Administrations Of The Last Seven Business Cycles example essay topic

MACROECONOMICS: The Effects of the Politics on Fiscal Policy over the Last Seven Business Cycles Jennifer Johns Principles of Macroeconomics Dr. Jean-Ron Lafalaise, DPA April 22, 2004 Abstract Being an election year, all you hear is the incoming presidential nominee bashing the policies of the current president. Of all of the administration policy, his economic stance, the health of the economy under his administration, and this fiscal policy are among the most prevalent. Does the possibility of losing an election affect how administration reacts to a recession? This paper shows that out of the last seven business cycles, during the last five politics does not seem to be an issue when administrations consider what needs to be done to boost the economy. Though Kennedy and Nixon both tried to use fiscal policy to further their own position and ensure reelection, the administration of late have understood that the economy is not a reelection tool and that what ever need to be done to bring us out of a recession is necessary, even if it means they may risk not getting reelected. MACROECONOMICS: The Effects of the Politics on Fiscal Policy over the Last Seven Business Cycles Reelection be Damned One might wonder how politics plays into fiscal policy.

Does the possibility of not getting reelected affect the choices a president makes? No, in fact, the administrations of the last seven business cycles usually make fiscal policy decisions that prove to be political suicide, yet are best for the economy. Started with the farthest back, John F. Kennedy is an exception to this rule. In his campaign, he promised tax cuts, but by the time congress got around to it, the economy was obviously expanding. Seeing as this would be embarrassing to the administration, congress went ahead and approved the unnecessary tax cut. Richard Nixon, whose reelection was a non issue due to his resignation, also played the political game.

Though his administration say that wage / price control would be ineffective at controlling inflation, they went ahead and implemented them with the goal of "gently tighten monetary and fiscal policy, which they thought would bring down inflation without a big increase in unemployment" (Hebert, 1984, 4). This proved to be detrimental anyway because wile people expected prices to stabilize, they failed to realize that this meant that the prices they charged would stop rising as well. Ronald Reagan took a huge leap of faith when his administration introduced supply-side economics. Although it didn't work in the way that he wanted it to, it helped greatly to boost the economy. However, had it been a horrible flop, His administration would have been highly chastised for it. He ended up losing the election largely because in trying to stabilize the economy and control inflation, the national deficit grew considerably.

George Bush Sr. had much of the same problem. As previously stated, Bush refused to use fiscal policy to control the economy, as he knew it may in fact "hamper the economy's recovery" (Walsh, 2002, 3). Bush's competition of reelection attacked his lack of use of fiscal policy, and was a key component to him losing the election. Bill Clinton actually raised taxes. His economic success came mainly though the control of the monetary policy and the actions of the Federal Reserve. The Fed worried about the stabilization of the economy, while Clinton worked on the deficit and budget with great success.

This was risky however because had something gone wrong, Clinton's raise in taxes and lack of fiscal policy would have come into question and he would not have been reelected in 1996. As far as I can tell, Bush does not seem to be as concerned with getting reelected as he does turning the economy around. Luckily, the tax cuts and rebates he campaigned with actually helped to cushion the blow of the recession, and since the trough, the Federal Reserve have pretty much been given the reigns of the economy. Though he is being attacked for his lack of policy since the trough and for his economic practices, he has done what he believed he must to expand the economy. MACROECONOMICS: The Effects of the Politics on Fiscal Policy over the Last Seven Business Cycles Review of Literature The oldest of the last seven business cycles peaked in April of 1960. During this time, unemployment was at 5.3 percent, and inflation reached.

442. Ten months later, the business cycle hit its trough in February of 1961. The unemployment rate rose to 6.9 percent, while inflations dropped to 0. Dwight Eisenhower was reaching the end of his presidency in 1961, but was in office for both the peak and the trough of the business cycle.

By November, he was out and the beloved John F. Kennedy had taken office. By this time, the business cycle had started to expand and unemployment had already dropped to 6.7 percent. According to Herbert Stein's piece entitled "Why JFK Cut Taxes" in The Wall Street Journal, Kennedy's administration wanted to boost the economy by "easing monetary policy" (Stein, 1996, 10). Of course, they could not control the monetary policy which was tied up in balance-of-payment deficit and supporting the U.S. dollar exchange rate. Fearing another recession, the JFK administration wanted to restore confidence by implementing a tax cut.

However, they did not plan on cutting government spending to counteract the tax cut. Congress insisted in "expenditure restraints" (Stein, 1996, 12). With the tax cut came extended economic expansion. However, these facts seem to be more correlation then causation. Expansion began in February of 1961 well before the tax cut was implemented in the middle of 1963. As a matter of fact it became so obvious that that economic recovery was underway that some wondered if the tax cut was still necessary.

