Chapter 26

1. Chapter 26 The Conservative Revolution (1980-1992)

2. Section 2: The Reagan Revolution • During the 1980 campaign, Ronald Reagan stressed three broad policies that he would purse if elected President: slashing taxes, eliminating unnecessary government programs, and bolstering the defense capability of the United States.

3. Changing the Economy • Reagan’s main goal was to spur business growth. His economic program, dubbed “Reaganomics,” rested on the theory of supply-side economics. This theory reversed earlier policies based on the ideas of English economist John Maynard Keynes. • In the 1920’s and 1930’s, Keynes had argued that eh government could best improve the economy by increasing consumers’ demand for goods. This meant giving people more money-either directly, through government payments and programs, or indirectly, by creating jobs. Once people had more money to spend, Keynes argued, they would purchase more goods and services, which would cause the economy to grow.

4. Changing the Economy cont. • Keynesian theory had helped explain the Great Depression and the recovery that took place as the United States began a massive military spending program during World War II. I the postwar years, most economists accepted Keynesian arguments. Federal spending was seen as an essential tool for keeping the economy healthy. • In contrast to Keynesian theory, supply-side economics focused not on the demand for goods but on the supply of goods. It predicted that cutting taxes would put more money into the hands of businesses and investors-those who supplied goods for consumers to buy. The theory assumed that business would then hire more people and help produce more goods an service, making the economy grow faster.

5. Cutting Taxes • Reagan’s first priority was a tax cut. In October 1981, a 5 percent cut went into effect, followed by 10 percent cuts in 1982 and 1983. In 1986, during Reagan’s second term, Congress passed the most sweeping tax reform in history. The law closed loopholes that had allowed some people to avoid paying their fair share of taxes. It simplified the tax system by reducing the number of income brackets that determined how much tax a person paid. While all taxpayers benefited from these measures, wealthy Americans benefited most. The tax rate on the highest incomes dropped from 70 percent before Reagan took office to 50 percent in 1984, and to 28 percent after the 1986 tax reform.

6. Reagan’s Foreign Policy • Over a five year period, the United States spend an unprecedented $1.1 trillion on defense. Much of this money went into new weapons and new technology. The United States continued to develop new missiles, such as the intercontinental MS, as well as new bombers and submarines that could carry nuclear weapons. Reagan also explored ways to protect American territory against nuclear attack. • In 1983, Reagan announced the Strategic Defense Initiative (SDI), popularly known as “Star Wars” after the 1977 film. SDI proposed the creation of a massive satellite shield in space to intercept and destroy Soviet missiles.

7. Recession and Recovery • During Reagan’s first two years in office, the United States experienced the worst economic downturn since the Great Depression. The Federal Reserve Bank raised interest rates to reduce inflation. However, high interest rates hurt businesses and discouraged Americans from borrowing to purchase goods or invest in new equipment. Foreign competition also cost thousands of American jobs. By 1982, unemployment had reached a postwar high of 10.8 percent and several hundred businesses were going bankrupt each week. • The 1981-1982 recession did, however, pave the way for a healthier economy. The high interest rates cooled down inflation, and as Reagan’s tax cuts took effect, consumer spending began to rise. By 1983, both inflation and unemployment had already dropped below 10 percent. Business leaders gained new confidence, and increased their investments. The stock market pushed upward. Republicans claimed that the recovery demonstrated the wisdom of supply-side economics. Poverty rates and homelessness, however, remained high.

8. Recession and Recovery cont. • An important prediction of the supply-side theorists had not come true, however. Cuts in tax rates were supposed to generate so much economic growth that the government’s tax revenues would actually increase. As a result, the federal deficit, or the amount by which the government’s spending exceeds its income in a given year, was supposed to decrease. • During the 1980 campaign, Reagan had vowed to balance the federal budget if elected. But, the combination of tax cuts and defense spending pushed the deficit up, not down. The deficit ballooned from nearly $80 billion in 1980 to a peak of $221 billion in 1986.

9. Recovery cont. • The national debt, the total amount of money owed by the government, rose from $909 billion in 1980 to $3.2 trillion in 1990. Future generations would have to bear the burden of interest payments on this monumental debt.

