Robert Kidd Ben Hobbes Steven Hunter

We are going to show you the correlations between the United States’ current economic situation and past recessions. We have found several similarities between our current situation and the recession that President Reagan inherited in The Japanese recession in the 1990’s also had similarities. We will then present what action we believe needs to be taken.

How We Got Here

The Fed was slow in raising the interest rates in 2004 as the economy started to boom. This helped inflate the housing bubble. People borrowed money they couldn’t afford to pay back. Investors bought real estate in hopes of turning it around and making money. In 2006, when the Fed finally raised the interest rate, housing prices tanked. Homeowners foreclosed and sent banks and hedge funds into a frenzy. This led to their first bailout.

Plan A, B, C,….....

Plan A: February 2008, Government doled out $165 billion in tax rebates. Plan B: February 2009, Stimulus bill estimated to cost tax payers $862 billion. Plan C: February 2010, Passing a “Jobs Bill” estimated to cost $85 billion. Why none of these are as good as they sound.

President Obama’s Tax Plans

Hands out special tax credits for favored behavior. Raise taxes on those making $200,000 or more. Raise Capital Gains tax to 20% Note: Proposed plan will eliminate capital gains tax on investments in small business. Repeal of last-in, first out tax accounting. 28% limit on itemized deductions. This means you will end up paying taxes on donations. Overall, a mixed review.

Unemployment

The CBO estimates that the unemployment rate will not dip below 8% until 2012 and will not reach the long-term sustainable unemployment rate of 5% until We will hover around 10% for the first half of This further indicates a slow recovery. Discouraged Workers Less efficient businesses wiped out Increase hours first

Summary and Analysis

1990s known as “lost decade” Japan passed series of stimulus plans that failed In Japan slipped into major recession Recession caused by exports In beginning of 2009 exports fell to US by 37% 50% in automotive industry 60% in audio-equipment

Massive Job cuts Unemployment rate went from 3.9% in November of 08 to 4.4 in December of 08 Stock Market crashed Nikkei 225 dropped to % lower than high in 2007 New Stimulus plan $81 billion in 2009

Market has improved in 4 th quarter of 09 10% growth rate Unemployment still at 4.4% Focused on improving Employment conditions Small midsize private businesses Subsidies for energy efficient products May sell construction funds Recent GDP numbers indicate that there is no longer a threat of a double-dip.

Prediction Fed will raise interest rates Currently floating between 0-.25% Taxes will be raised Don’t raise taxes, cut spending Restructure or cut government programs Social Security Medicare Medicaid Subsidies in certain industries

Learning from our past

The term Reaganomics can be known as Ronald Reagan’s economic policies throughout his term of being president. Reaganomics can also be referred to as “trickle-down economics.” Reagan was brought into an economy with high unemployment and high inflation. This was in part of the previous president, Jimmy Carter.

Parts of the Reaganomics were reducing inflation by increasing the money supply, reduce government spending, and reduce regulation and taxes. Reagan’s major tax cuts came from his start of his administration, which comes from the principles of supply side economics.

Under Reagan, corporate taxes were cut considerably, as well as income taxes. For the wealthier people in the country, taxes were at a rate of 70% and cut drastically to 28%. Although the tax cut helped out the wealthier people, in hurt the lower class. This meant that poorer people were not benefiting from Reaganomics.

Tax cuts reduced Federal Government tax revenues. In combination with its increased spending, a budget deficit was produced. Since there were less government programs, there were fewer resources for poorer people to use as well.

Even though some government spending was reduced, deficit spending did increase. Deficit spending increased due to getting out of 1970’s high oil prices. Many industries were deregulated when Reagan was president, such as railroad, banking and airlines.

Reaganomics caused an increase in income; however it reduced the ability for people to save money. Interest rates and the unemployment rate did decline throughout Reagan’s presidency.

Reagan became president after there was already a recession going on, which lasted from January 1980 – November This can be attributed to the Iranian Revolution, which was a main cause of the drastic increase of oil around the world. This forced the U.S. to enact a tight monetary policy to control inflation, which then would cause the recession. However, the Federal Reserve had do something to control the inflation, so therefore they changed the monetary policy.

Taxation and Government Spending

Don’t pass the Jobs Bill. Don’t take such a narrow approach Reduce the Corporate Tax Rate Set the Capital Gains tax at 15% permanently Spend the stimulus already passed based on ROI, not politics Get rid of the 28% limit on itemized reductions Make the repeal of LIFO only relevant to Publicly traded companies

Focus on policies giving the lower class tax credits. Don’t allow Businesses to expense investments the year they make them. Yes this would increase the firms’ after tax ROI and free up cash flow, but history says no. In the 2000’s this approach had little affect on the economy due to suppressed demand. This would be a waste of money. Scrap the idea of a $5000 tax credit for new hires.

Additional spending would spur employment and boost output. It is difficult to put together a large cost- effective spending bill in a short amount of time. It takes time to see the full effect of Government spending. Don’t spend more unless it can be done in a cost-effective manner. No more federal grants to states. They have no impact on GDP. 21 states have budget gaps. The money would just let them borrow less.

Questions?