But, seeing as it would be a huge to the Kennedy administration, congress went ahead and approved the tax cut. In actuality, monetary policy was more of a saving grace in the 1961 recession then fiscal policy. From 1959 to 1962 the Federal Reserve "increased [the money supply, M 1] at an annual rate of 1.8%" (Stein, 1996, 13). Then U.S. economy continued to grow until it hit the peak of the next business cycle in December of 1969. Unemployment reached a startlingly low 3.5 percent, like inflation increased to a modest. 533 percent.

During the trough, which hit 11 months later in November of 1970, unemployment had enlarged to 5.9 percent while inflations only dropped slightly to. 508? This recession was not followed by a strong recovery; however this is due to the fact that it was one of the shallowest recessions. While this recession wasn't that bad, the unstable growth before the recession late to accelerated inflation. In most of the past recession, fiscal policy had not been actively used.

Instead automatic stabilizers had been allowed to take affect. However, this changed in the 1970 recession. Under the Nixon administration, the Economic Stabilization Act of 1970 was enacted. This law, among other things, "authorized the President to stabilize prices, rents, ages, salaries, interest rates, dividends and similar transfers" (Economic, 2004, 1). The administration also enacted the 1971 Revenue Act, which "reduced taxes with the aim of further increasing aggregate demand to the already recover economy" (Labonte, 2002, p. 24).

In their paper Marc Labonte and Gail Makinen stated that "many argued that the easing of fiscal policy was spurred by growing American military involvement in Vietnam and the government's purported unwillingness to raise taxes to finance it" (Labonte, 2002, p. 3). According to an article in the American Banker, The Federal Reserve responded much as it had in the past, by lowering interest rates. The Fed lowered interest rates as an attempt to boost the economy until April of 1971 (Gamble, 1993, 1). From August of 1969 to February of 1971 the Federal Reserve dramatically eased monetary poly by cutting federal Funds rates. Soon U.S. economist would have a new word to add to their vocabulary, stagflation. In November of 1973 the business cycle peaked once more, with unemployment rates dipping down to 4.8 percent and inflation growing.

658, the highest of any of the last seven business cycles. The business cycle continued to contract for 16 months before reaching its trough in March of 1975. By this point unemployment had reached a dramatically higher 8.6 percent, while inflation only decreased to. 380, much higher than normal recessionary inflation rates. Stagflation is defined as a period with a high rate of inflation combined with an economic recession.

Under Keynesian economics, stagflation is impossible because high unemployment, like that experienced during a recession, would lower demand there for lowering prices. This would result in low or no inflation. This not being the case in the 1970's, gave momentum to the monetarist view of economics, which argues that fiscal policy is inherently inflationary and there for government should restrict their involvement in the economy. Monetarism also suggests that inflation is due to the money supply and that inflation can occur with high unemployment if the government increases the money supply. Labonte and Makinen attribute inflation to the decision by the Federal Reserve to lower interest rates below equilibrium which resulted in "excessive money growth" (Labonte, 2002, p. 18). Inflation and Unemployment continued to rise together into the forth quarter of 1974, when inflation reached 12.7 percent and unemployment grew to 8.9 percent.

Once the recession had started the Fed lowered federal funds rates. On the fiscal side of the coin, the Tax Reduction Act was passed in 1975 which called for a tax rebate to be sent out in 1975. The full effects of this act were not felt until the next year, once it took effect and was expanded. Government expenditures were also increased.

Though most economist group together the business cycles that peaked in 1980 and 1981 due to their closeness and the lack of anything significant occurring during the 1980 cycle, I am going to address them separately as they are distinguished as two different cycles by the National Bureau of Economic Research. The peak, which occur in January of 1980, only brought unemployment down to 6.3 while the out of control inflation rate had reached 1.430. This is the only time in the last seven business cycles that inflations had gone past 1. Once the business cycle reached it trough six months later in July, unemployment had risen to 7.8 percent while inflation dropped to. 121. In their paper, Labonte and Makinen state that "it is widely acknowledged that the major factor driving the economy into its deep recession in the early 1980's was the desire by the Federal Reserve to reduce the inflation rate to a more acceptable level" (Labonte, 2002, p. 15).

The Federal Reserve decided that they would need to enact changes that hurt the economy in the short run in order to make it stabile in the future. Though some critics "argue that the Fed could have deflated the economy more slowly and less severely, [... ] it did accomplish its goal of permanently lowering the inflation rate, which has not exceeded 5% since" (Labonte, 2002, p. 17). However, according to the U.S. Department of Treasury "the Federal Reserve's actions brought inflation down faster and further than was anticipated at the time, and one consequence was that the economy fell into a deep recession in 1982". (Fact, 2001, 38).

While the Fed was making huge changes, the Reagan administration was busy using fiscal policy to boost the economy. The Economic Recovery Tax Act of 1981 reduced marginal income tax rates. This sizable tax reduction "undoubtedly played a role in stimulating the economy in 1982" (Labonte, 2002, p. 17). Slightly more substantial was the next business cycle which peaked in July of 1981. A year after the previous trough, unemployment and only dropped. 6 percent to 7.2.

