Boom to Bust - International Factors that Affected the US Economy

It should be known that from 1945-68, the US experienced a great economic boom, and the reasons for this are in part 2 of these notes, but here is a brief overview:

• Inflation was low
• Successive administrations ran a surplus when it came to the budget
• Consumer demand was high
• Productivity of workers was very high

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Here are some of the factors that affected the US economic status post-1968:

• International Competition
• The Vietnam War
• 1970's Recession
• Oil Crises' in the 1970's

From there, in the next notes section, we will focus on Reaganomics, what it was, and whether it was a success.

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Downturn of the US Economy from 1968 Onwards

Oil Crises

In the 1970s, the United States faced two major oil crises. The first occurred in 1973 when the Organisation of Arab Petroleum Exporting Countries (OAPEC) imposed an oil embargo against the U.S. in response to its support for Israel during the Yom Kippur War. The second crisis happened in 1979 following the Iranian Revolution, which disrupted oil production and supply.

These crises led to a sharp increase in oil prices, causing widespread economic problems. Higher oil prices meant higher costs for transportation, manufacturing, and heating, leading to inflation—when the prices of goods and services rise. Inflation reduced people's purchasing power, meaning they could buy less with the same amount of money. The high oil prices also hurt businesses, as they faced higher production costs, leading to reduced profits and, in some cases, layoffs. The overall effect was slower economic growth and increased unemployment, contributing to a period of economic hardship known as stagflation, where high inflation and high unemployment occurred simultaneously.

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Deindustrialisation

Deindustrialisation refers to the decline of manufacturing industries in the United States, which began in the late 1960s and accelerated in the 1970s and 1980s. Many factories closed or moved overseas where labor was cheaper. This shift was driven by globalisation, technological advancements, and companies seeking to cut costs and increase profits.

The decline of manufacturing had several negative effects on the U.S. economy. It led to significant job losses, especially in industrial regions known as the Rust Belt—areas in the Northeast and Midwest that were heavily dependent on manufacturing. Many workers who lost their jobs found it difficult to get new ones, leading to higher unemployment rates. The loss of well-paying manufacturing jobs also meant that many people had less money to spend, which hurt local businesses and communities. Deindustrialisation contributed to economic decline, increased inequality, and social problems in many parts of the country.

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Inflation and Stagflation

Inflation is the increase in the prices of goods and services over time, which erodes the purchasing power of money. In the 1970s, the U.S. experienced high inflation rates, partly due to the oil crises and excessive government spending. Stagflation, a combination of stagnant economic growth, high inflation, and high unemployment, became a significant problem during this period.

Several factors contributed to stagflation. The oil crises increased production costs, leading to higher prices for goods and services. At the same time, the decline in manufacturing jobs reduced employment opportunities. Government policies, such as high spending levels without corresponding taxes increases, also fuelled inflation. High inflation made everyday items more expensive for consumers, while high unemployment meant that fewer people had jobs to afford these items. Rising prices and fewer jobs made it challenging for many Americans to make ends meet, leading to widespread economic dissatisfaction.

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Government Policies

Government policies in the 1970s and early 1980s also contributed to economic problems. Presidents and Congress attempted various strategies to address inflation, unemployment, and economic stagnation, but not all were successful.

For example, President Richard Nixon implemented wage and price controls in the early 1970s to combat inflation. These controls were meant to keep prices and wages from rising too quickly, but they often led to shortages of goods and inefficiencies in the market. President Jimmy Carter focused on reducing government spending and increasing taxes to control inflation, but these measures were unpopular and did not immediately improve the economy. The Federal Reserve, the central bank of the United States, also played a role by changing interest rates to control inflation. High interest rates helped reduce inflation but also made borrowing more expensive, which slowed down economic growth and investment.

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Foreign Competition

The rise of foreign competition from countries like Japan and Germany also contributed to the downturn of the U.S. economy. These countries rebuilt their economies after World War II and became major exporters of high-quality goods, such as cars and electronics.

American industries struggled to compete with these efficient and innovative foreign companies. As a result, many U.S. companies lost market share, leading to factory closures and job losses. The auto industry, for example, faced significant challenges as Japanese cars became popular for their reliability and fuel efficiency. The increased competition put pressure on American companies to improve their products and reduce costs, but many struggled to adapt quickly enough. This loss of competitiveness hurt the U.S. economy by reducing exports and increasing imports, leading to trade deficits—where the value of imports exceeds the value of exports.

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Key Terms

• Stagflation: A combination of stagnant economic growth, high inflation, and high unemployment.
• Deindustrialization: The decline of manufacturing industries, leading to factory closures and job losses.
• Rust Belt: Regions in the Northeast and Midwest of the U.S. that were heavily dependent on manufacturing.
• Inflation: The increase in prices of goods and services over time, reducing the purchasing power of money.
• Trade Deficit: A situation where the value of a country's imports exceeds the value of its exports.

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