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Transcript of 1990-1991 RECESSION
This was a supply shock and is therefore challenging to construct policies for
no clear-cut, perfect policy that solves the problems that arose during the 1990 recession -> trade-offs need to be made
part or reform was self-inflicted through the previous timing of the 1986 Tax Reform Act->undoing mistake
Ultimately though, the policies chosen by the government during the 1990-1991 recession were very adequate in tackling the problems and restoring economy
FED RESERVE LOWERED INTEREST RATE
BY ELSA GOMEZ, ON TIM TANG, NICOLE VON OLNHAUSEN, AND MATT ZELAK
Through a combined policy of lowering federal funds rates and increasing spending on unemployment insurance, the government quickly pulled the US economy from the recession of the early 1990’s; however, we believe the inclusion of reduced tax rates on capital gains and decreased payroll taxes would have contributed to an even more effective recovery.
Iraq invaded Kuwait, global oil prices rose rapidly.
Consumer confidence plummeted
However, economy displayed meager growth for several years before this
Restrictive monetary policy, the post-boom housing sector, and the 1986 Tax Reform Act on business set the scene for the 1990 recession
EVALUATION OF THEIR POLICIES
Fed lowered interest rates
Benefits: consumers spent more
Drawbacks: risk higher inflation, higher debt levels
Benefits: stimulated spending, trade-off between unemployment and inflation
Drawbacks: slow employment growth, expensive
Are the debts worth it?
What other policies could have been enacted?
Reducing tax on capital gains
Protect profits gained from inflation from being taxed
A similar policy was also suggested by the U.S Chamber of Commerce at the time, but it was never imposed
Combat the adverse effect the 1986 Tax Reform Act had on investment
Increase the risk taking by firms and investment
Tackle the issue of unemployment by incentivizing firms to increase output and hire more workers
Lower the payroll tax rates
Major issue during recession was lack in consumer confidence that can mainly be attributed to drop in housing prices
1990’s, the Consumer Confidence Index (CCI) was recorded at a 55.10 out of a possible 100 (Montgomery)
would have led to a perceived increase in future wealth that would translate into consumers saving less and consuming more
HOW TO OFFSET THESE DEBTS
Important to note that policies need to be enforced during periods of expansion to offset accumulated debts
Policies enacted and the ones we suggested result in tremendous debt
Fiscal policies including higher rates of taxes and raised interest rates need to be implemented during periods of expansion to counteract government debt in hopes of minimizing the intensity of future recessions.
INCREASING UNEMPLOYMENT INSURANCE
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with Past Recessions.” The New York Times. 26 January 2009. Web. 6 December 2014.
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1. Lowering the federal funds rate
2. Increasing unemployment insurance benefits
(Class notes from 11/4)
(Class notes from 11/6)