cy was to minimize unemployment. But the winter of 1982 saw 12 million men and women unemployed, and many complained bitterly
that they were the victims of a needlessly cruel government policy. This time public enemy number one was inflation and the jobless workers were the casualties
in the war.
From Richard Nixon through Jimmy Carter, President
after President set out to fight inflation. But when that fight threatened to increase
unemployment, President after President reversed course, opting for stimulative
policies to keep the economy growing and unemployment low.
When the Federal Reserve began once again to tighten the money supply, workers and businessmen alike refused to believe that the
government was serious about ending inflation. Wages and prices continued
upwards, growing faster than the money supply. Finally, as unemployment passed10%, the inflation rate began to drop. In August, Fed Chairman Paul Volcker announced that the time had come to ease monetary policy. Wall Street was the first to respond. But the bitter memories of the recession lingered on
and faith in counter-cyclical policy was one of the casualties. By 1985, after 2 years of recovery, inflation remained at 4%...but the economy still
bore the scars of the recession. Millions of manufacturing jobs were gone for good... and unemployment remained stuck at 7%. Fifteen years of entrenched inflationary expectations had been sharply reduced, but only after the government had finally proven its willingness to pay the price necessary to wring inflation out of the economic system.
Comment and Analysis by Richard Gill One could argue that the difficult times of the early 1980s were really a reflection of the success of our past policies. The very success of these policies, however, undoubtedly contributed to the recent inflationary tendencies of the economy and, perhaps more significantly, to the expectation of future inflation. By 1980, they had created a general sense that the government would back down in the inflation fight as soon as it began to create serious costs in terms of recession and unemployment. People, in short, began
betting on continued inflation. And this made the governments task infinitely
more difficult. The government had to act strongly enough to break the back of these well entrenched inflationary expectations. It not only had to fight inflation,
but to fight a general belief that it would not fight inflation that hard. Expectations are important in economics. They made the task of monetary policy much harder in the early 1980s.
Foreign Trade Effects In 1983 America came bouncing out of the recession with a boisterous recovery. However, out of all those billions of dollars of consumer spending, too much seemed to be pouring overseas. At the same time, foreigners had a high percentage of our
national debt. By 1985, economists both here and abroad were asking, "Is our
domestic economy the hostage of international forces?" Those international forces had been building throughout the 1970s. During that decade, the percentage of our economy devoted to foreign trade doubled. 1983 was a year of vigorous growth for America as the economic recovery surged ahead. It soon became obvious that many Americans were being left behind. While millions of jobs were being created in the service industries, millions more in manufacturing appeared gone for good
lost to overseas competition. In the 60s and 70s, expansive economic policies had created jobs for American workers. Now these same policies were creating jobs overseas while Americans remained unemployed. The situation was causing severe
problems for American policymakers You may want to expand the economy
us say by budget deficit or easier money
but some of this demand goes abroad.
People buy Japanese cars and so you get expansion in Japan but not in Detroit. For
instance, weve got a 200-odd billion dollar budget deficit, but half of the money is going abroad and so were getting stimulation only from alf. Fiscal policy is losing much of its power."
No one in the Reagan administration had forese