The World’s Largest Economy
The United States has been the world’s largest national economy since at least the 1920s. For many years following the Great Depression of the 1930s, when danger of recession appeared most serious, the government strengthened the economy by spending heavily itself or cutting taxes so that consumers would spend more, and by fostering rapid growth in the money supply, which also encouraged more spending. Ideas about the best tools for stabilizing the economy changed substantially between the 1930s and the 1980s. From the New Deal era that began in 1933, to the Great Society initiatives of the 1960s, national policy makers relied principally on fiscal policy to influence the economy.
The approach, advanced by British economist John Maynard Keynes, gave elected officials a leading role in directing the economy, since spending and taxes are controlled by the U.S. President and the Congress. The “Baby Boom” saw a dramatic increase in fertility in the period 1942–1957; it was caused by delayed marriages and childbearing during depression years, a surge in prosperity, a demand for suburban single-family homes (as opposed to inner city apartments) and new optimism about the future. The boom crested about 1957, then slowly declined. A period of high inflation, interest rates and unemployment after 1973 weakened confidence in fiscal policy as a tool for regulating the overall pace of economic activity.
The U.S. economy grew by an average of 3.8% from 1946 to 1973, while real median household income surged 74% (or 2.1% a year). The economy since 1973, however, has been characterized by both slower growth (averaging 2.7%), and nearly stagnant living standards, with household incomes increasing by 10%, or only 0.3% annually.
The worst recession in recent decades, in terms of lost output, occurred during the 2008 financial crisis, when GDP fell by 5.0% from the spring of 2008 to the spring of 2009. Other significant recessions took place in 1957–58, when GDP fell 3.7%, following the 1973 oil crisis, with a 3.1% fall from late 1973 to early 1975, and in the 1981–82 recession, when GDP dropped by 2.9%. Recent, mild recessions have included the 1990–91 downturn, when output fell by 1.3%, and the 2001 recession, in which GDP slid by 0.3%; the 2001 downturn lasted just eight months. The most vigorous, sustained periods of growth, on the other hand, took place from early 1961 to mid 1969, with an expansion of 53% (5.1% a year), from mid 1991 to late in 2000, at 43% (3.8% a year), and from late 1982 to mid 1990, at 37% (4% a year).
