The 1981-82 recession was the greatest economic slump in the United States since the Great Depression, prior to the 2007-09 recession. Indeed, the over 11% unemployment rate attained in late 1982 remains the postwar era’s pinnacle (Federal Reserve Bank of St. Louis). During the 1981-82 recession, unemployment was widespread, but manufacturing, construction, and the auto industries were especially hard hit. Despite the fact that goods manufacturers accounted for only 30% of overall employment at the time, they lost 90% of their jobs in 1982. Manufacturing accounted for three-quarters of all job losses in the goods-producing sector, with unemployment rates of 22% and 24%, respectively, in the home building and auto manufacturing industries (Urquhart and Hewson 1983, 4-7).
The economy was already in poor health prior to the slump, with unemployment hovering at 7.5 percent following a recession in 1980. Tight monetary policy in an attempt to combat rising inflation sparked both the 1980 and 1981-82 recessions. During the 1960s and 1970s, economists and politicians thought that raising inflation would reduce unemployment, a tradeoff known as the Phillips Curve. In the 1970s, the Fed used a “stop-go” monetary strategy, in which it alternated between combating high unemployment and high inflation. The Fed cut interest rates during the “go” periods in order to loosen the money supply and reduce unemployment. When inflation rose during the “stop” periods, the Fed raised interest rates to lessen inflationary pressure. However, as inflation and unemployment rose concurrently in the mid-1970s, the Phillips Curve tradeoff proved unstable in the long run. While unemployment was on the decline towards the end of the decade, inflation remained high, hitting 11% in June 1979. (Federal Reserve Bank of St. Louis).
Because of his anti-inflation ideas, Paul Volcker was chosen chairman of the Federal Reserve in August 1979. He had previously served as president of the New York Fed, where he had expressed his displeasure with Fed actions that he believed contributed to rising inflation expectations. In terms of future economic stability, he believes that rising inflation should be the Fed’s top concern: “It is what is going to give us the most troubles and cause the biggest recession” (FOMC transcript 1979, 16). He also thought the Fed had a credibility problem when it comes to controlling inflation. The Fed had proved in the preceding decade that it did not place a high priority on maintaining low inflation, and the public’s belief that this conduct would continue would make it increasingly difficult for the Fed to drive inflation down. “Failure to continue the fight against inflation now would simply make any subsequent effort more difficult,” he said (Volcker 1981b).
Instead of focusing on interest rates, Volcker altered the Fed’s policy to aggressively target the money supply. He chose this strategy for two reasons. To begin with, rising inflation made it difficult to determine which interest rate targets were suitable. Due to the expectation of inflation, the nominal interest rates the Fed targeted could be relatively high, but the real interest rates (that is, the effective interest rates after adjusting for inflation) could still be quite low. Second, the new policy was intended to show the public that the Federal Reserve was serious about keeping inflation low. The anticipation of low inflation was significant, as present inflation is influenced in part by future inflation forecasts.
Volcker’s initial efforts to reduce inflation and inflationary expectations were ineffective. The Carter administration’s credit-control scheme, which began in March 1980, triggered a severe recession (Schreft 1990). As unemployment rose, the Fed relented, reverting to the “stop-go” practices that the public had grown accustomed to. The Fed tightened the money supply further in late 1980 and early 1981, causing the federal funds rate to approach 20%. Long-term interest rates, despite this, have continued to grow. The ten-year Treasury bond rate surged from around 11% in October 1980 to more than 15% a year later, probably due to market expectations that the Fed would soften its restrictive monetary policy if unemployment soared (Goodfriend and King 2005). Volcker, on the other hand, was insistent that the Fed not back down this time: “We have set our course to control money and credit growth.” We intend to stay the course” (Volcker 1981a).
High interest rates put pressure on sectors of the economy that rely on borrowing, such as manufacturing and construction, and the economy officially entered a recession in the third quarter of 1981. Unemployment increased from 7.4% at the beginning of the recession to nearly 10% a year later. Volcker faced repeated calls from Congress to loosen monetary policy as the recession worsened, but he insisted that failing to lower long-run inflation expectations now would result in “more catastrophic economic situations over a much longer period of time” (Monetary Policy Report 1982, 67).
This perseverance paid off in the end. Inflation had dropped to 5% by October 1982, and long-term interest rates had begun to fall. The Fed permitted the federal funds rate to drop to 9%, and unemployment fell fast from over 11% at the end of 1982 to 8% a year later (Federal Reserve Bank of St. Louis; Goodfriend and King 2005). Inflation was still a threat, and the Fed would have to deal with several “inflation scares” during the 1980s. However, Volcker’s and his successors’ dedication to actively pursue price stability helped ensure that the 1970s’ double-digit inflation did not reappear.
In 1980, what happened to the economy?
