ACT II: The Great Prosperity

Scene 1

• Time: 1946-1972
• Place: Around the World
• Song: American in Paris (Reprise) fades into Japanese Everywhere
• Synopsis: We now know everything there is to know about economics. We have tamed the business cycle. We have whipped the specter of depression. Global prosperity resumes. It can't happen again.

Scene 2

• Time: 1974-1975
• Place: Around the World
• Song: Twilight Time
• Synopsis: The worst post-WW II recession occurs in the U.S. The first global recession since 1933 occurs as well. Expansionary macroeconomic policies fail to reduce unemployment. Expansionary macroeconomic policies cause the inflation rate to rise. The recession is blamed on OPEC.

Scene 3

• Time: 1975-1979
• Place: Around the World
• Song: Put on a Happy Face (4/4 beat rises to salsa rhythm)
• Synopsis: Relative prosperity returns to the industrialized countries, but material imbalances begin to appear. Not all sectors nor all economies recover at the same rate. Petrodollars are recycled to help the developing countries. OPEC countries pull the strings on world finance, ending the period with another oil price increase.

Scene 4

• Time: 1979
• Place: The United States
• Song: What Now My Love?
• Synopsis: There is heightened concern over rising inflation and interest rates. Paul Volcker, as the new Chairman of the Federal Reserve, ushers in an era of monetary restraint in the U.S., hoping to stop the upward spiral in prices.

Scene 5

• Time: 1980-1983
• Place: The United States
• Song: With A Little bit of Luck (salsa rhythm intensifying)
• Synopsis: Things get worse before they get better. Interest rates rise, inflation soars, and a mini-recession occurs in 1980. The buzz-word of the 1980 presidential election is "supply-side" economics. Incumbent Jimmy Carter is replaced by Ronald Reagan as President of the U.S. In 1981, the U.S. economy begins to drift aimlessly into another recession --- deeper than the 1974-1975 recession, but not quite so long. At Reagan's request, Congress passes the biggest tax cut in U.S. history, giving the country its biggest peacetime dose of fiscal stimulus. Unfortunately, the U.S. lacks sufficient saving to finance the resulting federal budget deficits. The dollar appreciates as foreigners step in to buy the growing mound of U.S. debt. The U.S. trade balance worsens. Meanwhile, back at the banks, an international debt crisis appears imminent. Developing countries fail to make payments on their foreign loans. The highlight of this scene is the financial blood-bath on stage of Mexico, Brazil, and Argentina. Fortunately, stop-gap measures at rescheduling to patch the debt crisis offer some relief and consolation to weary bankers around the world.

Scene 6

• Time: 1984
• Place: The United States
• Song: Love is Sweeping the Country
• Synopsis: The U.S. economy recovers quickly and robustly from its second post-WW II recession with annual real growth of 6.4%. A sense of relief blankets the nation. However, with disinflation and growing federal budget deficits in the U.S., the dollar appreciates further, and the trade deficit widens. The U.S. becomes a debtor nation for the first time since World War I.

Scene 7

• Time: 1985-1987
• Place: The United States
• Song: If You Could See Me Now (4/4 beat quickens to salsa tempo and then recedes to 2/2 time)
• Synopsis: Inflation and interest rates are coming down, and although the unemployment rate is "stuck" at a relatively high 7%, employment as a percentage of the working-age population reaches an all-time high of 65.4% in 1986. Annual growth of 2.5% is called "sluggish" by most economists and "unacceptable" by most politicians. The U.S. is in a growth recession. The dollar begins to depreciate. The U.S. calls on Japanese and West German leaders to stimulate their economies and to open their domestic markets to American exporters. The dollar continues to fall (thanks, in part, to coordinated efforts by the G-5, the central bankers of the five major industrialized nations --- Britain, France, West Germany, Japan, and the United States). Such a weakening in the dollar is perceived to be good for the U.S. trade balance, which had shown persistent weakness over the last several years. Wall Street analysts continue to predict improved earnings for U.S. companies. Increased exports and domestic demand (resulting from reduced demand for imports at the lower exchange rate) will continue to improve companies' balance sheets. The economy appears poised for a long-term period of sustained non-inflationary growth. It can't happen again.