10. Chapter 26Section 3: Reagan’s Second Term

11. Setting the Scene • Reagan faced the Democrat Walter Mondale, former Vice President under Carter. Mondale’s running mate was New York Representative Geraldine Ferraro, the first woman ever on a major party’s presidential ticket. • The relative strength of the economy and Reagan’s popularity gave the President a landslide victory over Mondale.

12. Continuing Social Debates • In 1983, Reagan signed a bill making the birthday of Martin Luther King, Jr., a national holiday. • Contributing to the backlash was the spread of acquired immunodeficiency syndrome, known simply as AIDS. Most victims of the virus were intravenous drug users and homosexual men. Some people contracted the virus through contaminated blood transfusions. By the late 1980’s, the rising costs associated with researching a cure and treating and caring for AIDS patients caused alarm among some Americans. Many people believed the government should promote abstinence as the best way to prevent AIDS, rather than providing controversial information on alternative forms of prevention.

13. An Evolving Economy • America’s farmers, who grew more than enough grain to feed Americans and sell excess crops abroad, faced oversupply and falling prices in the 1980’s. For a variety of reasons, foreign demand fell and supplies of grain outpaced demand. The price of a bushel of wheat fell from $3.91 in 1980 to $3.39 in 1984, and to $2.42 in 1986; a bushel of corn that earned farmers $3.11 in 1980 brought in less than half that much money six years later. • Falling prices hit farmers hard because so many had gone into debt to buy machinery and land when grain prices were high. Farmers who could not pay their debts risked losing their farms to bankruptcy. • The federal government intervened to increase farm income with continued price supports and credit. By 1987, federal spending on agriculture consumed more than $20 billion yearly and supplied 30 percent of America’s farm income.

14. Unequal Wealth • By the late 1980’s, wealth was more unevenly distributed than at any time since the end of World War II. In terms of current dollars, the average income earned by the top fifth of American households rose 23 percent, from $93, 225 in 1980 to $114, 912 in 1989. Among the bottom fifth, average household income rose only 4 percent, from $9,075 to $9, 433 in the same period.

15. Reagan’s Hands-Off Style • Officials at some deregulated S & Ls took advantage of the new laws to make huge fortunes for themselves. Many made risky investments in an overheated real estate market. When the market cooled down in the late 1980’s, many S & Ls collapsed, taking with them about $2.6 billion in depositor’s savings. Because bank accounts are insured by the federal government, taxpayers had to make up the billions of dollars lost when hundreds of S & Ls failed. A number of banking officials were prosecuted for their role in the scandal and for their efforts to cover it up.

16. The Iran-Contra Affair • (In Nicaragua) Reagan feared that the Sandinistas’ revolution would spread Marxist upheaval to other Latin American countries. Working through the Central Intelligence Agency, The United States trained and armed Nicaraguan guerrillas known as Contras. This policy violated laws on American intervention in the affairs of other nations. • Congress discovered these secret missions and in 1984 banned military aid to the Contras. Some members of the Reagan administration still believed that aid to the Contras was justified. These officials took the profits from secret arms sales to Iran and then sent the profits to the Contras. The arms sales were meant to encourage the release of American hostages held in Lebanon by pro-Iranian terrorists. • When the secret actions became public in the fall of 1986, Oliver North, the marine lieutenant colonel who had made the arrangements, took the blame. The Iran-Contra affair, as this scandal came to be called, caused the most serious criticism that the Reagan administration ever faced. The President himself claimed no knowledge of North’s operations.

17. Chapter 26Section 4: The George H. W. Bush Presidency

18. The Berlin Wall Falls • November 9, the government announced that East Germans could travel freely to West Germany. East Germans flooded around and over the hated Berlin Wall. Germans scaled it from both sides and stood atop the structure, cheering and chanting and waving signs. They came with sledgehammers and smashed it with glee. Within a month, the Communist Party had begun to collapse. A year later, East and West Germany reunified.