The early 1980s recession was a severe economic downturn that hit most of the world between the beginning of 1980 and the beginning of 1983. It is largely regarded as the worst economic downturn since World War II. The 1979 energy crisis, which was mostly caused by the Iranian Revolution, which disrupted global oil supplies and caused dramatic increases in oil prices in 1979 and early 1980, was a major factor in the recession. The sharp increase in oil prices pushed already high inflation rates in several major advanced countries to new double-digit highs, prompting countries like the United States, Canada, West Germany, Italy, the United Kingdom, and Japan to tighten their monetary policies by raising interest rates to keep inflation under control. These G7 countries all experienced “double-dip” recessions, with small periods of economic contraction in 1980, followed by a brief period of expansion, and then a steeper, lengthier period of economic contraction beginning in 1981 and concluding in the final half of 1982 or early 1983. The majority of these countries experienced stagflation, which is defined as a condition in which interest rates and unemployment rates are both high.
While some countries had economic downturns in 1980 and/or 1981, the world’s broadest and sharpest decrease in economic activity, as well as the highest increase in unemployment, occurred in 1982, which the World Bank dubbed the “global recession of 1982.”
Even after big economies like the United States and Japan emerged from the recession relatively quickly, several countries remained in recession until 1983, and high unemployment afflicted most OECD countries until at least 1985. Long-term consequences of the early 1980s recession included the Latin American debt crisis, long-term slowdowns in the Caribbean and Sub-Saharan African countries, the US savings and loans crisis, and the widespread adoption of neoliberal economic policies throughout the 1990s.
What brought the 1980 recession to an end?
Beginning in January 1980, there was a recession. Credit for vehicle and home loans became more difficult to obtain as a result of the rising federal funds rate. This resulted in significant contractions in industry and housing, both of which were reliant on consumer credit. The majority of the jobs lost during the recession were in the manufacturing sector, while the service sector remained mostly unaffected.
Manufacturing lost 1.1 million jobs during the crisis, for a total of 1.3 million jobs lost during the recession, accounting for 1.2 percent of payrolls. In 1979, the automotive industry, which was already in bad shape due to low sales, lost 310,000 jobs, or 33 percent of its workforce. A similar 300,000 people lost their jobs in the construction industry. Unemployment peaked at 7.8% in June 1980, but it remained relatively stable until the remainder of the year, averaging 7.5 percent through the first quarter of 1981.
In July 1980, the recession was declared officially over. Beginning in May, when interest rates fell, payrolls began to rise. Unemployment among auto employees climbed from 4.8 percent in 1979 to a record high of 24.7 percent in 1980, before falling to 17.4 percent by the end of the year. Unemployment in the construction industry increased to 16.3 percent in the third quarter and then began to decline at the end of the year.
There were questions in the final quarter of 1980 that the economy was recovering, and that it was instead experiencing a short pause. Poor house and auto sales in the closing months of 1980, as well as a second wave of rising interest rates and a stagnating jobless rate, reinforced these fears.
Was Reaganomics to blame for the Great Recession?
According to some analysts, Reagan’s policies were instrumental in achieving the third-longest peacetime economic expansion in US history. Real GDP growth averaged 3.5 percent during Reagan’s presidency, compared to 2.9 percent for the previous eight years. After increasing by 1.6 percentage points during the previous eight years, the yearly average unemployment rate fell by 1.7 percentage points, from 7.2 percent in 1980 to 5.5 percent in 1988. During Reagan’s administration, nonfarm employment expanded by 16.1 million, compared to 15.4 million in the previous eight years, but manufacturing employment fell by 582,000, after growing 363,000 in the previous eight years. Only Ronald Reagan’s administration did not raise the minimum wage. Inflation declined from 13.5 percent in 1980 to 4.1 percent in 1988, thanks in part to interest rate hikes by the Federal Reserve (prime rate peaking at 20.5 percent in August 1981). Between July 1981 and November 1982, the latter contributed to a recession in which unemployment reached 9.7% and GDP decreased by 1.9 percent. In addition, middle- and lower-class income growth dropped (2.4 percent to 1.8 percent) while upper-class income growth increased (2.2 percent to 4.83 percent ).
The misery index, which is calculated by adding the inflation rate to the unemployment rate, fell from 19.33 when he took office to 9.72 when he left, the best improvement record for a President since Harry S. Truman. In terms of American households, the percentage of total households earning less than $10,000 per year (in real 2007 dollars) decreased from 8.8% to 8.3% between 1980 and 1988, while the percentage of households earning more than $75,000 increased from 20.2 percent to 25.7 percent, both signs of progress.
What caused the recession of 1990?
The economy weakened throughout 1989 and 1990 as a result of the Federal Reserve’s tight monetary policies. The Fed’s stated policy at the time was to lower inflation, a practice that stifled economic growth. Another factor that may have contributed to the economy’s weakening was the passage of the Tax Reform Act of 1986, which put a stop to the early to mid-1980s real estate boom, resulting in falling property values, reduced investment incentives, and job losses. In the first quarter of 1990, measurable changes in GDP growth began to show, but overall growth remained positive. The recession was triggered by a loss of consumer and corporate confidence as a result of the 1990 oil price shock, which was compounded by an already weak economy.
