Download Reaganomics / Supply

Reaganomics / Supply-side
Economics
"This plan is aimed at reducing the growth in government spending and taxing,
reforming and eliminating regulations which are unnecessary and
counterproductive, and encouraging a consistent monetary policy aimed at
maintaining the value of the currency."
The Economic Problem
It was no accident that Ronald Reagan found the Misery Index to be very high in the late 1970s because the
US was experiencing a new problem - stagflation - the simultaneous appearance of high rates of inflation
and unemployment. The AS-AD diagram offers a visual representation of the problem. Twice in 1970s, the
OPEC oil cartel raised substantially the price of oil, a major resource used by the nation's businesses, and
this shows up as an inward shift in the AS curve. The result was the worst of both worlds. The equilibrium
moves up to the left so the economy is “hit” by more inflation (higher P) and recession (lower GDP) that
brings with it increased unemployment. People are out of work and watching prices rise rapidly.
Stagflation
The problem for policy makers was their Keynesian heritage, which meant they instinctively attempted to
manage aggregate demand to solve any macroeconomic problem. Too much unemployment, just increase
in aggregate demand and shift the AD curve out (left-side diagram below). Too much inflation, just
decrease aggregate demand and shift the AD curve in (right-side diagram below). The problem is that each
"solution" also creates a macro problem. If you used AD policies to reduce unemployment and increase
AD, you made inflation worse since the new equilibrium is higher, while if you worried about inflation and
decreased AD, you made unemployment worse since the new equilibrium is to the left. There was an
opening for a "new set of eyes."
Alternative Demand Management Policies with Supply Shock
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The spokesperson for that new perspective was Ronald Regan who offered the American people a free
lunch - a solution to the stagflation that had little, if any, negative side effects. At an abstract level, the
solution is obvious. The appropriate policy response to an adverse AS shock would be a compensating AS
policy shock. It was time to break with the Keynesian demand-management tradition and return to a focus
on aggregate supply - hence the term "supply-side" economics. Ronald Reagan promised the American
people that his policies would reduce inflation, AND put people back to work, AND balance the budget
AND cut taxes, AND stabilize the US $, AND raise defense spending to win the Cold War. As Regan
stated in his first State of the Union address, "This plan is aimed at reducing the growth in government
spending and taxing, reforming and eliminating regulations which are unnecessary and counterproductive,
and encouraging a consistent monetary policy aimed at maintaining the value of the currency" and in the
remainder of this unit we will examine the theories upon which he based his policies. The centerpiece of his
program was the Economic Recovery Tax Act of 1981.
The Reagan Plan: Expand output
To understand Reagan's plan we start with a simple production function. The supply of national output
(AS) depends upon the size of the capital stock (K), the size of the labor force (L), and the level of
technology (t), so any increase in AS would require an increase in the resources the nation employed and
the technology its worker's used.
AS = f(K,L,t)
The solution to mobilizing resources was all in the incentives, which is what you would expect from
conservatives. If you wanted a larger capital stock - new and better factories, offices, and machines businesses had to think it was in their best interest to build these offices and factories and purchase these
new machines. People, meanwhile, needed an incentive to get out of bed and supply the labor needed to
work in those new offices and factories and use the new machines. In microeconomics you learned the
secret to altering behavior was to alter prices, which is precisely what Reagan's policies were designed to
do.
Increase the capital stock
To increase the capital stock the level of investment spending would need to increase since investment
spending is by definition the addition to the nation's capital stock, and Reagan's program relied on five
policies - investment tax credit, accelerated depreciation, corporate profit taxes, deregulation, and
individual retirement accounts.
The investment tax credit, similar to what Kennedy had used twenty years earlier, allowed businesses to
reduce their tax bill by investing in plant and equipment. For example, if the investment tax credit were
10% and your business spent $100,000 on a new machine, then you would be able to deduct $10,000 from
your federal tax bill (10%*100,000). The "bottom line" is the machine costs $100,000 but because the
company saves $10,000 in taxes, the net cost of the machine is $90,000. This effectively reduces the cost of
the investment by 10%, so you would expect to see an increase in demand for the equipment.
