Edited by Alan M. Rugman and Gavin Boyd
William R. Emmons and Frank A. Schmid This chapter describes the US policy mix since about 1980, and explores how it has affected corporate financing and investment strategies adopted by US and foreign-based business firms operating in the United States. We define the policy mix as macroeconomic policies – fiscal and monetary – plus selected microeconomic policies with macroeconomic implications, especially financial deregulation. We consider in turn investment, production, and financing aspects of corporate strategy. Our discussion begins in 1980 because several watershed events in US policymaking took place at about that time. In the realm of fiscal policy, the first Reagan administration and Congress agreed during the early 1980s on huge tax cuts and a large increase in defense spending. Together, these initiatives drove the federal government’s structural (i.e. hypothetical full employment) budget deficit from approximately zero to nearly 5 per cent of GDP by the mid-1980s. All subsequent fiscal policy discussions have occurred in the shadow of this momentous shift toward structural deficit. In monetary policymaking, the Federal Reserve converted abruptly to an inflation-fighting monetary policy regime in late 1979. The new policy approach focused on lowering inflation rates rather than primarily supporting economic growth. Indeed, two recessions followed in fairly quick succession. Finally, important microeconomic policy shifts in the early 1980s included major tax changes and far-reaching legislation to deregulate the banking and financial systems. Deregulation coincided with, but also spurred, an increase in competition throughout the financial system. One important and immediate implication of the new post-1980 policy...
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