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Ten-Year Period of U.S. Economic History Overview
When discussing the 1980-1990s, several events characterize it. Reagan’s presidency is one of them. Being often referred to as Reaganomics, this doctrine reduced tax rates and government’s involvement in the life of the private sector (Tyler, 2013). In the beginning, these actions led to the bankruptcy of many companies, lower GDP rates, and speeded the country’s entrance to the recession stage in 1982. Thus, the actions of the Federal Reserve and favorable economic conditions helped the country encourage economic growth characterized by the financial prosperity and low inflation rates in 1983 (Tyler, 2013). Nonetheless, there were some problems that the government left unsolved. For instance, the agricultural sector was not as productive as it was before, and this issue led to high levels of deficit, stock market failure, and lower GDP growth rates in 1986-1989 (Tyler, 2013). Overall, this period of the U.S. history provides a clear support to the theory of the economic cycles, as the country experienced growth and recession phases with the ten-year timeframe.
GDP
In the first place, GDP has to be analyzed. In this case, the changes in GDP were positive. Nonetheless the country experienced the peak of the economic growth in 1981, 1984, and 1990. These changes comply with the theory of the economic cycles. At the same time, various events were the reasons for these dramatic changes in GDP. In the first place, the start of Reagan’s presidency was one of the historical events that affected the economic output. In this case, employing the theory of laissez-faire implied free market economy and the absence of control (Tyler, 2013). Despite having beneficial intentions, this theory led to failure in the beginning, as it took some time for Reagan to gain authority and make changes to the national economy. It is reflected by the start of the recession stage in 1981-1982. Alternatively, TEFRA in 1982 contributed to the positive economic changes. This act attempted to control the governmental spending and increase the revenues acquired from taxes by enlarging their coverage (Tyler, 2013). In this instance, it complies with the concepts of the general aggregate demand and implies that collecting taxes from different spheres and industries creates a well-established base for the economic growth and development.
Unemployment Rates
Additionally, election of a new president has a critical impact on the economic factors such as unemployment rate. For example, at the beginning of Reagan’s term, the unemployment rate was 6.3% (Macrotrends, 2016). Meanwhile, it continued to escalate until 1983. The politics of Reagan and TEFRA were not effective. This fact is related to the actions of the previous presidents, and it took some time to adapt to the changes. Nonetheless, after that, an increase in unemployment tax contributed to the downward shift in unemployment. These changes pertain to several reasons. In the first place, TEFRA attempted to minimize the unemployment rate by lowering the taxable wage (Tyler, 2013). Simultaneously, additional job offers were created to develop the industries (Tyler, 2013). The rules of supply and demand attracted many workers to the labor market, and relying on the Keynesian economic model helped the authorities intervene the market only during the stages of the recession to support growth. Meanwhile, during other economic cycles Reagan supported the concepts of free market trade.
Speaking of GDP, it is logical that high unemployment rate has a negative impact on the overall economic stability of the country. In this case, creating favorable working conditions and increasing taxes helped affect economic output positively. Consequently, when reviewing the selected case, it is possible to understand that lowering unemployment stabilized GDP growth since it increased the number of taxpayers and made the labor market competitive.
Inflation Rates
Similarly to the fluctuations of the unemployment rate, analogous changes took place with inflation. At the beginning of the development of Reaganomics and during the recession phase (1980-1981), the inflation rate was high (13.5%. Similarly, it took some time to adapt to changes, and Reagan was able to achieve it by reducing income and corporate taxes (Amadeo, 2016). In this case, decreasing the amount of available cash helped slow rapidly escalating inflation rate. Simultaneously, intervening only during the recession stage (Keynesian model) helped support the concepts of free market and maintain an equilibrium of supply and demand. This strategy stabilized the market and minimized drastic changes in price indexes.
Apart from that, Reagan used TEFRA agreement. It helped intervene the market during the recession stage and increase the governmental budget with the help of taxes (Tyler, 2013). This agreement contributed to the equal distribution of taxes across different spheres (Amadeo, 2016). This matter developed the free market with balanced supply and demand sides. This aspect helped avoid growth in price indexes in profitable industries while keeping the inflation level as low as possible. During the subsequent years, using the concepts of free market economy and increasing the coverage of the taxes helped fill the existent gaps in budgeting, avoid price restrictions, and, as a consequence, lower inflation rates. This concept had a positive impact on GDP, as low inflation rates increased the revenues and needs in products while balancing supply and demand curves (no deficit or excess). Overall, Reaganomics had a positive impact on the economic condition in the country, as, eventually, this strategy decreased inflation and unemployment rates while encouraging financial growth.
Interest Rates
Alternatively, one cannot underestimate the significance of interest rates, and during the selected timeframe, they tended to change. It remains apparent that they had a direct impact on inflation. For example, in 1980, interest rates were low, and it contributed to the rapid growth in demand for goods and services while increasing inflation (Taillard, 2013). Consequently, higher inflation rate encouraged the development of different industries due to the intensified competition and rising demands. This matter complies with the theory of supply and demand and market equilibrium.
Additionally, interest rates have a critical impact on the value of the currency and percentage of investments. For example, in 1981, interest rates were high. This matter strengthened national currency while attracting foreign investments to the American market (Taillard, 2013). According to the rules of supply and demand, this changes led to the prosperity of international firms (more revenues) while domestic ones started to stagnate. It created uneven competition. Consequently, lowering interest rates was one of the solutions to encourage the development of national producers.
Based on the factors depicted above, it could be said that interest rates can be discovered as one of the tools along with taxes that can help the government minimize the consequences of the recession stage. Consequently, lowering inflation rates has a positive impact on GDP, as it expands the opportunities for the companies while encouraging their development by rising demand. Overall, these aspects have a clear connection with the theories of free markets, need for governmental intervention during the economic downturn, and rules of supply and demand.
References
Amadeo, K. (2016). President Ronald Reagan’s economic policies.The Balance. Web.
Macrotrends: U.S. national unemployment rate. (2016). Web.
OECD: Gross domestic product. (2016). Web.
Taillard, M. (2013). 101 things everyone needs to know about the global economy. Avon, MA: Aadams Media.
Tyler, G. (2013). What went wrong: The big picture. Dallas, TX: BenBella Books, Inc.
World Bank: Inflation rates. (2016). Web.
World Bank: Real interest rate. (2016). Web.
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