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Articles & Press Releases > Article 26

What Resolved the Early 1980's Financial Mess?

If you landed on this page after a search on the search-engine-of-your-choice, welcome! This article was written by Glory Borgeson, an executive coach, author, and speaker. Schedule her to speak at your organization's next event:
Personal Branding Speaker; Emerging Leadership Speaker; Entrepreneurial Speaker

SUMMARY:   In the late 1970's and early 1980's, the financial condition of the U.S. was in a mess. Unemployment was in the double-digits, if you wanted to get a mortgage on a home you were buying, the mortgage rates were about 18%. We got in line at the gas station to put gas in the car. And if you were graduating from college hoping to get a job in your field, that only worked well for teachers and those of us with an accounting degree. So, how did things turn around?

Back in the late 1970’s and into 1980 to 1981, the unemployment rate was in double-digits (10% to 12%). If you wanted to buy a house and get a mortgage, the interest rate on your mortgage was around 18%. Inflation rates were pretty high. Stock prices were not doing very well. Young people who graduated from college had a hard time finding a job that paid enough money so that they could move out of mom’s and dad’s house.

And you think gasoline prices are bad now? Not only did gas prices escalate during this time period. Also, there was a gas shortage. We would see many cars lined up at gas stations waiting to get gas (and hoping there would still be gas by the time they got to the pump).

The economy finally started to change for the better in 1983.

While our current economy in late 2008 is also making journalists write fear-mongering articles (as they did from 1977 to 1982), having lived through the previous difficult financial era got me to wondering:  What was it that actually changed in the U.S. that allowed the country to pull out of that low economic point in our history?

Immediately, I recalled several events that occurred that had a direct impact. Ronald Reagan was elected president in November 1980. In August, 1981, he signed The Economic Recovery Act of 1981. I was in college at that time and started my tax class in September 1981. Because the tax textbook was already printed at the time the Act was signed, the textbook company printed a supplement, which was a separate booklet that held all of the tax laws that were part of the Act. Actually, the booklet was the Act itself.

Being young, and not realizing how tax acts can positively or negatively affect an economy, I just kept living my young life. By 1983, the unemployment rate was dropping. It was easier for young adults to find good paying jobs. Also in that year, the stock market started to perform much better. And gas prices came down and we didn’t have to line up to buy gas.

The mortgage lending rate slowly came down. In 1984, you could get a mortgage at a 13% interest rate. In 1986, we were all “woo-hooing” because interest rates came down to 10%.

So, what was it about this Economic Recovery Tax Act of 1981 that got the economy on its feet again?.

Being the nerd that I am, I still have a few textbooks, including the Tax Act booklet. I thumbed through it. There were a few tax reliefs for individual taxpayers. The majority of the tax relief, though, was for businesses.

The tax relief provided for the businesses was intended to put more money into each business. With these extra funds, businesses were able to hire people, attract more funding, do research and development, and whatever else they needed to grow.

This was a key to economic growth for everyone. When businesses create the jobs and hire the people; when businesses are allowed to grow; when businesses have what they need in order to expand; then people (individual people) in the marketplace can become wealthier. This is the way to get an economy back on its feet.

Earlier in 2008, the U.S. government thought they would stimulate the economy by sending all tax-paying individuals a rebate check of around $600 per person. While I didn’t mind receiving that money, I believed their intent was not well-placed. The government’s intent was that a majority of people would spend that money to purchase something, such as an appliance. However, most people either used the money to pay down existing debt or they saved the cash. A small percentage actually used it to buy something.

Another way to look at it is this:  Instead of sending me $600, what if they had given business incentives, much like the tax act of 1981 did. I could wind up with a lot more than $600 income, which would give me even more spending power, which would actually turn around the economy over a longer period of time. That is what I prefer. Helping people build wealth throughout the economy is better for everybody. Handing me $600 and crossing their fingers hoping that I’ll go out and purchase something to grow the economy doesn’t really work well.

Alright. Here is a confession. I voted for Jimmy Carter. That’s right, ladies and gentlemen. I voted for the man who couldn’t figure out how to create the Economic Recovery Act, and instead, in the summer of 1979, went on the radio one summer day to announce that he was suggesting a windfall profits tax. (My boss at the time, a small business owner, called everyone into his office to listen to President Carter’s address, and when Carter said “windfall profits tax,” my boss almost fell out of his chair.)

So, business people, please think about these things over the coming months regarding what is good for your business (or the business you work for), what is good for you over the long term, how helping businesses to create jobs and create wealth for individuals is good for everybody, and how the economic history of the U.S. from 1976 through 1986 can teach us some lessons regarding what works and what doesn’t work.

Glory Borgeson, President
2008 Borgeson Consulting, Inc.

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