Download TAKS Remediation Lesson #1

Supporting standards comprise
35% of the U. S. History Test
10 (B)
Supporting Standard (10)
The student understands the impact of political,
economic, & social factors in the U. S. role in the
world from the 1970s through 1990.
The Student is expected to:
(B) Describe Ronald Reagan’s leadership in
domestic & international policies, including
Reaganomics & Peace Through Strength
Supporting Standard (10)
The student understands the impact of political,
economic, & social factors in the U. S. role in the
world from the 1970s through 1990.
The Student is expected to:
(B) 1 Describe Ronald Reagan’s leadership in
domestic & international policies, including
Reaganomics
Reaganomics, the conflating of the two words Reagan &
economics, is attributed to ABC radio broadcaster Paul
Harvey & refers to the economic policies promoted
by President Reagan during the 1980s. These policies are
commonly associated with supply-side economics, referred
to as trickle-down economics (due to the significant cuts in
the upper tax brackets) by political opponents and free
market economics by political advocates.
The four pillars of Reagan’s economic policy
were to reduce the growth of government
spending, reduce the federal income
tax and capital gains tax, reduce
government regulation, and tighten the
money supply in order to reduce inflation.
Prior to the Reagan administration, the United States
economy experienced a decade of rising unemployment
and inflation (known as stagflation). Political pressure
favored stimulus resulting in an expansion of the money
supply. President Nixon’s wage & price controls were
phased out.
The federal oil reserves were created to ease any future short
term shocks. President Carter had begun phasing out price
controls on petroleum, while he created the Department of
Energy. Much of the credit for the resolution of the stagflation
is given to two causes: a three-year contraction of the money
supply by the Federal Reserve Board under Paul Volcker,
initiated in the last year of Carter's presidency (and continued
during the Reagan presidency), and long-term easing of supply
and pricing in oil during the 1980s oil glut.
In his stated intention to increase defense
spending while lowering taxes, Reagan’s
approach was a departure from his
immediate predecessors. Reagan enacted
lower marginal tax rates in conjunction
with simplified income tax codes and
continued deregulation. During Reagan’s
presidency the annual deficits averaged
4.2% of GDP after inheriting an annual
deficit of 2.7% of GDP in 1980 under
Carter.
The real (inflation adjusted) rate of growth in federal spending fell
from 4% under Jimmy Carter to 2.5% under Ronald Reagan. GDP
per working-age adult, which had increased at only a 0.8% annual
rate during the Carter administration, increased at a 1.8% rate
during the Reagan administration. The increase in productivity
growth was even higher: output per hour in the business sector,
which had been roughly constant in the Carter years, increased at a
1.4% rate in the Reagan years.
While running against Reagan for the Presidential
nomination in 1980, George H. W. Bush had derided
Reaganomics as “voodoo economics.” Similarly, in
1976, Gerald Ford had severely criticized Reagan’s
proposal to turn back a large part of the Federal
budget to the states. Reagan’s policies have since
become widely accepted by many Republicans.
In his 1980 campaign speeches, Reagan
presented his economic proposals as a return
to the free enterprise principles, free market
economy that had been in favor before
the Great Depression & FDR’s New
Deal policies. At the same time he attracted a
following from the supply-side
economics movement, which formed in
opposition to Keynesian demand-stimulus
economics. This movement produced some of
the strongest supporters for Reagan’s policies
during his term in office.
The contention of the proponents, that the tax
rate cuts would more than cover any
increases in federal debt, was influenced by a
theoretical taxation model based on the
elasticity of tax rates, known as the Laffer
Curve. Arthur Laffer’s model predicts that
excessive tax rates actually reduce potential
tax revenues, by lowering the incentive to
produce; the model also predicts that
insufficient tax rates (rates below the
optimum level for a given economy) lead
directly to a reduction in tax revenues.
SUPPLY SIDE ECONOMICS
In early 1980’s in the United
States, a novel strategy to deal
with stagflation offered to
approach inflation by cutting
cost of production: specifically,
the cost imposed on businesses
by government in the form of
taxes and regulations. The
Reagan administration sought
to cut taxes and regulations for
that purpose. The policies
appear to have been successful
but they have resulted is large
budget deficits.
LAFFER CURVE
The Laffer curve shows that
government revenues
increase if tax rates are
either increased from 0% or
reduced from 100%. A
hypothetical reduction of tax
rates from very high rates
may result in increased
revenues. Thus, the tax cut of
supply side economics was
defended. The increasing
budget deficits do not seem
to have fully verified the
Laffer curve proposition.
basic reasoning
reasoning behind
“The basic
behind the
the so-called
so-called “Laffer curve” is
plain, uncontroversial, and by no means was discovered by
Arthur Laffer. There is nothing to tax if no one produces
anything. But taxes affect the return and therefore the motive
to supply labor to economic production. An increase in the tax
rate can reduce the pool of wealth to tax — the tax base — by
reducing the supply of labor. No taxes, no revenue. Also, 100
percent tax rates, no revenue. Somewhere in between —
exactly where depends on, among other things, the
responsiveness of labor supply to after-tax wages — there will
be a point at which an increase in rates delivers a decrease in
revenue. If the tax rate is already past that point, a tax cut
delivers more revenue.
supply is
just one
one of
of many
many ways
ways in
an increase
in
‘Labor supply
is just
in which
which an
increase in
tax rates may reduce the effective tax base. In addition to
working less, individuals may alter their savings and
investment patterns, bargain to shift more of their labor
compensation to untaxable perks and benefits, move to a
different tax jurisdiction, consume more tax-deductible goods,
or simply hide income from the tax authorities.”
