BEYOND REAGANOMICS:THE CASE FOR GOVT REGULATION

It was year 1980.Things were looking gloomy and dim for an average American .Hit badly by the the years of slow-economic growth,high inflation and what economists gave the term stagflation The average American voter  was looking for a change.The fight was between the incumbent president Carter whose tenure was neither as controversial as nixon nor as successful as franklin roosevelt but somehow most politicals punditz expected him to win conclusively.His republican opponent was the former hollywood actor from illionios Ronald Reagan.Reagan was offering the people of America a change which they were looking for.The key issue on which the election was faught was carters inefficiency to revive economic growth and American impotency in the defence field which was strenghthen by the Iranian hostage crisis.Finally reagan campaigned rigrously on issues like restoration of American military strength, and reviving the economic growth by implementing the supply side economics and reducing the taxes in next few years.

Finally on 4th november 1980 the result shook everyone reagan beat carter by the margin of more than 10%.It was not just the defeat of carter but also the defeat of keynesian economics on which carter relied heavily and which was by then the most superior school of economic thought.Reagan who was more inspired by the austrian economist hayek and his austrian school of thought started a series of economic reforms in next few years.The four main pillars of Reagan,s economic policy were to reduce the growth of government spending,reduce income tax  and capital gains tax,reduce govt regulation of economy and control money supply to reduce inflation.Reagans economic policies were based on the assumptions of the laffer curve which was introduced by the American economist Arthur Laffer and which propagated that reduction in current tax-rates will lead to increase in the tax revenue because lowering the tax rate will give the producers an incentive to produce.It was claimed by some of his p[ropents that United states achieved the second highest peace time expansion under him and thus it proved the superiority of neo-liberal economic policies over more orthodox keynesian economics of his predecessors. however one cannot deny the fact that it was also under him that poverty in America increased from 29.2 million in 1980 to 31.8 million in 1988 while share of the top 5% grew from 16.5% in 1980 to 18.3% in 1988 and share of bottom 5% fell from 4.2 to 3.4% During this period.However his most controversial aspect of his presidency which we will discuss more closely was his deregulation policy.After assuming his charge as the President reagan appointed CEO of Investment bank Merill lynch Donald Reagan as his treasury secretary.Thus Donald reagan and his team of neo-liberal economists and financial lobbyist started a period of deregulation.By 1982 he deregulated thousands of savings and loans companies allowing them to make more risky investments.By the end of the decade most of these companies have failed and this costed the tax payers 124 billion$.During last 3 decades whether it was saving and loan scandal of 1982 or Enron in 2001 or the current economic crisis the common thread to all of them is the deregulation of safeguards for American consumers pushed for by the successive American govt following Reagonomics.From the new-deal until 1980,no such grand political or financial scandal took place the reason being regulations adopted by the roosevelt govt in 1930,s to prevent such corruption.

To add more to the story Reagan appointed Alan Greenspan as the chairman of the federal reserves in 1987.Greenspan was known for its anti-regulationary and libertarian views.Thus during Reagan era we saw the deregulation of many key industries including rail roads,banking and airlines.No wonder Reagonomics created growth in the economy however the growth which it created was neither inclusive nor sustainable. The growth was concentrated into few sectors and within few sectors it was only the upper strata of executives and bankers who made millions however most of the people in the lower strata suffered because of declining real wages in united states from last 30 years.

Moreover under the policies of mimimum interference by the state on economic matters followed by reagan and his successors during last 30years have severally effected the vulnerable and poor sections of the society which always looked towards state for affirmative help.Thus the inequality of wealth has significantly increased in United states since early 80,s. A study by CBO in 2011 revealed that the top earning 1% of household gained by about 275% after federal income taxes and income transfers between 1979-2007.From 1992-2007 the top 400 earners in united states saw their income increased by 392% and there average tax rate decreased my 37%. While the share of total income in America going to the lower earning 80% of households getting has dropped to less than half in in 2007.Thus no wonder we saw thousands of poor Americans pouring the streets of Detroit and new york during the 2011 occupy wall street protest.

In this graph which shows increase in income of different income strata in US after adjusting for taxes during last 30 years We can easily conclude that it is the common American which suffered the most by the supply-side policies of Reagan and his succesors.

The gini coefficient measures inequality among values of frequency distribution( for  example levels of income).It is commonly used for measuring inequality of wealth in a region or a country.The gini coefficient for united states is 40 while it is lowest for sweden and norway.Now in both of these countries the economy is highly regulated and the state interferes significantly in economic matters and thus state helps all those groups in society who lack resources and skills the problem which happened in united states during last 30 years was that state became completely insensitive to the needs of the poor American and there was a perception among the poor groups in US that it was not the US govt which was running the country but it was few bankers and executives who are running the administration of the country.

The point I want to make here in this article is that The perceived phobia which the classicals and the austrian economists have towards regulation is totally irrational and is not based on any sound economic models or theory.Everyone including the IMF and the world Bank always criticized India and China for there tight regulations in the financial sectors but now the same IMF And world bank are praising both these emerging giants for there sound regulations and it was because of tightening control of the govt over the banking sector the economies of both these countries are not effected as badly as some of its western counterparts during the sub-prime crisis of 2008.

We need to understand that market forces are not always rational and whenever the market becomes irrational the consequences for the economy and society becomes disastorous thus what we need today is not abolition of market forces because no modern economy can think of growth without market forces what we really need is a regulating watch-dog agency which enters into scene as when markets began to act irrationally. This system worked in United states for 50 years i.e from 1930,s to late 70,s as during this period The US economy doesn,t suffered any major recession although there were few minor recessions.I can conclude by saying that 2008 sub-prime crisis has given a new boost to the neo-keynesians and also to the school of thought which propogated more govt regulations and Reagonomics which was the dominant ideology for last 3 decades has few buyers today.