A 30-Year Look At America's Money Since the End Of the Cold War
November 2019 will mark the 30th anniversary of the official opening of the Berlin Wall by the East German and East Berlin government in 1989. That year witnessed world-shaking transformations taking place across the communist world. Now, the main adversary of the Cold War, the U.S.S.R., actually didn’t disintegrate until 1991. But the year 1989 marks a pivotal point, the point at which the international political settlement created after WWII — in which the liberal, capitalist West divided Europe and the world with the communist East — finally came to a definitive end. After more than 40 years, the specter of nuclear war up and vanished, and a whole slew of new governments took over in Europe.
In 1989, a wave of revolutions swept across the nations that had formed the communist Warsaw Pact, which for decades was pitted against the U.S. and its NATO allies. The Berlin Wall fell; communist parties across relinquished their monopoly on power; non-communist parties were elected and came to power; Soviet military forces withdrew from Eastern Europe, and also from Afghanistan after a decade-long war that’s often called “Russia’s Vietnam”; Soviet and American high commands agreed to limiting strategic nuclear weapons while President H. W. Bush announced the inauguration of a “new world order” in Sept. 1990.
The end of the Cold War was good news, of course, but it also marked the beginning of new uncertainties. The “Balance of Terror” during the Cold War did ultimately provide a degree of stability in international relations. With the disintegration of the Soviet Union from 1989 through 1991, the bipolar world of East vs. West, capitalist vs. communist, came to an end and new troubles quickly emerged — in the merger of East and West Germany, in the breakup of Yugoslavia and resulting wars, in the First Gulf War and at home in the U.S. in the form of an economic downturn.
Read on to find out how Americans’ money has changed since the end of the Cold War.
1. Brave New World: 1989 – 1995
The period got off to a rocky start during the crucial years of the disintegration of the Soviet Union. The U.S. entered a recession in July 1990, lasting eight months until March 1991, according to the National Bureau of Economic Research (NBER).
Several factors contributed to the onset of the early 1990s recession. One factor particularly tied to the time period was the impact on defense and defense-related industries of the ending of the Cold War. According to Federal Times, the early 1990s saw significant slashes to the Pentagon budget, the shutting down of many military facilities due to the Base Realignment and Closure Act, culminating in the so-called “last supper” in July 1993, in which the Deputy Defense Secretary William Perry informed industry leaders that they’d need to start tightening up their finances and eliminating overcapacity.
The early 1990s saw serious disruption in the realm of consumer spending when Americans were faced with the 1990 oil price shock. The principal cause was the Iraqi invasion of Kuwait, which not only eliminated Kuwait as a major supplier of oil, but also Iraq itself. On Aug. 6, 1990, the United Nations passed sanctions forbidding any country from importing oil from Kuwait or Iraq. As a result, the price of oil more than doubled, from $17.05 a barrel in June 1990 to $39.53 by Sept. 1990, according to the U.S. Energy Information Administration.
Americans felt the impact in their wallets. According to the Bureau of Labor Statistics’ Consumer Expenditure Survey, in 1989, Americans spent an average of $985 on gasoline and motor oil that year. By 1990, Americans were now spending more than $1,000 a year on gasoline and motor oil. Fortunately, the price shock didn’t last too long, and by Feb. 1991, the price per barrel of West Texas Intermediate (WTI) had fallen down to $19.28.
American incomes also experienced a rough ride during the final years of the Cold War and after. Based on data from Statista, the median household income in 1990 was $54,621, before dropping to a low of $52,334 by 1993 in the wake of the early 1990s recession.
In the end, the recession proved to be one of the shortest in the modern era, on par with the eight-month recession from 1957-1958, and the 2001 recession. The economy returned to 1980s level growth by 1993, fueled by the digital revolution, internet boom, low interest rates, low energy prices and a bourgeoning housing market. According to Census Bureau, by 1995, the median household income had rebounded to $54,600, less than in 1990, but significantly higher than the previous year and the lowest point in 1993 when the median income was $52,334.
The year 1995 would see the liftoff of the digital and dotcom boom so often associated with the 1990s. Indeed, according to the NBER, the expansion of the economy from March 1991 to March 2000 (120 months) is the longest period of economic growth in U.S. history, beating out the 106-month expansion of the 1960s, which was during the heyday of post-WWII American preeminence.
