The New Economy Presentation by Dr. Kevin T. Brady, AIHE President

What Was the Old Economy? The Depression — 1930 Herbert Hoover changed the 1920s “hands-off” policy to combat the Depression by using the federal government. Used the federal government to finance programs such as the Boulder Dam Raised taxes and poured money into the economy AIHE © 2010

Response to 1929 He had the Fed resume credit inflation (add $300 million after crash in 1929). Asked companies not to cut workers’ wages Cut taxes Increased government spending Deliberately ran a big deficit Increase government’s share of GNP from 16.4% in 1930 to 21.5% in 1931 AIHE © 2010

No Direct Aid — Unconstitutional Agricultural Marketing Act $600M to farmers Reconstruction Finance Corporation (9 point program) December $3.8B by 1932 More major work projects in Hoover’s four years than in the 30 previous years San Francisco Bay Bridge, Los Angeles Aqueduct, Hoover Dam, etc. Emergency Relief and Construction Act $3.9B

New Deal planner, Rexford Tugwell “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.” AIHE © 2010

Roosevelt: New Deal and First 100 Days New Deal tried to pump large amounts of money into the economy by providing jobs. Roosevelt hoped this would result in increased demand of goods and services. Roosevelt attempted to balance the budget. Roosevelt never fully embraced the concept of deficit spending.

After the War John Maynard Keynes Keynesian economics promotes a mixed economy, primarily set in the private sector, but with a major role played by the government and public sector. It served as the economic model during the Depression, World II and the economic expansion from 1945 to 1973, and beyond … up until AIHE © 2010

After World War II No other nation could compete against the U.S. AIHE © 2010

BOOM to BUST to BOOM From 1950 to 1973, real economic growth in the U.S. economy averaged 3.6 percent per year. There was no competition. From 1973 to 1982, a period of stagflation, it averaged only 1.6 percent. The Reagan economic boom brought back the more usual growth rate. The economy averaged 3.5 percent in real growth from the beginning of 1983 to the end of From 1950 to 1973, real economic growth in the U.S. economy averaged 3.6 percent per year. There was no competition. From 1973 to 1982, a period of stagflation, it averaged only 1.6 percent. The Reagan economic boom brought back the more usual growth rate. The economy averaged 3.5 percent in real growth from the beginning of 1983 to the end of AIHE © 2010

The Great Society War on Poverty- Welfare Medicare and Medicaid ESEA Act of 1965 PBS, NEH and NEA Higher Education Act Urban Transportation Act Etc. AIHE © 2010

1970s — Age of Stagnation AIHE © 2010 High inflation High unemployment Little or no economic growth

Return to Hard Competition Business had to downsize to compete Become more competitive Unions decreased Calls for smaller, more efficient government AIHE © 2010

Major Change Reaganomics Cut taxes Give money to the people to invest Investment creates jobs Employed people buy more produce Companies must hire even more people to produce More people working equals more tax income for the government AIHE © 2010

Basic Idea People will do better taking care of themselves. Big government stagnates the economy and individual lives. They have no real stake in people’s failures and successes. A buyer and a seller both take a risk. They determine prices. It’s the double “thank you” transaction. A third party takes no risk and pays no real consequence for a bad decision. AIHE © 2010

IRAs, 401Ks, 403Bs Started in the 1970s, people started investing more into these funds Changes from predetermined pensions More opportunities, more risks (maybe) People feel more comfortable to invest in the stock market Low capital gains taxes People invest AIHE © 2010

PERSONAL STOCK INVESTMENTS In 1900 only 1% of Americans owned stock. In 1980 only 13% of Americans owned stock. Now 52% of Americans own stock. AIHE © 2010

Effects of Reaganomics AIHE © Total Federal Revenues $591 Billion$1 Trillion Federal Revenues as a % of GDP (Gross Domestic Product) 18.9%18% Federal Revenues from Income Taxes$244 Billion$467 Billion

Federal Spending Under Reagan Federal Spending$591 Billion$1.25 Trillion Federal Spending as a percentage of GNP21.6%21.8% AIHE © 2010

Federal Spending Defense spending increased 50% from 1980 to It FELL 15% after the Cold War from 1989 to Nevertheless, MEANS TESTED entitlements, not counting Social Security and Medicare, increased 102% between 1980 to AIHE © 2010

Did Reaganomics Work? AIHE © 2010

BIGGEST NON-WAR BOOM in HISTORY This economic boom lasted 92 months without a recession … from November 1982 to July This was the longest peacetime period of sustained growth and the second- longest period of sustained growth in U.S. history. The growth in the U.S. economy lasted more than 100% longer than the average period of other expansions since World War II. AIHE © 2010

BOOM The American economy grew by about one- third in real inflation- adjusted terms. This was the equivalent of adding the entire economies of East and West Germany or two- thirds of Japan's economy to the U.S. economy. AIHE © 2010

Andrew Mellon 1924 “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates.” 73% of Nothing = Nothing? “It seems difficult for some to understand that high rates of taxation do not necessarily mean large revenue to the Government, and that more revenue may often be obtained by lower rates.” 73% of Nothing = Nothing? AIHE © 2010