By 1980, the inflation rate had risen to 13.5%, nominal short-term interest rates to 11.4%. Since October 1979, the Federal Reserve had radically changed the conduct of monetary policy. The desire to contain the excessive dynamics of prices through a monetary restriction suggested, in fact, to adopt the currency as an intermediate objective. With the increase in the level and variability of inflation, it was no longer possible to use the interest rate as a guide for monetary policy, while it seemed appropriate to keep the trend of monetary aggregates within predetermined target ranges. At the basis of the prescription of a monetary rule, which consisted in the gradual reduction of the rate of expansion of money, was the monetarist idea that it is this the latter rate that governs that of nominal income and, in the long run, that of inflation. In reality, large fluctuations in the currency and even deviations from the programmed objectives were tolerated: the novelties of the new monetary restriction regime were rather the decision to direct monetary policy towards the objective of price stability, and the greater variability of interest rates compared to the previous regime.
The disinflation period was therefore marked by sharp increases in real interest rates (from 1.9% in 1980 to 3.3% in 1981); the result was the recession of 1982 (GDP fell by 2.2%), the increase in the unemployment rate to almost 10%, a federal deficit that touched $ 130 billion that year, or 3.4 % of the product. Already at the end of 1982, by virtue of the contraction of economic activity and the appreciation of the dollar fueled by the formation of interest differentials favorable to it, inflation had fallen to 4% (from over 10% in 1981). Meanwhile, in October 1982, the Federal Reserve modified its control techniques in such a way as to prevent increases in the level and variability of interest rates that would arise from increase in the demand for money caused by financial innovation: in particular, the supply of new banking instruments with high liquidity at unregulated yields. The decision to expand money creation more decisively in 1983 was also influenced by considerations relating to the ultimate goals of monetary action. On the one hand, in fact, the current recession made it urgent to ease monetary conditions, on the other hand the stability of the domestic and international financial system was jeopardized by the persistence of high interest rates. In August 1982 the problem of the external debt of developing countries had emerged in its gravity and the cost of its service risked precipitating the debt crisis to traumatic outcomes; to exposure of the US banking system towards these countries was then added to that towards sectors of the national economy (agriculture, in particular) severely affected by the combined effect of high rates and the decline in activity. By 1983, inflation was contained to around 3%; the fall in interest rates and the increase in disposable income made possible by the tax relief policy launched in 1981 gave a boost to economic activity; the product grew by nearly 4%, investments by 11%. The resumption of that year would be followed by a long phase of expansion in the rest of the decade; the recovery and the subsequent phase were stimulated by the expansionary push of the public budget which, on the one hand, fueled aggregate demand, and on the other,
It is worth examining in more detail the issue of the federal deficit that has dominated the economic history of the US over the past fifteen years; in fiscal year 1981 it stood at 80 billion dollars, but already in 1983 it reached 200 billion. Public debt went from 34% of GDP in 1981 to 41% in 1983; the Treasury’s share of total internal credit from 28 to 38% over the same period; the burden of interest payments on debt rose to 11% of total public spending, immediately following military and social spending in size. This result arose from the concurrence of the effects of the 1982 recession and Reagan’s economic program, translated into the Economic Recovery Act introduced in 1981. The program was inspired by supply-side economics, in the simplified version made popular by A. Laffer, according to which, as taxation increases, state revenues would increase up to a maximum threshold beyond which it would fall as a result the reduction in economic activity, resulting from the excessive tax burden. The essential elements of the program were: a) a tight budgetary policy to reduce the growth rate of expenditure to below that of revenue, with the aim of a balanced budget by 1984; b) reductions in tax rates for individuals and investment tax incentives; c) a non-inflationary monetary policy; d) the deregulation of product and service markets in order to reduce the weight of the public sector in the economy and to increase the efficiency and competitiveness of companies.