Investment Tax Credit
($1,000s)
Profit
Profit
tax
Cost of
machine
10% Investment tax
credit
Profit tax + tax
credit
Tax
saving
Net Cost of
Machine
$1,000
$500
$100
-
$500
0
$100
$1,000
$500
$100
$10
$490
$10
$90
Net savings on
machine
$10
Accelerated depreciation is a little more complex. Let's assume you construct a factory for $1,000,000 and
the government allows you to depreciate this over 25 years. You can charge your business $40,000 as a
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depreciation expense each year, which in theory represents the value of the building "used up" during the
year ($1,000,000/25), so that at the end of the 25 years the building would have no value. Each year taxable
income is lowered by the $40,000 depreciation expense, so with a business tax rate of 50%, you would save
$20,000 a year in taxes ($4,980,000 vs. $5,000,000). What Reagan did was shorten the depreciation
schedule to 10 years. Now the business could subtract $100,000 from its business income ($1,000,000/10)
instead of the $40,000, which generated a tax savings of $30,000. This effectively reduces the cost of the
investment by 3% ($30/$1,000), so you would expect to see an increase in demand for the equipment.i
Accelerated Depreciation
for business ($1,000s)
Value of
building
$1,000
$1,000
Depreciation @
25 year life
$40
Depreciation @ 10
Gross Income
year life
$10,000
$100
$10,000
Net Income
before taxes
$9,960
$9,900
Taxes@ 50%
$4,980
$4,950
Net savings
on machine
$30
Reducing the corporate profit (income) tax was expected to raise after-tax profits and corporations were
expected to use some of the additional profit to make the capital investments. Finally, Reagan increased the
pool of funds saved by households that could be used by businesses to make the desired investments. This
was accomplished by introducing the individual retirement accounts (IRAs) that lowered the tax on some
savings and thus made savings more attractive.
Increase the labor supply
To get people to work you need to make work more attractive and non work less attractive. To make work
more attractive, Reagan proposed a tax cut to allow people to keep more of what they earned. During the
inflation of the 1970s people had been pushed into higher tax brackets, and because we had a progressive
tax system, their buying power fell - a phenomenon called tax bracket creep.ii Reagan planned to correct
this with his 30% across the board tax cut where all tax rates would be reduced by 30%, an idea that was
contained in the Kemp-Roth bill proposed in 1978. Although the proposal was never passed, it was a piece
of Congressman Kemp's platform in his bid for the presidency in 1980 and eventually Reagan adopted it.
One of the major appeals of the Reagan tax package was that it sounded "fair," it sounded like everyone
would share equally in the tax cut. This is not exactly how it worked, however, because of the progressive
nature of the income tax system. (History of tax rates). In the United States in 1980, the tax rate on the
lowest income bracket (up to $2,100) was 14%, while the rate for the highest income bracket (>$212,000)
was 70%. The "math" of the tax cut can be seen in the simple table below. If you earned $300,000 and your
tax rate was 70%, then your tax rate would be cut to 49%, while a person earning $40,000 would see their
tax rate cut from 20% to 14%. The biggest beneficiaries of the cut are clearly those with the higher incomes
and higher rates. In this example the 30% across-the-board tax cut would save the person earning $40,000 a
total of $2,400 in taxes, while the person earning $300,000 would save $63,000 in taxes. If you looked at
the gain relative to their initial net income, the gain for the person with a $40,000 income would be 8%,
while the gain for the person with a $300,000 income would be 70%.
An Across-the-Board Tax Cut
Actual
income
40,000
200,000
tax rate Taxes paid Net income
20%
70%
8,000
210,000
32,000
90,000
New rate
Taxes paid
Net income
14%
49%
5,600
147,000
34,400
153,000
Gain in aftertax income
2,400
63,000
% Gain
8%
70%
This is not what Kennedy did with his personal income tax cut in the early 1960s, but Kennedy’s tax cut
was never designed to achieve the same goal. Kennedy's tax cut was a traditional demand-side tax cut that
gave the money to people who would spend it. This would increase aggregate demand - shift the AD curve
out. Reagan, however, wanted to shift out the AS curve, so it could not be a Kennedy-like tax cut. The tax
cut would go to those with high incomes because they would likely save it, which would give businesses
more funds to use for investment. These businesses would then hire workers who would now have better
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jobs and higher incomes. The tax cut to the wealthy would "trickle-down" through the system to eventually
help those at the bottom, which is why Reaganomics has been referred to as "trickle-down economics."
