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1980-82 Early 1980s Recession

SUMMARY:

Between 1980 and 1982 the U.S. economy experienced a deep recession, the primary cause of which was the disinflationary monetary policy adopted by the Federal Reserve. The recession coincided with U.S. President Ronald Reaganís steep cuts in domestic spending and led to minor political fallout for the Republican Party. A gradual loosening of monetary policy as well as the stimulative effects of tax cuts and defense spending increases promoted a sustained yet uneven recovery.

DESCRIPTION:

In January 1980 the U.S. economy entered a recession that, at the time, was the most significant since the Great Depression. One of the causes of the early 1980s recession was the Iranian Revolution of 1979, which sparked a second large round of oil price increases. More important, however, were Federal Reserve Chairman Paul Volckerís efforts to tame inflation through restrictive monetary policy, which had the expected effect of dampening economic growth. The American economy experienced a modest recovery beginning in the summer of 1980 but declined again from July 1981 to November 1982.

The robust recovery that followed remains the source of considerable dispute, with some giving credit to the stimulative effects of the Reagan era tax cuts (link to paper on 1981 OBRA and ERTA), others crediting the Reagan era defense buildup ("military Keynesianism"), and others pointing to the Fedís gradual loosening of monetary policy. Nevertheless, the recovery was both uneven and tenuous. During the 1980s the incomes of wealthy and working class Americans began to diverge sharply, and Reaganís fiscal policies led to unprecedented federal budget deficits and a massive buildup of the national debt.

The 1980-82 recession, which the National Bureau of Economic Research considers as two separate recessions (one lasting for the first six months of 1980, the other from July 1981 to November 1982), had modest political consequences for Ronald Reagan and the rest of the Republican Party. Public opinion polls showed widespread disapproval with Reaganís handling of the economy, and Democrats gained 26 House seats in the 1982 midterm elections. Yet Reaganís approval ratings recovered along with the economy in late 1982, and he easily won reelection in 1984.

FURTHER INFORMATION:

Martin Feldstein, ed., American Economic Policy in the 1980s (National Bureau of Economic Research and the University of Chicago Press, 1994).

Charles F. Stone and Isabel V. Sawhill, Economic Policy in the Reagan Years (The Urban Institute, 1984).

Joseph White and Aaron Wildavsky, The Deficit and the Public Interest: The Search for Responsible Budgeting in the 1980s (University of California, 1989).

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