Economic Idealism Exploring Thatcherism, Reaganomics, Monetarism, and Keynesian Economics

Thatcherism At its most crude, Thatcherism represents a belief in free markets and a small state. Rather than planning and regulating business and people's lives, government's job is to get out of the way. It should be restricted to the bare essentials: defence of the realm and the currency. Everything else should be left to individuals, to exercise their own choices and take responsibility for their own lives. This was a revolutionary, even dangerous, notion to most postwar politicians. Central planning of industry and society had helped win the war. The only way to "win the peace", it was believed by the leaders of both the Labour and Conservative parties, was to plan and control industry, vast swathes of which were owned by the state. Margaret Thatcher was not alone in rejecting state ownership of businesses and socialist central planning.

Thatcherism Taking her cue from Friedman, she advocated monetarism, controlling the money supply with high interest rates, to tame inflation without resorting to union-negotiated pay policies. Her battle against inflation led to mass unemployment, but despite that she managed to win a second general election. Low taxation was a key area where Thatcherism was applied. Under the previous Labour government, there had been high levels of income tax for high-earners, but Thatcher progressively cut income tax - the basic rate of tax fell to 25%, while the higher rate was slashed from 83% to 40%. There was a shift away from direct taxation to indirect, for example by increasing VAT (Sales Tax) from 8% to 15%. Thatcherism also focused on rolling back the frontiers of the state. To that end, Thatcher introduced privatization of state-owned industries, including British Telecom, British Gas, British Airways and electricity companies, putting them back into private hands. Such a retreat of the public sector from large areas of the industrial landscape would have seemed unthinkable a few years before, but were pushed through. Since Thatcher's day, such privatization has gone further, says Thatcher expert Professor Richard Toye, of the University of Exeter, citing the privatisation of British Rail under her successor John Major. There was also a huge sale to tenants of council housing. The government also abandoned its commitment to full employment, stating this was the responsibility of employers and employees.

Monetarism Monetarism is a school of economic thought that holds that the money supply is the main determinant of economic activity. In other words, if the money supply is growing, the economy will grow, and if money-supply growth is accelerating, so will economic growth. Monetarism's leading advocate is the economist Milton Friedman Central to monetarism is the equation MV = PQ. M is the money supply; V is velocity -- the number of times per year the average dollar is spent; P is prices of goods and services; and Q is quantity of goods and services. The equation suggests that if V is constant and M is increasing, there must be an increase in either Q or P. Accordingly, monetary policymakers can control inflation by allowing the money supply (M) to grow no faster than the desired rate of economic growth (Q). https://www.youtube.com/watch?v=SgweT-7i1hU

Reaganomics What is 'Reaganomics‘? Reaganomics is a popular term used to refer to the economic policies of Ronald Reagan, the 40th U.S. president (1981–1989), which called for widespread tax cuts, decreased social spending, increased military spending and the deregulation of domestic markets. These economic policies were introduced in response to a prolonged period of economic stagflation that began under President Gerald Ford in 1976. BREAKING DOWN 'Reaganomics' The term Reaganomics was used by both supporters and detractors of Reagan's policies. Reaganomics was partially based on the principles of supply-side economics and the trickle-down theory. These theories hold the view that decreases in taxes, especially for corporations, offer the best way to stimulate economic growth. The idea is if the expenses of corporations are reduced, the savings "trickle down" to the rest of the economy, spurring growth. Prior to becoming Reagan's vice president, George H. Bush coined the term "voodoo economics" as a proposed synonym for Reaganomics.

Reaganomics The Objectives of Reaganomics Reaganomics in Action As Reagan began his first term in office, the country had been suffering through several years of stagflation, in which high inflation was accompanied by high unemployment. To fight high inflation, the Federal Reserve Board had been increasing the short-term interest rate, which was near its peak in 1981. Reagan proposed a four-pronged economic policy that was intended to reduce inflation and stimulate economic and job growth: 1) reduce government spending on domestic programs; 2) reduce taxes for individuals, businesses and investments; 3) reduce the burden of regulations on business; and 4) support slower money growth in the economy. Reaganomics in Action Although Reagan reduced domestic spending, it was more than offset by increased military spending, creating a net deficit throughout his two terms. The top marginal tax rate on individual income was slashed to 28% from 70%, and the corporate tax rate was reduced to 34% from 48%. Reagan continued with the reduction of economic regulation that began under President Jimmy Carter and eliminated price controls on oil and natural gas, long distance telephone services and cable television. In his second term, Reagan supported a monetary policy that stabilized the U.S. dollar against foreign currencies.

Keynesian Economics Keynes argued that the solution to the Great Depression was to stimulate the country ("inducement to invest") through some combination of two approaches: A reduction in interest rates (monetary policy), and Government investment in infrastructure (fiscal policy). If the interest rate at which businesses and consumers can borrow is decreased, investments which were previously uneconomic become profitable, and large consumer sales which are normally financed through debt (such as houses, automobiles, and, historically, even appliances like refrigerators) become more affordable. A principle function of central banks in countries which have them is to influence this interest rate through a variety of mechanisms which are collectively called monetary policy. This is how monetary policy which reduces interest rates is thought to stimulate economic activity, i.e. "grow the economy", and why it is called expansionary monetary policy.