Ronald Reagan was re-elected in 1984 because of the boom in the economy of the 1980s.
The decade did not start out quite so sunny. Understanding the history of how the economy went from bust to boom in the early 1980s offers a surprising model for optimism about how the American economy could progress in the next couple of years.
The Federal Reserve would need to pull off a delicate economic pivot that is the mirror image of the one it managed four decades ago.
High inflation and a seemingly never-ending epidemic are depressing Americans' attitudes about the economy. In December 1981 when Reagan had been president for 11 months, conditions were worse than they are now. The unemployment rate kept rising throughout 1982. Consumer sentiment was abysmal and inflation was over 8 percent.
You can see how bad the vibes were if you look at the cover story of the Time magazine that ranked Reagan's cabinet and an advertisement for a Smith-Corona typewriter as a holiday gift for your child.
The headline states that a spreading slump swells the long gray line of the unemployed. Community leaders fear that they are sitting on a smoldering powder keg of urban unrest because of the high joblessness in Detroit.
This is a reminder that conditions can change quickly. The unemployment rate was 7.2 percent when Reagan was re-elected in 1984 and inflation was 4.2 percent.
Some commentators have argued that Mr. Biden has the opportunity to be an inverse of Reagan politically, and that Senator Joe Manchin pulled his support from the president. The next three years will not be known if the economy improves or not.
It is important to understand why the Reagan economic reversal happened.
The unemployment numbers in Reagan's first two years were a result of the Fed chairman's policy to end the high inflation of the 1970s.
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President Reagan and Federal Reserve Board Chairman Paul Volcker met in 1981 in the Oval Office.
Over the course of the previous decade, high inflation seemed inevitable. This led to labor unions and individual workers demanding higher pay raises and businesses charging more for their products. This had settled into a vicious cycle with deep social and political ramifications.
Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute, said that inflation wasn't just an economic problem. It gave people the impression that the system wasn't working.
Mr. Volcker wanted to change that psychology. The worst downturn in five decades was brought about by steep interest rate increases that were used to control inflation.
Even as the job market worsened, the Reagan administration focused on breaking inflation. Alan Greenspan, a former presidential adviser who would go on to succeed Mr. Volcker, said in a 1981 Time article that politicians are not calling for federal job training or the extension of unemployment benefits. Five years ago, politicians would have been stumbling to demand antirecession spending.
There were signs that it was starting to work. The same article states that employees at major airlines agreed to a 10 percent wage reduction in order to get a 31.5 percent pay raise from the Teamsters in 1979.
Mr. Volcker was ready to lower interest rates. The Reagan boom and a period in which both unemployment and inflation were falling were powered by this.
The opposite problem has been faced by Powell as Fed chair.
The job market was weak and inflation was lower than the Fed wanted. Too-low inflation and too few jobs were the main economic problems for the first nine months of the epidemic. In December 2020, bond market prices implied that inflation would remain below the Fed's 2 percent target for years to come, and the unemployment rate was still 6.7 percent.
Mr. Powell and the Fed had a plan for monetary policy to build the Fed's credibility that it would no longer allow persistently low inflation and a weak job market. The flexible average inflation targeting strategy was introduced in 2020.
That helps explain why the Fed has been slow to move toward tighter money this year, even as inflation soared and the job market recovered quickly. After inflation reached a whopping 6.8 percent, Mr. Powell made a shift to tighter money. He said the Fed could begin raising interest rates in the first part of 2022.
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President Biden nominated Mr. Powell for a second term as Federal Reserve chair.
Mr. Volcker was willing to allow a recession to take hold to break the high inflation of the 1970s, just as Mr. Powell was willing to allow an inflationary surge to be temporary.
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won't go as far tomorrow as it did today. The change in prices for everyday goods and services is called the annual change in prices.
What causes inflation? It could be the result of increased consumer demand. There are developments that have little to do with economic conditions, such as limited oil production and supply chain problems, that can cause inflation to rise and fall.
Is inflation bad? It depends on the situation. Moderate price gains could lead to higher wages and job growth.
Can inflation affect the stock market? Trouble for stocks is usually caused by rapid inflation. During inflation booms, financial assets have been bad, while tangible assets have held their value better.
Mr. Volcker was ready to relent in 1981 and cut interest rates in order to set the stage for the economy to recover. The psychology had broken because of the signs that inflationary pressures were shifting downward.
The fall was bad, but Volcker stuck the landing and many parts of the macroeconomic landscape could be changed.
What would the economy look like over the next few years?
Inflation will start to fade over the course of the next decade. Consumers shift some of their spending back toward services and away from physical goods, corporate supply chain managers figure out how to adjust to whatever changes in demand prove permanent, and Congress does not repeat its spending binge of the first half of the year.
In the best-case scenario for Mr. Biden and the Democrats, the Fed doesn't use it. The Powell Fed faces a delicate task of trying to bring down inflation while not acting so aggressively as to undermine further improvement in the job market, just as the Volcker Fed did in 1983 and 1984 when it was able to achieve a simultaneous drop in unemployment and inflation.
The goal is to achieve a scenario where the economy is in a good place by late 2022. The median Fed leader expected an unemployment rate of 3.5 percent and inflation of 2.6 percent in the final months of next year, with a strong labor market and gradual inflation continuing through the year.
If the Fed gets this thing settled down in the next year or two, you can make a strong case that the underlying progressive agenda, which is to deal with income and wealth inequality, could actually flourish.
If that were to happen, it would be an economy in which the benefits of the 2021 economy, such as rising wages, would persist, while the high inflation that has overwhelmed those gains in the minds of many Americans fades.
It would be difficult to achieve. The Fed raising interest rates to rein in inflation caused a recession more often than not in the decades immediately following World War II. The inflationary forces that have taken hold will prove to be more profound if there is a recession.
The experience of the 1980s shows that things can get better, and that the economic and political fortunes can change faster than it might seem.