Of the aforementioned elements, those concerning taxation and, to a more limited extent, the containment of public spending had relative fulfillment and success. Personal income tax was reduced by nearly a quarter over three years; at the same time, incentives were granted to business investments through the ability to carry out accelerated depreciation and the granting of tax credits. The administration thus achieved one of the cornerstones of the economic policy program, lowering the taxation and offsetting part of the consequent loss of revenue by reducing non-military spending; there was thus a shift in priorities in the structure of public spending with an increase in military spending from 5.3% of GDP in 1981 to 6.5% in 1985-86, and a decline in the other components from 17, 6% to 17%. The next stage was the 1986 reform which reduced the progressivity of the personal income tax, setting the maximum marginal rate at 33%; corporation tax was lowered to 34%; at the same time, the investment incentives decided in 1981 and many exemptions and deductions from personal taxation were eliminated.
The federal deficit grew (from 1% of GDP in 1981 to about 4% in 1983, remaining at values around 3% until 1986), due to the burden of service, as well as the increase in military spending. of a growing public debt; the consistency of the same went from 33%, in relation to the product, in 1981 to 50% in 1986. The decision-making paralysis in budgetary matters lasted until December 1985 when, after a long negotiation between Congress and the administration, the amendment (Gramm-Rudman-Hollings Act) which established a schedule for reducing the deficit until it was zeroed, and to this end provided for an automatic procedure for spending cuts if the deficit estimated for the following financial year exceeds the limit set by law. The innovative and most effective element of the new law, despite the perplexities raised initially, was the incentive that arose for Congress and the administration to reach a compromise on the budget before the entry into force of the automatic mechanism envisaged. Under the impetus of the new law and as a result of the prolonged economic expansion, the federal deficit shrank from 3.1% in relation to GDP in 1985 to about 1.5% in 1989. In 1990, the Gramm-Rudman-Hollings Act was abolished and replaced by Omnibus Budget Act in hopes of achieving more satisfactory control of the budget deficit, which however, due to the then ongoing recession, returned to 2.5% of GDP in 1990 and 3.2% in 1991.
The desired consequences of the Reagan economic program on the main real quantities (savings, investments, production, productivity) did not materialize. There was no hoped-for increase in household savings: it was equal to 9.1% of disposable income in 1981, and in 1993 it was just over 4.5%. As negative public sector savings increased over the same period, the country’s overall savings declined, and only the strong inflow of foreign capital, prompted by high interest rates, allowed investment to be financed. As regards the expected effect of supply policies on productivity, mainly through the reduction of the tax burden and the deregulation in industry and services, which had already started under the Carter administration, this was modest; output per employee for the entire economy grew at a rate of 0.7% per annum. As the most comprehensive indicator of economic well-being, real income for the head, net of taxes, it grew by 1.5% a year during the Reagan administration, compared with average increases of 2.3% in the 1970s and 2.8% in the 1960s; certainly a positive result, but strongly influenced by the terms of trade gains and the reduction in taxation. With the advent of the Clinton administration in 1992, economic policy became more interventionist even if the commitment to reduce the federal deficit remained firm. One of the characterizing points of the Clinton program, the reform of the national health system, has among its objectives the reduction and rationalization of health costs which constitute a significant portion of the total federal expenditure. The administration was also very active in terms of international initiatives, Uruguay Round, concluding the negotiations on the NAFTA agreement with Mexico and Canada and those for a new economic cooperation with Japan. Economic growth continued throughout 1994, albeit with some signs of slowing down. Unemployment has fallen further and further falls are expected in the years to come. 1995 began with the presentation of the budget in Februaryfor the fiscal year 1996 which provides for cuts in expenses, while ensuring the maintenance of those for social security, and tax cuts especially for the benefit of the middle classes. Eliminating the federal deficit remains one of the central themes of the economic policy debate. In 1995, both the House and the Senate passed budget resolutions of the new Republican majority that aim to achieve balance by 2002. President Clinton, in June 1995, responded with his proposal to achieve a balanced budget in ten years, i.e. by 2005.
