photorandy2023 Our Economy

Our Economy: The Good, The Bad, and The Ugly–Chapter Seven–Late 20th Century

The late 20th-century American economy, particularly the 1990s, was characterized by a powerful economic boom, low unemployment, and a budget surplus, but also faced long-term challenges including increased wealth inequality and growing foreign trade deficits. Key features of the period included strong growth, particularly in the “long boom” that started in 1982 and continued through the 1990s under the presidencies of Reagan and Clinton, fueled by technological innovation and increased global trade. However, the decade also saw the rise of mergers, a weakening manufacturing sector due to automation, and growing concerns about economic insecurity for some workers. 

Key Trends and Characteristics

  • Technological Innovation: The development of modern corporations and advancements in technology drove continuous economic growth and sparked new industries and products. 
  • Globalized Markets: Opening up global trade routes was seen as beneficial for the economy, though it also contributed to competition in some domestic sectors. 
  • Budget Surplus and Low Unemployment: The late 1990s saw the government post a budget surplus and the stock market boomed, with the U.S. accounting for a significant portion of global economic output. 
  • The “Long Boom”: This period of sustained economic expansion from 1982 to the late 1990s was a historical high point for the American economy, driven by factors like responsible monetary policy and open global markets. 
  • Automation and Job Insecurity: Automation began to take over certain jobs, leading to increased economic insecurity for some workers, even as overall economic growth continued. 
  • Increased Inequality: A growing gap between the wealthy and the poor contributed to a feeling of insecurity for many, despite the overall economic prosperity. 

Key Challenges

  • Foreign Trade Deficit: The U.S. ran a persistent deficit in foreign trade, indicating that the nation was importing more than it was exporting. 
  • Environmental Concerns: While the economy thrived, environmental quality remained a long-term challenge. 
  • Corporate Consolidation: The trend of mergers and increased corporate power contributed to inequality and raised concerns about economic concentration.

A History of American Economic Growth in the 20th Century

As the American economy matured in the 20th century, the freewheeling business mogul lost luster as an American ideal. The crucial change came with the emergence of the corporation, which appeared first in the railroad industry. Other industries soon followed. Business barons were being replaced by “technocrats,” high-salaried managers who became the heads of corporations. By the start of the 20th century, the era of the industrialist and the robber baron was coming to a close. It was not so much that these influential and wealthy entrepreneurs (who generally personally owned majority and controlling stakes in their industry) disappeared, but rather that they were replaced with corporations. The rise of the corporation triggered, in turn, the rise of an organized labor movement that served as a countervailing force to the power and influence of business.

The Changing Face of the Early American Corporation

The largest early 20th-century corporations were much larger and more complicated than the commercial enterprises that came before. To maintain profitability in a changing economic climate, American companies in industries as diverse as oil refining to whiskey distilling began to emerge in the late 19th century. These new corporations, or trusts, were exploiting a strategy known as horizontal combination, which granted those corporations the ability to limit production in order to raise prices and maintain profitability. But these corporations regularly ran into legal trouble as violations of the Sherman Antitrust Act.

Some companies took another route, employing a strategy of vertical integration. Instead of maintaining prices through control of the production supply as in horizontal strategies, vertical strategies relied on obtaining control in all aspects of the supply chain required to produce their product, which gave these corporations more control over their costs. With more control over costs came more stable and protected profitability for the corporation.

With the development of these more complicated corporations came the need for new management strategies. Though the highly centralized management of previous eras did not entirely disappear, these new organizations gave rise to more decentralized decision-making through divisions. While still overseen by central leadership, divisional corporate executives would eventually be given more responsibility for business decisions and leadership in their own piece of the corporation. By the 1950s, this multi-divisional organizational structure became the growing norm for large corporations, which generally moved corporations away from reliance on high-profile executives and solidified the fall of the business barons of the past.  

The Technological Revolution of the 1980s and 1990s

The technological revolution of the 1980s and 1990s, however, brought a new entrepreneurial culture that echoed the age of tycoons. For instance, Bill Gates, the head of Microsoft, built an immense fortune developing and selling computer software. Gates carved out an empire so profitable that by the late 1990s, his company was taken into court and accused of intimidating rivals and creating a monopoly by the U.S. Justice Department’s antitrust division. But Gates also established a charitable foundation that quickly became the largest of its kind. Most American business leaders of today do not lead the high-profile life of Gates. They differ greatly from the tycoons of the past. While they direct the fate of corporations, they also serve on boards of charities and schools. They are concerned about the state of the national economy and America’s relationship with other nations, and they are likely to fly to Washington to confer with government officials. While they undoubtedly influence the government, they do not control it — as some tycoons in the Gilded Age believed they did.

