WHEN THE NATIONAL Bureau of Economic Research (NBER) announced in December 2008 that the U.S. economy had been in a recession since the previous December, it hit American citizens with a dull thud. The word “recession” had been whispered over cubicles and at dinner tables, splashed in sensationalist headlines on tabloids and magazines, and calmly and firmly denied by politicians for months. By the time the rumors were confirmed, it was hardly news. Still, forewarned is not forearmed, and assuming the worst did nothing to diminish the ensuing fear. Traditionally, a recession is defined as two consecutive quarters of decreasing gross domestic product, although the official designation is determined by the NBER as “a significant decline in economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production and wholesale-retail sales.” By either standard, the American economy is in a recession. While this is surely no cause for celebration, it is also not cause for apocalyptic speculation. Economic contractions are as natural and necessary as expansions, and although it may be more severe than normal, it is also bound to turn around.
Including the current one, there have been 11 recessions since the Great Depression according to the NBER—and the country has survived each. Read on to learn the history behind a few of America’s economic turmoils in recent memory, and see what the government did to remedy the situation.
The 1970s
The Duration: November 1973 to March 1975
The Cause: The Vietnam War led to increases in military spending at a time when America was suffering both international payment and trade deficits. As a response to international demands for payment, President Nixon abandoned the Bretton Woods system of basing currency exchange on the value of gold, effectively taking the dollar off the gold standard. This started a chain reaction of other countries abandoning the gold standard, leading to a period of economic volatility as international currencies stabilized in relation to one another. This precipitated the stock market crash of 1973, affecting economies worldwide. The same year, OPEC placed an oil embargo on the United States because of America’s support of Israel during the Yom Kippur War.
The Response: The perpetual increases in inflation were not predicted by standard economic models, and several policies attempted by the administration failed to curtail the trend. Following a rejected tax proposal by then-head of the Council for Economic Advisors, Alan Greenspan, Congress passed several tax cuts for individuals and businesses, as well as a one-time tax rebate. The government borrowed money heavily to sponsor the tax cuts as well as to create public service jobs, and although the federal deficit doubled twice in this period, the increased activity from the government and boost from the tax cuts had the intended effect of reducing both inflation and inspiring confidence in the private sector with the prospect of an improved economy. This in turn promoted private investment, causing the stock market to slowly regain traction.
The 1980s
The Duration: July 1981 to November 1982
The Cause: Inflation resulting from the oil crises of 1973 and 1979 continued to increase despite the stabilization of oil price and supply. Unemployment in the early ’80s escalated dramatically to over 10 percent, as many industries, including the manufacturing, automobile and real-estate sectors, were affected by the stagnant economy. In addition, in 1980, banks received increased lending power, leading several to invest in real-estate loans immediately before the recession began, causing widespread bank failures as many citizens defaulted on their mortgages.
The Response: To curb the rampant inflation from the 1970s, Paul Volcker, chairman of the Federal Reserve, severely increased federal funds rates, leading to equally steep interest rates, essentially inciting a recession intentionally to prevent inflation from growing beyond control. To pull the economy out of this manufactured recession, President Reagan ordered a series of tax cuts, the Economic Recovery Tax Act of 1981, which provided a 25 percent decrease in the personal marginal tax rate, and later supplemented the law with the Tax Equity and Fiscal Responsibility Act of 1982, which temporarily increased specific corporate taxes.
The 1990s
The Duration: July 1990 to March 1991
The Cause: Following a drastic drop in the Dow Jones in 1987 known as “Black Monday,” several countries with strong ties to the United States entered into prolonged recessions. The reduced U.S. gross domestic product stemming from the international slowdown combined with increased oil costs resulting from the Gulf War, simultaneously escalated American unemployment and inflation respectively. Savings and loan organizations, already in trouble from the prior decade, were failing at an accelerated rate, drastically impacting the real-estate market and jeopardizing the savings of countless Americans.
The Response: In response to economic conditions and a credit crunch occurring in America, the Federal Reserve opted to lower interest rates. Ten separate decreases in the federal funds rate in 1991 dropped the percentage from 6.75 to 4, ultimately going as low as 3 percent in 1992. These decreases, a more than 50 percent cut in less than two years, bolstered the economy and is viewed as one of the factors leading to the economic boom of the mid and late ’90s. PPR
Information in this article is taken from the National Bureau of Economic Research website, www.nber.org; the Federal Reserve website, www. federalreserve.gov; and the United States House of Representatives website, www.house.gov.
Kyle A. Richardson is the editorial director of Promo Marketing. He joined the company in 2006 brings more than a decade of publishing, marketing and media experience to the magazine. If you see him, buy him a drink.