Thursday, January 22, 2009

And Now You Find Yourself in '82

The Times' David Leonhardt reminds us that the recession of the early 1980's was worse than the current one (so far):
The recession of the early 1980s doesn’t have a catchy name, and almost half of Americans are too young to have any real memory of it. But it was terrible — qualitatively different from the mild recessions of 1990-91 and 2001.

The first big blow to the economy was the 1979 revolution in Iran, which sent oil prices skyrocketing. The bigger blow was a series of sharp interest-rate increases by the Federal Reserve, meant to snap inflation. Home sales plummeted. At their worst, they were 30 percent lower than they are even now (again, adjusted for population size). The industrial Midwest was hardest hit, and the term “Rust Belt” became ubiquitous. Many families fled south and west, helping to create the modern Sun Belt...

So why are public opinion polls showing Americans to be even gloomier about the economy today than they were back then? I think there are two main reasons.

First, the economic expansion that just ended wasn’t as good as the 1970s expansions. The ’70s get a bad rap, and deservedly so in many ways. But median family income still rose 2 percent during the decade, after adjusting for inflation. Over the past decade, it has fallen.

Second, people seem to understand that the worst is yet to come — that the economy has not yet worked off its excesses.
I'd suggest another reason - the reduction in macroeconomic volatility after the mid-1980's (formerly) known as the "great moderation." There were only two recessions between 1982 and the current one, and they were both relatively short and minor, which means that we are much less accustomed to big economic swings now than we were 27 years ago. In 1982, however, the turbulence of the 1970's was still a fresh memory. The "double dip" recessions of 1980 and 1981-82 came only a few years after the severe 1973-75 recession, so perhaps it is not surprising people felt like this:

1982 also saw a bottoming out of the stock market, Floyd Norris recalls.

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