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Emerging Macroeconomics Impact of changing policies.

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Presentation on theme: "Emerging Macroeconomics Impact of changing policies."— Presentation transcript:

1 Emerging Macroeconomics Impact of changing policies

2 USA: WWII Baby Boom: This is not a sociology course, but the BB did have enormous impacts on financial matters Post war: Little or no inflation Keynes ruled economics; regulation & central direction

3 USA: Kennedy/Johnson: Keynesian policy of “fine tuning” the economy: tax cut + accommodating (rapid) money growth => rapid growth of GDP but with rising inflation (Fed chief was buddy of Kennedy) Nixon: Inflation sustained and increased to double-digit (Fed chief was buddy of Nixon) Unemployment worsens

4 USA: Ford: Cut inflation to single-digit but with recession Carter: Returned inflation to double-digit (Fed chief was his buddy); later shifted to reverse Carter invents the “misery index,” lives to regret it. Stagflation

5 Stagflation Too little demand => stagnation Too much demand => inflation But in the 70s we had both; misery index soars Economist Robert Mundell, developed policy combinations that would simultaneously attack the two hitherto incompatible problems

6 Paul Volcker Carter appointed Volcker to head the Fed Inflation fighter: slowed money growth rate; unemployment soared M/y shrank; M slowed down, but y grew rapidly due in part to long-run effects of the Kennedy tax cut

7 Ronald Reagan Reagan preferred a strong military => defense spending rose sharply Reagan cut taxes => short-run reduction in T, tax revenue Democrats preferred expanded welfare and social programs => social spending rose sharply In short, G – T deficit soared

8 Volcker’s Tight Money Inflation died out by 1984 Interest rates were over 20% Debtor countries suffered The dollar rose from about ¥140 to over ¥250 CA = Ex – Im soared to record deficits

9 The Rest of the 1980s Interest rates & inflation fall Dollar’s exchange value declines sharply Japan as Ichiban Heavy foreign investment in US

10 Everything Happens at Once InnovationTechnologyDeregulation Exchange rates Capital mobility Asian countries as major economic powers

11 And Keeps Happening Trade imbalances Government growth Globalization Free market economics Baby boomers grow up USA’s long term economic growth

12 1990s Bush Sr. raises taxes, induces a recession, loses election Clinton continues most policies Impact of earlier tax cuts continue to boost growth Budget briefly in surplus

13 In Asia Japan tanks: graph coming in next slide Other Asia: prosperity until 1997 Crash and recovery

14 Japan: Money, Income & Current Account


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