A History of the U.S. Economy
Into the Modern Era (1950s – Present)
While portions of Asia and Europe lay in literal ruins, the United States continued to grow after the war, both in population and economically. The postwar “baby boom” was one of many results of the American military returning home. Most significantly, consumer spending and numbers of consumers increased substantially. The American “middle class” became dominant (Conte 2001). Suburbs exploded with the passing of the Federal-Aid Highway Act of 1956. By now the United States was the richest nation in the world. As a result, America was developing an extensive infrastructure to match its wealth. The completion of the Interstate Highway System “remains the largest public works project in the history of the world” (Gordon 2001). Finally, the strong interrelationship between the government and the ever-expanding industrial sector (the “military-industrial complex”) helped establish the United States as the economic superpower of the world going into the Cold War—a dominance that would be cemented with the collapse of the Soviet Union (Tassava 2008).
The middle of the twentieth century saw a brief expansion of labor unions and then labor policy. Most important to American workers were expanded labor rights regulated by the federal government, as well as the Civil Rights movement of the 1960s. President Lyndon Johnson’s “Great Society” further expanded and guaranteed access to opportunity by minorities in America while Congress helped support new federal spending in the form of programs such as Medicare and Food Stamps (Conte 2001). Economic trouble largely resulting from the Vietnam War and high domestic spending plagued the economy in the 1970s as the government grappled with inflation and shockwaves from global crises that drove oil prices and consumer discontent high.
As president from 1977 to 1981, Jimmy Carter was hit hard by such discontent as the trade deficit increased dramatically, inflation hit its highest point since World War I, and unemployment had climbed to 9 percent. With the country in another recession, President Ronald Reagan was subsequently elected on promises of smaller government as well as lower taxes and increased deregulation. But Reagan did not also decrease public spending. The result of increased expenditures (particular in the military and defense) but decreased taxes was significant increases in both the budget deficit and the national debt as the U.S. government was forced to borrow heavily from other countries (America.gov).
A recession of the early 1990s lingering from the stock market crash of 1987 was drawn out by high oil prices stemming from the Persian Gulf War, but consumer confidence and spending helped keep the economy afloat. The economy of the 1990s was driven by the rise of technology and the Internet, whose companies made startling gains on the stock market. Personal and business technology alike broadened and streamlined access to the global marketplace. Economic optimism was based upon high-tech “dot.com” industries who built their success from low interest rates and enthusiastic investors during an era of low unemployment and low inflation (American.gov).
The Federal Reserve closely monitored America’s economic pace, so despite President Bill Clinton’s insistence on smaller government, it still played an active role in the American’s economy (Conte 2001). But it is also because of the Reserve selling billions in bonds to the Chinese that China has gradually assumed role of banker to America. That, in addition to America’s virtual dependence upon cheaply manufactured Chinese goods to sustain America’s consumer-driven economy, had managed to keep inflation, interest rates, and corporate wage costs in America artificially low (Ferguson 2008). Low, even as the economy was taxed by terrorism, dual military fronts in Afghanistan and Iraq, and natural disaster.
Understanding the Recession: Stock Markets, Subprime Lending, and Bursting Bubbles
In all, there have been over thirty cycles of expansions and recessions of the U.S. Economy just since 1854, according to the National Bureau of Economic Research. When markets are surging, “bubbles” form out of wild speculation and overvaluation that are based largely upon euphoria and greed. Electronic “herds” of investors are populated with optimistic, or “bull” buyers (Ferguson 2008). In 2000, the dot.com economic boom came to an end as interest rates rose and investments in technology slowed (America.gov). When an economic bubble bursts, the herd became fearful. A pessimistic “bear” market is a seller’s stock market in decline. Some of these economic forces were the same key factors that caused the “subprime” mortgage bubble that burst in late 2007. However, it was dubious and unregulated lending practices (with encouragement from the U.S. government) that caused this shutter in the economy—with aftershocks felt around the world (Ferguson 2008).
President George W. Bush and the U.S. Department of Housing and Urban Development urged lenders and the governmental mortgage enterprises like Fannie Mae to support subprime mortgage lending to extend the American “dream” of homeownership to low-income groups, but most notably to minority home owners. The model of lending may have worked if interest rates stayed low, but because the loans were mostly adjustable-rate mortgages (ARMs) with “teaser” introductory rates, when rates inevitably did rise, borrowers could no longer afford their mortgages and began to default. Since the success of the loans was also dependent upon a good job market and rising real estate, defaults on loans and house foreclosures signaled just the opposite. House and real estate prices in fact fell dramatically, and “asset-backed securities,” like those bundled with the subprime mortgages, collapsed in value (Ferguson 2008). Mortgage-backed securitization had attempted to manage the risk of subprime lending by dividing and bundling the loans into units of investments that were sold in the form of “exotic securities” and bonds to eager—and unfortunate—investors around the world (America.gov).
Americans have tried to be cautiously optimistic, embracing the message of “Hope” in the presidential campaign of Barack Obama. Like many presidents who took over in the midst of recession, President Obama faces the task of virtually “remaking America,” and to do so with a sharply partisan Congress. Direct effects of smaller government and deregulation under previous administrations, but most recently with the energy and environmental policies of President Bush and Vice President Dick Cheney, were seen in the Gulf of Mexico when as much as 180 million gallons of oil gushed from a self-regulated rig’s blownout wellhead. The question, then, seems virtually the same as that which faced a younger America: how big should the government be? The answer is overwhelmed by the sheer number of complexities that complicate the task facing President Obama and Americans today—the task of remaking another new American economy.