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The two topics of politics and the economy are interconnected. Economics is mainly concerned with analyzing and influencing the market. The activities involved in running a country or region are referred to as politics, notably the disputes between the parties in control. The American economy was in dire straits in January 1981 when President Reagan took office. Numerous Americans were unemployed, American businesses were having trouble, and inflation and interest rates were out of control. The President stated in his inaugural address that reviving the American economy was his top priority, but it would not be simple. He had to make some difficult decisions that would affect both the course of his presidency and the long-term health of the American economy. It is more appropriate to view economic conditions as a manifestation of political results than to characterize American politics as being influenced by economic conditions since political issues may affect how a country’s economy develops.
The Extent to Which Politics influence American Economy
America faced significant economic difficulties at the time of Ford’s inauguration on August 9, 1974, including skyrocketing inflation, rising unemployment rates, and a shaky stock market (Alzoubi, 2022). The economy shrank, and unemployment reached its most significant level since World War II. The highest inflation level ever since 1919 made matters worse. The New York Times’ economic report was depressing. The awful inflation in the nation’s past of peacetime, the uppermost interest rates in the era, the ensuing severe housing slump, sinking and completely disheartened securities marketplaces, a still economy with large-scale joblessness soon, and a deteriorating global trade and expenditures position. General Motors said that its 1975 exemplary year automobiles would have an average worth rise of 9.5%, which was bound to lead to increased costs in other sectors (Magoc, 2021). The problem of price rise did not go away. Nixon’s strategies were to blame, but he had warned Ford not to make the same blunder again by enforcing wage and price restrictions as he did in 1971. Ford pointed out another factor contributing to the sluggish economy: the lasting effects of the Great Society’s and the New Frontier’s faulty policies. The new leader agreed with Senator Mike Mansfield’s suggestion to convene a national conference to address the price increase issue.
Ford, who had a classic Republican viewpoint, thought there would be hardships along the way to any economic recovery. The Democratic Party has concentrated on boosting the economy to create more jobs since the 1930s, and the Keynesian benefits were favourable (Lause, 2017). Inflation had not been a concern throughout the majority of the 42 years when Democrats had control of Congress (Lause, 2017). Democrats, unlike Republicans, did not consider inflation to be the most pressing issue when it began to rise in the late 1960s (Lause, 2017). When Carter took office in 1978, there was a rise in taxes and inflation.
Regarding inflation, it was expensive for lenders who made fixed-amount loans since it allowed borrowers to settle their debts with less expensive funds. Since uncertainty reduced incentives for businesses to develop and grow, and because less economic activity meant less employment, inflation was a severe problem for firms. Workers suffered when the cost of products and services increased faster than increases in earnings and salaries unless they received automatic cost-of-living adjustments. Although some homeowners profited from growing property values, many looking to purchase their first home were met with prices that were out of their price range and made matters worse by high borrowing rates.
For the Carter administration, which was still committed to Keynesian principles, inflationary pressure presented significant challenges with job programs and expenditure initiatives. The Brown administration took action by making the big announcement of removing the origin prospect that had been on exhibition at the capital throughout the Christmas season for decades after California’s joblessness rate rose beyond 9.8 % in late 1975 (Magoc, 2021). The so-called underground economy cost the U.S. administration billions in unpaid duties from individuals who engaged in undercover employment. Additionally, because companies preferred the cheaper taxes of the Sunbelt area, liberal states, particularly those in the northeast, suffered revenue losses. The capital of liberal compassion and care was New York City, but at a great price; that city paid double as much in levies as residents of the following 26 biggest cities combined (McDonald, 2017). When the White House attempted to balance the economy in 1979, Robert Lekachman, a writer for the New Republic, forecasted that the century would likely end with moderate economic growth.
Beginning in 1979, farmers protested by blocking Washington streets with their tractors and claiming that their family farms were being attacked. The administration had no better success with its urban regeneration initiatives, especially the public housing developments that turned into hotbeds of crime and a haven for the poor. According to Milton Friedman, expensive social projects with good intentions frequently fall short of their goals (Jacobs & Milkis, 2022). According to critics, environmental and no-growth groups are making constructing new homes, flats, and factories harder.