As Laffer’s model
model shows,
As
shows, at
at certain
certain tax
tax rates,
rates, aa tax
tax cut
cut will
will
lead to an increase in tax revenue. So how can policy makers
be sure whether the United States is currently at a point on its
Laffer curve that an increase in taxes won’t result in a
Laffer
decrease in tax revenue?
President’ Reagan’s
“Boy Genius,”
David Stockman,
Director of the
Office of Budget &
Management
Reagan significantly increased public expenditures,
primarily the Department of Defense, which rose (in
constant 2000 dollars) from $267.1 billion in 1980 (4.9% of
GDP and 22.7% of public expenditure) to $393.1 billion in
1988 (5.8% of GDP and 27.3% of public expenditure);
most of those years military spending was about 6% of
GDP, exceeding this number in 4 different years.
In 1981, Reagan significantly reduced the maximum tax
rate, which affected the highest income earners, and lowered
the top marginal tax rate from 70% to 50%; in 1986 he
further reduced the rate to 28%. The federal deficit under
Reagan peaked at 6% of GDP in 1983, falling to 3.2% of
GDP in 1987 and to 3.1% of GDP in his final budget. The
inflation-adjusted rate of growth in federal spending fell
from 4% under Jimmy Carter to 2.5% under Ronald
Reagan.
The most substantial change was in the tax code, where the top
marginal individual income tax rate fell from 70.1% to 28.4%, and
there was a “major reversal in the tax treatment of business
income,” with effect of “reducing the tax bias among types of
investment but increasing the average effective tax rate on new
investment.”
Spending during Reagan’s two terms (FY 1981–88)
averaged 22.4% GDP, well above the 20.6% GDP average
from 1971 to 2009. In addition, the public debt rose from
26% GDP in 1980 to 41% GDP by 1988. In dollar terms,
the public debt rose from $712 billion in 1980 to $2.052
trillion in 1988, a roughly three-fold increase. The
unemployment rate rose from 7% in 1980 to 10.8% in
1982, then declined to 5.4% in 1988. The inflation rate
declined from 10% in 1980 to 4% in 1988.
Some economists have stated that Reagan’s
policies were an important part of bringing
about the second longest peacetime economic
expansion in U.S. history, though the even
longer 1990s expansion that began
under George H. W. Bush in 1991 occurred
after a rejection of the Reagan-era tax
plan by Congress in November 1990 and
continued through the Clinton
administration, resulting in a 42% decrease
in unemployment.
The misery index, defined as the inflation
rate added to the unemployment rate, shrunk from
19.33 when he began his administration to 9.72
when he left, the greatest improvement record for a
President since Truman left office. In terms of
American households, the percentage of total
households making less than $10,000 a year (in real
2007 dollars) shrunk from 8.8% in 1980 to 8.3% in
1988 while the percentage of households making
over $75,000 went from 20.2% to 25.7% during
that period, both signs of progress.
But not all observers were
quite so positive about the
progress
Supporting Standard (10)
The student understands the impact of political,
economic, & social factors in the U. S. role in the
world from the 1970s through 1990.
The Student is expected to:
(B) 2 Describe Ronald Reagan’s leadership in
domestic & international policies, including
Peace Through Strength
PAX
ROMANA
“Peace through strength” is an
ancient phrase and concept
implying that strength of arms is a
necessary component of peace.
The phrase is quite old; it has
famously been used by many
leaders from Roman
Emperor Hardian in the first
century AD, to Ronald Reagan in
the 1980s. The concept has long
been associated with Realpolitik.
The phrase and concept date to ancient
times. Roman Emperor Hadrian (76-138
AD) said that he sought “peace through
strength, or failing that peace through
threat.” Hadrian’s Wall was a symbol of this
policy.
“Peace Through Strength”
is the title of a book about a
defense plan by , a
former World War
II adviser to
President Franklin D.
Roosevelt, published by
Farrar, Straus and Young
in 1952.
President Reagan used the phrase in political campaigning
during his election challenge against Jimmy Carter in 1980,
accusing the incumbent of weak, vacillating leadership that
invited enemies to attack the USA and its allies. Reagan
later considered it one of the mainstays of his foreign policy
as U. S. President. In 1983, he explained it thus:
“We know that peace is the condition under which mankind
was meant to flourish. Yet peace does not exist of its own will. It
depends on us, on our courage to build it and guard it and pass
it on to future generations. George Washington’s words may
seem hard and cold today, but history has proven him right
again and again. ‘To be prepared for war,’ he said, ‘is one of the
most effective means of preserving peace.’ Well, to those who
think strength provokes conflict, Will Rogers had his own
answer. He said of the world heavyweight champion of his day:
‘I've never seen anyone insult Jack Dempsey.’”
Dempsey.”
The approach was credited by
many for forcing the Soviet
Union to lose the arms race
and end the Cold War. “Peace
Through Strength” is the
official motto of the Nimitzclass nuclear-powered
aircraft carrier, USS Ronald
Reagan (CVN-76).
Fini