billion $1.25 Trillion

Federal Spending as a percentage of GNP 21.6% 21.8%

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Federal SpendingFederal Spending

• Defense spending increased 50% from 1980 to 1989.

• It FELL 15% after the Cold Warfrom 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?Did Reaganomics Work?

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BIGGEST NON-WAR BOOMin HISTORY

BIGGEST NON-WAR BOOMin 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 second-longest 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 one-third in real inflation-adjusted terms. This was the equivalent of adding the entire economies of East and West Germany or two-thirds 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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