Here’s a look at the top-grossing domestic movies of the period 1989-1995, according to Box Office Mojo:
- Jurassic Park – 1993: $357,067,947
- Forrest Gump – 1994: $329,694,499
- The Lion King – 1994: $312,855,561
- Home Alone – 1990: $285,761,243
- Batman – 1989: $251,188,924
2. The Golden Years: 1995 – 2001
After the end of the early 1990s recession in March 1991, the U.S. entered a “Belle Époque”: A brief golden age, fueled by the growth and innovation of the Third Industrial Revolution in information and communications technology (ICT), and reflected in the romanticized, nostalgic sheen that Americans have thrown across that era from the late 1990s to the turn-of-the-millennium.
According to the Federal Reserve Bank of St. Louis, at the beginning of second quarter 1991, U.S. GDP was $6,126.86 billion (or $6.127 trillion). Ten years later, by the beginning of second quarter 2001, GDP had reached $10,597.82 billion ($10.6 trillion) — an increase of 73 percent in a decade. The U.S. economy went on a 120-month streak of sustained growth, the longest in history.
Incomes reflected the startling economic growth of America’s Belle Époque. Real household incomes were already on the upswing in 1995, having risen from $52,942 in 1994 to a median of $54,600 the following year, according to the Census Bureau. The surge continued to 1999 when median household income topped out at $60,062. As the dotcom bubble peaked and deflated, so did the economy, and median household income fell to $58,609 in 2001.
But like the Belle Époque in Europe — the time period leading up to the First World War in 1914 — wealth inequality grew substantially in America’s Belle Époque. According to Piketty’s “Capital in the 21st Century,” in 1990, the top 10% of earners accounted for about 40% of total U.S. national income. Over the course of the decade, the top 10%’s share of national income grew substantially, eventually accounting for over 45% of national income by 2000 — a level not seen since the late 1920s.
Yet it’s easy to miss this growing inequality when times are good, as they very much were in the latter half of the 1990s. And the good times could be seen not just in the private sector, but in the public. Over the course of the 1990s, the federal government, according to the Mercatus Center, cut federal spending down from 21.9% to 18.2% of GDP, all the while politically divided between the Republican-controlled Congress and the Democrat commander-in-chief, President Bill Clinton.
President Clinton and his Vice President, Al Gore, were both major proponents of the digital revolution and the adoption of the internet. This major development fueled a dramatic rise in stock prices. On Jan. 1, 1995, the Dow Jones closed at 3,867.41. Three years later, on. Jan. 4, 1998, the Dow closed at 7,580.40, which equates to an increase of 96%, just shy of doubling. Two years later, at the height of the dotcom bubble, the Dow closed at 11,722.98 on Jan. 9, 2000 — thus tripling over five years from 1995 to 2000.
The five top-grossing domestic films of the period 1995-2001:
- Titanic – 1997: $600,788,188
- Star Wars: Episode I – The Phantom Menace – 1999: $431,088,295
- Harry Potter and the Sorcerer’s Stone – 2001:$317,575,550
- The Lord of the Rings: The Fellowship of the Ring – 2001: $313,364,114
- Independence Day – 1996: $306,169,268
3. Sowing the Wind: 2001 – 2007
Expectations about the future ran high as the new millennium approached. The digital revolution that underpinned the economy’s boom, however, was also responsible for the growth of what would later be termed the dotcom bubble.
A great snapshot of the dotcom bubble can be observed in the fortunes of Priceline.com. According to Ideas.Ted.com, Priceline went public at $16 a share in March 1999. On its first day of trading, the price rose to $88, before settling at $69, giving Priceline a market capitalization of $9.8 billion — making it the largest first-day valuation of an internet company to that date. Under the surface, however, Priceline amassed losses of $142.5 million in its couple of quarters. It was a hallmark of internet businesses of the day, promising to change the world while pursuing a strategy to attain ubiquity and corner a particular market.
As the fervor for internet businesses increased, the stock markets rose to dizzying historical heights. The Dow Jones peaked at 11,722.98 in Jan. 2000, a level it would not surpass for more than six years. Dotcom companies really ran up the tech-heavy Nasdaq, which peaked on March 10, 2000, at 5,048.62. Soon, however, time had run out for the dotcoms, as many businesses failed to create a realistic path for making money in the long-run. By April 2000, the Nasdaq had lost 34.2% of its value since its peak the month before.
