Jon Talton: Today’s Recession Is Different From Those of the 1980s





My Britannica Blog colleague Mark J. Perry laid out some telling statistics last week, contrasting the current downturn with the nasty recession of the early 1980s. For example, the prime rate was 20.5 percent in 1981 compared with 3.25 percent now. Inflation was 14.8 percent in 1980 — it was essentially zero in December 2008.

His point was echoed in a Jan. 21 column by New York TimesDavid Leonhardt, who argued, as the headline put it, “the economy is bad, but 1982 was worse.” Looking at broad Labor Department measures of the unemployed, underemployed and discouraged workers, 1982 toted up 16.31 percent broad unemployment vs. today’s more than 13 percent. He reminded readers too young to recall how in the late 1970s and early 1980s housing sales plummeted, interest rates and inflation skyrocketed and oil prices jumped.

We should be cautious about overstating the current crisis and heed the copy editor’s reluctance to let the word “unprecedented” creep into stories. Leonhardt writes, “The biggest risk is that these problems will feed on themselves and make the situation even worse than now seems likely.”

All good points.

Yet having lived through the 1980-82 recession(s) as an adult, it’s also important that we understand how today’s economic disruption is different and dangerous. It’s not all in our heads, as some critics of the media might have it.

As Leonhardt concedes, we have yet to see how badly the unemployment and housing sales rates go this time. We have yet to hit bottom. I’ll add some other ways our situation is different from 1982, and even from 1932. This takes us beyond “worse” or “better” arguments, to focus on the distinct nature of this recession.

1. China was barely a blip on the world economy in 1982. Today it is in many ways a controlling force for better or worse. For example, the United States owes China some $1 trillion in debt, largely Treasury securities, sold to finance our trade deficit and multiple wars. China and America are locked in an unsustainable and reckless “debt-for-stuff” relationship. Were it to deflate suddenly, it could make the popping of the housing bubble look small by comparison. In addition, China has become the world’s factory and is feeling the sharp slowdown, closing plants, laying off workers and losing the rapid growth that allowed it to absorb large numbers of rural poor and provide upward mobility for the better off, particularly in the prosperous coastal crescent. Now unrest is growing and could prove destabilizing.

2. Peak oil. The United States was only a few years past its peak in oil production in 1982, and world production remained ahead of demand — India, China and the communist block had yet to enter the world economy as big energy guzzlers. That’s all changed now. World peak is happening or near and the nations of this petroleum-addicted world are far from making the necessary adjustments to make the transition to a future of much more expensive energy. This is another recipe not only for economic disruption but also for geopolitical conflict.

3. Global warming. In 1982, it was a rarefied theory. Now it’s a clear and present danger. Pundits and policymakers can bicker about whether the current recession makes it more difficult to address climate change, but the reality is that it’s happening, and at a faster rate than scientists had expected. It will impose huge economic and social costs in the decades ahead. Also, more than 2 billion people have been added to the world population since 1982, severely stressing the planet’s carrying capacity.

4. The housing bubble. The housing crash of 1982 was part of a broad, cyclical downturn, made worse by the 1979 oil shock and the Federal Reserve’s war on inflation. Today’s housing crash is the result of a speculative bubble the size of which has few precedents. It will take years for this sector to come back and, for a variety of factors, the old suburban sprawl model is dying or dead. So it’s pointless to hope for a return to the 2005 go-go era. The housing crash this time has made Americans poorer, decapitated several major job sectors and helped bring on…

5. The banking crisis. Nearly every recession has an accompanying banking crisis. It could be contained in 1982 for several reasons, especially better regulation and smaller banks. There were more large money center banks than today, yet they were smaller than their counterparts today (a fact much fretted upon in the 1980s as Japanese banks swelled — until they were taken down by the Japanese real-estate collapse). The result of a less concentrated, better regulated banking industry was to contain the damage (although it was substantial). Today’s banking system is a highly concentrated creature whose innards have metabolized far beyond traditional banking. This is exemplified by the derivatives that are essentially worthless if not outright swindles. All this feeds on itself in a viral nature, leaving Washington to prop up sick institutions that are “too big to fail” but otherwise would be considered insolvent.

6. Manufacturing and trade. In 1982, the Rust Belt was synonymous with a nation in trouble. But on the ground, American manufacturers were going through a wrenching restructuring that would again make them the most productive and innovative in the world. One slice of this story is told in Richard Preston’s thrilling book American Steel. When I arrived in Dayton, Ohio, in 1986, I found a city that was filled with factories making things for the world, and the high-paid jobs that went with it. Dayton had gone through hell as companies such as NCR and GM had remade themselves. But it had come through. Today’s America is far, far different — as the hollowed out Ohio economy attests. Poorly crafted trade agreements and the rise of new competitors has badly damages the productive heart of the economy. In many cases, there’s little left to retool for the next upswing — it’s gone to China or Mexico. No wonder the last “factory jobs” seeing growth were in producing the tract houses that now stand foreclosed throughout the Sunbelt, and Americans who once made productive things were working in “financial services” hawking fraudulent mortgages.

7. Human capital. Americans have seen their earnings stagnate for years — their only consolation the housing bubble which has now exploded. Their 401(k) nest eggs have lost as much as half their pre-crash value. Income inequality is at a high not seen since the eve of the Depression, stifling, among other things, economic mobility. Perhaps a million or more illegal immigrants are consigned to the shadow economy, kept out of mainstream advancement and creating a costly underclass. In 1982, the middle class was still strong, with relatively secure jobs, benefits and pensions. The health insurance system still worked. It was a very different country, whatever the temporary pain. In addition, today the skill gap has grown substantially. A tech-savvy “creative class,” as Richard Florida calls it, will create value in the future. Yet millions are left out, without the ladder up once provided by skilled, union, blue-collar jobs.

8. Monetary policy. Much of the early 1980s pain involved the Federal Reserve’s successful battle to wring inflation out of the economy. It was a textbook case that the Fed could indeed, with the right leadership of Paul Volcker, defeat inflation and bring price stability — something considered nearly impossible by conventional wisdom in the 1970s. Today’s recession is part of a larger set of disruptions and discontinuities. So far, it’s showing the limits of Fed monetary policy. As Alan Greenspan once said, “You can’t push a string.”

None of these factors preclude an American renaissance. But they are real. We ignore them at our peril.



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