The American Economy During the 1980s

The Role of the 1970s' Recession, Reaganism and the Federal Reserve

1980s ATM
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In the early 1980s, the American economy was suffering through a deep recession. Business bankruptcies increased to over 50 percent of the previous year. Farmers were particularly negatively impacted due to a combination of reasons, including a decline in agricultural exports, falling crop prices and rising interest rates.

But by 1983, the economy rebounded. The American economy enjoyed a sustained period of economic growth as the annual inflation rate stayed below 5 percent for the remainder of the 1980s and part of the 1990s.

Why did the American economy experience such a turnaround in the 1980s? What factors were at play? In their book “Outline of the U.S. Economy,” Christopher Conte and Albert R. Karr point toward the lasting impacts of the 1970s, Reaganism and the Federal Reserve as explanations. 

The Political Impact and Economic Impact of the 1970s

In terms of American economics, the 1970s was a disaster. The 1970s recession marked the end to the post-World War economic boom. Instead, the United States experienced a lasting period of stagflation, which is a combination of high unemployment and high inflation.

American voters held Washington, D.C., responsible for the economic state of the country. Upset with federal policies, voters ousted Jimmy Carter ​in 1980 and former Hollywood actor and California governor Ronald Reagan was voted in as president of the United States of America, a position he held from 1981 to 1989.

Reagan's Economic Policy

The economic disorder of the 1970s lingered into the beginning of the 1980s. But Reagan’s economic program soon kicked into place. Reagan operated on the basis of supply-side economics. This is a theory that pushes for lower tax rates so that people can keep more of their income.

In doing so, proponents of supply-side economics argue that the result would be more saving, more investment, more production and thus more overall economic growth.

Reagan’s tax cuts mainly benefited the wealthy. But through a chain-reaction effect, tax cuts would benefit lower-income people as higher levels of investment would eventually lead to new job openings and higher wages.

The Size of the Government

Cutting taxes was only one part of Reagan’s national agenda of slashing government spending. Reagan believed that the federal government had become too large and interfering. During his presidency, Reagan cut social programs and worked to reduce or completely remove government regulations ​that affected the consumer, workplace and environment.

What he did spend on was military defense. In the wake of the disastrous Vietnam War, Reagan successfully pushed for big budget increases for defense spending by arguing that the U.S. had neglected its military. 

Resulting Federal Deficit

In the end, the reduction in taxes combined with increased military spending outweighed the spending reductions on domestic social programs. This resulted in a federal budget deficit that went above and beyond the deficit levels of the early 1980s.

From $74 billion in 1980, the federal budget deficit rose to $221 billion in 1986. It fell back to $150 billion in 1987, but then started growing again.

Federal Reserve

With such levels of deficit, the Federal Reserve remained vigilant about controlling price increases and raising interest rates any time it seemed a threat. Under the leadership of Paul Volcker, and later his successor Alan Greenspan, the Federal Reserve effectively guided America’s economy and eclipsed Congress and the president.

Although some economists were nervous that heavy government spending and borrowing would lead to steep inflation, the Federal Reserve succeeded in its role as an economic traffic cop during the 1980s. 

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State, U.S. Department of. "The American Economy During the 1980s." ThoughtCo, Apr. 23, 2018, State, U.S. Department of. (2018, April 23). The American Economy During the 1980s. Retrieved from State, U.S. Department of. "The American Economy During the 1980s." ThoughtCo. (accessed April 27, 2018).