19. The Soviet Union • In August 1991, conservative Communists in the Soviet Union staged a coup and held Gorbachev captive, hoping to pressure him to resign. The coup quickly collapsed, but the Soviet Union’s 15 republics sensed weakness in the central government and began to move toward independence. • Gorbachev resigned the presidency of the Soviet Union on December 25, 1991. One week later the Soviet Union no longer existed. It had been replaced by a loose alliance of former Soviet republics called the Commonwealth of Independent States. • The Soviets and the Americans signed a number of pacts that signaled the end of the Cold War. The first Strategic Arms Reduction Treaty, known as START I, called for dramatic reductions in the two nations’ supplies of long-range nuclear weapons. It was signed in 1991.

20. A New International Role • As Communist governments tottered in Eastern Europe, Chinese students gathered in the capital, Beijing, to march for democracy and reform. In May, protestors occupied Tiananmen Square in the heart of the city, despite official orders to leave. On June 3, China’s leaders ordered the army to attack the protester camps. Hundreds, possibly thousands, of demonstrators died and others quickly scattered in the face of overwhelming military force. The government cracked down on the democracy movement after the attack and many more people were imprisoned and executed. • Bush valued the relationship the United States had with China. Rather than attack China’s leaders and risk an international crisis, Bush preferred to negotiate quietly and encourage trade between China and the United States. His nonconfrontational stance upset many people who believed he was indifferent to human rights in China.

21. The Invasion of Panama • Bush suspected General Manuel Noriega, Panama’s dictator, of smuggling cocaine into the United States. After Noriega declared war on the United States, Bush launched a lightning attack against Panama in December 1989 and quickly won control of the country. Noriega surrendered to American forces on January 3, 1990, and two years later a federal jury in Florida convicted him of drug smuggling. The invasion demonstrated Bush’s willingness to act boldly to stop the flow of drugs into the United States.

22. The Persian Gulf War • In August 1990, the Arab nation of Iraq, headed by a brutal dictator, Saddam Hussein, launched a sudden invasion of neighboring Kuwait. Saddam justified the assault by citing centuries-old territorial claims. But in fact he had sights on Kuwait’s substantial oil wealth. • Of concern to the Bush administration was the flow of Kuwaiti oil to the West. Bush viewed the protection of those oil reserves as an issue of national security. The administration was also concerned about the security of Saudi Arabia, a key Arab ally in the region, and Saddam’s investment in destructive weapons. • Months of diplomatic efforts failed to persuade Saddam to withdraw. Finally, the United States, working through the United Nations, mobilized an alliance of 28 countries to launch the Persian Gulf War. It was a limited military operation to drive Iraqi forces out of Kuwait.

23. The Persian Gulf War cont. • To organize military operations, President Bush turned to General Colin Powel. At age 42, he had become the Army’s youngest brigadier general. He was the first African American to serve as national security advisor. By 1989, he had been named the nation’s youngest ever Chairman of the Joint Chiefs of Staff, the top military officer in the nation. • A series of massive air strikes, known as “Operation Desert Storm, “ was launched on January 16-17, 1991. UN forces, directed by General Powell and led by Norman Schwarzkopf, liberated Kuwait in just six weeks of war. The allies had lost fewer than 300 soldiers while tens of thousands of Iraqi troops had died. Bush opted not to send troops deep into Iraq to oust Saddam, expecting that Saddam’s opponents would soon overthrow hm. Yet Saddam’s opposition proved weaker than Bush advisors had thought and he remained in power.

24. Domestic Issues • Bush angered many moderates and liberals with his nomina.ion of Clarence Thomas, a conservative black judge, to the Supreme Court in 1991 when Thurgood Marshall retired. Thomas faced grilling about his views on civil rights and about charges of past sexual harassment. • Budget deficits continued to swell during Bush’s presidency. Finally, he agreed to a deficit reduction plan that included new taxes. The tax hike broke Bush’s 1988 campaign promise and generated public anger. • Bush’s real undoing was a recession that began in the early 1990s. Turmoil in the Persian Gulf led gasoline prices to rise rapidly, creating unexpected costs for businesses and consumers alike.