Post War Consensus- Modern Liberalism •  In the post war era most

western democracies embraced the ideas of Keynes

•  They developed a social safety net or welfare state

•  This included such government run programs as pensions, health care, unemployment insurance.

Crown Corporations •  Crown corporations are government owned

companies that provide goods or services: –  that the private sector can’t or won’t provide; –  or that are so important the government wants to

control them. •  These corporations give government

increased ability to “steer” the economy. •  Canada and other countries expanded their

control over some important industries 1945 - 1970

1970s Stagflation

•  Stagflation is the combination of two words; stagnation and inflation.

•  According to classical economics an economy should never have high inflation and high unemployment at the same time.

•  During a boom there should be high inflation but low unemployment.

•  During a recession low inflation but high unemployment.

Cause of Stagflation

Oil Price Shock +

Taking Currency of the gold standard Led to inflation during a recession.

Oil Price Shock •  1973 USA supported Israel in

its war against Egypt •  Arab countries retaliated by

placing an oil embargo on the USA.

•  The Organization of Petroleum Exporting Countries (OPEC) is a cartel that set production quotas to control prices.

•  Cartel=group of independent producers the cooperate to fix prices

Inflation •  OPEC countries also cut production and this

quadrupled the price of oil. •  Oil influences most economic activity and the price

shock was felt throughout the economy

Nixon and Gold Standard •  In 1971 then president

Nixon took the US dollar off the gold standard.

•  Many other countries followed suit

•  These floating currencies began a period of inflation

Summing UP

•  The combination of the oil price shock and going off goldStandard lead to inflation even though the economy was stagnating:

= Stagflation

1970s Economic Crisis Leads to Questioning Keynes •  In the mid 1970s many countries

including Britain, Canada, and the USA experienced debt problems.

•  This lead to a questioning of Keynesian stimulus policies

•  High debt also made stimulus spending more difficult - Can you increase spending when people feel there is an impending debt crisis?

•  Many politicians (even those on the political left) became critical of the notion that you could “spend your way out of a recession”

James Callaghan British Labour Primeminister p. 217 text

Keynesians Respond •  Keynesians responded arguing that there

was nothing wrong with Keynes theory it simply was not being followed by governments.

•  In particular during good times governments did not cut spending as Keynes had advocated.

Thatcher and Reagan

Rise of Neoconservatives •  Neoconservative means “new” conservative.

They generally believe: •  in a free market and minimal government

intervention in the economy •  traditional values like marriage between a man

and a woman, pro-life, anti gun control etc. •  In a strong sense of nationalism and advocate an

aggressive foreign policy. “If you want peace, prepare for war.”

Ø Thatcher, believed government and labour unions had gotten too big and distorted the economy. To fix things she:

Margaret Thatcher

British Prime Minister 1979 - 1990

Ø  Cut Taxes

Ø  Reduced gov’t spending on social programs

Ø  Privatized large gov’t owned companies

Ø  Decentralized government departments to different areas of the country

Thatcher a disciple of Hayek Ø  In his famous book Road to Serfdom,

Hayek argued that Economic control eventually led to political dictatorship.

Ø  Governments would need to use censorship and coercion in order to get citizens to go along with the planned economy

Ø  Like Hayek, Thatcher believed economic control would lead to loss of freedom and eventually dictatorship. She emphasized individualism, basic rights and economic freedom in many of her speeches.

Results of Thatcherism Ø She laid the foundation for a stronger more

competitive British economy Ø She moved the economy to the right by cutting

taxes and giving private business increased incentives

Ø Higher unemployment in the short term Ø Poor people vulnerable because of cuts in social

programs Ø Some privatization like transit systems led to less

efficient and more expensive service in private sector

Reagan was influenced in his economics policies by Milton Friedman who advocated a return to the free

market.

Ø MILTON FRIEDMAN was a monetarist. He believed government should manage the economy by controlling the money supply and interest rates.

Ø  Friedman believed that as inflation rose the money supply should be tightened to raise interest rates

Reganomics - Supply Side The Plan

•  Entered office intending to cut taxes and gov’t spending

•  Lower taxes would mean more investment and a bigger economy

•  Believed that cutting taxes would actually increase gov’t revenue because the overall economy would grow

•  The deficit would be reduced

Reagan Quotes “Government isn’t the solution to the problem, government is the problem.” "The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." “What are the scariest words in the English language? We’re from the government and we’re here to help.”

