THE ECONOMY IN THE 1980s
President Reagan’s domestic pro- gram was rooted in his belief that the nation would prosper if the power of the private economic sector was un- leashed . The guiding theory behind it, “supply side” economics, held that a greater supply of goods and services, made possible by measures to increase business investment, was the swiftest road to economic growth . Accordingly, the Reagan administration argued that a large tax cut would increase capital in- vestment and corporate earnings, so that even lower taxes on these larger earnings would increase gov- ernment revenues .
Despite only a slim Republican majority in the Senate and a House
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of Representatives controlled by the Democrats, President Reagan suc- ceeded during his first year in office in enacting the major components of his economic program, including a 25-percent tax cut for individu- als to be phased in over three years . The administration also sought and won significant increases in defense spending to modernize the nation’s military and counter what it felt was a continual and growing threat from the Soviet Union .
Under Paul Volcker, the Federal Reserve’s draconian increases in in- terest rates squeezed the runaway inflation that had begun in the late 1970s . The recession hit bottom in 1982, with the prime interest rates approaching 20 percent and the economy falling sharply . That year, real gross domestic product (GDP) fell by 2 percent; the unemployment rate rose to nearly 10 percent, and almost one-third of America’s indus- trial plants lay idle . Throughout the Midwest, major firms like General Electric and International Harvester released workers . Stubbornly high petroleum prices contributed to the decline . Economic rivals like Ger- many and Japan won a greater share of world trade, and U .S . consump- tion of goods from other countries rose sharply .
Farmers also suffered hard times . During the 1970s, American farm- ers had helped India, China, the Soviet Union, and other countries suffering from crop shortages, and had borrowed heavily to buy land and increase production . But the
rise in oil prices pushed up costs, and a worldwide economic slump in 1980 reduced the demand for agri- cultural products . Their numbers declined, as production increasingly became concentrated in large opera- tions . Those small farmers who sur- vived had major difficulties making ends meet .
The increased military budget — combined with the tax cuts and the growth in government health spend- ing — resulted in the federal gov- ernment spending far more than it received in revenues each year . Some analysts charged that the deficits were part of a deliberate adminis- tration strategy to prevent further increases in domestic spending sought by the Democrats . However, both Democrats and Republicans in Congress refused to cut such spend- ing . From $74,000-million in 1980, the deficit soared to $221,000-mil- lion in 1986 before falling back to $150,000-million in 1987 .
The deep recession of the early 1980s successfully curbed the run- away inflation that had started dur- ing the Carter years . Fuel prices, moreover, fell sharply, with at least part of the drop attributable to Rea- gan’s decision to abolish controls on the pricing and allocation of gasoline . Conditions began to im- prove in late 1983 . By early 1984, the economy had rebounded . By the fall of 1984, the recovery was well along, allowing Reagan to run for re-election on the slogan, “It’s morning again in America .” He de- feated his Democratic opponent,
CHAPTER 14: THE NEW CONSERVATISM AND A NEW WORLD ORDER
OUTLINE OF U.S. HISTORY
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former Senator and Vice President Walter Mondale, by an overwhelm- ing margin .
The United States entered one of the longest periods of sustained economic growth since World War II . Consumer spending increased in response to the federal tax cut . The stock market climbed as it reflected the optimistic buying spree . Over a five-year period following the start of the recovery, gross national prod- uct grew at an annual rate of 4 .2 percent . The annual inflation rate remained between 3 and 5 percent from 1983 to 1987, except in 1986 when it fell to just under 2 percent, the lowest level in decades . The na- tion’s GNP grew substantially dur- ing the 1980s; from 1982 to 1987, its economy created more than 13 mil- lion new jobs .
Steadfast in his commitment to lower taxes, Reagan signed the most sweeping federal tax-reform measure in 75 years during his sec- ond term . This measure, which had widespread Democratic as well as Republican support, lowered income tax rates, simplified tax brackets, and closed loopholes .
However, a significant percentage of this growth was based on defi- cit spending . Moreover, the national debt, far from being stabilized by strong economic growth, nearly tri- pled . Much of the growth occurred in skilled service and technical ar- eas . Many poor and middle-class families did less well . The adminis- tration, although an advocate of free trade, pressured Japan to agree to a
voluntary quota on its automobile exports to the United States .
The economy was jolted on Octo- ber 19, 1987, “Black Monday,” when the stock market suffered the great- est one-day crash in its history, 22 .6 percent . The causes of the crash in- cluded the large U .S . international trade and federal-budget deficits, the high level of corporate and personal debt, and new computerized stock trading techniques that allowed in- stantaneous selling of stocks and fu- tures . Despite the memories of 1929 it evoked, however, the crash was a transitory event with little impact . In fact, economic growth continued, with the unemployment rate drop- ping to a 14-year low of 5 .2 percent in June 1988 .