I’m not sure that there’s a clear answer to this question, which is why I chose great debates.
I think it’s pretty clear that America entered into an economic revival in the early to mid 1980s. America had muddled through a stagnant, inflationary economy in the 1970s, and by the mid 1980s the mood was decidedly better (the president, Reagan, won re-election in a landslide, claiming it to be “morning in America”). It’s my perception that this was a boom time for the country.
If so, I’m asking why. I’m far from an expert on economics, but when I think of other booming eras I can usually identify some thing that might account: in the 1920s, there was new technology like radio and the automobile that had become widely available. There was also easy credit for investing in the stock market. The 1990s saw a similar technology explosion, what with the Internet (and perhaps the early stages of a real estate credit bubble). And in the 1950s (again a time for new technology- the television - to become widespread), there was the unique lack of international competition due to the end of WW2.
What happened in the 1980s? I’m certainly aware of some important changes: the top income tax rates were dramatically lowered. Government deficit spending exploded. Were these the catalysts? Reagan, of course, was a president with unfailing optimism. Is it as simple as a change in national mood? A savings and loan collapse would eventually hit the country in the late 1980s: was it just the bubble from an unregulated market?
What’s the straight dope? What accounts for the American economic revival of the early to mid 1980s?
What mostly happened was the end of the 70s. Following Johnson’s guns and butter policies that drained money to pay for Vietnam, Nixon was hit with the gas shortage of 1973 and Carter got the sequel in 1976.
The result was giant inflation, as reflected in this chart of mortgage prices.
Paul Volcker was appointed as chair of the Federal Reserve by Carter in 1979, but had the most impact in the 1980s when Reagan, proselytizer of small government, backed his austerity program. That immediately threw the U.S. into a severe recession and saw the unemployment rate soar from 6% to 11%.
Nevertheless, austerity broke the back of inflation. The stock market, in the S&P 500, more than doubled over Reagan’s two terms. Optimism is definitely important in economics, despite what the rationalists say. The public also likes to see day-to-day improvement, whatever the long-term costs.
Nevertheless, again, the rosiness of the Reagan years masked the deep damage that was being done to the underlying economy. Post-Reagan, unemployment began to increase again, another recession started, and the deficit tripled from 1980-1990. All of these had been predicted but ignored. George H. W. Bush was forced to break his promise and raise taxes, a good and necessary change. It cost him the election in 1992.
Nothing outstanding happened to the economy as a whole in the 1980s. A look at a GDP graph shows a virtually unbroken 45° increase since the 1960s in current dollars. Stuff that looms large over the short-term is smoothed out into overall growth.
I thought “austerity” referred to a reduction in spending. But I thought that spending (mainly military spending) shot up under Reagan; it’s a myth that he was into smaller government. Or are you just referring to social programs?
And how dos that “break the back of inflation”? My knowledge is pretty rudimentary, but I think that you beat inflation by contracting the money supply.
Are you saying that Regan managed to bring inflation down by changing the path of the previous decades, when government programs were becoming increasingly prominent in people’s lives?
In response to questions about his views on the money supply, Volcker responded the supply had been “rising at a pretty good clip,” and there was no evidence the nation was “suffering grievously from a shortage of money” (Dow Jones News Service July 30, 1979).
A few weeks later in a breakfast meeting with reporters, Volcker, who had just started his tenure as chairman, reinforced this message, saying he would be focused on restraining the growth of the money supply, with the ultimate goal of promoting sustainable growth for the US economy.
You’re right that austerity budgets usually presume a reduction in spending. They also normally require an increase in taxes as well, in order to sensibly balance the budget. Reagan responded by cutting taxes and increasing military spending (small government never applies to the military): that’s a recipe for deficits. Volcker’s short, sharp shock to the economy made the recessionary period shorter than most schemes and allowed Reagan to coast on the results. Inflation slowed without cutting wages and prices, at least after the steep rise in unemployment, and the military increase was justified by the very existence of the “evil empire,” which tottered when its much feebler economy tried to match our spending. Damaging one’s own economy to defeat an enemy does not have much precedent; it only works when one’s wealth is bottomless.
Demographics has to play a part - the 1980s was when the huge cohort known as the Baby Boomers reached their prime productive years. More people working = stronger economy.
Demographics must have helped, but the timing was basically Volcker lowering rates. He purposely threw the economy into a deep recession by raising rates to insane levels. The US went into recession, unemployment soared, and inflation finally came down. Then, he lowered rates once things were basically under control.
Perception also helped. Unemployment was lower relative to where it was, but still a lot higher than it is today. Ditto inflation – lower than it had been, but still higher than it is today.
All of this. It wasn’t necessarily that the economy was booming in the mid-late '80s, so much as that it was reasonably normal, compared to how horrific it had been in the late '70s and early '80s, when interest rates and unemployment had been at extremely high levels. Thus, coming out of those terrible years, a fairly good economy felt rosy, by comparison.
I’ve always felt this was a re-writing of history. I certainly don’t remember back in the eighties any talk of American military spending being an economic contest with the Soviets. The talk back then was that the Soviets were a military threat and we needed to spend money on the military because the possibility of war was real.
And then the Soviet Union collapsed. People started wondering if we had just wasted a trillion dollars to get ready for a war that had never been going to happen.
Conservatives didn’t want to admit that they had misread the situation. So they rewrote history. They said that the plan had never been to actually fight the Soviet Union, it had all along been to drive the Soviet Union into an economic collapse which would lead to political reform.
I was in college in the '80s, and I do recall that being generally discussed at that time: that the USSR would spend in response to the US’s military build-up, and that their economy couldn’t really support that level of spending.
It’s also true that the USSR was still seen as an existential threat to the US by many, but I do think that the idea that the US could damage the USSR economically in that fashion wasn’t just revisionist history.
In hindsight, the U.S. truly overestimated the strength of the U.S.S.R. Another example of our vaunted spy systems failing miserably to understand the structure and culture of other countries.
The cold warriors in charge of American policy were determined to outcompete the Reds militarily. Remember the Star Wars defense system? Sheer insanity, popularized by paleo-conservatives like science fiction writer Jerry Pournelle. The proposal put the Reds into a bind: not pursue it and find their offensive first strike threat nullified; pursue it and divert needed money from the rest of their economy, just as they had done for decades. The 80s were piled high with these military ventures, some of which actually developed.
Outcompeting Russia and outspending Russia were not alternative goals; they were intertwined policies that depended upon one another and worked better than imagined because the U.S.S.R. was already too weak to escape such a trap. As @kenobi_65 indicated, without the battering of exterior forces America could go back to being the wealthiest country in history, with all the power and privilege that provided.
My takeaway point is that the 80s were not some special growth period - look at the GDP graphs in my link above: without dates the decade is unfindable because it fits without a blip - but the norm that only catastrophes would alter.
