By 1975 the economic slump that had begun in 1973, described by some economists as the most severe business decline since the 1930s, gave signs of coming to an end. The economy remained "soft," however, and serious problems continued. Inflation decreased consumers' purchasing power. In response, policymakers raised interest rates so high that by the end of the decade the Federal Reserve Bank's prime rate--the rate banks charge their most creditworthy borrowers--rose to 21.5 percent. High interest rates, in turn, made it difficult or impossible for consumers to borrow money to purchase two essential parts of the American dream: houses and cars.
The Economic Picture
Federal budget deficits hampered the government's ability to develop creative and effective policies for dealing with inflation. In the first quarter of 1980, inflation reached the incredible rate of 18 percent. Making matters worse, prices for food, housing, energy, and medical care rose appreciably faster than for other items. These necessities accounted for about two-thirds of the spending in four of five American families.
Just as troubling were the persistently high levels of unemployment. In 1975 nearly 8 million men and women--8.3 percent of the labor force--were unemployed. About one-third of the unemployed were out of work for fifteen weeks or longer, indicating the need for retraining to equip them to move into new lines of work. The unemployment figures do not reflect the hundreds of thousands who were unemployed for so long that they gave up looking for jobs and were classified as "discouraged workers." Contracts with leading labor unions awaited negotiation,