At the beginning of 1980 the US economy faced the most significant recession since The Great Depression. It was a chain of two recessions. The first lasted six months, whereas the second began in July 1981 and lasted sixteen months till November 1982. One of the causes of the earlier 1980s decline was the revolution in Iran, which provoked oil price increases. The Federal Reserve adopted a disinflationary monetary policy that worsened the situation. It raised interest rates to combat inflation, however the consequences were far from desirable. Moreover, president Ronald Reagan cut domestic spending and this led to minor political fallout for the Rebuplican party. The unemployment rate started with 7% in 1980 and rose up to 10.8% by December 1982. GDP was negative for six of the 12 quarters. During the 1960s and 1970s economies believed in tradeoff known as the Phillips Curve. That meant to lower unemployment through higher inflation. In 1979 Paul Volcker was appointed chairman of the Fed because of his anti-inflation views. He was sure that the primary concern for the Fed should be the mounting inflation: “In terms of economic stability in the future, [inflation] is what is likely to give us the most problems and create the biggest recession” (FOMC transcript 1979, 16). His first attempt proved insufficient, however he didn’t give up even though he got repeated calls from Congress to loosen monetary policy. Ultimately, he turned out to be right. By October 1982 inflation had fallen to 5% and unemployment declined to 8% in one year. All in all, the recovery that followed remains the source of considerable dispute. Some believe that it was a result of Reagan era tax cuts. Others credit the Reagan era defense buildup ("military Keynesianism"). Nevertheless, no one doubts that it was one of the deepest recessions after the Great Depression.
https://bancroft.berkeley.edu/ROHO/projects/debt/1980srecession.htm
I found your post to be concise yet informative. I also liked how you included some info about Keynesian economics. Interestingly, in 1981 a survey was given to Americans about the economy and most said that they were optimistic about where things were going. Although in 1982 when the unemployment rate roes to 10.1%, American were, non-surprisingly, displeased.
ReplyDeleteSource:
https://www.pewresearch.org/2010/12/14/reagans-recession/