Throughout the years that the United States has been a nation the economy has fluctuated. During the 1980s specifically, the eight-year span from 1981 to 1989, Ronald Reagan was elected into office and became the 40th president of the United States. “When Ronald Reagan took over the leadership of the United States in 1981, he inherited an economy that was in terrible shape, the worst American economy, in fact, since the Great Depression of the 1930s” (Shmoop Editorial Team 1). This was a significant election because it acted as a turning point for the nation.
Reagan was the first republican president elected into office in almost 50 years. The presidents before him were democratic and had different ideas about how an economy should function. Reagan, the Republican Party and the American people wanted to see change in the economy. With the goal of changing the economy and how people thought about it on his mind Reagan and the government performed two interventions; tax cuts and deregulation on the market. A major reason governments intervene in the market place is to correct market failures, which is when the assumption of an efficient and competitive market does not stand to be true. Reagan promised to restore prosperity by getting the government off the backs of the American people by cutting taxes, slashing spending and deregulating” (Shmoop Editorial Team 2). The two interventions, tax cuts and deregulation influenced the spending and investing habits of the United States people and impacted the United States economy as a whole during the 1980s. The two interventions previously mentioned had a significant impact on how the ’80s would look from an economic standpoint. Reagan wanted to have an economy that was thriving.
His plan included to, “cut taxes, get control of government spending and get government out of the way so that the entrepreneurial spirit of the American People could be unleashed” (Institute 1). He wanted to create security throughout the nation. Reagan’s presidency jump-started change in the American people and the market place. Ronald Reagan wanted the economy to become a free market place. In order for all of these things to be true, he intervened. The first intervention performed by the government on the market place was cutting taxes.
“Regan proposed a phased 30% tax cut for the first three years of his presidency” (ushistory. rg 1). This proposal indicated that the president proposed a gradual tax cut and would implement it slowly, so it didn’t affect the market or the people drastically and all at once. Shortly after being inaugurated in August of 1981 Reagans plan was in motion. President Reagan, “signed the Economic Recovery Tax Act of 1981 which brought reductions in individuals income taxes, the expensing of depreciable property, incentives for small business and incentives for savings” (Institute 2). This tax act later became a staple document for which the Republican Party went about conducting economic policies for years to come.
A few years later a second policy was enacted. “The tax reform act of 1986 brought the lowest individual and corporate income tax rates of any major industrialized country in the world” (Institute 2). These two documents signed into action had a positive effect on where the US economy would be headed. This act of cutting taxes propelled an economy that was once in a recession toward an economic boom. The second intervention, which was implemented into the market place by the government, was deregulating certain markets, which had price controls placed on them from prior presidencies.
This meant that the government was withdrawing its regulation of certain goods such as oil and gas. Nixon the president before Reagan had placed price controls on these markets. By placing a price control on these goods the market price kept moving away from the equilibrium price. Intervening in the market by deregulation would allow the determination of the prices’ of goods and services to be determined by the markets themselves and not by the government. The two interventions had a significant impact and influence on the United States economy. They sparked a period of growth for the states.
The period of growth for the United States occurred only because each of the interventions had a specific purpose. For starters, tax cuts drove consumer demand. People had more money in their pockets and could buy more. And the slashing of taxes encouraged people to invest their money into places. The tax cuts in turn helped the government pay off debt and put money into the economy. Reagan made sure; “The bulk of the cut would be concentrated at the upper income levels” (ushistory. org 1). The thought behind slashing taxes in the upper income levels was a no brainer for Reagan.
He knew that was where the big spends resided. By incorporating the tax cuts in the upper income levels Reagan thought, “rich people would spend more money and invest in private enterprise and create new jobs” (Crash Course, 2014). The slashing of taxes resulted in all of three of those things becoming true. The idea of slashing taxes in the upper income levels had another added benefit. Performing a tax cut (30%) would, “encourage people to work harder because they will get to keep more of their money” (Crash Course, 2014).
This intervention had a purpose and it was to have people invest and spend their money, and to create new jobs for the people who were unemployed. “Reagan believed that a tax cut of this nature would ultimately generate even more revenue for the federal government” (ushistory. org 1). And we will soon realize Reagan’s economic plan of slashing taxes to the upper class did in fact increase revenue, create jobs and lead the United States out of a recession all by encouraging people to spend. The second intervention deregulation led the US economy toward a free market economy.
Once deregulation was performed the producers in the oil and gas markets were able to determine how much to sell and at what price. The main reason the government intervened by deregulation was to, “end what the (Reagan) Administration regards as counterproductive Federal regulations of the oil industry” (Hershey Jr. 1). The Reagan Administration saw Nixon’s price controls as a waste of time and energy because nothing was really being benefited by those actions. According to an article written for the New York Times in January 1981 some analysts said the price of oil would increase and surpass the price of gasoline.
However, “the Administration insisted that the price of gasoline at the end of the year would be no higher than it would have been if the controls had been allowed to expire as scheduled on Sept. 30, instead of today” (Hershey Jr. 1). Deregulation allowed the government to let the markets of the economy do the work. Deregulation allowed the prices of goods in certain markets to shift naturally. Deregulation helped shaped how the economy functioned moving forward. Deregulation and tax cuts had specific purposes when intervening in the 1980s economy.
