Excerpt from an interesting post from Michael Yates’s blog, Cheap Motels and a Hotplate: An Economist’s Travelogue. I had seen the article by David Leonhardt claiming that the current recession is not (yet) as bad as the 1982 recession. I wondered whether he was off the mark, and Mike gives us a nice answer to that question.
In an interesting article in the Business Section of the New York Times for January 21, 2009, David Leonhardt says that “It’s Bad But 1982 Was Worse.” He uses the labor market statistics just discussed to argue that the downturn of 1982 was worse than the current recession. 1982 was bad. I lived in Johnstown, Pennsylvania then, and I remember that the state’s Department of Labor estimated that the unemployment rate in the two-county area surrounding Johnstown (Cambria and Somerset counties) hit 26%. The state doesn’t use the same method to estimate unemployment that the Bureau of Labor Statistics employs, but even if there is a larger margin of error in local unemployment rate estimates, 26% unemployment is evidence of economic catastrophe. We don’t know how many hidden unemployed there were in the Johnstown area, but there must have been quite a few, implying that the expanded rate must have been well over 30%. Nationally in 1982, the unemployment rate hit double digits during some months. For the entire year, the official unemployment rate was a whopping 9.7%. We’ll have to see considerably more job loss in 2009 for the yearly rate to hit this level. In 1982 the expanded unemployment rate peaked at 16.3%, again much higher than today’s 13%. In 1982, like today, home sales plummeted, even more than now.
I suppose that Leonhardt wrote his column to put our current economic mess into perspective, maybe to remind us (many of us weren’t alive in 1982 or too young to remember) that yes, things are bad but they have been worse. So don’t despair. He does tell us that worse things might well happen and the economy might continue to deteriorate, but the overall thrust of the article is optimistic.
There are serious problems with Leonhardt’s comparison of 1982 and today. Then the Federal Reserve was in the process of ridding the economy of inflation, which had burgeoned in the late 1970s. Inflation benefits debtors—who are more likely to be in the working class—because they get to pay back loans with depreciated dollars. It therefore harms creditors, like banks, and these and their owners have always been prime concerns of the Fed. Federal Reserve chairman Paul Volcker (name sound familiar? He is on Obama’s economic team) pushed interest rates into the stratosphere. I had cash in a money market fund that was paying more than 15% interest. As the Fed tightened, less money was availalble to banks to lend out, and they responded by increasing their rates to prospective borrowers. Business firms couldn’t secure short-term loans, and this wreaked havoc on some industries, notably the steel companies, which began to downsize and shed workers. By the end of the 1980s, Johnstown had lost thousands of high-paying mill jobs, as had other steel towns, like Pittsburgh and Gary. This was when, as Leonhardt points out, the term “rust belt” became part of the language. One of the outcomes of the de-industrialization, helped along by the high interest rates, was a gravely weakened labor movement (President Reagan helped here too with his historic firing of the striking Air Traffic Controllers). The economic bleeding and the consequent arrow to the heart of organized labor set the stage for the implementation of the regime of deregulation, cuts in social programs, and privatization known as neoliberalism. All of this is to say that the recession of 1982 served a political purpose—to squeeze workers and help employers gain the upper hand vis-a-vis unions, while laying the groundwork for the freedom of movement of capital that characterizes the world economy today.
Read the whole post, which includes some other nice bits about growth, GDP, and inequality.