Learning From the Past as We Enter Another 10-Year Economic Cycle

There is no doubt in my mind that we have entered a new era--one of lowered expectations. You can deduce this from business’ modest hiring.

Many firms are apparently still smarting over the bulking up they did in the 1980s, when they added layers of management and staff believing that their markets would grow indefinitely.

Today senior corporate managers want to be as lean and mean as possible and assume that markets will continue growing slowly--if at all. While it prevails, it only serves to darken the mood of both businessmen and consumers and, of course, to perpetuate today’s slow-growth economy.

If the past is any guide, don’t look for any major change in people’s attitude anytime soon.

It usually takes a while before people realize that they’ve gone too far--and that goes not only for pricing but for other policies, such as caution when it comes to hiring, inventory accumulation, buying new machinery, etc. These trends last so long, they tend to be identified with entire decades.

You all have heard of the Roaring Twenties. This was the decade that followed World War I and the end of wartime restrictions on business and consumers. It brought sweeping changes to American life, as the U.S. economy entered a period of spectacular, though uneven, economic growth.

Spurred by good times and a desire to be “modern,” Americans adopted new attitudes and lifestyles; people moved from farms to cities in record numbers. The demand for such features of modern life as cars, phones and radios soared.

These good times extended to Wall Street--until the stock market crash of 1929. The market’s collapse sent shock waves through the financial community. Banks severely curtailed their loans to businesses, which, in turn, cut back production, leading to the Great Depression of the 1930s. The aftermath of the over-exuberant 1920s, the 1930s saw thousands of businesses fold and millions of workers lose their jobs.

In an effort to shore up domestic business, the Smoot-Hawley Act, a law restricting imports, was passed. Other countries retaliated, deepening our downturn.

Notwithstanding the efforts of President Roosevelt and his New Deal economic program, hard times dragged on until the advent of World War II and the stimulus of a huge jump in military spending.

The ‘40s were years of substantial growth. Factories had to be converted into defense mills for the production of weapons. Unemployment disappeared rapidly as men first found work in factories, then were called up to serve in the military. Restrictions on civilian spending were imposed.

This led to pent-up demands, which exploded once the war ended. Returning veterans bought products not previously available.

Unfortunately, prices jumped rapidly as well, setting the stage for the consolidation of the 1950s. Known as the Silent Generation, Americans after the end of the Korean War turned inward and concentrated on social reforms.

The move to the suburbs slowed, and many localities began to impose restrictions on new building, leading to a slowdown in construction. A conservative economic policy cooled inflation--but at the cost of several recessions.

The 1960s quickly became known as the Soaring Sixties. Pushed ahead by stimulative economic policies and by the progressive growth in military spending associated with the war in Vietnam, the U.S. economy registered its longest expansion in history--a record 106 months--between February, 1961, and December, 1969. Economic growth soared, and the unemployment rate fell to a postwar low of just over 3%. However, the Johnson Administration’s fiscal policy, which called for no increase in taxes to finance both increased military spending as well as greater outlays for domestic purposes (“Guns and Butter”), along with an accommodating monetary policy, laid the groundwork for the inflationary 1970s.

Dubbed by some the Hangover Decade, the 1970s were marked by rapidly rising prices as an aftermath of the stimulative policies of the 1960s, unusually bad weather affecting the nation’s crops, a deal with the Soviet Union that tied up the country’s boxcars, two freezes and four phases of price controls--and, of course, a massive jump in oil prices twice engineered by OPEC. If these developments weren’t enough to depress people, attitudes were severely battered by Watergate and other political scandals.

The spurt in energy prices reversed several trends of the postwar era that fueled growth.

It caused people to turn away from the suburbs and back toward the cities, which were more energy-efficient. It also encouraged people to stop buying gas-guzzling American cars and turn to more fuel-efficient foreign cars. And it also caused many companies to substitute labor for equipment. This was an attempt to offset the rise in energy costs--but it led to the over-staffing and poor productivity.

Like the 1960s, the decade of the 1980s was one of prolonged growth; it contained the second-largest (92 months) expansion in U.S. economic history.

Still many blue-collar workers lost their jobs when factories restructured to meet foreign competition in mid-decade; their white-collar counterparts found themselves in the same boat as the decade’s mergers, takeovers and leveraged buyouts led to sizable staff reductions.

The passage of the Tax Reform Act of 1986, by retroactively changing the rules for investing, especially in real estate, set the stage for the collapse of the stock market in 1987 and the subsequent trimming back by Wall Street.

At the same time, the major banks began to set aside reserves to cover their developing country debt; this necessitated cutbacks to replenish lost earnings. Other industries began to downsize as well, leading to widespread job losses.

This explains why attitudes are so cautious--but even more important, it may well offer some important insights into the years ahead. Far more important than the percentage by which the gross domestic product expands this year is what the socioeconomic climate will bring. This will have a much greater impact on corporate America’s ability to make a buck, on people’s chances of finding jobs and on our overall sense of well being.

Apparently it takes about 10 years for people’s memories of the previous decade’s opportunities and mistakes to fade. Growth in the years ahead is likely to be slow--but so will be inflation. This means no sharp swings--up or down--are likely. Less risk, maybe--but also less of an opportunity for reward.