Unemployment Rate in the USA in the End of 20th Century: Analytical Essay

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Some of the major economic events that occurred in the 1990’s that will be discussed in this presentation will include:

  • 1990-1991 – US Economic Depression that started with the Savings & Loans scandal in 1989.
  • 1992 – Election year and economy began to start its comeback.
  • 1991 Q2 – GDP began to rise from -1.8% all the way to 3.14% and remained positive for the next ten years.
  • 1993 – NAFTA was enacted
  • 1997 – US Unemployment was down to less than 5%
  • 1997 & 1998 – Surplus in the national deficit (Hawks, n.d.).

Additional economic and miscellaneous events include:

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  • 4/1/90 – Federal minimum wage raised
  • 4/25/90 – Hubble telescope is launched
  • 1/16/91 – Gulf War
  • 1/1/95 – World Trade Organization was founded
  • 8/7/98 – US Embassies were attacked in Africa (Stout, n.d.)

The 1990’s:

Our U.S. Economic History overview is going to cover the time period of 1990-1999. In the beginning, we see that the U.S. was successful in ending the Persian Gulf War that begin in 1990 under President George H. W. Bush. The Soviet Union also came to an end in 1991 with its dissolution thanks to President Bush. However, by July 1990, the United States was in a recession and the federal budget grew larger despite tax hikes. Unemployment also spiked during this time. By March 1991, the recession had ended but the unemployment rates had not decreased. It was coined a “jobless recover.” Regardless of President Bush’s foreign policies, the economic issues lead to his defeat in the Presidential Primaries in 1992 and ushered in the Clinton years (Luke, 2014).

We will see that the 1990’s were changed by the addition of new technologies. This was due to cutting-edge science and advancement of technology which includes the P.C., better telecommunications, cell phones, software and the internet. All of these factors lead to an economic boom in the 1990’s, known as the “Dot-Com Bubble” which lead to both Wall Street and the NASDAQ gaining prosperity. President Clinton raised the income taxes on all high-income households to 39.6% and 35% on businesses that were in the top tax tiers. These moves paid off because by the end of 1999, the U.S. had a federal budget surplus. Capital gains taxes were also lowered in 1996. Overall federal spending was decreased (Luke, 2014).

Another aspect of the 1990’s economic boost was the adoption of NAFTA between the U.S., Canada and Mexico. The government then decided to cut back on government regulations, known as “Reinventing Government.” Next came government welfare reformed in 1996 known as PRWORA of 1996. The government then raised the federal minimum wage that was felt by over 10 million Americans. Alan Greenspan, Fed Chairman, also balanced the interest rates over this time by raising and lowering them (Luke, 2014).

With all the policy changes, the development of technology and scientific discoveries; the U.S. economy grew approximately 3.6% annually. As the economy and stock market both grew, so did employment. In December 1999, the unemployment rate fell to 4.1%. This further impacted American households whose median household income had a surprising increase to 8.4% which translates to approximately $37,005. The U.S. wouldn’t see another recession until March 2001, after the “Dot-Com Bubble” burst in 2000 (Luke, 2014).

What is Gross domestic product (GDP)? It refers to the market value of all final goods and services produced and purchased within a country in each period. What is the Real GDP? It is growth that is adjusted for price changes, as inflation or deflation. It is also tied to the U.S. dollar value (Amadeo, Inflation – How It’s Measured and Managed, 2019).

The GDP growth rate is a good indicator of how fast or slow an economy is either increasing or decreasing. When the growth rate is increasing, it is a positive. However, if an economy experiences consecutive quarters that are negative, or decreasing, that typically means it is in a recession. There are four factors that affect the GDP growth rate: personal consumption, business investments, government spending and net trade. Personal consumption is the largest of them. Additionally, any exports will add to an economy’s GDP; while any imports will take away from it (Amadeo, What is the GDP Growth Rate?, 2020).

As we know, the higher the GDP the better the economy is doing and the lower the GDP the worse the economy is doing. However, GDP can be faulty. For example, if there is a natural disaster, the GDP is likely to get a big boost because of the rebuild efforts (Smith, 2019).

Due to the Gulf War of 1990, the end result was high oil prices. This of course affected gasoline prices across the board from vehicles to airlines. It even affected employment rates. Just like in recent history when gas prices soared, drivers were having to adjust for their driving and travel with the higher fuel prices. In 1990 the GDP = 1.9%, Unemployment was at 6.3% and Inflation was at 6.1% (Amadeo, Inflation – How It’s Measured and Managed, 2019). This meant that the economy was stalling out, and the U.S. unemployment was high as demonstrated in the graph and chart above .

In addition to just gasoline prices, any other product that is made with oil or service that uses oil. It is clear to see there is a correlation between war, oil and the GDP. High oil prices clearly cause the economy to become stagnant and can cripple it. Because oil is used for different manufacturing purposes, it also has a direct affect on the cost of the product and/or service to the consumer. We know that typically, when prices are higher, consumers tend to save their money unless it is a necessity. This will be seen later in the presentation.

