 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 foreseen this effect in 1981 when the administration first embarked on its expansive course
as our trade deficit shot past the 100 billion dollar mark, economists and politicians
alike began to search for a solution. Most economists agreed that the trade deficit
was caused by the overly strong American dollar, which was in turn caused by the
runaway budget deficit. But many politicians began to argue for trade barriers to
keep out the flood of imports. The Reagan administration resisted this approach.
Five months after the Bonn summit, the U.S., Japan,
France, Britain and Germany announced a coordinated effort to reduce the value of
the U.S. dollar. The move was a promising effort to ease the U.S. international trade dilemma and possibly create more jobs for American workers. But major problems remained. By 1985, the United States was running 200 billion dollar budget deficits. But half the economic stimulus, the amount of the U.S. trade deficit, was going overseas and any effort to contain this deficit or to promote continued growth had a major impact around the world
Comment and Analysis by Richard Gill
The main reason the international aspect is so important today is that the numbers are so big. In 1971 the deficit was a little over $2 billion. By 1984, it was over $105 billion. And what these numbers mean is that we cant separate our domestic
stabilization policies from our international trade policies.
The Employment Act of 1946 created a Council of Economic Advisors to give the president the benefit of the best economic advice. For almost 40 years the essence of this advice was to manipulate the economy to prevent inflation and to promote growth. It was called counter-cyclical policy. But, by 1985, the man who occupied this office was urging a receptive president to keep his hands off. By 1985, the man who held this office sharply rejected the idea that the government could fine tune the economy. Monthly fine-tuning of monetary policy created havoc in the economy,
When Paul Volcker initiated a new monetary policy