U.S. Economic Policies and Theoretical Frameworks from the Second World

U.S.Economic Policies and Theoretical Frameworks from the Second WorldWar to Early 1970s and From Late 1970s To 2007

Abstract

Acombinationof monetarypoliciesandfiscal policies wasusedin thefirstera(World War II-early 1970s) andthesecondera(late1970s-2007) to stimulatetheU.S. economy.PresidentTrumann increasedthetaxratesandreducedthepublicspending to providea safelandingfortheU.S. economythat hadjustemergedfrom successindustrialproductionduring theSecond World War andtheKorean War. TheFederal Reserve Board aswell astheCongress wasinstrumentalinstitutionsthat contributedtowards thesuccessfulformulation andimplementation of theseeconomicpolicies.During thesecondera,thepoliticalandnon-political leaderssoughtto reducetheroleof governmentin controllingbusiness,which wasachievedby empoweringtheprivatesector.Forexample,President Reagan establishedtheprivate-public partnershippolicy,which indicatedtheappreciationof theroleof theprivatesectorin theU.S. economy.Otherpoliciesappliedin theseconderaincludethereductionin taxrates,free-market policy,andreductionin thepublicspending.

Keywords:Public spending, economicpolicy,taxrates,fiscalpolicy,monetarypolicy.

U.S.Economic Policies andTheoretical Frameworks from theSecond World War to Early 1970s andFrom Late 1970s To 2007

Allcountrieshaveeconomiesthat havediverseweaknessesandstrengths.Thenationaleconomyconsists of agentsthat manage,control,andsustainfiscalandmonetarypolicieswith theobjectiveof addressingtheunderlying economicchallengesandexploittheavailableopportunities.Mises (2006) definedeconomicpolicyas a setof actions(settingthetaxrates,regulatingthesupplyof money,andpublicexpenditure)takenbythegovernmentto regulateeconomicactivities.TheU.S. economyhas beenshiftingfrom theuseof conservativepoliciesto economicapproachesthat supportliberalization andglobalization since theSecond World War. Althoughtheconceptof liberalization gainedpopularityin theworldsoonafter theWorld War II, its effectwasfeltduring theseconderathat startedin thelate1970s. Thiswassupportedby theformulation of policiesthat could facilitatetheintegrationof theU.S. economywith othereconomies.Thispaperwill addresstheeconomicpoliciesthat wereadoptedduring thefirstera(World War II-early 1970s) andthesecondera,late1970s-2007. TheU.S. leaderswhomanagedto stimulatetheU.S. economyuseddifferentora combinationof policiesin differentsituationssince economicpoliciesare not one-size-fits-allanswersto economicconditions.

Firstera:Second World War to early1970s

TheSecond World War providedtheU.S. economywith an opportunityto growat a highratecomparedto otherstates,suchasJapan andGermany. Someof thekeyfactorsthat resultedin drasticeconomicgrowthduring thewarincludetheincreasein industrialproductionforthepurposesof war,which increasedtheU.S. capacityto produceforexport(Paxton, 2008).By theendof theWorld War II, theU.S. economywashyper-charged with industrialproduction,which usheredin theperiodof theGolden Age that ranfrom theendof thewarto the1970s. AlthoughtheU.S. economyachievedseveralmilestones(includingthefull-employment, an increasein investmentandoutput)during theWord War II, maintainingthehypercharge wasthemajorchallengein thepost-war period.Mostof thetopleaders(includingthepresident)whowerein powerduring thisperiodformulatedpoliciesthat failedto boosteconomicgrowth,buta fewof them succeededas shownin thissection.

Acombinationof fiscalandmonetarypolicies

PresidentHarry S. Truman inheritedthechallengeof theWorld War II andservedunderpressuretomaintaintherateof growthandfullemployment.Truman, the33rd presidentof theUnited Statesdecidedto usea combinationof both themonetaryaswell as fiscalpolicieswith theaimofbalancingthefederalbudget.Thefirstmovewasto increasetaxesandreducethegovernmentspending, which wasperceivedto be themostappropriatemeasureof countering theeconomicchallengesassociatedwith drasticreductionin industrialproductionforwar(Trumann, 2015).Theincreasein taxrateshelpedthegovernmentin raisingmorerevenueto fillthebudgetgapsusingan approachthat waslessharmfulto thenationaleconomy.Reducingthegovernmentspending, on theotherhand,helpedthenationaltreasuryin reducingannualborrowingandstimulate,which wasan effectivestrategythat stimulatedeconomicgrowthin themedium-term. Thiswasconsistentwith Lilico (2012) findingsindicatingthat1 % increasein thegovernmentspending above 25 % of thenation’sGDP resultsin a 0.1-0.15 declinein economicgrowthandviceversa.

