The subject of this study will be the 1970s. The 1970s were a turbulent time with several major events that influenced the economic growth. This decade was chosen because economists still argue about the causes of the economic downturn in 1973 and 1974. The oil embargo was blamed for many of the economic woes of the 1970s. However, there are some that claim that the oil crisis was fabricated and the situation was entirely fabricated by economic policy makers. The controversy surrounding this time period makes it an interesting subject of study.
How many goods and services a country produces is a good indication of the economic health of that country. The Gross Domestic Product (GDP) measures the production level of the country. Inflation and unemployment service to enhance the data obtained by the GDP and give us a good overall picture of who is working, what they are spending, and how much they are producing. This is one of the most misused terms by economic television commentators who often announce that there is a recession when there is a fall in the GDP for two consecutive quarters.
However, it takes more than that to indicate a recession to most economists. This was the case in the 1970s. The overall growth during the decade rose. However, there were temporary dips in this growth that indicated a short downturn. Whether these downturns indicated a true recession is still argued by economists. The overall GDP increased for the 10-year period.
There are also discrepancies due to whether the figure are being discussed in current dollar or real GDP. The annual percentage change in real GDP rose from 1970 to 1973, then the oil embargo and fuel crisis hit in 1974. This had a real effect of the GDP, which experienced a negative change. By 1976, the GDP had recovered and remained stable until 1980 when it again experienced a drop.
The unemployment rate supported the data for the real GDP, showing its highest rate just after the 1974 oil shortage. It may be noted that unemployment often lags behind changes in GDP because the effects of rises and falls in production are not immediate and it takes a short time for the effects to be felt. This was the case in the 1970s, rises and falls in unemployment lagged behind changes in real GDP.
Inflation rates are typically measured by the 10-year government bond rate. These are adjusted in relation to economic events. During the 1970s the 10-year Treasury bond rate indicated the rises and falls in unemployment and GDP (OECD, 1996). The rise in unemployment coupled with the rise in the 10-year bond rate patterns indicate that the country may have been in a true recession. A drop in GDP was followed by a rise in unemployment, while inflation rises were soon to follow. The value of peoples' dollars fell in relation to prices (OECD, 1996). This meant that they spent less and employers spent less on employees. This created a viscous cycle and the former employees now had less to spend and boost demand, thus causing a rise in the GDP.
Major wars typically cause inflation such as was seen in the 1970s. However, uncertainty caused the only inflationary period to take place during peacetime (De Long, 1996). De Long proposes that the memory of the Great Depression was still fresh in people's minds and that this sparked the uncertainty that led to a decrease on consumer spending during the 1970s. War produces uncertainty and uncertainty causes people to become insecure. This insecurity is reflected in a desire to hold onto their money. This decrease in consumer spending causes a drop in demand. This in turn causes the need to decrease production. Companies do not need as many workers and therefore lay them off, causing a rise in unemployment and an even greater decrease in consumer spending. This was the mechanism that led to the 1973/1974 inflationary period.
There was one major event that was responsible for the inflationary period of the mid 1970s, the oil embargo and uncertainty over fuel supply. Gas prices rose due to a shortage in supply and this caused panic among consumers. As gas prices rose, they were less likely to spend money elsewhere. They cut back on travel and exercised frugality. The period was characterized by pictures of long lines at gas stations. Whether this shortage was real or fabricated is still a source of debate.
Once the viscous cycle is started, the government must institute price controls to try to curb the rising prices (Schwenk, 2001). In addition to a fear over the oil embargo, the United States was engaged in an unpopular war in Vietnam. It is interesting that in the article by De Long, he claims that the inflationary period occurred during peacetime. He completely ignored the war in Vietnam, the United States was at war and this may have contributed to the inflationary period in 19973/1974 as well.
The second half of the decade was marked by a deteriorating unemployment rate and rate of change in consumer prices. (Schwenk, 2001). From 1970-74, the average annual unemployment rate was 5.4%, while the average annual change in the Consumer Price Index (CPI) was 6.6%. From 1974-79, these numbers rose to 7.9% for unemployment and 8.1% for the CPI (Schwenk, 2001).
Labor disputes were also a source of unrest in the economy of the early 1970s. In 1970, the U.S. experienced the first work stoppage by the U.S. Postal service since its beginning. That same year Railroad workers organized a one day nationwide strike (Schwnek, 2001). In 1971, two longshore workers strikes closed ports in every coastal region in the United States. In 1975, Pennsylvania State workers launched a massive strike. The years 1977-78 saw massive miners' strikes. The decade ended with a trucker's strike in 1979 (Schwenk, 2001). These strikes were primarily over wages and working conditions. They only added to the economic turmoil by shaking consumer confidence in the supply of goods. This unrest was not the major factor influencing the economic turmoil of the 1970s, but it certainly had an impact (Layard, et. al. 1991).
The Employee Retirement Income Security Act of 1974 (ERISA) and the Revenue Act of 1978 were aimed at correcting the confidence issue. ERISA regulated private pensions and provided for financial and accounting controls. This was an attempt by the government to convince the employees that their retirement savings were secure they also helped to build confidence that proper accounting procedures were followed and that workers were getting their fair compensation. The 401(K) was instituted that allowed employees to contribute to a retirement plan. All of these measures were designed to attempt to instill a sense of confidence in American workers and boost their confidence so that they would feel comfortable in spending more money, in turn boosting the economy (Hall, 1986).
The primary influence that shaped the economic atmosphere of the 1970s were the two major oil shortages of 1973/74 and again in 1979. Whether real or fabricated, these events shook the confidence of consumers and caused a drop in demand. The oil shortage of 1979 and the incipient high prices were a contributing factor in the trucking strike. Drivers were hard pressed to stay afloat in the face of decreasing demand for consumer products and rising fuel prices. Their services were not needed to deliver goods to consumers and still the cost of doing business rose. The strike was an indirect result of the oil shortage. When the trucking industry had a massive strike, consumers were not confident that they would have access to the goods that were vital to their existence. This caused them to stop spending and led to an even more deteriorated economy. Had the…