The US economy from 1972-1975 was struggling with high unemployment, stagnant industrial output, and high inflation. Unemployment was over 7% and industrial output had declined in 6 of the past 7 months. Inflation was rising without signs of slowing. To address this stagflation, an expansionary fiscal policy of tax cuts and increased government spending was proposed to stimulate aggregate demand and boost the economy. However, Congress rejected this plan and instead enacted their own tax cuts and public service jobs. While the economy recovered by 1976, high inflation persisted and unemployment remained above 6% until 1978 as the Federal Reserve prioritized controlling inflation over full employment.
1. Macro Problem 3
By: Donna Moulton, Daniela Dessi, Karissa
Cook, Jeanine Minnocci, Joseph Mangione,
Alexander Di Paola
2. Scenario: 4 For the years: 1972-1975
Economic Indicators:
GDP
Unemployment
CPI
Industrial output
Trade
The Economy is dead in the water.
Unemployment is well above 7% and
industrial output has been down in 6
of the 7 months. Inflation is high and
shows no signs of abating anytime
soon. Meanwhile, there’s enormous
political pressure from all regions and
groups in the country, as well as from
foreign central banks and
government. The plea: Do Something!
3. Background
Happening around the world:
Britain takes over direct rule of Northern
Ireland in bid for peace
President Nixon orders "Christmas bombing"
of North Vietnam (December)
United States events: US Supreme Court
rules that death penalty is unconstitutional
Thriving economic growth post WWII starting
in 1947
1973 the stock market crashed. Source:
http://www.infoplease.com/year/1972.html
U.S. abandoned the gold standard
Economics
US GDP (1998 dollars): $1,237.30 billion
Federal spending: $230.68 billion
Federal debt: $435.9 billion
Median Household Income
(current dollars): $9,697
Consumer Price Index: 41.8
Unemployment: 5.9%
Cost of a first-class stamp: $0.08
Recession in the 1970’s differed from previous
recessions → this recession was a stagflation,
where high unemployment coincided with high
5. Unemployment Rate: 1972- 1975
https://www.google.com/search?q=2008+economic+data&sourceid=ie7&rls=com.microsoft:en-US:IE-
Address&ie=&oe=&gws_rd=ssl#q=1973+unemployment+rate
http://useconomy.about.com/od/GDP-by-Year/a/US-GDP-History.htm
1973: GDP $25,415 Organization of Petroleum Exporting Countries (OPEC) oil embargo.
● Tripling inflation to 8.7%. Fed doubled rate to 11%. U.S. withdrew from Vietnam. Nixon
resigned over Watergate.
● Unemployment was close to 5% throughout 1973 and started to rise in 1974 until it reached
7.2% in the 4th Quarter of that year, reaching a high of 9% in May 1975.
10. Industrial Output:
The Industrial Production Index (INDPRO) is an economic indicator that
measures real output for all facilities located in the United States manufacturing,
mining, and electric, and gas utilities
1972 1973
January 41.66 45.71
July 43.45 46.87
November 44.89 47.7
13. Recession:
The post war boom that started in 1947 had slowed to a crashing halt in 1973.The annual GDP ratio
dropped from a pre 1973 value of 3.6% per year to 2.8% after 1973. Productivity growth dropped from
2.5% to 1.5%. GDP growth rate dropped from 7.2% to -2.1% in 1973. Real GDP level fell 3.2%.
14. Inflation:
The inflation rate ranged from 2.94% to 3.61% in 1972. In January of 1973 the inflation rate was 3.61 but
increased dramatically throughout the year, to 6.8% in the Third Quarter, and to a high of 8.71% in
November. The inflation rate continued to increase in 1974 to a high of 12.3%.
15. Stock Market:
Starting in February 1973 the value of the S&P 500 declined by over half and the Dow declined by 45%
over 21 months.The average trailing PE ratio slumped from 17-18 to 7-11 and stayed at that level for a
decade.The stock market was so affected that it took until August 1983 to return to the same levels of
January 1973.