PresidentTrumann usedthebudgetsurplusto pursuethemonetarypolicyof reducingthenationaldebt,which in turnstimulatedeconomicgrowth.Thispolicywasbased on theconventionaltheoryof publicorgovernmentdebt,which holdsthatunless savingsby theprivatesectorraisedto levels that can offsetthepublicdebts,anyincreasein thelevelof governmentborrowingresultsinan increaseintheinterestrates(Bohn, 2011).In thelong-run, highpublicdebtandinterestrateincreasedtherequiredrateof returnon borrowings,which resultsin thecrowding out of investmentcapital.Byreducingthenationaldebt,Trumann wasableto shield thenationaleconomyfrom a sharpincreasein theinterestrates,which motivatedAmericans to investin alternative ventures(suchas productionforexport)since productionforwarwasnolongerrequired.

Trumann’scontrolsover theconsumeras wellas businesscreditshelpedthegovernmentin controllingtherateof inflation.TheFederal Reserve Board wasinstrumentalin theimplementation of thesetypesof regulationsthat werecommonlyreferredto as regulationsX andW (Wooley &amp Peters, 2014). Thepolicywasimplementedby settinga higherrateof downpaymentandestablishinga shorterrepaymentperiodforconsumerswhoboughta newone- ortwo-end housesanddurablegoodson credit(Wooley &amp Peters, 2014).Moreover,theFederal Reserve Board controlledtherateof inflationby reducingexcessivelending by banks,which wasimplementedby allowingtheinterestratesforshort-term borrowingandincreasingreserverequirements.AlthoughsomecriticssuggestthattheGDP growthwaslowerduring theTrumann’s Presidency, thecombinationof monetaryandfiscalpolicywasthemostappropriateoptionthat anyeffectiveleadercould useto givethenationaleconomya safelandingafter an economicstimulation that wascreatedby necessity,theWorld War II.Thetwo typesof policieshelpedTrumann stabilizingeconomicgrowthandshield thenationaleconomyfrom a sharprecessionduring thefirsttermof Presidency.

KoreaWar andthereverseof Trumann’s fiscalpolicy

Economicpoliciesare not one-size-fits-allmeasure,which meansthatdifferentcircumstancescallforuniquepoliciesto addresstheunderlying challengesandexploittheavailableopportunities.Theoutbreakof theKorean War in 1949 forcedTrumann’ governmentto returnto thefiscalpolicyof an increasein thegovernmentspending, which hadbeenprovento be effectiveduring theWorld War II. Thiswasan opportunityto turnthenationaleconomyaroundby increasingindustrialproductionformilitaryoperations(Wooley &amp Peters, 2014). Thepolicywasbasedon Keynesian theory,which holdsthatan increaseinpublicspending enhanceseconomicgrowth,by increasingemploymentopportunities,stimulatinginvestmentvia theimpactsof aggregate demand,andprofitability of establishmentbusinesses(Nkiru &amp Izuchukwu, 2013).However,thepositiveimpactof publicspending on thenationaleconomydepends on thesizeof theexpendituremultiplier. Thespending multiplier forgovernmentspendingon military-related productionwassufficientto boostexponential economicgrowthafter a periodof relativelyslowgrowthrate.TheCongress wasan instrumentalinstitutionfora successfulimplementation of thisfiscalpolicy.Thisis becausethepassageandenactmentof theDefense Production Act allowedthegovernmentto establishtheunitof Defense Mobilization (Wooley &amp Peters, 2014). Thisgavethegovernmentan opportunityto keepinflationandunemploymentin check.Thisfiscalpolicywasprovento be effectiveduring thelastpartof Trumann’s andthefirstfewyearsof Dwight Eisenhower’s Presidency.

PresidentEisenhower endedtheKorean War, andthiscalledfora drasticshiftin theeconomicpolicy.Theappropriateactionwasto reduceto reducethegovernmentexpenditureby $ 5 billion andcuttingthedeficitby $ 10 billion, which wasa returnto a combinationof fiscalandmonetarypoliciesadoptedsoonafter theSecond World War (Nkiru &amp Izuchukwu, 2013).However,Eisenhower managedto addanothercomponent,which wasthehealthinsurancecoupledwith hightaxrates.Theobjectiveof thesepolicymeasureswasto stabilizethenationaleconomyandhelppeoplewhohadmadesubstantialprofitsfrom themilitary-related productionto investin othersectors.In addition,thehealthinsurancepolicywasadoptedto enhancethelifestyle of Americans.