If the dotcom bubble bookmarks the end of the belle epoque of 1995-2001, then the September 11 attacks in 2001 mark the beginning of the next period, which lasts from 2001 to 2007. The attacks by Al Qaeda shut down Wall Street trading. When markets reopened, according to Investopedia, the New York Stock Exchange (NYSE) fell 684 points, a 7.1% decline, which set a record at the time for the biggest loss in a single day of trading. At the close of trading that Friday, the Dow Jones was down nearly 1,370 points, for a loss of roughly 14%, while the S&P500 closed having lost 12% of its value.
The 2001 recession was technically fairly short, lasting eight months from March to Nov. 2001, but the economy remained sluggish for years. It wasn’t until well into 2003 the S&P500 turned around, and not until 2007 that it reached the highs attained during the dotcom bubble.
One of the main engines of the stock market turnaround would be the U.S. housing market. The collapse of the dotcom bubble sent many investors away from riskier tech stocks, towards more traditional and supposedly safer sectors. American housing, thus, seemed like a sound investment.
Indeed, housing was heating up after 2001, as residential construction soon soared above 5% of GDP. According to a report by the Center for Economic and Policy Research, by the peak of the building boom in 2005, residential construction accounted for 6.8% of GDP. All this building occurring while vacancy rates steadily marched upward, reaching a milestone level of 13.2% in the third quarter 2004 — well before the peak of the U.S. housing bubble.
At the same time, outside of the U.S., the War on Terror — initiated with the invasion of Afghanistan in Oct. 2001 — escalated and expanded into new theaters, namely, Iraq. Based on limited evidence of a connection to Al Qaeda, and idealist notions of bringing democracy to Iraq, the U.S. launched an invasion of the country on March 20, 2003.
Quick victory over the regular armed forces of Saddam, however, did not translate to peace. Irregular warfare began, and by 2004, the Insurgency was in full-swing. The military’s budget began to markedly rise year-over-year, with the Insurgency escalating into near-civil war in 2006. In 2007, the Department of Defense’s combined base and Overseas Contingency Operations (OCO)/Other Budget exceeded $601 billion for the first time, according to the Department of Defense.
Household incomes reflected the sluggish economy. According to the Census Bureau, median household income stood at $58,609 in 2001, before going on a three-year decline down to $57,674 by 2004. Then, as the U.S. housing market heated up to record temperatures in 2005, household incomes rebounded. In 2005, real median household income was up to $58,291; in 2006, it reached $58,746; and by 2007, at the peak of the housing bubble and business cycle, the real median household income had reached $59,534, the highest since 2000.
Yet, there were some people who already recognized the dangerous seeds that were being planted by the ballooning housing market, specifically in the proliferation of subprime mortgage lending. A combination of easy credit and lax lending standards; use of adjustable rate mortgages and innovations like interest-only mortgages, in which the borrower only pays the interest on the loan for a set period, after which they then have to pay the principal as well; securitization of subprime mortgages, which multiplied leverage exponentially, and therefore the potential impact of a downturn in the market; and the behavior of banks, which held onto these bad assets rather than trading them off the balance sheet and funded them in a fragile manner, and thus faced a liquidity crisis when these assets proved nearly worthless. If 2001 to 2007 saw the sowing of these potentially lethal seeds, the period 2007 to 2013 would witness their reaping.
The five top-grossing domestic films of the period 2001-2007:
- Shrek 2 – 2004: $441,226,247
- Pirates of the Caribbean: Dead Man’s Chest – 2006: $423,315,812
- Spiderman – 2002: $403,706,375
- Star Wars: Episode III – Revenge of the Sith – 2005: $380,270,577
- The Lord of the Rings: The Return of the King – 2003: $377,027,325
4. Reaping the Whirlwind: 2007 – 2013
The Great Recession of 2007-2009 really was the worst economic downturn since the Great Depression. According to the National Bureau of Economic Research, in the Great Depression, the U.S. economy contracted for 43 months, from August 1929 to March 1933. After this, the Great Recession clocked in at 18 months of contraction, from December 2007 to June 2009. Two other notorious post-WWII recessions — one from November 1973 to March 1975, and the other, July 1981 to November 1982 — saw the economy contract for 16 months.
The good news is that each of these historical recessions were followed by recessions that were significantly less severe. After the Great Depression, the economic contraction suffered during the “Roosevelt Recession” lasted less than a third of the time the Depression’s lasted. The recessions of 1980 and 1990-1991 each lasted eight months compared to 16 months of the recessions immediately preceding. Based on these historical patterns of some of the worst downturns, the next one will probably be comparatively milder than the Great Recession of the late 2000s.