16. Income Growth:
A slowdown in income growth started in 1973.
Between 1947 and 1973 family income increased
over 100%, increasing at an average annual rate of
3.19%.
Between 1973 and 2004 family income only rose
22%.
Between 1973 and 2006 family income for the
bottom 90% increased at an average annual rate of
.5%.
Between 1973 and 1987 the income of families
headed by someone less than 30 years of age fell
30%.
17. Economic Situation:
http://www.mofa.go.jp/policy/other/bluebook/1972/1972-1-11.htm
The U.S. economy in 1972 experienced prosperity that consisted of stable prices, a high real growth rate (6.4
per cent) and a fall in unemployment (5.1 per cent at the end of 1972).
After achieving short term success in fixing prices under Phase 2, in which wages and prices were legally
controlled, the U.S. Government shifted from legal controls over wages and prices to voluntary controls
(the so-called Phase 3) in January 1973.
Prices, which had shown signs of an increasing trend focused around wholesale prices since the end of 1972,
sharply increased their upward pressure on the occasion of the shift.
The economy continued to grow in the fourth quarter of 1972 through the first quarter of 1973, marking a real
annual growth rate of 8 per cent in the first quarter of 1973.
The growth rate greatly exceeded the initial Government estimate of 6.75 per cent made at the start of 1973,
18. Fiscal policy solution:
Expansionary policy- a policy that allows to increase the money supply and or prevent inflation. An
example of this is fiscal policy, which comes in versions of tax cuts, rebates, and increased government
spending.
Issues:
The dollar. The price of gold had been fixed at $35 an ounce since the Roosevelt administration. But
the growing U.S. balance-of-payments deficit meant that foreign governments were accumulating
large amounts of dollars -- in aggregate volume far exceeding the U.S. government's stock of gold.
In retrospect, some would call the Nixon presidency the "last liberal administration." This was not only
because of the imposition of economic controls. It also carried out a great expansion of regulation
into new areas, launching affirmative action and establishing the Environmental Protection
Agency, the Occupational Safety and Health Administration, and the Equal Employment
Opportunity Commission. "Probably more new regulation was imposed on the economy during the
Nixon administration than in any other presidency since the New Deal," Herbert Stein ruefully
observed.
19. Monetary policy solution
Expansionary Monetary Policy
Lower interest rates/Increasing the money supply to boost economic activity.
Reduce incentive to save, therefore, consumer spending will increase
Lower reserve requirement
Buy securities
Main objective of this policy is to increase aggregate demand and economic
growth in the economy
20. Conclusion: Best Solution
An Expansionary Fiscal Policy should be used.
A macroeconomic policy that tries to expand the money supply to stimulate economic growth or
prevent inflation.
Increase aggregate expenditures and aggregate demand through an increase in government
spending (both government purchases and transfer payments) or a decrease in taxes.
Creating jobs which will alleviate unemployment.
21. Actual Outcome:
Recession ended in March 1975 & the unemployment rate did not peak until several months afterwards.
In May 1975, the rate reached its height 9 percent.
Economic recovery from the 1973 -1975 recession had many of the characteristics of a typical U-type recovery.
GNP reached and then exceeded its pre-recession level by the first quarter of 1976. Industrial production had also recovered to its pre-
recession levels by the end of 1976.
The major influence of the 1974 recession was stagflation, that is inflation during a period of recession. The Federal Reserve, as a
result, adjusted its mandate in believing that the inflation-unemployment tradeoff was much higher than previously thought, and
established a six percent target as full employment. Thus, unemployment, which had reached a peak of 9% in May 1975 did not
dip below 6% until June 1978.
22. The Economic Report of the President for 1975 states:
“We therefore confront three problems:
Immediate problem of recession and unemployment,
Continuing problem of inflation
Problem of reducing America's vulnerability to oil embargoes”
The economy needs an immediate one-year tax cut of $16 billion... We chose the method that would provide
immediate stimulus to the economy without permanently exacerbating our budget problem.