In the graph, we have the Index Value vs the Trailing Year Dividends per share from December 1991 through December 2007 (Ironman, Political Calculations, 2010). We can see that the “Dot-Com Bubble” started in April 1997 and ended in June 2003. The Taxpayer Relief Act of 1997 helped investors since dividends were taxed just like regular income at the rates. This may help explain why the “Dot-Com Bubble” started in 1997 after the development of computer and internet companies earlier in the decade. There was also the Jobs and Growth Tax Relief Reconciliation Act of 2003 that helped to end the “Dot-Com Bubble” (Luke, 2014).

The above graph shows the correlation between the Real GDP, Personal Consumption Expenditures and the Unemployment levels. We can see that the Real GDP and the Personal Consumption Expenditures, PCE, are parallel to each other, but the unemployment level varied during the decade. The Personal Consumption Expenditures tells us how much money is spent on goods and services. This also proves that regardless of what is going on with employment, consumers, must spend money on goods and services. It is also a key component of GDP. There are two subcategories of PCE: durable goods and non-durable goods. It is also an indicator that consumers are spending money over putting in or investing in savings (Amadeo, Personal Consumption Expenditures, Statistics, and Why It’s Important , 2020).

In the coming slides, we will go more into details regarding the unemployment and inflation rates. We will also see the lowering of interest rates by the Fed Chair in order to help fight unemployment. The thought process is that with lower interest rates, banks will be able to lend out more money to citizens and businesses and then those citizens and businesses will spend money creating more spending and then more job hires. As the economy shifted for the better, the Fed Chair would then start to raise rates.

In order to determine the unemployment rate, we must first calculate it. The unemployment rate is measured by taking the number of unemployed dividing it by the labor force and multiplying it by 100.

The Inflation Rate will tell us how quickly prices rose during a specific time period, usually done by a month or year (Amadeo, Inflation – How It’s Measured and Managed, 2019). Inflation is calculated as follows: (Current CPI – Historical CPI)/Current CPI x 100. CPI stands for Consumer Price Index. For example, if the inflation rate is 2%, then an item that costs you $3.00 this year, it will cost $3.06 next year. If the inflation rate is 5%, then that same item will cost you $3.15 next year.

In July 1990, the recession began and with that the Fed Funds Rate was at 8.0% on July 13, 1990. Even though there was inflation, the Fed Chair, Alan Greenspan, decided to lower interest rates in order to help boost the economy and the Fed Funds were lowered to 7.75% on October 29, 1990. In the 4th Quarter the economy had contracted to 3.6% and on December 18, 1990 the Fed Funds was at 7.0%. The follow year the GDP was at -0.1%, Unemployment was at 7.3% and Inflation was 3.1%. In January 1991, the economy had contracted to 1.9% and once again the Fed Funds rate continued to drop to 6.75%. By the time the recession had ended in March 1991, the Fed Funds rate was down to 6.0% on March 8th. Interest rates continued to drop in 1991 to help fight unemployment with the Fed Funds listed at 4.75% on November 6, 1991 (Amadeo, Fed Funds Rate History with Its Highs, Lows, and Charts, 2020). The process continued into 1992 with the continued lowering of the interest rates to help with unemployment (Amadeo, Inflation – How It’s Measured and Managed, 2019).

In 1993, Bill Clinton took Office and the Fed did not make any changes that year (Amadeo, Inflation – How It’s Measured and Managed, 2019). President Clinton’s welfare reform act of 1996 introduced us to PROWRA which also had an impact on the unemployment rate. By signing this reform into law, more people began to enter the workforce (Pilon, 2018). In 1994, the GDP was 4.0%, Unemployment was 5.5% and Inflation stayed at 2.7%. The next year, the GDP was 2.7%, Unemployment was 5.6% and Inflation was 2.5% (Amadeo, Inflation – How It’s Measured and Managed, 2019).

As we have already seen, the “Dot-Com Bubble” created a high impact on the unemployment. In the beginning of the boom, many tech and science jobs were created which was a great impact on the economy and employment levels. Once the bubble “burst,” it had the opposite affect on the employment and economy (Luke, 2014).

The graph above includes the GDP, Unemployment and Inflation rates from 1990 to 1999. The U.S. 1990’s economy had to begin with a recovery. The U.S. was overcoming the economic depression of Savings & Loans scandal that started in 1989. It had entered a war in 1990 and ended in 1991. Unemployment rates were high, and many did not feel that the President Bush was doing enough for the economy which ultimately led to his defeat in 1992 (Luke, 2014).

There are many economists look for the relationship between unemployment and inflation, also known as the Phillips Curve. In the early 1990’s Alan Greenspan, initially, pushed interest rates up. With tighter monetary policies to reduce total spending, unemployment began to rose above its natural rate to 7.4% in 1992 and inflation began to fall (DeLong, 2000). This is visible in the graph above that demonstrates for the most part, when the GPD is up, the Unemployment rate is on the down swing.