The interventions that took place helped increase spending and investing among the different classes. While the two interventions definitely impacted the economy they did incur some costs, as is the case with any period of transition. The primary and secondary costs of these two interventions were evident. For starters, the primary cost of deregulation included gas prices initially going up from where they originally were. According to the Office of Energy Efficiency and Renewable Energy after deregulation was performed on the gas market the price of it went from $1. 19 in 1980 to $1. 31 in 1981.
Before consumers could reap the benefits of a stable and thriving economy they had to pay. Another primary cost people experienced was the fact that the middle and lower classes received no tax break. As a matter,” the poorest 1/5 endured income declines of 24% while income of the middle 3/5 of American families stayed flat” (Shmoop Editorial Team 4). Yet it seemed as if the tax cut and income rises in the upper classes made up for the lack of change in the bottom two classes. As for the secondary costs of these interventions one is particularly important to talk about, and that is the fact that people were living in a recession.
Before Reagan introduced tax cuts and deregulation the American people lived in a recession. Before people could enjoy a strong economy they had to live in one, which was classified as a recession from 1980 to the middle of 1981. The costs of the interventions (tax cuts and deregulation) involved the prices of goods rising as well as a period of recession for a short period of time before Reagan was elected and a short period of time after Reagan was elected. However there were many benefits that came about as a direct result from the interventions performed by the Reagan administration.
For starters the primary benefits of the intervention were huge. For instance, according to an article, “during the year 1980 only 4,400 taxpayers in America had an income of 1 million dollars and 6 years later 35,000 taxpayers had an income of 1 million dollars” (Shmoop Editorial Team 4). This was a huge increase in income among the American people. Consumers also saw Wall Street and the stock market boom and do well. During the Reagan period the American people saw the creation of 20 million jobs. According to an article written by The Ronald Reagan Foundation, the consumers during this eight-year period saw unemployment fall from 7. % to 5. 5%. Lastly, one of the biggest primary benefits that came about due to interventions such as deregulation and tax cuts was the, “Average net worth of families earning between 20,000 and 50,000 annually grew between 27%” (Institute 2). These statistics indicate that Reagan’s interventions worked because growth was evident.
As for the secondary benefits brought about by these interventions the American people saw those as well. According to the Ronald Reagan Library Foundation website, as a nation the United Sates inflation rate dropped from a hefty 13. % in the year 1981 to a low 4. 1% in the year 1989. In a matter of eight/nine years Ronald was able to lower the inflation rate by performing tax cuts and deregulation in the marketplace. Another secondary benefit, which was received by the nation as a result of these two interventions was that the, “real GNP went up by 26%” (Institute 2). These numbers were staggering for a time previously in a recession. Another secondary benefit the nation received as a result from this act was, “Prime interest rates were 21. 5% in January of 1981 and in August 1988 they were 10%” (Institute 2).
In a matter of 7 years Reagan was able to shrink the interest rates all by simply intervening in the market place. Lastly, “between the years 1981 and 1989 the real GDP per capita increased by 23% and in the same span of time value in the stock market tripled” (Shmoop Editorial Team 2). The interventions on the market during this time period had major benefits to both the consumers and the country. After these two interventions were put to action in the marketplace one can see how the interventions were economically efficient.
We can see how these interventions helped the economy by the numbers and statistics previously mentioned. Cutting taxes at a level of 30% proved to be an economically efficient intervention because inflation dropped significantly, jobs were created, and real GNP and GDP per capita both increased. These interventions helped the people and the markets. One way to tell if an intervention on the market is economically efficient or not is to see if the good you are making and selling is listed at the market equilibrium price and quantity.
Because if it is that means the quantity supplied equals the quantity demanded, and no money is wasted. And we can see that since the price controls were lifted by deregulation the markets were headed toward equilibrium, making the deregulation intervention economically efficient. This market during the late 1980s was efficient because “any change made to assist one entity would harm another and goods are produced at their lowest variable cost” (Investopedia 1).
Tax Cuts and deregulation and the way they were utilized in this specific market would make for fficient interventions as well as an efficient market in the late 1980s. The year 1980 was a turning point in America from an economic standpoint. Ronald Reagan was elected in 1980 for his conservative views on life and economics. The American people desperately wanted change. After dealing with a recession the American people wanted to live in a place where the American spirit lived and where an economy thrived. Ronald Reagan was the man for that job. Ronald Reagan once said during his inaugural speech. “Government wasn’t the solution to problems but was itself the problem” (Edwards 1).
This one line was a powerful one it was one that influenced his economic choices while acting as president of the United States. Reagan cut taxes and performed deregulation on two powerful markets, gas and oil. Ronald Reagan intervened on the market because he saw market failures happening left and right. The two interventions tax cuts and deregulation led the 1980s economy toward a period of growth. The nation saw everything from a drop in interest rates to an increase in jobs, income, GDP and GNP. Most importantly the US saw a period of growt