Early 1980s recession
The early 1980s recession was a severe global economic recession that affected much of the developed world in the late 1970s and early 1980s. The United States and Japan exited the recession relatively early, but high unemployment would continue to affect other OECD nations until at least 1985.
Long-term effects of the recession contributed to the Latin American debt crisis, the US savings and loans crisis, and a general adoption of neoliberal economic policies throughout the 1980s and 1990s.
A severe global economic recession in the late 1970s and early 1980s affected most of the developed world. It was the deepest recession since the post-war period. In the wake of the 1973 oil crisis and the 1979 energy crisis, stagflation began to afflict the American economy.
In the early 1980s, Canada experienced higher inflation, interest rates, and more underemployment than the United States. The Bank of Canada rate hit 21% in August 1981, and the inflation rate averaged more than 12%. The inflationary period made Canadians seek to protect themselves by investing in the housing market.
Canadian firms, preoccupied with prospective investment opportunities because of high inflation, no longer focused on innovation and productivity improvements. In addition, high inflation was partly responsible for larger government spending. The overall tax burden rose from 27% of income in 1951 to 34% in 1969 and 37% in 1988. From 1975 to 1992 national deficit more than tripled to 8% of GDP. The resulting high interest rates caused more Canadian income to be paid out to foreign holders of Canadian public and private sector debt.
Canada changed from a country producing and exporting mainly primary products to one producing and exporting more manufactured goods. Jobs were lost to mechanization in industry. Moreover, globalization meant that Canadian firms had to downsize their workforce to stay efficient and compete internationally. In early 1980s, Canada's unemployment rate peaked at 12%. It took almost four years for the number of full-time jobs to be restored. A slowdown in productivity also emerged during the recession. Real GDP declined by 5% between June 1981 and December 1982, and average output per worker slowed by 1%. The US decision to switch to a floating exchange rate devalued the Canadian dollar, which was worth US$0.85 by 1979, which made US imports more expensive. On the other hand, Canada's major exports declined in price. Combined with high inflation and interest rates, the high commodity prices reduced the standard of living.
As with most of the rest of the developed world, recession hit the United Kingdom at the beginning of the 1980s. That followed a string of crises that had plagued the British economy for most of the 1970s. Consequently, unemployment had gradually increased since the mid-1960s.
When the Conservative Party, led by Margaret Thatcher won the general election of May 1979, and swept James Callaghan's Labour Party from power, the country had just witnessed the Winter of Discontent in which numerous public sector workers had staged strikes. Inflation was about 10% and some 1.5 million people were unemployed, compared to some 1 million in 1974, 580,000 in 1970 and just over 300,000 in 1964. Thatcher set about controlling inflation with monetarist policies and changing trade union legislation in an attempt to reduce the strikes of public-sector workers.
Thatcher's battle against inflation raised the exchange rate, resulting in the closure of many factories, shipyards and coal pits because imports were cheaper. Inflation fell below 10% by the turn of 1982, having peaked at 22% in 1980, and by spring 1983, it had fallen to a 15-year low of 4%. Strikes were also at their lowest level since the early 1950s, and wage growth rose to 3.8% by 1983.
However, unemployment reached 3 million, or 12.5% of the workforce, by January 1982, a level that had not been seen for some 50 years. The unemployment rate would remain similarly high for a number of years afterwards. Northern Ireland was the hardest-hit region, with unemployment standing at nearly 20%. The rate exceeded 15% in much of Scotland and Northern England. By April 1983, Britain, once known globally as the "workshop of the world" became a net importer of goods for the first time in modern times[dubious ]. Areas of Tyneside, Yorkshire, Merseyside, South Wales, Western Scotland and the West Midlands were particularly hard hit by the loss of industry and subsequent sharp rise in unemployment. Only in Southeast England did unemployment remain below 10%.
Despite the economic recovery that followed the early 1980s recession, unemployment in the United Kingdom barely fell until the second half of the decade. As late as 1986, unemployment exceeded 3 million, but it fell below that figure the following year. By the end of 1989, it had fallen to 1.6 million.
The mass unemployment and social discontent resulting from the recession were widely seen as major factors in widespread rioting across Britain in 1981 in parts of towns and cities including Toxteth, Liverpool, as well as a number of districts of London. In 1985, the economy had been out of recession for three years, but unemployment remained stubbornly high. Another wave of rioting occurred across numerous areas of Britain, including several areas across London. Poor employment opportunities, and social discontent were once again seen as factors in the rioting.
