Economic Issues and Politics

 Stagflation – 1970s  Deficit spending  International competition in economy  Foreign oil  OPEC  Increased taxes and frozen wages

 Stagflation occurs when the economy isn't growing but prices are rising  oil prices rose dramatically, fueling inflation ▪ average price of a barrel of oil reached $ (adjusted for 2007 dollars)  Economic growth is measured by GDP (gross domestic product):  1974 GDP contracted (decreased) 0.5%  1975, GDP contracted 0.2%  In 1980, GDP contracted 0.2%  Unemployment reached 8.5%

  Causes:  high inflation due to high government spending and growing deficit because of Vietnam war and social programs of Great Society during the 1960s  International competition in the economy  Oil crisis – extreme rising prices ▪ American took sides with Israel in the Yom Kippur War (Israel attacked by Arab nations around them) so OPEC (Organization of Petroleum Exporting Nations) cut off oil sales to the US until 1974

 To reduce the deficit he tried to raise taxes and cut spending – Congress refused (good thing, because it would have made the recession worse)  Tried to raise interest rates to cause inflation which backfired and caused the economy to slow down  Tried to use price and wage freezes, but was a short term fix only and the recession continued

 Seen as honest and not connected to Nixon’s crimes in Watergate  Pardoned Nixon so the country could get over it – but it made him look bad  Economic recession had gotten worse  Unemployment and inflation rising – it was 10% by 1974  Economic Policy called “WIN”  “Whip inflation now” didn’t work because Americans had no incentives to cut back on gas use  Cut government spending and had the FED restrict credit = the WORST recession in 40 years  Other Issue (Cold War): North Vietnam invades the South, but Congress would not send troops and S. Vietnam falls in 1975

 Democrats – a sure bet after Nixon’s scandals hurt Republicans’ reputation  Seen as good, down to earth “outsider” to politics

 Economy is bad – he blames America’s dependence on imported oil  Tries to get Congress to pass laws – major fight and not much gets done because car industry and energy-producing states fight his ideas  National Energy Act  Tax on gas guzzling cars  Removed price controls on oil and natural gas (would cause the price of these items to rise based on demand)  Tax credits for trying alternative forms of energy  Fireside chat urged Americans to cut back gas use willingly  BUT… 1979 new Middle East crisis = another major fuel shortage in the US which caused inflation to rise to 11.3% and by 1980 inflation hit 14%

 Decrease taxes  Known as “supply side economics” – if people paid less in taxes they’d have more to spend in the economy. The largest tax cuts went to the RICHEST people  Decrease the federal budget by cutting government spending on program  Focused on programs like food stamps, welfare, school lunches – basically programs that helped the poor  Increase spending on defense  Doubled the amount spent  Spent all the money he saved by cutting other programs

 Cut income taxes and business taxes by an average of 25 percent  Believed that the prosperity at the top would trickle down to the middle and eventually the poor. In the end, the rich got richer and the poor got poorer.

 In , the nation suffered a severe economic downturn.  Business bankruptcies, factory closings, and farm foreclosures increased.  Unemployment grew to more than 10 percent  Worst (at that point) since the Great Depression  Economic growth returned by 1983  Increased consumer spending, stock market growing rapidly

 "Black Monday" was the largest one-day market crash in history. The Dow lost 22.6% of its value or $500 billion dollars on October 19 th  SEC found it difficult to prevent shady deals like unstable new IPOs and illegal insider trading At the same time, inflation became a concern due to the high rate of economic and credit growth.  Market rebounded after huge sell off

 Reagan’s policies accomplished an economic turn-around in  The Federal Reserve Board lowered interest rates which made it easier to borrow money.  A 25 percent cut in income taxes put more money into the hands of consumers, allowing Americans to make more purchases.  Reaganomics resulted in federal budget was the most unbalanced budget in American history.  Congress refused to make the spending cuts Reagan requested in social programs.  By 1984, the federal deficit was nearing $200 billion a year.

 In reality, economic cycles of growth and recession happen constantly (every 5 – 6 years or so), though some are worse than others  How much does any one president impact the economy? A little, but not as much as we think

 In the last 70 years, the U.S. government had 12 surpluses  The largest uninterrupted stretch of surpluses came between 1920 and  Ended by Great Depression.  The largest uninterrupted stretch of deficits came between 1970 and (click for bigger chart on line)  html html

1940$2.9 Billion Deficit$48.33 Billion Deficit 1945$47.6 Billion Deficit$ Billion Deficit 1948$11.8 Billion Surplus$ Billion Surplus $3.9 Billion Surplus$33.62 Billion Surplus 1962$7.1 Billion Deficit$55.04 Billion Deficit 1968$25.2 Billion Deficit$ Billion Deficit 1976$73.7 Billion Deficit$ Billion Deficit 1986$221.2 Billion Deficit$ Billion Deficit 1999$125.6 Billion Surplus$ Billion Surplus 2004$413 Billion Deficit$ Billion Deficit 2013$900 Billion Deficit