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1990-1991 RECESSION

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Nicole von Olnhausen

on 11 December 2014

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Transcript of 1990-1991 RECESSION

RECESSION 1990-1991
CONCLUSION
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
CAUSES
1990-1991 RECESSION
BY ELSA GOMEZ, ON TIM TANG, NICOLE VON OLNHAUSEN, AND MATT ZELAK
THESIS
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
POLICIES ENACTED
EVALUATION OF THEIR POLICIES
Fed lowered interest rates
Benefits: consumers spent more
Drawbacks: risk higher inflation, higher debt levels
Unemployment Insurance
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?
SUGGESTIONS
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
SUGGESTIONS
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
REFERENCES
Auerbach, Alan J. "The Economic Effects of the Tax Reform Act of 1986."Journal of
Economic Literature 35.2 (1997): 589-632. JSTOR. Web. 6 December 2014.
Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rate
[FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis, 8 December 2014.
Burman, Leonard E., and Carol Rosenberg. "Capital Gains and Dividends," American
Economic Review (September 1994), II 8-1. Web.
Cochrane, John H. "How Did Paul Krugman Get It So Wrong?." Economic Affairs 31.2
(2011): 36-40. Business Source Premier. Web. 9 Dec. 2014.
Gardner, Jennifer M. "The 1990-91 recession: how bad was the labor market?."Monthly
Labor Review (1994): 3-11.
Kamery, Rob H. "A Brief Review of the Recession of 1990-1991." Academy of Legal,
Ethical and Regulatory Issues 8.2 (2004): 61. Print.
Montgomery, Daryl. “Consumer Confidence in the Last 5 Recessions.” eftguide. 03
August 2010. Web.
Quealy, Kevin, Gregory Roth, and R. M. Schneiderman. “How the Government Dealt
with Past Recessions.” The New York Times. 26 January 2009. Web. 6 December 2014.
US. Bureau of Economic Analysis, Personal current transfer receipts: Government
social benefits to persons: Unemployment insurance [W825RC1], retrieved from
FRED, Federal Reserve Bank of St. Louis, 8 December 2014.
Walsh, Carl E. "The role of fiscal policy." FRBSF Economic Letter 9.06 (2002): 2002.

1. Lowering the federal funds rate
2. Increasing unemployment insurance benefits
(Class notes from 11/4)
(Class notes from 11/6)
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