In the first three years of Thatcher's premiership, opinion polls gave the government approval ratings as low as 25%, with the polls initially being led by the Labour opposition and then by the SDP-Liberal Alliance, the latter being formed by the Liberal Party and the Social Democratic Party in 1981. However, an economic recovery, combined with the Falklands War, led to the Thatcher-led Conservative Party winning 42.4% of votes for a parliamentary majority in the general election in 1983.
The early 1980s recession in the United States began in July 1981 and ended in November 1982. One cause was the Federal Reserve's contractionary monetary policy, which sought to rein in the high inflation. In the wake of the 1973 oil crisis and the 1979 energy crisis, stagflation began to afflict the economy.
Unemployment had risen from 5.1% in January 1974 to a high of 9.0% in May 1975. Although it had gradually declined to 5.6% by May 1979, unemployment began rising again. It jumped sharply to 6.9% in April 1980 and to 7.5% in May 1980. A mild recession from January to July 1980 kept unemployment high, but despite economic recovery, it remained at historically high levels (about 7.5%) until the end of 1981. In mid-1982, Rockford, Illinois, had the highest unemployment of all metro areas, at 25%. In September 1982, Michigan led the nation with 14.5%, Alabama was second with 14.3%, and West Virginia was third with 14.0%. The Youngstown–Warren Metropolitan Area had an 18.7% rate, the highest of all metro areas, and Stamford, Connecticut, had the lowest unemployment, at 3.5%.
The peak of the recession occurred in November and December 1982, when the nationwide unemployment rate was 10.8%, the highest since the Great Depression. In November, West Virginia and Michigan had the highest unemployment with 16.4%, Alabama was in third with 15.3%. South Dakota had the lowest unemployment rate in the nation, with 5.6%. Flint, Michigan, had the highest unemployment rate of all metro areas, with 23.4%. In March 1983, West Virginia's unemployment rate hit 20.1%. In spring 1983, thirty states had double-digit unemployment. When Reagan was re-elected in 1984, the latest unemployment numbers (August 1984) showed that West Virginia still had the highest rate in the nation (13.6%) followed by Mississippi (11.1%) and Alabama (10.9%).
Inflation, which had averaged 3.2% annually since World War II had more than doubled after the 1973 oil shock, to a 7.7% annual rate. Inflation reached 9.1% in 1975, the highest rate since 1947. Inflation declined to 5.8% the following year but then edged higher. By 1979, inflation reached a startling 11.3% and in 1980, it soared to 13.5%.
A brief recession occurred in 1980. Several key industries, including housing, steel manufacturing, and automobiles, experienced a downturn from which they did not recover until the end of the next recession. Many of the economic sectors that supplied the basic industries were also hit hard.
Each period of high unemployment was caused by the Federal Reserve, as it substantially increased interest rates to reduce high inflation. Each time, once inflation fell and interest rates were lowered, unemployment slowly fell.
Determined to wring inflation out of the economy, Federal Reserve chairman Paul Volcker slowed the rate of growth of the money supply and raised interest rates. The federal funds rate, which was about 11% in 1979, rose to 20% by June 1981. The prime interest rate, an important economic measure, eventually reached 21.5% in June 1982.
Financial industry crisisEdit
The recession came at a particularly bad time for banks because of a recent wave of deregulation. The Depository Institutions Deregulation and Monetary Control Act of 1980 had phased out a number of restrictions on their financial practices, broadened their lending powers, and raised the deposit insurance limit from $40,000 to $100,000, which caused moral hazard. Banks rushed into real estate lending, speculative lending, and other ventures as the economy soured.
By mid-1982, the number of bank failures was rising steadily. Bank failures reached 42, the highest since the depression, as both the recession and high interest rates took their toll. By the end of the year, the Federal Deposit Insurance Corporation (FDIC) had spent $870 million to purchase bad loans in an effort to keep various banks afloat.
In July 1982, the US Congress enacted the Garn–St. Germain Depository Institutions Act of 1982, which further deregulated banks and deregulated savings and loans. The Act authorized banks to begin offering money market accounts in an attempt to encourage deposit in-flows, and it also removed additional statutory restrictions in real estate lending and relaxed loans-to-one-borrower limits. That encouraged a rapid expansion in real estate lending while the real estate market was collapsing, increased the unhealthy competition between banks and savings and loans, and encouraged too many branches to be started.
The recession affected the banking industry long after the economic downturn had technically ended, in November 1982. In 1983, another 50 banks failed. The FDIC listed another 540 banks as "problem banks", on the verge of failure.