But what about the prospect of workers striking and bargaining for higher wages if the unemployment rate
drops - the Phillips Curve in action? What Reagan did was send a message to labor that they had no friend
in the White House when his response to the air-traffic controllers' strike was to fire them. If air-traffic
controllers could be replaced, so could others and an effective labor movement never materialized in this
period. He also made union workers nervous about their jobs and weakened their ability to raise wages by
encouraging the free trade movement that gutted many manufacturing industries and moved jobs abroad.
At this point Reagan's plans seem to have logic, and now we will look at how he hoped to achieve some of
the other objectives.
The Reagan Plan: Lower government spending, tax cuts, and balance the budget
All governments are constrained by the mathematics of governmental finance - the budget deficit (D)
equals the difference between tax receipts (T) and outlays (G) - so any budget deficit (D >0) could be
eliminated only by an increase in Taxes or a decrease in Government outlays. The task facing Republicans
was to find a way to cut taxes AND increase defense spending without raising the budget deficit.
D=G-T
Traditionally Republicans had argued for lower taxes and lower government spending and a balanced
budget, but Congressman Jack Kemp had warned Republicans of any attack on the New Deal programs
since the voting public would not support a dismantling of the welfare state. This was not a problem for
Reagan. Reagan would lower government spending without raising the specter of losses in favorite
entitlement programs because of the extraordinary amount of waste in the government. All he would do is
cut waste, a theme we still hear today.
As for simultaneously cutting taxes and reducing the deficit, the "solution" was found in a new "theory"
suggesting that reductions in tax rates and a balanced budget were possible. Arthur Laffer had developed
this idea, and on August 4, 1976 it surfaced in an editorial in the Wall Street Journal that maintained "it is
far from clear that a tax cut will always cause a deficit. It depends on whether it succeeds in stimulating the
economy enough that the lower tax rates yield a larger net revenue."
Part of the success in selling this idea can certainly be attributed to the simplicity with which it could be
presented to the public using the Laffer Curve. Normally, tax revenue would increase with tax rates, such
as you would see at a rate at pt. A, but only to a certain point. Once tax rates reached a certain unspecified
level, the equilibrium point in the diagram, then any additional tax rate increase would result in lower
revenues. Republicans argued that high income tax rates in the U.S. put the economy into the range where a
tax cut would actually raise revenue. If you had a tax rate at pt. B, then a reduction in the tax rate movement left from point B - would increase tax revenue. This was the basis of the Republican National
Committee's endorsement of the Kemp-Roth tax bill containing a cut in personal income tax rates of 10
percent per year for three years.
The Laffer Curve
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How could this counter intuitive result be explained? The "mathematics" of the answer is straightforward.
The level of tax income (T) is simply the product of the tax rate (t) and the level of income (Y). If the
reduced tax rate ($t) could stimulate the economy and increase income (#Y), then the level of tax revenue
could increase and the budget deficit would be reduced.
T = t*Y
The Reagan Plan: No cost lower inflation
The Phillips Curve had been an accepted piece of the Keynesian macro model in the 1960's and Carter's
gradualism in the 1970's was grounded in the belief that the cost of lower inflation was higher
unemployment. Carter accepted the trade-off as inescapable and hoped to use wage and price guidelines to
reduce inflation without incurring the cost of higher inflation. This was not an option for the Republicans
who had no interest in increased government intervention.
The key piece of the no-cost solution to lower inflation was a new spin on expectations, and to see this
we return to the question: what will the weather be tomorrow? The simplest answer, and the one accepted
in the 1970s', is the adaptive expectations model. Expected inflation next period (i+1) would simply be
equal to the current inflation rate (i), which is equivalent to a weather forecasting strategy of forecasting
tomorrow to be the same as today. If the inflation rate last year were 5%, then you would expect it would
be 5% this year.
Adaptive expectations I
i+1 = i
The weaknesses of this model of expectations are it is backward looking and people are going to get fooled
by any changes in inflation. The implication of this approach was that a painful, slow adjustment in
inflationary expectations would limit the political value of discretionary policies designed to wring inflation
out of the system. If inflation were to be reduced, it would come at a substantial cost because American
workers had built inflation into their wage demands and bankers built it into their interest rates.
