corporate raiders evil empire arthur laffer dot-com bubble black monday phrase – “read my lips:...

Corporate raiders

Evil empire

Arthur Laffer

Dot-com bubble

Black Monday

Phrase – “read my lips: no new taxes”

doc. Ing. Tomáš Dudáš, PhD.

Economic situation in 1980

The rise of inflation of the 1970s had resulted in an enormous increase in tax burden

Social security tax and Medicare had also increased the personal tax burden.

31 million jobs had been destroyed between 1978 and 1982.

Fully one-third of all private sector jobs that existed in 1978 had disappeared by 1982.

•Attempts to solve the economic malaise that was continuing in the late 1970’s were largely unsuccessful

•Reagan proposed a new idea to address the economic stagflation (lack of growth)

•Reagan believed that the root of the problem for the economy was:

•Intrusive government regulations of business and industry

•Expensive government social programs that offered “handouts” to non-productive citizens

•High taxes

•Deficit spending

•Tax cuts, rather than government spending, will create economic growth

•Arthur Laffer suggested that at some point rising tax rates discourage people from participating in taxable activities such as investing

•This is known as the point of diminishing returns – where a policy provides benefits only to a certain point – the effort/expense no longer produces a sufficient amount of desired outcome to be worthwhile

•If profits from investing are taken away by taxes, what is the point of investing?

•If investment is reduced, the economy slows

•Even though tax rates remain high, the government collects less money because the economy is slower (50% of 100 = 50 vs. 25% of 300 = 75- a lower tax rate produces more tax revenue)

•Reagan believed that lower taxes would encourage people to buy products and invest, creating an overall benefit to the economy

•The benefits of the growing economy would “trickle down” to the rest of society

Reagonomics - ResultsIncome tax rates of the top personal tax

bracket dropped from 70% to 28% in 7 years, while social security and Medicare taxes increased

GDP growth recovered strongly after the 1982 recession and produced five straight quarters of growth averaging 8.4%

The GDP grew during Reagan's remaining years in office at an annual rate of 3.4% per year, slightly lower than the post-World War II average of 3.6%

Reagonomics - ResultsDespite the tax cuts of 1981, federal tax

revenues nearly doubled in the Reagan years. Real inflation-adjusted manufacturing output

rose to its highest point of the post-WWII period.

Domestic-based manufacturing employment fell from 20.3 million in 1980 to 19.2 million in 1990, a decline of 6%, probably as a result of productivity gains.

U.S. exports of manufacturing goods grew by 90% between 1986 and 1992, compared with 25% for the rest of the OECD countries.

Reagonomics - ResultsMore than 18 million new jobs were created in

the 1980s in the U.S.—this was more than Japan, Britain, and Germany combined.

82% of the jobs created were high-pay, high-skill managerial and technical positions. 12% were low-skill service jobs.

While real wages declined from $11.41 per hour in 1978 to $10.02 per hour in 1990, workers’ total compensation increased as workers demanded increased benefits.

Reaganomics did not gut social welfare programs. In fact, social welfare spending was the largest cause of the budget deficits of the Reagan administration.

•Reagan believed that a substantial military build up was the best way to counter communism

•This included the Strategic Defense Initiative (SDI) which was labeled “Star Wars”

•This was a space-based missile defense shield that would, ostensibly, shift the balance of power in favor of the USA

•The use of nuclear weapons would no longer be deterred by “Assured Mutual Destruction”

Black MondayBlack Monday refers to Monday, October 19,

1987, when stock markets around the world crashed, shedding a huge value in a very short time

The crash began in Hong Kong, spread west through international time zones to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74 (22.61%)

The Black Monday decline was the largest one-day percentage decline in stock market history

It caused no great recession

ClintonomicsBetween 1980-1992 America had undergone twelve

years of conservative policies implemented by Ronald Reagan and George Herbert Walker Bush

Economic recession in 1991-1992Bill Clinton ran on the economic platform of

balancing the budget, lowering inflation, lowering unemployment, and continuing the traditionally conservative policies of free trade

In 1992, Bill Clinton was elected president of the United States of America. During Clinton’s presidency (1993 to 2001), the economic policies he put into place for the U.S. were termed Clintonomics

ClintonomicsClinton failed to push through an ambitious

proposal to expand health-insurance coverageClintons main goal – balanced budget

In 1998, the government posted its first surplus in 30 years, although a huge remained

Record surplus of the budget in 2000Continuing deregulation of the economyStrong economic performance in the USA – 8

years of strong economic growth between 1992-2000

GDP growth in USA between 1992-2000

Unemployment in USA between 1992-2000

CPI in USA between 1992-2000

Dot-com bubble

Creation of the BubbleThe "dot-com bubble“ was a speculative bubble covering

roughly 1998–2001 (with a climax on March 10, 2000 with the NASDAQ peaking at 5132.52) during which stock markets in Western nations saw their equity value rise rapidly from growth in the more recent Internet sector and related fields

The period was marked by the founding (and, in many cases, spectacular failure) of a group of new Internet-based companies commonly referred to as dot-coms

The venture capitalists saw record-setting rises in stock valuations of dot-com companies, and therefore moved faster and with less caution than usual, choosing to mitigate the risk by starting many contenders and letting the market decide which would succeed.

Creation of the BubbleThe low interest rates in 1998–99 helped

increase the start-up capital amounts. Although a number of these new

entrepreneurs had realistic plans and administrative ability, many more of them lacked these characteristics but were able to sell their ideas to investors because of the novelty of the dot-com companies

According to dot-com theory, an Internet company's survival depended on expanding its customer base as rapidly as possible, even if it produced large annual losses

Aftermath of the Dot-Com BubbleThe dot-com bubble crash wiped out $5 trillion

in market value of technology companies from March 2000 to October 2002.

Many dot-coms ran out of capital and were acquired or liquidated

Several companies and executives accused or convicted of fraud for misuse of shareholders moneyCitigroup and Merrill Lynch fined millions by SEC for

misleading investors

Huge layoffs of technology experts