The Economy in the 1970s
The U.S. economy, which had grown by 5% in 1976, continued to grow at a similar pace during 1977 and 1978. Unemployment declined from 7.5% in January 1977 to 5.6% by May 1979, with over 9 million net new jobs created during that interim; in addition, real median household income grew by 5% from 1976 to 1978. The recovery in business investment in evidence during 1976 strengthened as well. Fixed private investment (machinery and construction) grew by 30% from 1976 to 1979, home sales and construction grew another one third by 1978, and industrial production, motor vehicle output, and sales did so by nearly 15%.
The 1979 Energy Crisis
The 1979 energy crisis ended this period of growth, however. As both inflation and interest rates rose, economic growth, job creation, and consumer confidence declined sharply. The relatively loose monetary policy adopted by Federal Reserve Board Chairman G. William Miller had already contributed to somewhat higher inflation, rising from 5.8% in 1976 to 7.7% in 1978. The sudden doubling of crude oil prices by OPEC, the world's leading oil exporting cartel, forced inflation up even higher, averaging 11.3% in 1979 and 13.5% in 1980. The sudden shortage of gasoline as the 1979 summer vacation season began exacerbated the problem and would come to symbolize the crisis among the public in general.
Carter's Approach
Jimmy Carter’s administration began with great promise, but his efforts to improve the economy through deregulation largely failed. Like Nixon before him, Carter asked Congress to impose price controls on energy, medicine, and consumer prices; however, he was unable to secure passage of such measures due to strong opposition from Congress. One related measure approved by Congress during the presidency of Gerald Ford, the Energy Policy and Conservation Act of 1975, gave presidents the authority to deregulate prices of domestic oil, and Carter exercised this option on July 1, 1979, as a means of encouraging both oil production and conservation. Oil imports, which had reached a record 2.4 billion barrels in 1977 (50% of supply), declined by half from 1979 to 1983.
Following an August 1979 cabinet shakeup in which Carter asked for the resignations of several cabinet members, Carter appointed G. William Miller as Secretary of the Treasury, naming Paul Volcker as Chairman of the Federal Reserve Board. Volcker pursued a tight monetary policy to bring down inflation, which he considered his mandate. Volcker succeeded, but only by first going through an unpleasant phase during which the economy slowed and unemployment rose. Inflation did not return to low single-digit levels until 1982, during a second, more severe recession.
The policy, along with record interest rates, would lead to a sharp recession in the spring of 1980. The sudden fall in gross domestic product (GDP) during the second quarter caused unemployment to jump from 6% to 7.5% by May, with output in the auto and housing sectors falling by over 20% to their weakest level since the 1975 recession.
Carter phased out credit controls in May, and lower interest rates and easing of credit controls sparked a recovery during the second half of 1980. Although the hard-hit auto and housing sectors would not recover substantially, GDP and employment totals regained pre-recession levels by the first quarter of 1981. The Carter Administration remained fiscally conservative during both growth and recession periods, vetoing numerous spending increases while enacting deregulation in the energy and transportation sectors and sharply reducing the top capital gains tax rate. The V-shaped recession coincided with Carter's reelection campaign in 1980, however, and contributed to his unexpectedly severe loss.
Paul Volcker
Paul Volcker, former Chairperson of the President Carter's Economic Recovery Advisory Board.