The transition from high to low inflation rates did not have to be painful, however, if you believed in the
emerging theory of rational expectations introduced by Robert Lucas, work that earned him the Nobel
Prize in economics in 1995. According to Lucas, decision makers formed their expectations rationally by
looking forward and people could learn, which would make it difficult to fool them continuously.
Furthermore, if macroeconomic policies were credible, then decision makers' inflation expectations would
adjust quickly and the economy would adjust quickly to the new equilibrium.
To see how this works, let's look back at what we learned about inflation earlier - that inflation is a
monetary phenomenon. The Quantity Theory of Money that linked the price level and the money supply, so
if you knew the money supply was increasing, then you would adjust your estimate of inflation
accordingly. For example, if people knew the inflation rate would equal the growth rate in the money
supply (m), then they would immediately adjust their expectations for inflation downward if the Fed
embarked on a tight money policy. Decision makers would then lower their demands for wage and price
increases. Rational expectations offered policy makers a painless cure to inflation.iii
Rational expectations
i+1 = m
In this situation there was no necessary connection between inflation and unemployment and we could
therefore break inflation without any increase in unemployment - a no pain decline in inflation could be
accomplished by the restrictive monetary polices being followed by the Fed as Reagan took office. The
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research focus thus shifted to how macroeconomic policies could gain the credibility needed to influence
the expectations.
The "results"
The rest, as they say, is history. Let's begin with the successes. The Fed's policies and the dramatic drop in
the price of oil did break the rising spiral of inflation. By the first quarter of 1982 inflation was down to
under 4%, and this was reflected in a boom in the stock market. By the end of the 1980s the stock market
had regained all of the losses incurred during the late 1960s and 1970s, although what you do not see is that
terrifying day in 1987 known as Black Monday when the Dow Jones Industrial Average dropped nearly
23% in one day. You do not see it because by the end of the year the losses had been regained. The rapidly
falling inflation rates were reflected in the rapid decline in interest rates, with the rate on 3-month US
Treasuries down by more than 50%. Real interest rates, however, abruptly rose and this had an adverse
effect on Latin American countries that had borrowed heavily in the 1970s. With the rise in real interest
rates they faced a debt crisis that signaled the beginning of what has become known as the "Lost Decade."
The value of the dollar was also affected by the high interest rates, and as you know from the last unit, the
high rates helped push the US $ higher - approximately an 80% increase in the trade-weighted exchange
rate by 1985 before it fell back to 1980 levels.iv The rise in the value of the dollar severely "hammered" the
traded-goods sectors of the US economy and the balance of trade, which had turned negative in the late
1970s, moved sharply negative in the 1980s, bottoming out at nearly $160 billion in 1986.
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Manufacturing firms began to lose out to foreign competitors as we began to hear much about the deindustrialization of the US economy. Employment in the steel industry, for example, declined from 400,000
in 1980 to 150,000 in 1986. These were tough times for the "Rust-Belt" with a net loss of 2 million
manufacturing jobs - 10 percent - during the decade. Farmers were also hurt with agricultural exports down
sharply and farmland prices following. The news was filled with stories of bankrupt farmers. On the coasts,
however, it was a very different story. It was good times along the Atlantic and Pacific coasts, the
beginning of the boom known in New England as the "Massachusetts Miracle."
The position of labor was weakened as those imports continued to flow into the country in record amounts
and union workers found employers increasingly willing to shut down factories and move operations
overseas where labor costs were substantially lower. In the Four-Tigers of Southeast Asia, countries where
governments were committed to export-led growth, the cost advantage approached 90% in Korea and
Taiwan and 85% in Singapore and Hong Kong. Even Japan, which by 1980 had become a rising world
power, had costs nearly 50% lower than in the US. By mid decade Time magazine was running “Trade
Wars” cover stories, and at that time the culprit was Japan. As for what they were doing with the $s flowing
into the country, they were buying US assets, which became a hot topic by 1987 when Time ran a cover
story, The Selling of America: Foreign Investors Buy, Buy, Buy.” And they were not low profile purchases,
with Japanese investors landing two prime US assets – the Pebble Beach golf course and Rockefeller center
in New York City. It was also the decade in which Americans began driving Hyundai autos imported from
Korea and the Yugo from Yugoslavia, although the Yugo disappeared quickly due to serious safety and
reliability issues. Honda and Toyota, meanwhile, in response to rising tensions over international trade and
restrictive trade quotas opened up production facilities in the US. Honda opened its plant in Ohio in 1982
and Toyota followed in 1988 with a plant in Kentucky.