In 1984, the Continental Illinois National Bank and Trust Company, the nation's seventh-largest bank (with $45 billion in assets), failed. The FDIC had long known of its problems. The bank had first approached failure in July 1982, when the Penn Square Bank, which had partnered with Continental Illinois in a number of high-risk lending ventures, collapsed. However, federal regulators were reassured by Continental Illinois executives that steps were being taken to ensure the bank's financial security. After its collapse, federal regulators were willing to let the bank fail to reduce moral hazard and so other banks would rein in some of their more risky lending practices. Members of Congress and the press, however, felt that Continental Illinois was "too big to fail". In May 1984, federal banking regulators finally offered a $4.5 billion rescue package to Continental Illinois.
Continental Illinois itself may not have been too big to fail, but its collapse could have caused the failure of some of the largest banks. The American banking system had been significantly weakened by the severe recession and the effects of deregulation. Had other banks been forced to write off loans to Continental Illinois, institutions like Manufacturer's Hanover Trust Company, Bank of America, and perhaps Citicorp would have become insolvent.
Saving and loan crisisEdit
The recession also significantly exacerbated the savings and loan crisis.
In 1980, there were approximately 4590 state and federally chartered savings and loan institutions (S&Ls), with total assets of $616 billion. From 1979, they began losing money because of spiraling interest rates. Net S&L income, which had totaled $781 million in 1980, fell to a loss of $4.6 billion in 1981 and a loss of $4.1 billion in 1982. The tangible net worth for the entire S&L industry was virtually zero.
The Federal Home Loan Bank Board (FHLBB) regulated and inspected S&Ls and administered the Federal Savings and Loan Insurance Corporation (FSLIC), which insured deposits at S&Ls. The FHLBB's enforcement practices were significantly weaker than those of other federal banking agencies. Until the 1980s, savings and loans had limited lending powers and so the FHLBB was a relatively small agency, overseeing a quiet, stable industry. Unsurprisingly, the FHLBB's procedures and staff were inadequate to supervise S&Ls after deregulation. Also, the FHLBB was unable to add to its staff because of stringent limits on the number of personnel that it could hire and the level of compensation it could offer. The limitations were placed on the agency by the Office of Management and Budget and were routinely subject to the political whims of that agency and political appointees in the Executive Office of the President. In financial circles, the FHLBB and FSLIC were called "the doormats of financial regulation."
Because of its weak enforcement powers, the FHLBB and FSLIC rarely forced S&Ls to correct poor financial practices. The FHLBB relied heavily on its persuasive powers and the US states to enforce banking regulations. With only five enforcement lawyers, the FHLBB would have been in a poor position to enforce the law, even if it had wanted to.
One consequence of the FHLBB's lack of enforcement abilities was the promotion of deregulation and of aggressive, expanded lending to forestall insolvency. In November 1980, the FHLBB lowered net worth requirements for federally insured S&Ls from 5% of deposits to 4%. The FHLBB lowered net worth requirements again to 3% in January 1982. Additionally, the agency required S&Ls to meet those requirements only over 20 years. The rule meant that S&Ls less than 20 years old had practically no capital reserve requirements. That encouraged extensive chartering of new S&Ls since a $2 million investment could be leveraged into $1.3 billion in lending.
Congressional deregulation exacerbated the S&L crisis. The Economic Recovery Tax Act of 1981 led to a boom in commercial real estate. The passage of the Depository Institutions Deregulation and Monetary Control Act and the Garn–St. Germain Act expanded the authority of federally chartered S&Ls to make acquisition, development, and construction real estate loans, and the statutory limit on loan-to-value ratios was eliminated. The changes allowed S&Ls to make high-risk loans to developers. Beginning in 1982, many S&Ls rapidly shifted away from traditional home mortgage financing and into new, high-risk investment activities like casinos, fast-food franchises, ski resorts, junk bonds, arbitrage schemes, and derivative instruments.
Federal deregulation also encouraged state legislatures to deregulate state-chartered S&Ls. Unfortunately, many of the states that deregulated S&Ls were also soft on supervision and enforcement. In some cases, state-chartered S&Ls had close political ties to elected officials and state regulators, which further weakened oversight.