12 percent rebate of 1974 taxes, up to a maximum of $1000. The rebate will be paid in two large lump sum payments
totaling $12 billion, the first beginning in May and the second by September.
$4 billion investment tax credit which would encourage businessmen to make new commitments and expenditures now
on projects that can be put in place this year or by the end of next year.…
it will increase the size of the budget deficit. This is all the more reason to intensify our efforts to restrain the growth of
Federal spending. I have asked Congress to institute actions which will pare $17 billion from the fiscal 1976 budget. we
foresee a deficit of more than $50 billion for the fiscal year beginning July 1.”
23. The energy program will entail costs. The import fee and tax
combination will raise approximately $30 billion from energy
consumers.
● A fair and equitable program of permanent tax reductions to
compensate consumers for these higher costs. These will
include income tax reductions of $16 billion for
individuals, along with direct rebates of $2 billion to low-
income citizens who pay little or no taxes, corporate tax
reductions of $6 billion, a $2-billion increase in revenue
sharing payments to State and local governments, and a
$3-billion increase in Federal expenditures.
The tax cuts and energy tax increase tabulates as follows:
24. 1. A tax cut was effective at stimulating the economy
2. The level of investment purchases was increased despite the increased
government borrowing to finance the tax cut.
Actual Outcome:
25. Actual Outcome:
A careful consideration of the tax cut combined with the energy tax increase reveals that no net tax cut is involved and
therefore there would not be any stimulus to the economy. Furthermore the impact of the rest of the package would have
been a decrease in aggregate demand of $2 billion. Thus this package would have had no stimulus for the economy; if
anything it would have slightly depressed the economy slightly.
Congress rejected the proposed package and enacted its own tax cut. This included a one-time rebate to taxpayers of 10
percent of their 1974 personal income tax, up to a maximum of $200. There was also permanent tax reduction that
affected the tax-withholding through the rest of the year. The tax cut bill included negative income tax for low income
taxpayers. This was called an earned income tax credit. There was also an increase in the business investment tax
credits. To accompany the economic stimulus of the tax cuts there was an increase in state and local governments to be
used to create public service jobs.
Jeanine: Ideal GDP growth rate is 2-3%; 1972→ 5.2% GDP growth rate; 1974→ -.5% GDP growth rate= bad; due to events in 1973 (OPEC oil embargo; dollar off gold standard). & events in 1974→ wage- price controls (stagflation). Inflation raised rate to 13%.
http://www.applet-magic.com/rec1974.htm
In 1972 - 1973 the unemployment rate decreased and then from 1974-1975 it increased. D.D
Joe:
The U.S. civilian unemployment rate rose significantly from 4% in 1970 to just under 6% in 1971
In 1975, the U.S. civilian unemployment rate was just under 9% which was the highest in all the years
Eventually the U.S. civilian unemployment rate fell in the years 1976 and 1978
Alex: If you look at the average changes of prices paid by consumers, The economy had the largest percent change in 1974. The economy had the smallest percent change in 1972. From 1972 to 1974, the average CPI is 7.8%. The increase of CPI over the past 4 years was a direct result of the Vietnam War. The Vietnam war created an increase in industrial production which created an increase in demand for the economy which then led to an increase in the average percent change of the Consumer Price Index.
Jeanine: CPI: cost of basket in current year/ cost of basket in base year * 100
43 is the CPI for 1973
Compared to today where the CPI is over 240 CPI
Jeanine:
Around 1972-1973 industrial production index is about 48
Then drops down to about 42 in 1974
Donna
Joe:
In 1980, the Trade weighted U.S. Dollar Index was at 37
It then went up in 1990 to exactly 70
In 2000, the Trade Weighted U.S. Dollar Index was at 126
Finally, in 2010 it dropped to 105
Karissa
D.D From the years 1970 to about 1977 the economy suffered a severe recession,as seen by the black vertical lines in the graph following the vietnam war.