The global financial crisis of 2007-2008 was set off by the collapse of the American housing market. When major investment banks like Bear Stearns and Lehman Bros. failed, they severely disrupted the global money market which had been operating for years on a circuit of round-tripping dollars, with Europe investing the most in U.S. housing via these investment banks. As the housing market imploded, the value of the securities based on these mortgages evaporated. This undermined liquidity for many domestic and international banks, causing inter-bank lending to dry up dangerously in 2007-2008 and bringing the global financial system to a halt.
While the American housing market was causing domestic woes, on the international stage, America’s War on Terror was reaching its climax. In 2007, amid near-civil war in Iraq, the U.S. increased military deployment and extended tours in the Iraq War, in a move that has been nicknamed “The Surge.” The U.S. military budget climbed over the years, reaching its peak in 2010, according to the Department of Defense.
Under President Obama, the U.S. began drawing down its forces from Iraq, officially ending operations in Dec. 2011. Across the board, the military budget declined significantly each year after 2010. American forces were reallocated to the Afghanistan theater, but overall, this period of time was one of military drawdown.
American households saw their incomes reach heights not seen in several years. According to the Census Bureau, median household income was $59,534 in 2007, the highest since 2000 when it had been $59,938. But when the bottom fell out of the housing market, dragging down the financial institutions that helped construct its faulty foundations, incomes plummeted. From over $59,000, household income fell to $54,569 by 2012, more than an 8% drop.
The American economy suffered a significant contraction during the Great Recession. According to the U.S. Bureau of Economic Analysis, U.S. real GDP stood at $15,761.97 billion ($15.76 trillion) in the fourth quarter of 2007. Less than two years later, real GDP had fallen to $15,134.12 billion ($15.13 trillion) by the end of the second quarter 2009, for a massive decline of 4%. Home prices would continue their decline until bottoming out in Feb. 2012, according to the S&P/Case-Shiller U.S. National Home Price Index.
The 2007-2008 global financial crisis dealt America’s wealthiest a temporary blow, reducing their overall share in national income — but only briefly. Income inequality, as measured by the Gini index, a metric which ranges from 1 (representing total inequality) and 0 (representing total equality), was equal to 0.467 in 2007, according to the U.S. Census Bureau. By 2013, the Gini index had risen to 0.4811. By 2017, it had risen again to 0.4822, showing that despite the downturn of the Great Recession, the wealthiest still manage to keep the lion’s share of income for themselves.
The five top-grossing domestic films of the period 2007-2013:
- Avatar – 2009: $749,766,139
- Marvel’s The Avengers – 2012: $623,357,910
- The Dark Knight – 2008: $533,345,358
- The Dark Knight Rises – 2012: $448,139,099
- The Hunger Games: Catching Fire – 2013: $424,668,047
5. Fire Rises: 2013 – 2019
From the depths of the Great Recession, the U.S. economy marched forward, initiating a period of business expansion lasting from 2009 to now; if it continues to June 2019, this period of expansion will reach 120 months, and will thus tie for first place with the 1990s boom for the longest period of economic growth.
Yet America’s recovery was uneven. On paper, household incomes are looking great. According to the Census Bureau, real incomes have recovered, initially in big rebounds — from $55,613 in 2014 to $58,476 in 2015 — and then in smaller, though still sizeable increases — from $60,309 in 2016 to $61,372 in 2017. But looking beyond national averages reveals patchy recovery, weak growth and rising inequality.
