Inflation woes: 1970s
In the late 1960s it was apparent to some that this juggernaut of economic growth was slowing down, and it began to become visibly apparent in the early 1970s. Stagflation gripped the nation, and the government experimented with wage and price controls under President Nixon. The Bretton Woods Agreement collapsed in 1971–1972, and President Nixon closed the gold window at the Federal Reserve, taking the United States entirely off the gold standard. President Gerald Ford introduced the slogan, "Whip Inflation Now" (WIN). In 1974, productivity shrunk by 1.5%, though this soon recovered. In 1976, Jimmy Carter won the Presidency. Carter would later take much of the blame for the even more turbulent economic times to come, though some say circumstances were outside his control. Inflation continued to climb skyward. Productivity growth was pitiful, when not negative. Interest rates remained high, with the prime reaching 20% in January 1981; Art Buchwald quipped that 1980 would go down in history as the year when it was cheaper to borrow money from the Mafia than the local bank.[34]
Unemployment dropped mostly steadily from 1975 to 1979, although it then began to rise sharply.
This period also saw the increased rise of the environmental and consumer movements, and the government established new regulations and regulatory agencies such as the Occupational Safety and Health Administration, the Consumer Product Safety Commission, the Nuclear Regulatory Commission, and others.
[edit] Deregulation and Reaganomics: 1974–1992
The deregulation movement began when Nixon left office and was a bipartisan operation under Ford, Carter and Reagan. Most important were the removals of New Deal regulations from energy, communications, transportation and banking. The hasty removal of some regulations of Savings and Loans while keeping federal insurance led to the Savings and Loan crisis which cost the government an estimated $160 billion.
In 1981, Ronald Reagan introduced Reaganomics, that is fiscally-expansive economic policies, cutting marginal federal income tax rates by 25%. Inflation dropped dramatically from 13.5% annually in 1980 to just 3% annually in 1983 due to a short recession and the Federal Reserve Chairman Paul Volker's tighter control of the money supply and interest rates. Real GDP began to grow after contracting in 1980 and 1982. The unemployment rate continued to rise to a peak of 10.8% by late 1982, but then dropped as sharply as it had risen to a level of 5.4% at the end of Reagan's presidency in January 1989. Critics of the Reagan Administration often point to the fact that the gap between those in the upper socioeconomic levels and those in the lower socioeconomic levels increased during Reagan's presidency; they also note that the federal debt spawned by his policies tripled (from $930 billion in 1981 to $2.6 trillion in 1988), reaching record levels. Every president in the later half of the 20th century before Reagan reduced debt as a share of GDP. In addition to the fiscal deficits, the U.S. started to have large trade deficits. Also it was during his second term that the Tax Reform Act of 1986 was passed. Vice President George H. W. Bush was elected to succeed Reagan in 1988. The early Bush Presidency's economic policies were essentially a continuation of Reagan's policies, but in the early 1990s, Bush went back on a promise and increased taxes in a compromise with Congressional Democrats. He ended his presidency on a moderate note, signing regulatory bills such as the Americans With Disabilities Act, and negotiating the North American Free Trade Agreement. In 1992, Bush and third-party candidate Ross Perot lost to Democrat Bill Clinton.[35]
The advent of deindustrialization in the late 1960s and early 1970s saw income inequality increase dramatically to levels never seen before, but at the same time never in USA consumers could buy so much goods even with the inflations in the 1970s. In 1968, the U.S.' Gini coefficient was 0.386, about equivalent to Japan (.381), though still above that of the United Kingdom (36.8) and Canada (33.1). However, in the years since deregulation and globalization have allowed U.S. companies to begin to shift their manufacturing and heavy industrial operations to second- and third-world countries with lower labor costs, income inequality in the U.S. has risen dramatically. In 2005, the American Gini coefficient had reached 0.469, similar to that of Malaysia and the Philippines, both at 46.1, and well-ahead of China (44.0). Critics of economic policies favored by Republican and Democratic administrations since the 1960s, particularly those expanding "free trade" and "open markets" say that these policies, though benefiting trading as well as the cost of products in the U.S., could have taken their own on the prosperity of the American middle-class. But in this period, consumers were buying as never before with so many products and goods at such low costs and in high quantities.
[edit] The New Economy: 1990s to 2007
Main article: New Economy
This graph shows three major stock indices since 1975. Notice the meteoric rise of the stock market in the 1990s, followed by the collapse of the dot-com bubble in 2000 on the tech-heavy NASDAQ.During the 1990s, the national debt increased by 75%, GDP rose by 69%, and the stock market as measured by the S&P 500 grew more than three-fold.