The Clinton Administration began to raise taxes on the wealthiest taxpayers and businesses in 1993. They also reduced government spending to help strengthen the 1990 budget agreement and maintain the baseline budget from deficit to surplus (Luke, 2014). By reducing the federal budget deficit, it allowed the Fed to lower interest rates and push money into the economy and help unemployment.

Here we have a graph that shows the annual inflation rate from 1989 through present day. It depicts the 2% FED Target rate, Annual Inflation Rate, 12 Month Moving Average, Trend up and Trend Down and Long-Term Linear Regression Trend Line. We also additional economic events that occurred in U.S. History (McMahon, 2020).

The Fed set a 2% target inflation rate. Should it rise, the Fed puts it contractionary monetary policy in affect which increases the fed funds rate. The inflation rate helps those who are able to lend money or have the ability to influence it, make decisions about the actions that are needed to help balance it out. When inflation is at or near the target rate, everyone benefits. Low inflation can lead to cost cutting efforts including cutting staff to make up for the lower profits (Amadeo, US Inflation Rate by Year from 1929 to 2022, 2020).

In the events section of the graph, we can see that certain events affected the GDP, Inflation and Fed Funds Rate. We can tell that in 1990 the recession affected everything. The inflation rate was at 6.1% which is about 4% higher than the target inflation rate. The Fed Funds Rate was 7% which meant that banks and lenders who had to borrow money from other banks and lenders were having to pay higher prices on that money. The GDP was listed at 1.9%, which meant that the economy was weak and could not get started and it was going to require government intervention to help get the economy out of it. The following year, the Fed had to lower interest rate and se the Fed Funds Rate to 4% which caused the inflation rate, now at 3.1%, to get closer to the target inflation rate of 2%.

The Interest Rates and Federal Funds have already been touched on in earlier in this presentation, but we will go a little bit deeper in this section. When it comes to interest rates there are a variety to choose from. They are Macroeconomics, interest rates and inflation rates are tied together. We have already learned that inflation gives us the rate at which prices for any goods and/or services rise. Interest rates on the other hand are the amount that a bank or lender charges a consumer to borrow funds (Folger, 2019).

The Federal Reserve, or the Fed, sets and employs the U.S.’s monetary policy. The policies include setting the Federal Funds Rate, which influences the interest rates. One can assume that when the interest rates are low the economy will be good which causes an increase in inflation. If the interest rates are high on the other hand, we know that the economy is slow to grow which causes inflation to decrease (Folger, 2019).

The above graph shows the Inflation and Fed Funds Rate from January 1, 1990 to January 1, 2000. This helps to show the inverse correlation that exists between both the inflation and interest rates. CPI, Consumer Price Index, shows how prices change over time. The CPI helps to identify inflation and deflation.

During the 1990’s, we can see that initially the CPI was higher around 5%, while at the end of the decade it was only around 2.5%. Even when the government lowered the Federal Funds Rate between 1992 and 1994, the CPI index was on a down swing. The Fed had to keep the CPI low during most of the decade to help the overall economy out.

The above graph shows the Federal Funds Rates in the 1990’s. To recap the Federal Funds Rate is an interest rate that banks will lend out excess funds to other banks. During the recession period the Fed Funds Rates were lowered and continued to decline from about 8% to 3% in 1994. In 1995 it hoovered around 5% through 1998, lowered again and then went back to around 5% at the end of the decade (Amadeo, Fed Funds Rate History with Its Highs, Lows, and Charts, 2020).

We know that when interest rates are lower, banks loosen up on their lending requirements which gives people the ability to borrow money and in turn, spend that money. This helps the economy to grow and of course will increase inflation. However, as interest rates increase consumers tend to save their money and the economy slows and inflation decreases (Folger, 2019).

Projected vs Real Employment (Cashman, 2016)

Because Greenspan kept interest rates low and allowed unemployment to fall further it led to approximately 4.2 million more people employed, than if interest rates were raised to maintain unemployment at 6%. The decision to ignore the economic consensus of the time led to large life improvements for many US citizens (Cashman, 2016).

A lower interest rate encourages buying on credit, so saving is discouraged during this period. Consumers can now afford to purchase more goods. This will increase demand and production for goods and services and have a direct effect on unemployment by creating a need for more workers, inflation buy driving up costs to pay more workers and buy more materials, and GDP up as a result of increased inflation.

A 3 Month Treasury Bill is from a government issued treasury security that matured for 3 months. They are also known as T-Bills and some have different maturity dates. They are essentially short-term bonds and are auctioned once a week. Yields are also smaller than other notes or bonds (Kenny, 2019). T-Bills are influenced by monetary policy, supply and demand and macroeconomic conditions (Chen, 2019).

This graph represents the Federal Funds Rates in the 1990’s. During the recession, rates began to fall and continue to decline from just above 8% to just under 3% in 1994 before climbing again in 1995 and staying close to 5% for the remainder of the decade.

When interest rates are lower more people can borrow money by either loans or credit cards. By having more money to spend and it cause the economy to grow and inflation to increase. However, as interest rates increase over time, consumers have a tendency to save their money and the economy beings to cool off and inflation begins to decreases (Folger, 2017).

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