On February 18, 1981, President Reagan gave a joint session of Congress and a national television audience a detailed four-part blueprint for economic recovery. The plan included 83 significant policy and program reforms, and the majority intended to rein in inflation, decrease taxes, reform and eliminate regulations, and slow the increase of government expenditure (Shoven, 2019). President Reagan said that if people fully implemented the plan, it could assist America in creating 13 million new jobs (Shoven, 2019). It could also help in bringing inflation under control. When the concept was initially presented, Democrats and even some Republicans opposed it. But President Reagan urged Congress to support his proposal, and he utilized his persuasive skills to win over the American people. By July 1981, his plan for economic recovery had received support from two-thirds of the populace and enough Democrats to pass Congress. In August 1981, President Reagan signed the Recovery Act into law at his ranch in southern California.
The Reagan Uprising of the 1980s required changing Americans’ views of their nation, their régime, and the rest of the world as the United States occurred from the 1970s. Ronald Reagan won the presidency in January 1981 after making campaign pledges to reduce “Big Government,” strengthen American security, notably against the Soviet Union, and reinstate Americans’ faith in their government and themselves. Throughout his two terms in administration, President Reagan continued his long-running battle in contradiction of the communist movement, the Great Society liberal movement, and the behaviours and ideology of the student demonstrators of the 1960s and 1970s. Reagan’s American restoration gave patriotism, money, and peace.
To control inflation, the Federal Reserve Board implemented stringent policies, which resulted in a recession that lasted well into Reagan’s first term. Numerous blue-collar workers who had supported Reagan were particularly hard hit as unemployment rose sharply. The unemployment rate had increased to 10.7 per cent by November 1982, the highest level since the Great Depression (Ajello et al., 2022). Numerous ill, old, and impoverished people were forced into homelessness, thousands of businesses failed, and farmers lost their land. But in January 1983, the economy started to recover. It grew throughout President Reagan’s second term and into the Bush management, resulting in the most extended harmony growth in American history.
In 1988, the annual inflation rate decreased to an average of 4.4 per cent from the previous year’s average of 12.5% under the Carter administration (Magoc, 2021). In the meantime, the main interest level was cut by almost six percentage points to 9.32%, and the job loss rate fell from 7.1 cents to 5.5 per cent (Magoc, 2021). William Niskanen, a prominent economic counsellor to President Reagan and author of the book Reaganomics, has commented that President Reagan succeeded in each of his four primary policy objectives. Still, the recovery program was not an unqualified success. The national debt climbed, the budget deficit expanded significantly, and the tighter enforcement of U.S. trade restrictions damaged U.S. trade. The “stagflation” and “malaise” that afflicted the American economy from 1973 through 1980 were distorted into a continuous period of faster development and lesser inflation thanks to the Reagan economic plan.
Conclusion
Economic realities usually influence government decisions on the adoption of new policies. Government policy has historically had a substantial impact on economic growth, the creation of new business organizations, and the operation of financial markets, notably in the United States. Exploring the connection between politics and the economy is crucial to economic theory and practice because of its significant impact. Numerous aspects of economics, banking, and finance are impacted by the political economy, including trading choices made on financial markets and behavioural biases held by investors, managers, and other economic agents.
References
Ajello, A., Benzoni, L., Schwinn, M., Timmer, Y., & Vazquez-Grande, F. (2022). Monetary policy, inflation outlook, and recession probabilities. FEDS Notes, 3(12), 63–75. Web.
Alzoubi, M. (2022). Stock market performance: Reaction to interest rates and inflation rates. Banks and Bank Systems, 17(2), 189–198. Web.
Jacobs, N., & Milkis, S. M. (2022). Liberalism transformedthe Democratic Party since 1960. What Happened to the Vital Center?, 131–178. Web.
Lause, M. A. (2017). Free Democrats to the Republicans. University of Illinois Press, 5(25), 5–63. Web.
Magoc, C. J. (2021). The Reagan Revolution. A Progressive History of American Democracy Since 1945, 5(35), 251–278. Web.
McDonald, I. M. (2017). ‘we will end up being a third rate economy … A banana republic’: How behavioural economics can improve macroeconomic outcomes. Australian Economic Review, 50(2), 137–151. Web.
Shoven, J. B. (2019). Federal Government Taxes and tax reform. The Economy in the 1980s: A Program for Growth and Stability, 5(35), 199–221. Web.
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