Post industrial (service) economy

Manufacturing employment and nominal value added shares of the economy have been in a steady decline since World War II. In the late 1960s manufacturing’s share of both employment and nominal value added was about 26%, falling to about 11% and 12% respectively by the end of the century.

Per-capita steel consumption in the U.S. peaked in 1977, then fell by half before staging a modest recovery to levels well below the peak.

Service sector expansion

The decline in the relative size of manufacturing coincided with a rise in the size of the service sector.

Productivity slowdown

Technological innovations of the final third of the 20th century were significant, but were not as powerful as those of the first two-thirds of the century. Manufacturing productivity growth continued at a somewhat slower rate than in earlier decades, but overall productivity was dragged down by the relative increase in size of the government and service sectors.

Inflation woes: 1970s

The postwar boom ended with a number of events in the early 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. The United States grew increasingly dependent on oil importation from OPEC after peaking production in 1970, resulting in oil supply shocks in 1973 and 1979. 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 small, 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.

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.

Deregulation and Reaganomics: 1976–1992

US federal minimum wage if it had kept pace with productivity. Also, the real minimum wage.

Deregulation gained momentum in the mid-1970s, spurred by slow productivity growth and increasing operation and capital costs in several key sectors. It was not until 1978 that the first meaningful deregulation legislation, the Airline Deregulation Act, was cleared by Congress. Transportation deregulation accelerated in 1980, with the deregulation of railroads and trucking. Deregulation of interstate buses followed in 1982. In addition to transportation deregulation, savings and loan associations and banks were partially deregulated with the Depository Institutions Deregulation and Monetary Control Act in 1980 and the Garn–St. Germain Depository Institutions Act in 1982.

On a broader front, the economy initially recovered at a brisk pace from the 1973–75 recession. Incoming president Jimmy Carter instituted a large fiscal stimulus package in 1977 in order to boost the economy. However, inflation began a steep rise beginning in late 1978, and rose by double digits following the 1979 energy crisis. In order to combat inflation, Carter appointed Paul Volcker to the Federal Reserve, who raised interest rates and caused a sharp recession in the first six months of 1980. In March 1980, Carter introduced his own policies for reducing inflation, and the Federal Reserve brought down interest rates to cooperate with the initiatives.

During the 1980 recession, manufacturing shed 1.1 million jobs, while service industries remained intact. Employment in automotive manufacturing in particular suffered, experiencing a 33% reduction by the end of the recession. Collectively these factors contributed to the election of Ronald Reagan in 1980. The Federal Reserve once again began to raise interest rates in 1981, which plunged the economy back into recession. Unemployment rose to a peak of 10.8% in December 1982, a post-war high.

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 Volcker‘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 dropped well under 6% unemployment at the end of Reagan’s presidency in January 1989.

20 million jobs were created under Reagan’s presidency – which were made up of 82 percent high-paying and long-term jobs. From 1982 to 1987 the Dow Jones Industrial Average gained over 1900 points from 776 in 1982 to 2722 in 1987 – about a 350% increase. An economic boom took place from 1983 until a recession began in 1990. Between 1983 and 1989 the number of people below the poverty line decreased by 3.8 million.

The boom saw the increasing popularity of electronic appliances like computers, cell phones, music players and video games. Credit cards were a symbol of the boom. The Reagan tax cuts seemed to work and Americans were able to shrug off the crash of 1987 by the beginning of 1988. The growth ended by 1990 after seven years of stock market growth and prosperity for the upper and middle class. The federal debt spawned by his policies tripled (from $930 billion in 1981 to $2.6 trillion in 1988), reaching record levels.

Though debt almost always increased under every president in the latter half of the 20th century, it declined as a percentage of GDP under all presidents after 1950 and prior to Reagan. 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 sometimes seen as 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

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, most orthodox economists, and most policy makers, pointed to the fact that consumers could buy so many goods, even with the inflation of the 1970s, as evidence that the general shift away from manufacturing and into services was creating widespread prosperity. In 1968, the U.S. Gini coefficient was 0.386. In 2005, the American Gini coefficient had reached 0.469.

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 America 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. Critics however argued that this consumer behavior was giving a false reading of the health of the economy, because it was being paid for by taking on rapidly increasing levels of indebtedness, thus covering up the stagnating wages and earnings of most of the workforce.

The rise of globalization: 1990s – late 2000

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, government debt increased by 75%, GDP rose by 69%, and the stock market as measured by the S&P 500 grew more than threefold.

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.