The combination of the government's anti protectionist policies and the "flattening" of the world,
manufacturing employment in the US actually declined in the 1980s. In the 1970s manufacturing growth
was still positive, although down almost 2/3rds from the growth in the 1960s, but weaknesses were
showing up in the nondurable sector. Nondurable producers, especially textiles and apparel, are capable of
moving their operations quickly in search of cheap labor and in the 1970s the US was already seeing
employment declines. By the 1980s, though, employment losses in manufacturing had become widespread
with over 1.5 million jobs lost - about 1 of every 12 manufacturing jobs - and the losses were concentrated
in the heavier, more unionized, durable industries.
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Rising immigration - nearly 2/3rds higher than in the previous decade - also pushed wages of some less
skilled American workers lower as they found themselves in competition with immigrants who were
increasingly from Mexico. Immigration in the 1980s represented a full 1/3rd of the country's population
growth - a number not seen since the 1910s when immigration was becoming a national issue. And if that
were not enough, Reagan sent a very clear message to American workers that they had no friend in the
White House when he ended the air traffic controllers strike by firing all of the PATCO union controllers.
One impact of these developments was an increase in income inequality. Below is a graph of average
incomes for the top 5t% percent of the income distribution (95th percentile) and the lowest 20% of the
distribution from the Economic Policy Institute. It is very clear that from the end of WW II through the end
of the 1970s the incomes of these groups tracked each other pretty closely. In this time period was true that
“a rising tide lifts all boats, but that ended in the 1970s as the gap between the wealthy and poor widened
sharply.
In the output market GDP grew at faster rates than in the 1970s, but below the average for the 1960s.
There was also no rebound in productivity growth, which was lower in the 1980s than in either the 1960s or
1970s. The significant employment gains in the 1980s, however, were not reflected in earnings that
continued to fall during the decade. By 1989 real earnings for American workers were lower than they were
in 1959. It was also a decade of rising inequality and insecurity that was especially hard on the less
educated and less skilled workers who were staggered by the one-two punch of globalization and
technological change.
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The biggest gap between the promises and the performance was in federal government finances. Reagan
did get his tax cuts as Congress quickly passed the Economic Recovery and Tax Act of 1981 in the
summer. The program included the three-step, across-the-board reduction in personal income tax rates.
Reagan began to backtrack on his promises almost immediately, however, and the budget delivered in 1981
included a one-year delay in the eventual budget balance (1983 to 1984) and a six-month postponement in
the starting date for the first-round of the tax cuts. It soon became obvious, however, that the Laffer curve
was the weakest link in Reaganomics. The passage of the tax cut, coupled with the defense buildup,
produced massive deficits by the middle of the decade. It soon became clear that there was a serious
inconsistency in Reaganomics' goals, and that Reagan would give up the balanced budget to pursue the
other goals. In fact, in a Washington Post article of June 6, 2004 reflecting on the Regan presidency, we
hear about how David Stockman, Reagan's budget director, used accounting gimmicks known as the "rosy
scenario" and the "magic asterisk" to get the budget accepted, so it is not clear that Reagan's team ever
really bought the idea. The rosy scenario predicted the economy would do much better than expected,
providing revenue that would never materialize, while the magic asterisk designated spending cuts that
would be identified later - but never were."v
There was also the promise that deregulation would unleash the powers of the market place, but it also
unleashed some problems. In 1980 and 1982 the US passed two laws that allowed S&Ls to take bigger
gambles on depositors’ funds, and by the end of the decade the country was hit by the S&L crisis - a
precursor to the subprime crisis of 2008.
By the end of the 1980s there was no question monetary policy was powerful, but there were rising doubts
about the ability to harness the power of fiscal policy as the US had entered a period of exceptionally high
budget deficits, which is the focus of the Unit on the 1990s. First, however, we will look more closely at
the concept of economic growth.
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10
1980s Reagan
i
One of the results of this legislation designed to increase the demand for new machines and factories that was not
anticipated was a surge in the purchases of rental property and vacation homes by successful, high-income
professionals who used real estate to "hide" their income. The deal went something like the following. The professional
who was earning $100,000 would buy a building for $200,000. Originally the government would allow the person to
depreciate the building over 25 years, which meant the individual could subtract $10,000 from their income before
taxes. Under the Reagan plan, meanwhile, the life was shortened to 10 years so the individual could write off $20,000.