For instance, Chicago is not a city often associated with the housing crash, versus, say, how Las Vegas, Miami or Phoenix are. Chicago home prices soared during the housing bubble just like they did in nearly every city, but unlike in many others, Chicago home prices have not recovered. According to the S&P/Case-Shiller IL-Chicago Home Price Index, as of Jan. 2019, Chicago home prices are still down over 27% from their peak in March 2007, and the rate of appreciation is slow compared to the U.S. overall. In addition, according to the Bureau of Economic Analysis, Chicago’s GDP grew at a slower rate than the national average for metropolitan areas for all years from 2012 to 2017 with the exception of one:
|Millions of dollars ($)|
|U.S. metropolitan areas||$14,485,166||$14,966,839||$15,628,087||$16,358,498||$16,857,169||$17,547,902|
|Year-over-year growth (%)|
|U.S. metropolitan areas||3.3%||4.4%||4.7%||3.0%||4.1%||3.9%|
Out of 383 metro areas tracked by the BEA, Chicago’s average annual GDP growth (3.3%) from 2012 to 2017 ranks No. 187. The top 10 fastest growing economies in terms of average yearly growth from 2012 to 2017 include the following metro areas:
- Bend-Redmond, Oregon: 9.6%
- Midland, Michigan: 9.6%
- Elkhart-Goshen, Indiana: 9.4%
- San Jose-Sunnyvale-Santa Clara, California: 8.8%
- Provo-Orem, Utah: 8.7%
- George, Utah: 8.3%
- Greeley, Colorado: 7.8%
- Austin-Round Rock, Texas: 7.5%
- Salisbury, Maryland: 7.1%
- San Antonio-New Braunfels, Texas: 6.8%
The 10 metro areas that have seen the worst growth, indeed outright decline in GDP on average, include the following:
- Lafayette, Louisiana: -4.4%
- Houma-Thibodaux, Louisiana: -3.7%
- Peoria, Illinois: -3.1%
- Anchorage, Alaska: -2.3%
- Farmington, New Mexico: -2.2%
- Watertown-Fort Drum, New York: -1.7%
- Longview, Texas: -1.4%
- Charleston, West Virginia: -1.3%
- Sierra Vista-Douglas, Arizona: -1%
- Pine Bluff, Arkansas: -0.8%
Several of the cities with negative GDP growth are facing potentially severe housing crises.
The tech industry, especially with the evolution of Web 2.0 in this period, fueled much of the economic growth in metro areas like San Jose and Austin. The latter city has experienced spectacular growth in recent years. According to the Census Bureau’s 2017 American Community Survey, Austin’s population currently stands at 916,906, up 20% from 2010 when the population was 764,129.
The U.S. stock market recorded solid growth from 2013 on, with the Dow Jones rising from 13,488.43 on Jan. 7, 2013, to a peak of 18,272.56 on May 11, 2015. After this, international uncertainties such as the Greek debt crisis and Brexit kept the Dow from achieving much growth for more than a year.
Finally, the stock market got a jolt from the election of Republican candidate Donald Trump. From closing at 17,888.28 on Oct. 31, 2016, the Dow Jones jumped about a thousand points in a week, to 18,847.66 by closing on Nov. 7, 2016. The Dow Jones went on a sustained march for over a year, reaching 26,616.71 on Jan. 22, 2018, before declining for the rest of the first quarter.
Though times have been technically good, the distribution of that prosperity is very uneven. The Economic Policy Institute’s appropriately named report “The new gilded age: Income inequality in the U.S. by state, metropolitan area and county,” makes it apparent that income inequality in America has reached levels not seen, ominously, since the late-1920s, just before the Wall Street Crash and Great Depression. The top-earning households are grabbing a greater share of national income while the middle class and those below take on more and more debt, most recently in the area of student loan debt and historic levels of auto loan debt. Younger generations, saddled with student loan debt, face difficult obstacles to homeownership, a key financial milestone that’s being increasingly put off by Americans these days.
The five top-grossing domestic films of the period 2013-2019:
- Star Wars: The Force Awakens – 2015: $936,662,225
- Black Panther – 2018: $700,059,566
- Avengers: Infinity War – 2018: $678,815,482
- Jurassic World – 2015: $652,270,625
- Star Wars: The Last Jedi – 2017: $620,181,382
The Bottom Line
So, how has Americans’ money changed since the end of the Cold War? In terms of real household income, Americans are earning more now than in 1989, $61,372 in 2017 vs. $55,329. However, this growth in income needs to be tempered by the simultaneous growth of income and wealth inequality during these years.
Income inequality had reached a historical low-point in the early-to-mid-1970s, right around the time of the 16-month 1973-1975 recession that marks the end of America’s post-WWII economic supremacy. Since then, income inequality has been on an inexorable rise, reaching levels not seen in this country since the Roaring ‘20s, when Wall Street was booming all the way until it crashed in 1929.
According to the Census Bureau, in the U.S. in 1989, the Gini index — a metric that measures income inequality from 0, which means total equality, to 1, which means total inequality — was 0.431. By 2017, it has increased dramatically, to 0.482 — an increase of 11.8%. Back in 1989, the top-5 percent of households accounted for 18.9% of total U.S. income. In 2017, this share had risen to 22.3% of national income. So, while real incomes, unemployment, GDP and other economic metrics have shown overall improvement, the progress has been uneven, creating greater and greater socio-economic inequality in the U.S. One could perhaps describe current conditions as ‘the best of times and the worst of times.’
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