Economic Events 1980-1989 the Decade of Greed  Term Paper

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  • Subject: Economics
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Economic Events: 1980-1989

the decade of greed. The era of Ronald Reagan when the rich got richer and the poor got poorer. Despite this common wisdom, 1980 started off auspiciously. On May 8, 1980 the World Health Organization hailed "one of the century's greatest medical accomplishments," the final and total eradication of smallpox (Dickson 247). But how quickly times change - barely a quarter century has passed and this same disease is making headlines once again.

Attitudes change also. While many in this day and age would still agree that the 1980's was a selfish period in American history, a sea-change has occurred in the rhetoric issuing forth from Washington D.C. In a very fundamental way, party politics has been thrust aside as concerns for homeland security take precedence over petty partisanship. Michael Barone notes this in his analysis of a speech made by Democrat Richard Gephardt in the Summer of 2002: "For many years, especially in the 1970s and the 1980s, most Democrats' and most Republicans' views of the world were very different.... Now they see the world in pretty much the same way: a world in which the United States is at war with evil terrorists and must win." The economic analysis of the period from 1980 to 1989 that follows will serve to highlight just how far partisanship has come since the days of Reagan.

The Data - An Introduction

In order to most effectively evaluate this period of time, a thorough analysis of the relevant economic data is necessary. From this 'data-foundation' one can more readily assess the credibility of the various individuals (experts?) who have commented on events occurring during the decade. The following types of data will be highlighted: Gross Domestic Product (GDP), growth of GDP, unemployment, inflation, fiscal policy (federal budget figures including receipts, outlays and deficit), monetary policy (money supply, discount rate) and finally exchange rate. The figures above will be considered both individually as well as in concert in order to formulate as accurately as possible a clear picture of the decade (economically speaking, that is).

The Data - The State of the Economy

GDP figures for the decade of the 1980's tell a story of decent growth overall. Consider that "[b]etween 1900 and 1990, the U.S. economy grew at an average rate of 3.1% per year." (Case and Fair, 603). The average for the 1980s was 3.0% which is every close to this long-run average. Leave off the recession years of 1980 and 1982 (where GDP growth was -0.2% and -2.0% respectively) and the average growth of the 1980s would be 4.0% (Current Dollar).

Regarding the 1980-1983 recession referred to above, two other sets of figures shed some illumination. The annual unemployment rate rose to a high of 9.9% in both 1982 and 1983 before gradually declining to a low of 5.2% by the end of the decade (Civilian Unemployment). Likewise the inflation rate as measured by the GDP Chain Weight Deflator rose to a high of 5.32% in 1982 before declining to 1.63% in 1986 (Gross Domestic). The corresponding inflation figures as measured by the CPI tell a similar story (Consumer Price). The December to December percentage change in the CPI for 1980 was 12.5% followed by a still historically high rate of 8.9% in 1981. But by 1986 the rate had fallen as low as 1.1%.

The Data - Monetary and Fiscal Measures

The above figures outline the state of the economy during the 1980's. Monetary and fiscal policy figures tell the other side of the story since they represent the government's attempt to deal with the economic situation during this period of time. Consider first the money supply numbers as represented by M3 (Money Stock). In billions of dollars, M3 increases from 1,992.2 to 4,065.5 from 1980 to 1989. This is a more than doubling of the money stock in 9 years. The first large increase occurs in response to the recession of the early 1980s as M3 increases 10.3% in 1980 and 12.5% in 1981.

Another aspect of the monetary policy was the movement of the discount rate. This rate started out in early 1980 at 13, dipped to 10 by the end of July before moving back up to a high of 14 in May 1981 (Historical Changes). From this point it made a steady movement down reaching a low of 5.5 in August of 1986 before going back up somewhat by the end of the decade.. The Federal Funds rate made a similar move starting at 14 at the beginning of 1980, dipping to the range of 8.5-9.5 in June of the same year before vaulting higher and higher until reaching a pinnacle of 20 in late May of 1991. From here it was a fairly steady march downward to a low of 5 7/8 in August of 1986 before it too moved up somewhat as the decade came to a close.

The proxy for fiscal policy is the federal budget and the corresponding deficit figures. The story told here is clear: receipts were not increasing as fast as outlays. Specifically, the receipts from 1981-1989 increased by 474.1 billion but the outlays increased over that same time period by only 552.8 billion (Federal Receipts). The result was a mushrooming deficit: from 73.8 billion at the start of the decade to as high as 221.2 billion by 1986 before declining somewhat to 152.5 billion by 1989. In all fairness, perhaps the impact of this indebtedness was blunted if one considers the deficit as a percentage of the GDP (Federal Budget). In 1980, the deficit as a percentage of GDP was 2.7%. Within three years it had climbed above 6%. But then it returned from out of the stratosphere back to the opening decade figure of 2.8% of GDP. In this light, the deficit does not look so bad.

One final piece of data is the exchange rate of the U.S. dollar. While technically this value is not a direct monetary or fiscal policy issue per se, it can certainly be affected by these policies and so is appropriate for this discussion. There are various ways to measure this fluctuating value. For the purposes of this paper the rate was calculated by reference to a basket of currencies that include: Canada, France, Italy, Germany, Japan and Belgium (Foreign Exchange). These particular countries were chosen as a proxy since they were the ones included in the Council of Economic Advisers Economic Report of the President Feb-97. The pattern of their values is clear. Almost to a country they show their extreme degree of weakness against the dollar in 1981, but then they begin a slow but inexorable climb until reaching their apogee in 1986. From this point they begin to lose their value steadily until the end of the decade. The pattern is very clear.

The Data - Interaction of the Variables good deal of the interaction and interrelation of these variables has been foreshadowed above. Clearly the unemployment and various inflation rates declined as the economy pulled out of the early 1980's recession. But the very fact that they move in concert seems to indicate that there is no trade off of these two variables as predicted by the Phillips curve. Also interesting is the realization that inflation is decreasing even though the money supply is being increased quite a bit. In fact M1 shows the highest percentage increase in 1986 precisely when inflation as measured by CPI (1.1%) and GDP Deflator (1.63%) are at their lowest points.

Deficit as a percentage of GDP reaches its highest point right at the end of the recession in 1983. Likewise, the deficit number itself shows an enormous jump from 1981 (79 billion) to 1983 (207.8 billion) which corresponds to the end of the recession and the highpoint of unemployment (9.9% in 1983). Finally (and as expected), the percentage change in tax receipts by the government are the lowest during the recession years (1982: 3.1%, 1983: -2.8%) and the corresponding outlays are their highest during the recession - in 1981 outlays increase 14.8% and in 1982 they increase 10.0% (Federal Budget).

Turning to monetary policy figures, the discount and federal funds rates appear to lead the U.S. dollar exchange value down. These rates hit their lowest point in 1986 and the dollar shows its steepest decline against various currencies in the very same year (-23% against the French franc, -26% against the German mark, -22% against the Italian lira, -30% against the Japanese yen, and -25% against the Belgian franc)

Important Events of the 1980s - The Negative Spin

Before this more recent "era of good feelings" brought about by the tragedy of September 11, 2001, politics was business as usual. And any analysis of the events of the 1980s decade makes this quite clear. Robert Kuttner reveals his bias in the article "Supply-Side Turkey Comes Home to Roost," which appeared in the Los Angeles Times, October 14, 1991, p. B9 (as referenced in McKenzie). The title of the…

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