What went right in the 1980s.

• Author: McKenzie, Richard B.
• Position: U.S. economy

THE 1980s gave birth to the second longest peacetime economic recovery in the U.S. since World War II. Yet, in the minds of many Americans, those years were the antithesis of economic renewal. Like the 1920s, the decade was one of decadence. Like the 1930s, it was a period of pervasive economic retreat, of widespread retrogression for the country and the vast majority of its citizens--or so critics maintain.

Unlike the 1960s, many commentators have claimed that, during the 1980s, the competitive position of American firms and their workers was beaten back at home and abroad. The decade gave birth to a new form of robber barons--Wall Street financiers, dubbed "paper entrepreneurs"--whose new-found wealth detracted from national production. At the same time, it gave rise to the impoverishment of the poor and, more importantly (in the rhetoric of politicians), practically all of the middle class. As the nation entered the 1990s, many of these same commentators could be heard breathing a sigh of relief in the fondest hope that the decade would be radically different. Still, pessimism about the future persisted.

Policy debates during the late 1970s often were filled with mournful discussions of economic malaise, stagnation, or, even more descriptively, "stagflation," meaning high inflation with slow or no economic growth. Indeed, during the late 1970s, inflation was high by historical standards, reaching higher and higher peaks almost every year. Economic growth was slowed as productivity growth fell, in several years, to close to zero, attributable in part to the OPEC embargoes and U.S. policies that held down the rise in the prices of energy and thereby restrained further the growth in supplies. The Dow Jones industrial average index stood at 860 at the start of 1980, less than 80 points (or 10%) above the beginning of 1970.

Public commentaries concerning the fate of the economy began to take on a more foreboding tone after the turn of the decade, especially following the advent of the 1981-82 recession, caused, to a considerable extent, by the harsh anti-inflation policies of the Federal Reserve adopted in late 1979. Harvard Business School professor George Lodge warned that the country was beset with a peculiarly "American disease" (a phrase obviously intended to equate the nation's problems with England and its "British disease"). The symptoms of the American disease were to be found everywhere, in slow economic growth, rising interest rates, plunging profits, and lagging business investment, thus stagnating wealth.

Boston economist Barry Bluestone agreed, warning that the pace of job destruction, especially in the industrial sector, was alarming and accelerating. He pointed out that 31,000,000 jobs had been destroyed between 1978 and 1982, which meant that "fully one-third of all private sector jobs in 1978 had disappeared by 1982." In 1984, Bluestone and Bennett Harrison had developed their empirical case of job losses sufficiently to declare flatly in The Deindustrialization of America that the U.S. rapidly was losing its manufacturing base, the supposed heart of the economy. Harvard's Robert Reich, as well as other academics in northeastern universities, seconded the call for a national industrial policy, maintaining that the country was unraveling, slowly but surely.

Looking back at the 1980s, what did happen? Proposals for a national industrial policy went down to flaming defeat in the 1984 election with Walter Mondale, who had made such policies the hallmark of his campaign. Moreover, the economy did not continue on the economic skids, as forcefully had been predicted. Instead, economic growth rebounded. Total employment increased by 19,000,000 between 1980 and 1990, in spite of all the talk about jobs being destroyed.

Did the country deindustrialize? Hardly. The Federal Reserve's industrial production index rose in line with gross national product, by 29% between January, 1980, and September, 1990 (just prior to the start of the recession). Contrary to the predictions of demise in U.S. manufacturing, the manufacturing index grew absolutely and relatively, by 36% during the same period.

Furthermore, real, inflation-adjusted manufacturing output increased by 38% between 1980 and 1989. This means that, in 1989, manufacturing output represented a higher percentage of GNP (23%) than it did in 1980 (21%). Manufacturing output as a share of GNP was higher, albeit modestly so, in 1989 than in any other year (aside from 1988) since 1947.

The belief that the country was deindustrializing was aggravated by the view that the U.S. was becoming a "service economy." This was worrisome not only because, the country often was reminded, "manufacturing matters," but also since the survival, not just the health, of the service economy is tied inextricably to the manufacturing sector: "Lose manufacturing and you lose--not develop--those high-wage services."

Admittedly, domestic-based manufacturing employment fell from 20,300,000 in 1980 to 19,100,000 in 1990, or by six percent. However, that loss points to the fact that manufacturing productivity in many industries was surging during the 1980s, in no small response to the competitive pressures from abroad and home. If manufacturing employment had risen in line with production, it is a safe bet that output would have represented a smaller share of GNP in 1990 than it actually was because manufacturing in the U.S. would not have been cost-effective then. With the improvement in the cost-effectiveness of manufacturing, exports of manufactured goods grew by 90% between 1986 and 1992, as compared with 25% for the rest of the members of the Organization of Economic Cooperation and Development. These relative changes enabled the U.S. to raise its share of the world's manufacturing exports from 14% in 1987 to 18% in 1991, regaining its 1980 share of world manufacturing trade.

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Just as importantly, the U.S. manufacturing base no longer is in the domestic economy represented by the 50 states--it is scattered worldwide. While manufacturing employment fell as a share of total employment from 20% in 1980 to 16% in 1990, according to economist Kenichi Ohmae, U.S. manufacturing employment on a global scale held steady at 30% of the world share through at least 1986. This suggests that the decline in manufacturing employment was part of an international phenomenon, sparked by competition American producers had to meet--and most did.

The "decline of America"

With their deindustrialization fears dashed by the continuing expansion and without ever acknowledging the errors in their previous claims, the nation's Chicken Littles began to twist, albeit judiciously, their foreboding prophecies in the mid 1980s. The U.S., they professed, was in long-term economic decline, not so much absolutely (it clearly was not), but relatively--that is, when compared to the rest of the world. The collapse of communism and the current efforts of former Soviet republics and the Eastern Bloc countries to duplicate the U.S. market system speaks volumes about the misguided predictions of the harbingers of the decline thesis, but American political successes obscured the nation's economic tumble in the world economy, or so it has been argued.

Daniel Sharp, president of the American Assembly, stated without qualification in The New York Times, "America can't compete." The chief evidence offered was the huge balance of trade deficits and the failure of the falling dollar to reduce the deficits materially. Joel Kurtzman warned in The Decline and Crash of the American Economy that the U.S. needed to alter its economic course, principally through national planning, in order to "end the steep decline of our nation so that we can once again assume our position at the helm of the world's economy." "The saddest outcome of all," wrote Harvard University economist Benjamin Friedman, "would be for America's decline to go on, but to go on so gradually that by the time the members of the next generation are old...