At a 35% income tax rate, the income taxes paid would be reduced by $3,500. You would be buying a home that was
appreciating in value and it would allow you to lower your taxes. It was a deal many professional could not resist and it
helped fuel the real estate boom in the mid to late 1980s.
ii
You can see the problem with a simple example summarized in the table below. Between 1978 and 1979 you got a
25% raise which puts you into a higher tax bracket - 50% rather than 40%. When you look at after-tax income - what
you take home - your big raise has been almost eliminated. It's now only $1,000, but even this exaggerates the increase
since one of the reasons you received the big raise was to compensate you for a 10% increase in prices (an increase in
the price index of 100 to 110). Adjusting income for inflation using the formulas for real, in 1979 you feel like you are
earning only $22,727 because prices had gone up faster (10%) than your after-tax income (4%).
Tax Bracket Creep
Actual
tax rate
Taxes paid
Net income
Prices
Real income
income
1978
40,000
40%
16,000
24,000
100
24,000
1979
50,000
50%
25,000
25,000
110
22,727
iii
We can see how this works by returning to the Phillips Curve graph introduced in the 1970s unit. Assume the
economy is at a with an unemployment rate of 5% and an inflation rate of 6%, a rate accepted as the prevailing
inflation rate and the policy officials. If a policy maker wanted to lower the inflation rate to 4%, the Phillips curve
provided a guide to the cost, which would be higher unemployment as the economy moved toward point b. This
inflation rate was pushed below the expected rate (4% < 6%) and the unemployment rate rose as the economy
contracted because decision makers were "fooled" by the lower inflation. Once they adjusted to it the economy would
eventually move to point C, but only after a painful recession with high rates of unemployment.
But what if expectations were formed "rationally," if an announced reduction in the growth rate in the money supply
would translate immediately into a lower expected rate of inflation. This would lower the Phillips curve and the
economy would go straight from A to C. In this situation there was no necessary connection between inflation and
unemployment and we could therefore break inflation without any increase in unemployment - a no pain decline in
inflation could be accomplished by the restrictive monetary polices being followed by the Fed as Reagan took office.
The research focus thus shifted to how macroeconomic policies could gain the credibility needed to influence the
expectations.
iv
In the early 1980s the US government followed a policy of "benign neglect" and let the dollar, a symbol of
American prosperity, rise sharply. High interest rates in the US attracted foreign capital and this increased demand for
$s translated into a higher price for $s. By 1985 the finance ministers from France, UK, Germany, Japan and the US
met at the New York Plaza Hotel and declared the dollar overvalued, but by February 22, 1987 the finance ministers
were meeting again, this time at the Louvre where they agreed the dollar had fallen far enough.
v
In Reagan's second campaign, Walter Mondale, acknowledging the magnitude of the federal deficit, made the classic
blunder when he announced: "Let's tell the truth. Mr. Reagan will raise taxes, and so will I. He won't tell you. I just
did." While this "honesty" may have contributed to the landslide Reagan victory, Mondale was in fact correct. Reagan's
second term, as well as George Bush's presidency, were both affected by the budget deficits that became one of the
defining issues of this period. In fact, in Reagan's first term there were two significant tax increases passed to reduce
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the deficit - the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982 and the Deficit Reduction Act (DEFRA) of
1984 - and these were resisted by those who saw tax increases more as an opportunity to spend additional money on
new programs and less as a means to reducing the deficit. The situation was described by Gary Becker as: "I do not
claim an iron law of democratic politics that expenditures always increase by more than additional revenue, but
powerful forces do push us in this direction."
At the outset of Reagan's second term the Tax Reform Act of 1986 was passed which had two had two main
components. The first was the simplification of the tax rate schedules. For federal taxes there would now be two basic
rates , 15% and 28%, which would replace the graduated rate scheme that ranged from 15% to 28%. The second was
the broadening of the tax base, which closed some existing loopholes. One of the loopholes was the set of tax
incentives that were designed to increase the level of investment spending. Both the investment tax credit and
accelerated depreciation features of the 1981 law were eliminated, as was the limitation on passive losses. Some
researchers have identified the effect of these latter provisions as a major contributing factor to the real estate bust in
the late 1980s and early 1990s.
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