Secondperiod:Late 1970s to 2007

Mostof thepoliticalleaderswhoruledtheU.S. from thelate1970s to 2007 appliedeconomicpoliciesandframeworksthat failedto addresstheunderlying issuesof unemployment,escalatingnationaldebt,stagnatingGDP growth,andinflation.However,Presidents Ronald Reagan andWilliam Clinton managedusinga combinationof economicpoliciesthat rescuedtheU.S. economy.Leaderswhosucceededduring thesecondperiodmadesomeeffortsto liberalizeandglobalize theU.S economy,approachedtheeconomicgrowthfrom thesupplyside,andreducethegovernmentrolein business.

Thefreemarketpolicyandtaxcuts

PresidentReagan tookthepresidencywhentherateof inflationwas12.5 % unemploymentwas7.5 %, andGDP growthof 7.9 % (Bureau of Labor Statistics, 2014). Reagan perceivedthatthefree-market policycoupledwith significanttaxcutswould stimulatethenationaleconomy.Thecombinationof thetwo policieswasbased on Laffer economictheoryorcurve(developedby non-political player,Arthur Laffer), which holdsthatthere is at leastsometaxratebetween 0 % and100 % that will maximize thegovernment’srevenuecollection(Novales &amp Ruiz, 2001).Thefreemarketpolicywould givean opportunityforallpeopleto investin theU.S. economy,whileacrosstheboardtaxreductionswould ensurethatpeoplehadsomedisposable incometo spendorinvest.Thiswould in turnenlargethetaxbase,thushelpingthenationaltreasuryto offsettherevenuelossas a resultof taxratereductions.There weretwo majorinstitutionsthat playedsignificantrolesin theformulation andtheimplementation of thesepolicies.TheEconomic Policy Advisory advisedthepresidenton theimplementation,whileCongress passedtheEconomic Recovery Act in 1981, which allowedtheexecutiveto reducethetaxrates.Reagan alsorestoredsomeGold standardsin orderto helpthegovernmentprotecttheU.S. dollar’sexchangerate.

Public-privatepartnershippolicy

Theconceptof therelationshipbetween theprivateandthepublicsectorshas gainedpopularityin within thelastthree decades. In theU.S., thisconceptwasdevelopedby Al Angrisani, theAssistant Secretary of Labor Who servedduring Reagan’s Presidency (Miraftab, 2004). Thepartnershipwasalsopromotedby theCongressfollowingthepassageof theJob Training Partnership Act in theyear1982. Thistypeof partnershipwasbasedon theresourcedependencetheory,which holdsthatallfirms depended reciprocally on others forthe provisionof resources(Garnes, 2014). Thisimpliesthatboth thepublicsectorandtheprivatesectorcould gainsignificantly by partnering with eachother.Through thispartnership,privatefirms would supportthegovernment’semploymentcreationprogramby providingcitizenswith an opportunityto learnthejobskillsin their firms. Thiswould in turnincreasetheemployability andon-the-job performanceof thepeople,thusincreasingeconomicgrowth.

Tradeliberalization andtradeagreements

Althoughtheconceptof liberalization wascoinedin thefirstperiod,itwaspracticedduring thesecondperiod.WilliamClinton, the42nd President of theU.S. playedamajorrolein liberalizingtheU.S. economy,which wasachievedby signingadpromotingtheNAFTA agreementthat would facilitatefreetradein theNorth American states(Maggi &amp Rodriguez, 2007).Clinton’spolicyof liberalizingtheU.S. adtheregionaleconomywasbased on thetheoryof politicaleconomytradeagreement,which assumesthata politically motivated moveto signtradeagreementsfacilitatestradeby allowingthepoliticalsectorto dealwith externalities of terms-of-trade (Maggi &amp Rodriguez, 2007).Consequently, Clinton’s decisionto liberalizeandlinktheU.S. economywith theothereconomiesin theregionopenedup newopportunitiesforlocalmanufacturersto exporttheir productsto NAFTA members.Theideaof increasingexportthrough tradeagreementwasintendedto increaselocalandforeigninvestment,which would in turnincreasejobopportunities.

Similaritiesanddifferencesbetween thetwo eras

Similarities

Inbotheras,economicpoliciesweredevelopedby politicalas wellas non-political actors.PoliticalactorswhoplayedsignificantrolesincludePresident Trumann andDwight Eisenhower. During thesecondera,President Reagan formulatedpoliciesthat rescuedtheU.S. economyfrom an exponential increasein theratesof inflationandunemploymentandPresident Bill Clinton liberalizedandglobalized theU.S. economy.Non-political actorswhocontributedtowards thepolicyformulation during thefirsteraincludeKeynes (Keynes theory)andDavid RicardowhosupportedtheKeynes’s theory.During thesecondera,Arthur Laffer developedLaffer’s Curve,whileAl Angrisani developedthepolicyon theprivate-public partnership.