Reaganomics - What actually happened •  Reagan did freeze spending and

cut taxes in particular the top marginal rate from 70% to 28%.

•  He reformed the tax code and also raised some other taxes and user fees.

•  Spending on education, welfare, health care and other social programs was limited

•  Military spending exploded with such things as the Strategic Defense Initiative (star wars).

•  Regan tripled the national debt accumulating more debt in his time in office than all previous presidents combined

•  Supporters argue that Reagan “won” the Cold War and that the spending was worth it.

•  He left office as the most popular president of the century.

Many would argue this graph gives a more accurate account of Reagan’s debt because it shows debt as a percent of GDP (total national wealth)

Do Tax Cuts Stimulate Growth •  Comparing the recovery from the 1981-82

recession (1983-1990) with the years between 1971 (end of a recession) and 1980 shows that the rate of growth of real GDP per capita averaged 2.77 under Reagan and 2.50% under Nixon, Ford and Carter. Following the recession, the unemployment rate had averaged slightly higher (6.75% vs. 6.35%), productivity growth lower (1.38% vs. 1.92%), and private investment as a percentage of GDP slightly less (16.08% vs. 16.86%). Real wages were lower following the recession, while real median family income grew by $4,000 during the Reagan period."

- From Wikipedia"

What does the evidence say? •  Most non partisan research like the

“Congressional Budget Office” have concluded that tax cuts do not produce enough economic growth to pay for themselves.

“Starving the Beast.” •  Critics often charge that tax cuts are a

thinly veiled ideological move to starve government of money.

•  Economists like Milton Friedman are on record saying that tax cuts won’t pay for themselves. He goes on to say that tax cuts will force congress to reduce spending.

•  Reagan put it this way in the 1980 presidential debate: “Well, if you’ got a kid that’s extravagant, you can lecture him all you want to about his extravagance. Or you can cut his allowance and achieve the same end much quicker.”

What is the message of this cartoon?

Canada •  PM Brian Mulroney began a process of

privatizing crown corporations eg. Petro Canada, Air Canada, Canadian National Railways

•  He negotiated a Free Trade Agreement with the US that later grew into NAFTA.

•  Although members of Mulroney’s gov’t talked a lot about cutting spending they were unable to do so.

•  When he left office the annual deficit had grown to $40 Billion a year and because of such policies as the Goods and Services Tax (GST) Mulroney was very unpopular.

Examples of Neoconservative Policies

•  Belief that government has become too large, too much regulation, and unions have become too powerful

•  Thatcher took on powerful coalminers unions and forced them back to work

•  She also privatized many government owned businesses with mixed success rates

•  Reagan gave an ultimatum to air traffic controllers on an illegal strike: get back to work or be fired.

Supply Side benefits the rich? The most frequent criticism of supply side economics is that only a small group of rich people benefit. This graph shows that the bottom 20% saw very little increase in buying power until the mid 1990s

This Graph compares the top marginal tax rate

to the % of income going to the richest 1%. Some like Paul Krugman, have argued that the

high concentration of wealth in 1928

and in 2007 (not shown on this

graph) is a reason for the of 1929

and 2008. Why would some argue that 1950 to 1980 was the golden age for the middle class?

Alberta’s Neoconservative •  In the early 1990s Alberta was hurt by

historically low oil prices and low agricultural prices. Faced with a mounting debt Premier Klein cut spending in Education and Health Care

•  He reduced the welfare rolls - made it more difficult for single employable people to qualify. He famously said that he would, “Give people on welfare a one way bus ticket to BC.”

• The result was that he made Alberta debt free. • Critics argue that by paying off the debt quickly Klein scored cheap political points but left the province with a huge infrastructure deficit that would cost much more in the long run to fix than a slower debt repayment schedule and maintenance of this basic infrastructure

Thatcher, Reagan, Mulroney •  How do we view the neo-conservative era of the

1980s? •  Supporters believe that the prosperity of the 1980s

and 90s was due to neoconservative policies. The reduction of taxes to give business incentive is key

•  Critics charge that these policies merely benefit the rich and increase disparity within society. They argue that this was the beginning of the hollowing out of the middleclass.