Interest rates on the other hand, had risen to an unheard of 1.105. None of the last seven business cycles even came close to reaching inflation in a whole number. By the trough, 16 months later in November of 1982, unemployment had rising to a catastrophic 10.8 percent, while inflation dramatically dropped to -. 102. This caused the Reagan administration to add yet another word to the economics dictionary, supply-side economics. While this "turned out to be the biggest and most successful Demand-side fiscal gambit in peacetime U.S. history" (Tobin, 2001, 6), it wasn't "a Supply-side transformation of the economy" (Tobin, 2001, 6).

The Reagan administration believed that "the Federal Reserve could and should control inflation by stabilizing the supply of money" (Tobin, 2001, 6). There were also other consequences of this systematic lowering on interest rates going on in this and the 1980 recession. The U.S. Department of Treasury says that "federal spending levels, which had been predicated on a higher level of expected inflation, were suddenly much higher in inflation-adjusted terms" (Facts, 2001 38.) In 1987 Alan Greenspan took over as the new Chairman for the Board of Governors of the Federal Reserve. Still wary of inflation, he was criticized for not reducing interest rate fast enough.

Once inflation started to decrease, the tax cuts from the Economic Recovery Act of 1981 went into effect. By 1983, the tax cuts implemented by the Economic Recovery Tax Act of 1981 had completely taken affect and "income taxes had dropped to 54% of total receipts" (Budget, 2004, 66). According to Labonte and Makinen, the tax cut was a large stimulus to consumer as well as business spending (Labonte, 2002). With inflation finally dropping the economy started to expand more stability. According to Daniel Mitchell, Ph. D., "this economic boom lasted 92 months without a recession, from November 1982 to July 1990, the longest period of sustained growth during peacetime and the second-longest period of sustained growth in U.S. history" (Sperry, 2001, 6). Though this was one of the worst of the last seven recessions, it was by far the best of all the booms, because of the long term changes in policy that it caused.

The 1990's proved to be less turbulent than the previous two decades. In July of 1990 the business cycles peaked, with unemployment dropping to 5.5 and inflation increasing to a modest. 462. In March of 1991 the trough of the business cycle was not nearly as detrimental as the previous one had been. Unemployment only rose in the eight months since the peak to 6.8 percent, while inflation dropped to 0. Statistically, this was much like the 1961 recession.

Then President George Bush Sr. "resisted attempts to use fiscal policy to stimulate the economy. In fact, his Council of Economic Advisers, in their February 1992 report, argued that increases in fiscal expenditures or reductions in taxes might hamper the economy's recovery" (Walsh, 2002, 3). In November of 1992 Bill Clinton took office. When it comes to his fiscal policy "Clinton attempted to redress the policies of the supply side era by increasing tax rates of the wealthiest income brackets, and such measures proved effective in increasing tax revenues and reducing the national debt" (Rothenberg, p. 7). Monetary policy continued to play an increasingly important role in the stabilization of the economy.

Under the Clinton administration Greenspan continued to work on achieving low inflation and tightened interest rates to keep price level constant and "despite his continued contraction ary measures, the economy grew soundly as it was driven by information technology improvements and the resulting productivity gains" (Rothenberg, p. 7). In March of 2001 the business cycle peaked once more. Unemployment dropped to a record low 4.3 percent while inflations excelled to a modest. 057. Eight months later in November of 2001 the business cycle dipped into its trough, with unemployment at 5.6 and inflation lowering to -. 056.

Although the public widely attributes this recession with the attacks of September 11th, there were signs of a recession well before the Twin Towers came down. According to Labonte and Makinen "monetary policy has been significantly expansive since the beginning of 2001" (Labonte, 2002, 28). Trying to balance out the effects of the recession the Federal Reserve has reduced its benchmark policy interest rat since January of 2001 and "Greenspan was quick to inject liquidity into the system and after lowering the Fed Funds Rate eleven times in the span of less than a year" (Rothenberg, p. 7). These aggressive actions by the Federal Reserve helped to support consumer spending. The Bush Administration cushioned the effects of the recession with "fiscal policy provided additional support to consumer spending.

The cuts in taxes [... ] including the rebates paid out over the summer cushioned the loss of income from the deterioration in labor markets" (Monetary, 2002, 7). As far as our current economic status is concerned, I think it is doing fairly well. According to the GPO, unemployment dropped in March to 5.7 percent while inflation is on the rise to. 483 percent.

Greenspan has been considering raising interest rates, a sign that the Federal Reserve sees substantial economic growth, and consumer confidence has increase as more people are spending their money, rather than hording it all. MACROECONOMICS: The Effects of the Politics on Fiscal Policy over the Last Seven Business Cycles Conclusion While various shocks have caused the last seven business cycles, both fiscal and monetary policies have been used to boost the economy and pull us out of a recession. Whether successful or not, monetary policy has taken over in the last few recession as the preferred way to stabilize the economy, while tax cuts seem to be the primary way in which fiscal policy accelerates the expansion of the business cycle.