Mixed Economy (1939 – 1975)

о After WWII (1945) government continued with many of the ideas of the New Deal
(eg. – public works
– regulation of banking
– unemployment insurance …etc)

1945 –– US government adopted policies of John Maynard Keynes (refer to handout)

(Demand Side Economics)
 Fiscal Policy – the government use of taxing and spending to regulate and influence the
economy.
– US government wanted to stop fluctuations in production and employment caused by the
business cycle (refer to handout)
– In bad economic times, the government
1. Increase spending on goods and services (debt)
2. Decrease taxes to stimulate the economy – personal and corporate
3. Decrease interest rates
– In good economic times, the government
1. Reduce spending on goods and services
2. Increase taxes to slow down the economy (refer to handout)
3. Increase interest rates [use excess money to pay off debt--↑]

1945 – 1970 – Keynesian Principles

promoted – high economic growth
– full employment
– stable incomes

HOWEVER

1970 – US involvement in Vietnam began to increase prices

1973 – oil prices increase sharply

US economy deep recession
– industry production decrease
– unemployment increase

1975 –– New Economic Ideas

Milton Friedman and others called for a change in the treatment of recession
–– To stabilize economy (Monetary)
1. Increase interest rates to limit the demand for money from the government.
–– as interest rates rose, increase businesses cut back on spending
–– consumers reduced spending  businesses cut production and lay off workers – US
went into deep recession (1981 – 1982)

Reaganomics
1981 – Ronald Reagan  newly elected  announces new economic policy
Known as: Supply Side / Reaganomics / Thatcherism

1. Lower government spending on social welfare programs  Privatization

2. Lower personal / corporate income taxes
3. Reduce government regulation / intervention
4. Lower interest rates
(handout: “Drip-Down” Theory)
–– this did not work because Reagan increased military spending  did not lower the deficit

1990’s – Bush (sr.) raised taxes