As the risk exposure of S&Ls expanded, the economy slid into the recession. Soon, hundreds of S&Ls were insolvent. Between 1980 and 1983, 118 S&Ls with $43 billion in assets failed. The Federal Savings and Loan Insurance Corporation, the federal agency which insured the deposits of S&Ls, spent $3.5 billion to make depositors whole again (in comparison, only 143 S&Ls with $4.5 billion in assets had failed in the previous 45 years, costing the FSLIC $306 million). The FSLIC pushed mergers as a way to avoid insolvency. From 1980 to 1982, there were 493 voluntary mergers and 259 forced mergers of savings and loans overseen by the agency. Despite the failures and mergers, there were still 415 S&Ls at the end of 1982 that were insolvent.
Federal action initially caused the problem by allowing institutions to get involved in creating wealth by unhealthy fractional reserve practices, lending out much more money than they could ever afford to pay back out to customers if they came to withdraw their money. That ultimately led to S&Ls' failure. Later, the government's inaction worsened the industry's problems.
Responsibility for handling the S&L crisis lay with the Cabinet Council on Economic Affairs (CCEA), an intergovernmental council located within the Executive Office of the President. At the time, the CCEA was chaired by Treasury Secretary Donald Regan. The CCEA pushed the FHLBB to refrain from re-regulating the S&L industry and adamantly opposed any governmental expenditures to resolve the S&L problem. Furthermore, the Reagan administration did not want to alarm the public by closing a large number of S&Ls. Such actions significantly worsened the S&L crisis.
The S&L crisis lasted well beyond the end of the economic downturn. The crisis was finally quelled by passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The estimated total cost of resolving the S&L crisis was more than $160 billion.
The recession, which has been termed the "Reagan recession", coupled with budget cuts, which were enacted in 1981 but began to take effect only in 1982, led many voters to believe that Reagan was insensitive to the needs of average citizens and favored the wealthy. In January 1983, Reagan's popularity rating fell to 35%, approaching levels experienced by Richard Nixon and Jimmy Carter at their most unpopular periods. Although his approval rating did not fall as low as Nixon's during the Watergate scandal, Reagan's re-election seemed unlikely.
Pressured to counteract the increased deficit caused by the recession, Reagan agreed to a corporate tax increase in 1982. However, he refused to raise income tax or to cut defense spending. The Tax Equity and Fiscal Responsibility Act of 1982 instituted a three-year, $100 billion tax hike, the largest tax increase since the Second World War.
The 1982 US midterm elections were largely viewed as a referendum on Reagan and his economic policies. The election results proved to be a setback for Reagan and his Republicans. The Democrats gained 26 seats in the US House of Representatives seats, then the most for the party in any election since the "Watergate year" of 1974. However, the net balance of power in the US Senate was unchanged.
In the UK, economic growth was re-established by the end of 1982, but the era of mass unemployment was far from over. By the summer of 1984, unemployment had hit a new record of 3.3 million although the Great Depression had seen a higher percentage of the workforce unemployed. It remained above the 3 million mark until the spring of 1987, when the Lawson Boom, seen as the consequence of tax cuts by Chancellor Nigel Lawson, sparked an economic boom that saw unemployment fall dramatically. By early 1988, it was below 2.5 million; by early 1989, it fell below 2 million. By the end of 1989, it was just over 1.6 million, almost half the figure of three years earlier. However, the unemployment figures did not include benefit claimants who were placed on Employment Training schemes, an adult variant of the controversial Youth Training Scheme, who were paid the same rate of benefit for working full-time hours. Other incentives that aided the British economic recovery after the early 1980s recession included the introduction of Enterprise Zones on deindustrialised land in which traditional industries were replaced by new industries as well as commercial developments. Businesses were given temporary tax breaks, and exemptions as incentives to set up base in such areas.
The midterm elections were the low point of Reagan's presidency.
According to Keynesian economists, a combination of deficit spending and the lowering of interest rates would slowly lead to economic recovery. Many economists also insist that the significantly-lower tax rates significantly contributed to the recovery. From a high of 10.8% in December 1982, unemployment gradually improved until it fell to 7.2% on Election Day in 1984. Nearly two million people left the unemployment rolls. Inflation fell from 10.3% in 1981 to 3.2% in 1983. Corporate income rose by 29% in the July–September quarter of 1983, compared with the same period in 1982. Some of the most dramatic improvements came in industries that were the hardest hit by the recession, such as paper and forest products, rubber, airlines, and the auto industry.
By November 1984, voter anger at the recession had evaporated, and Reagan's re-election was certain. Reagan was subsequently re-elected by a landslide electoral and popular vote margin in the 1984 presidential election. Immediately after the election, Dave Stockman, Reagan's OMB manager admitted that the coming deficits were much higher than the projections that had been released during the campaign.
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