Is Deficit Matter

In financial markets, Black Monday is the name given to Monday, October 19, 1987, when the Dow Jones Industrial Average (DJIA) dropped by over 500 points (about 25%), the largest degree in the stock market history. A degree of mystery is associated with this 1987 stock market crash. But one underlying reason is the securities overvaluation as a result of Reagan’s economic policy to prop up dollar, restrict inflation and control deficit. Unfortunately, the deficit is one of the biggest disappointments of Reagan’s economic recovery plan.

The Reagan era, like the current Bush presidency, began with an economy in recession. But unlike the mild downturn of 2001, the 1981 version was severe, with soaring unemployment and plummeting output. Under such serious situation, in 1981, Reagan proposed four main strategies: (1) Reduce the growth of government spending, (2) reduce the marginal tax rates on income from both labor and capital, (3) reduce regulation on companies, and (4) reduce inflation by controlling the growth of the money supply. These major policy changes, in turn, were expected to increase saving and investment, increase economic growth, balance the budget, restore healthy financial markets, and reduce inflation and interest rates.

One will sure ask that how much of the expected economic effects were realized? Actually, Reagan delivered on