During the period from 1991-2001, when the economy experienced unmitigated growth and relatively little political upheaval, analyzes could finally be made of the wealth of former President Reagan’s economy, which was called “Reaganomics”. The Reagan administration implemented tax cuts on the upper income bracket and cut capital gains taxes in an effort to increase the money supply and therefore increase aggregate demand and ultimately the price level. Underpinned by Reagan’s fiscal policy in response to economic stagnation, it was the first policy makers had ever attempted such a plan: The Keynesian economist’s response would have been to use various instruments to keep aggregate demand low at the current level and therefore increase economic output. Reagan ultimately faced this dilemma with successes and failures. One of the main failures was the inability to significantly cut government spending as promised; indeed, under Reagan, defense spending was increased and not offset by other spending cuts. This lead to higher government deficits that would take about a decade to offset. The inability to reduce increases in government spending meant that Reaganomics policy was a de facto contradiction to the concept of the supply side of the economy, which is that increases in government spending increase aggregate demand rather than aggregate supply.
In addition, tax cuts are meant to increase overall taxes in other areas, an idea based on the Laffer line: at a certain point, the tax will deter marginal spending, where the tax cut will increase. tax revenue Tax cuts were also thought to stimulate investment output, which would then lower the demand for money and lower price levels. But the cuts were seen beyond the maximum marginal rate on the side of the curve where taxes were not enough to collect the economy. Economists noted in the 1990s that the nominal tax gathered collections a little later and surpassed them. tax falls, real tax revenue (adjusted for inflation) does not really rise much later. Government spending likely had an effect on this, with high inflation rates lowering the multiplier and increasing productivity. Reaganomics succeeded in lowering inflation rates, which is likely to be one of his plans to “accelerate” the timeline to detect price changes, which in fact are determined by the increase in output. However, in the short term, Reagan ran into deficits and did not bring about the significant change he had promised, leaving budget issues to the future administration.
The Obama administration, with a legacy of fiscal deficits and an economic recession, chose a Keynesian approach to fiscal policy. During the World War II-era, this policy was preceded by government economic intervention. Only recently, as a result of the Reaganomics, such a plan has become intensely political in nature. Other issues aside, Obama’s economic stimulus was found to be a multiplier of 2.5, the conservative marginal propensity to consume (MPC); at the same time, lower price levels and higher growth rates, raising the impact of competition. The multiplier represents an increase in aggregate demand, a short-run level in price, and a decrease in interest rates.
These changes are designed to create a long economic growth and bounce back from the recession by increasing consumption and investment more quickly. In the long run, these changes will lead to deficits, presumably in the future economic growth and inflation. But it is this very presumption which leads to the question whether the cost of the short stimulus is too high; Indeed, the long-term offset of future economic growth is the cost of discovering such a short period of time. Reaganomics encouraged long-term effects at high cost, but resulted in lower inflation rates that Obama could not control administrative decisions. Inflation at this time was not as serious as in the early 1980s and thus Obama was justified. Like Reagan, however, Obama has cut taxes, and in fact he has moved on because Reagan did not go far enough in twisting government spending. While not strictly based on supply side or Keynesian ideas, it appears that Obama is using all the tools possible that have historically been proven by economists. Everyone can make the best of history and learning.