From 1994 to 2000 real output increased, inflation was manageable and unemployment dropped to below 5%, resulting in a soaring stock market known as the Dot-com boom. The second half of the 1990s was characterized by well-publicized Initial Public Offerings of High-tech and "dot-com" companies. By 2000, however, it was evident a bubble in stock valuations had occurred, such that beginning in March 2000, the market would give back some 50% to 75% of the growth of the 1990s. The economy worsened in 2001 with output increasing only 0.3% and unemployment and business failures rising substantially, and triggering a recession that is often blamed on the September 11, 2001 Terrorist Attacks.[citation needed]
Through 2001 to 2007, the red-hot housing market across the United States fueled a false sense of security regarding the strength of the U.S. Economy. Many have argued that the Clinton Administration may have to shoulder some of the blame for this housing boom and bubble. The New York Times published an article that reported the Clinton Administration pushed for Sub-prime Lending during the late 1990s: "Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people" (NYT, 30 September 1999).
In 1995, the administration also tinkered with the Carter's Community Reinvestment Act of 1977 by regulating and strengthening the anti-redlining procedures. It is felt by many that this was done to help a stagnated home ownership figure that had hovered around 65% for many years. The result was a push by the administration for greater investment, by financial institutions, into riskier loans. In a 2000 United States Department of the Treasury study of lending trends for 305 cities from 1993 to 1998 it was shown that $467 billion of mortgage credit poured out of CRA-covered lenders into low and mid level income borrowers and neighborhoods. (See "The Community Reinvestment Act After Financial Modernization, April 2000).
Additionally, under Bill Clinton, the white house also removed crucial regulation. The Washington Post wrote: "Congress also wanted to free up money for Fannie Mae and Freddie Mac to buy mortgage loans and specified that the pair would be required to keep a much smaller share of the funds on hand than other financial institutions. Where banks that held $100 could spend $90 buying mortgage loans, Fannie Mae and Freddie Mac could spend $97.50 buying loans. Finally, Congress ordered that the companies be required to keep more capital as a cushion against losses if they invested in riskier securities. But the rule was never set during the Clinton administration, which came to office that winter, and was only put in place nine years later."(WP, 14 September 2008).
Finally, in 1999, the Clinton Administration repealed part of the Glass-Steagall Act of 1933. This Act introduced the separation of financial institutes in commercial and investment banks, according to their business, in order to prevent conflicts of interest and frauds. The Act was born as a consequence of the Wall Street Crash which had uncovered many unlawful activities on the part of financial firms. The Repeal of 1999 effectively gave a free reign to banks, reintroducing them once again into the security business and eliminating the difference between categories. The result of this operation is described by the Washington Post: "Fanny and Freddie Mac enjoyed the nearest thing to a license to print money. The companies borrowed money at below-market interest rates based on the perception that the government guaranteed repayment, and then they used the money to buy mortgages that paid market interest rates." (WP, 14 September 2008).
Many assert that the forced investments during the Bill Clinton white house years, and the repeal of the Glass-Steagall Act, had a significant impact on the exponential growth of sub-prime lending and the looming 2007-2008 financial crisis.
[edit] Ongoing financial crisis
Further information: Global financial crisis of 2008, Financial crisis of 2007-2008, and Automotive industry crisis of 2008
In 2008 a perfect storm of economic disasters hit the country and indeed the entire world. The most serious began with the collapse of housing bubbles in California and Florida, and the collapse of housing prices and the construction industries. Millions of mortgages (averaging about $200,000 each) had been bundled into securities called collateralized debt obligations that were resold worldwide. Many banks and hedge funds had borrowed hundreds of billions of dollars to buy these securities, which were now "toxic" because their value was unknown and no one wanted to buy them. A series of the largest banks in the U.S. and Europe collapsed; some went bankrupt, such as Lehman Brothers with $690 billion in assets; others such as the leading insurance company AIG, the leading bank Citigroup, and the two largest mortgage companies were bailed out by the government. Congress voted $700 billion in bailout money and an activist Treasury and Federal Reserve, committed trillions of dollars to shoring up the financial system, but the measures did not reverse the declines. Banks drastically tightened their lending policies, despite infusions of federal money. It became much harder to get car loans, for example. The government for the first time took major ownership positions in the largest banks. The stock market plunged 40%, wiping out tens of trillions of dollars in wealth; housing prices fell 20% nationwide wiping out trillions more. By late 2008 distress was spreading beyond the financial and housing sectors, especially as the "Big Three" of the automobile industry (General Motors, Ford and Chrysler) were on the verge of bankruptcy, and the retail sector showed major weaknesses. Critics of the $700 billion Troubled Assets Relief Program (TARP) expressed anger that much of the TARP money that has been distributed to banks is seemingly unaccounted for, with banks being secretive on the issue.
President Barack Obama has backed the American Recovery and Reinvestment Act of 2009, a bill that would provide $800 billion to $900 billion in stimulus through a combination of spending and tax cuts. The plan is largely based on the Keynesian theory that government spending should offset the fall in private spending during an economic downturn; otherwise the fall in private spending may perpetuate itself and productive resources, such as the labor hours of the unemployed, will be wasted. Critics claim that government spending cannot offset a fall in private spending because government must borrow money from the private sector in order to add money to it. However, most economists do not think such "crowding out" is an issue when interest rates are near zero and the economy is stagnant. Opponents of the stimulus also point to problems of possible future inflation and government debt caused by such a large expenditure.
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