In 1980, what was going on?
- Ronald Reagan is elected President of the United States. CNN Makes Its First Broadcast.
- Sandra Day O’Connor was the first woman to serve on the United States Supreme Court. Iranian hostages have been freed.
What presidents were responsible for recessions?
Ten of the last eleven recessions began under Republican presidents, according to CNN, and “every Republican president since Benjamin Harrison, who served from 1889 to 1893, had a recession begin in their first term in office.” The National Bureau of Economic Research (NBER) tracks the start of recessions, and the following list includes the president in office at the time, as well as their political party:
According to Blinder and Watson, the economy was in recession for 49 quarters between 1949 and 2013, with 8 quarters under Democratic leadership and 41 under Republican leadership.
Did Reagan’s economic policies work?
- Former President Ronald Reagan’s economic ideas are known as Reaganomics.
- Reagan implemented tax cuts, reduced social spending, raised military spending, and deregulated the market as president.
- The trickle-down hypothesis and supply-side economics impacted Reaganomics.
- President Ronald Reagan’s presidency saw a fall in marginal tax rates, an increase in tax collections, a decrease in inflation, and a decrease in the unemployment rate.
- Reaganomics is currently viewed in a mixed light. While GDP and commercial activity increased, the policies resulted in a widening wealth inequality, reduced economic mobility, and increased public debt.
Did Reagan mention the term “trickle-down” economics?
Government can be divided into two types. There are others who believe that if you only legislation to make the wealthy wealthy, their wealth will trickle down to the rest of society. The Democratic concept has been that if you legislation to make the masses wealthy, that wealth would trickle down to and through every class that depends on it.
Not this year, but four and six years ago, this election was lost. They didn’t start thinking about the old commoner until they were halfway through the election campaign. All of the money was earmarked for the top, with the assumption that it would flow down to the less fortunate. Mr. Hoover was a professional engineer. He was well aware that water trickled down. It will reach the driest small location if you put it upward and let it go. But he had no idea that money was trickling in. Give it to the bottom people, and the top people will have it before nightfall. However, it will have gone through the poor man’s hands. The big banks were preserved, while the smaller ones were sent up the chimney.
The argument that cutting taxes for higher earners and corporations was a “trickle-down” policy was coined by comedian Will Rogers, and the term has lasted over the years.
The theory that had prevailed in Washington since 1921, that the goal of government was to bring wealth to those who lived and worked at the top of the economic pyramid, with the hope that success would trickle down to the bottom and benefit everyone.
The earliest recorded usage of “trickle-down” as an adjective meaning “related to or acting on the concept of trickle-down theory” was in 1944, according to the Merriam-Webster Dictionary, while the first known use of “trickle-down theory” was in 1954.
Democrat Lyndon B. Johnson claimed after leaving the president that “Republicans have no idea how to run a business. They’re so preoccupied with implementing the trickle-down doctrine, which benefits the wealthiest firms the most, that everything goes to hell in a handbasket.”
Although the term “trickle-down” is typically associated with income, Arthur Okun has used it to describe the flow of innovation’s advantages, which do not go exclusively to “great entrepreneurs and innovators,” but instead trickle down to the masses. In fact, according to William Nordhaus, a Nobel Laureate in Economic Sciences, innovators can only collect a meager 2.2 percent of the overall surplus generated by innovation. Returning to income “trickle-down,” according to Nobel laureate economist Paul Romer, the surplus from innovation can take the shape of gains in real wages that are disseminated across the economy. “The bulk of the exceptional and widespread growth in the industrialized world’s living standards since the Industrial Revolution could not have occurred without the revolution’s innovations,” according to economist William Baumol.
Senator Hank Brown (R-Colorado) declared on the Senate floor in 1992: “Mr. President, the Republican Party’s trickle-down philosophy was never articulated by President Reagan, was never articulated by President Bush, and has never been advocated by either of them. One may debate whether or not trickle-down makes sense. Attributing policies to those who have argued for the contrary is not only wrong, but it also poisons the public discourse.”
Thomas Sowell, an economist, has constantly argued that no economist has ever endorsed trickle-down economics, saying in a 2014 column:
Let’s try something new: let’s take a break and think. Why would anyone recommend that we “donate” anything to A in the hopes of it trickling down to B? Why would anyone in their right mind not give it to B and take out the middleman? But none of this matters because there was no such thing as a trickle-down theory when it came to providing something to anyone in the first place. Even the most extensive scientific examinations of economic theories notably J.A. Schumpeter’s massive History of Economic Analysis, which is over a thousand pages long and printed in extremely small type do not mention the “trickle-down” notion.
Sowell has written extensively about trickle-down economics and strongly dislikes the term, claiming that supply-side economics has never claimed to work in a “trickle-down” manner. The economic idea of lowering marginal tax rates, on the other hand, operates in the exact opposite direction: “Workers are always paid first, and profits flow upward afterwards if at all.”