Publicinstitutionsplayedsignificantrolesin theformulation andimplementation of economicpolicies.TheFederal Reserve Board helpedTrumann in pursuingthemonetarypolicyin thefirstera(Wooley &amp Peters, 2014), whilethesameboardhelpedPresident Reagan in restoringsomeGold Standards in orderto protecttheDollar exchangerate.

Actorsin thetwo erassucceededin addressingtheeconomicchallengesby combiningthemonetaryandfiscalpolicies.Forexample,President Truman increasedtaxratesandcontrolledthenationaldebtduring thefirstera(Paxton, 2008). During thesecondera,President Reagan reducedthetaxrateandre-introduced theGold Standards in orderto rescuetheU.S. economy(Novales &amp Ruiz, 2001). In bothcases,thefiscalandmonetarypoliciesresultedin the reduction of the rate of unemployment, containment of the rateof inflation, stabilization of wages, and an increase in industrialproduction.

Differences

Politicalleaderswereinvolvedin designingof economicpolicies,butthere wasa differencein theroleof governmentin thetwo eras.During thefirsterapoliticalleadersemphasizedonthegovernment’sroleto controltradeandeconomicactivities,whilepoliticalactorsin theseconderareducedtheroleof thegovernmentandsoughtto empowertheprivatesector.Forexample,President Truman stated“itis criticaltimesthatthegovernmentmust assumeleadershipin theplanning”(P. 1). ThismeansthatTrumann believedthatthegovernmenthadto playa centralrolein determiningthedirectionof thenationaleconomy.During thesecondera,President Reagan adoptedthefreemarketpolicyandreducedtheroleof thegovernmentby empoweringtheprivatesectorthrough theprivate-public partnership(Novales &amp Ruiz, 2001).

Althoughleadersusedfiscalpolicyof adjustingthetaxratesin thetwo eras,adjustmentswerein theoppositedirections.Forexample,leadersin thefirsteraincreasedthetaxrates(Novales &amp Ruiz, 2001). During theseconderaleaders(includingPresident Reagan) reducedtheratesacross theboardwith theobjectiveof stimulatinginvestmentandaggregate demand.

Recommendedpolicyto addressthecurrentrecessionin theU.S. economy

Devaluationof theU.S. currencyat somefixedrate:This is a fiscalpolicythat will requirethestakeholders in theU.S. economyto devaluethedollarat a fixedrate(suchas 20 %) usingtheGold Standards.Thiswill discourageimports since theywill appearexpensiveandencouragedomesticproduction.

Taxcutscoupledwith an increasedin governmentspending on localinfrastructure:These are two fiscalpoliciesthat will complement theeffectof eachother.Taxcutswill increasetherealincomeof citizens,which will givethem somefundsto invest.Thisincomemay alsobe spentlocally,thusstimulatingaggregate demandandinvestment.Increasingthegovernmentspending on localinfrastructurewill increasetheamountof disposable incomein thehandsof thecitizensemployedto buildandrepairinfrastructure,which will in turnincreaseaggregatedemand.In essence,thecombinationof thetwo fiscalapproacheswill boostinvestment,reducetherateof unemployment,andstimulatetheeconomicgrowth.

Reducingthenationaldebtcan be achievedby reducingthelevels of domesticas wellas foreignborrowing.Reducinglocalborrowingwill helpthegovernmentavoidthecrowding out effect,which meansthatthere will be sufficientfundsforlocalinvestors to stimulatetheir businesses.Reducingtheforeignborrowingwill helpthegovernmentreducetheburdenof largeloans,thusreducingfinancialconstraintsin thelong-run.

Fairtrade:The U.S. should re-evaluate thetreatiesandtradeagreementsthatithas established,in orderto ensurethattheysupportthelocaleconomyandavoidweakeningthelocalinvestors. Theeffectof fairtradepolicymeasureis an increasein tradeopportunitiesforlocalinvestors.

Conclusion

Fiscalandmonetarypoliciesare not one-size-fits-allanswerto economicchallenges,which explainsthefactthattheU.S. leadersuseddifferentpoliciesin thefirstera(from World War II to early1970s) andthesecondera,late1970s to 2007 depending on theprevailingeconomicconditions.Thecombinationof both thefiscalandmonetarypolicieswasan intelligentdecisionthat helpedleadersin thetwo erasto stimulatetheU.S. economyandgiveita safelandingafter boomsthat werefacilitatedby events,suchas Korea War.However,leadersin thefirsteraemphasizedontheroleof governmentin controllingbusiness,butleaders(includingPresident Reagan) in theseconderafocusedon theempowerment of theprivatesectorandreducingthegovernment’scontrol.Theformulation of economicpoliciesrequiredthecontributionof nonpolitical actors(includingthetheorists)andinstitutions(suchas theFederal Reserve Board), to ensurethatthesepoliciessucceedin stimulatingtheU.S. economy.

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