Globalization, deindustrialization and wage deflation

Real Income Gains in the Global Population

In 2010, Paul Krugman called for a general tariff rate of 25% on all Chinese products to halt the deindustrialization of the United States and the offshoring of American industries and factories to China. Paul Krugman notes that the trade deficit caused by free trade has been detrimental to the U.S. manufacturing sector: “There is no doubt that increased imports, particularly from China, have reduced manufacturing employment…, the complete elimination of the U.S. manufacturing trade deficit would add about two million manufacturing jobs. . In 2010, he expects Chinese surpluses to destroy 1.4 million American jobs by 2011. He therefore proposes taxing the products of certain countries to force them to readjust their currencies. He calls for a general rate of 25% on Chinese products.

In 2010, Krugman wrote that China pursues a mercantilist and predatory policy, leading to massive deindustrialization of the United States. He says it keeps its currency undervalued to accumulate trade surpluses using capital flow controls. The Chinese government sells renminbi and buys foreign currency to keep the renminbi low, giving China’s manufacturing sector a cost advantage over its competitors. China’s surpluses drain US demand, destroy US industry and slow economic recovery in other countries with which China trades. He notes that trade deficits impoverish the United States and pose a threat. Krugman writes: “This is the most distorted exchange rate policy any major nation has ever followed”. He notes that an undervalued renminbi is tantamount to high tariffs or export subsidies. A cheaper currency improves employment and competitiveness, as it makes imports more expensive while making domestic products more attractive.

Krugman notes that free trade leads to trade deficits, deindustrialization and lower real wages for less-educated workers due to competition from low-cost imports. Indeed, wages are falling more than import prices, and the problem is getting worse as trade with low-wage countries becomes more frequent. He also notes that free trade has a significant effect on deindustrialization and income inequality in developed countries.

Studies by David Autor, David Dorn and Gordon Hanson show that free trade with China cost Americans around one million manufacturing workers between 1991 and 2007. Competition from Chinese imports has led to manufacturing job losses and declining wages. They also found that offsetting job gains in other industries never materialized. Closed companies no longer order goods and services from local non-manufacturing firms and former industrial workers may be unemployed for years or permanently. Increased import exposure reduces wages in the non-manufacturing sector due to lower demand for non-manufacturing goods and increased labor supply from workers who have lost their manufacturing jobs. Other work by this team of economists, with Daron Acemoglu and Brendan Price, estimates that competition from Chinese imports cost the U.S. as many as 2.4 million jobs in total between 1999 and 2011.

Avraham Ebenstein, Margaret McMillan, Ann Harrison also pointed out in their article “Why are American Workers getting Poorer? China, Trade and Offshoring” these negative effects of trade with China on American workers.

The Economic Policy Institute, a left-leaning think tank, has claimed that free trade created a large trade deficit in the United States for decades which lead to the closure of many factories and cost the United States millions of jobs in the manufacturing sector. Trade deficits lead to significant wage losses, not only for workers in the manufacturing sector, but also for all workers throughout the economy who do not have a university degree. For example, in 2011, 100 million full-time, full-year workers without a university degree suffered an average loss of $1,800 (~$2,516 in 2024) on their annual salary. According to the Economic Policy Institute, the workers who lost their jobs in the manufacturing sector and who have to accept a reduction in their wages to find work in other sectors, are creating competition, that reduces the wages of workers already employed in these other sectors. The threat of offshoring of production facilities leads workers to accept wage cuts to keep their jobs.

According to the Economic Policy Institute, trade agreements have not reduced trade deficits but rather increased them. The growing trade deficit with China comes from China’s manipulation of its currency, dumping policies, subsidies, trade barriers that give it a very important advantage in international trade. In addition, industrial jobs lost by imports from China are significantly better paid than jobs created by exports to China. So even if imports were equal to exports, workers would still lose out on their wages.

According to the Economic Policy Institute, the manufacturing sector is a sector with very high productivity growth, which promotes high wages and good benefits for its workers. Indeed, this sector accounts for more than two thirds of private sector research and development and employs more than twice as many scientists and engineers as the rest of the economy. The manufacturing sector therefore provides a very important stimulus to overall economic growth. Manufacturing is also associated with well-paid service jobs such as accounting, business management, research and development and legal services. Deindustrialisation is therefore also leading to a significant loss of these service jobs. Deindustrialization thus means the disappearance of a very important driver of economic growth.

Executive compensation

Ratio of the average compensation of CEOs from the top 350 firms and production workers, 1965–2009. Source: Economic Policy Institute. 2012. Based on data from Wall Street Journal/Mercer, Hay Group 2010.

In the late 20th century, business executives started being paid more in stock and less in salary, and at a disproportionately greater rate compared to other employees and to their own performance. CEO compensation at the top 350 firms increased by 940.3% from 1978 to 2018 in the United States. The typical worker’s annual compensation grew just 11.9% within the same period. This disparity has been criticized as unfair, and large payouts after bad performance have been criticized as bad for shareholders.