Midlands hit harder in 1980s

The current economic crisis nationally has been dubbed the Great Recession, going down in history as the worst downturn Americans have endured since the Great Depression.

But in Nebraska and Iowa, at least, that label rates as the Great Overstatement.

We've seen worse — arguably much worse.

The downturn of the early 1980s, a double-dipping disaster with deep roots in agriculture, slammed the heartland much harder than this downturn, taking a heavier employment toll.

Nebraska shed 5 percent of its jobs over the course of that economic dive, and Iowa a staggering 10 percent. With peak job losses in the current recession of about 3.4 percent for Nebraska and 4.7 percent for Iowa, things would have to get quite a bit worse before they'd be as dismal as back then.

“No, these are not the worst of times,'' said Iowa State University economist Peter Orazem. “I get annoyed at too many people whining about this being the worst time since the Great Depression. It's not.''

How much worse was it in the 1980s? Iowa's top unemployment level during this recession has been 6.6 percent. During the 1980s, Iowa's unemployment hit that level every month for 5½ straight years. Nebraska went through two long stretches totaling more than three years where its unemployment was at or above the 4.8 percent peak it hit for four months in this recession.

Of course, we're not out of the woods yet in this downturn, though most economists aren't expecting things to get a lot worse in coming months. And to be sure, any recession is painful if you're out of a job.

But when looking at the history of economic downturns, one can see that there really is no such thing as a truly “national recession.'' Because regions have different economic and industrial makeups, recessions will hit them with varying severity, said Chad Wilkerson, a Federal Reserve economist in Oklahoma who monitors conditions in Nebraska and surrounding states.

This crisis, driven by reckless lending practices and the collapse of a speculative hot-market housing bubble, has without a doubt lived up to all the superlatives in the nation as a whole.

Job losses are indeed the worst since the Great Depression. The 8 million-plus jobs that have disappeared represent more than 6 percent of all jobs, topping the previous high of 5 percent job losses in the post-World War II recession of 1947. The job losses nationally are almost twice as severe as the peak '80s recession losses.

Some of the other ways this recession tops any since the Great Depression: longest downturn; worst long-term unemployment; biggest housing slump; biggest loss of household wealth. Nationally, at least, all are true.

But Nebraska and Iowa, with less risky banking activity and more stable housing prices, have weathered this downturn in much better shape.

“Every national recession is an average, with some regions above average and some below,'' said economist Murray Weidenbaum, who during the '80s served as chairman of President Ronald Reagan's Council of Economic Advisers. “The Midwest didn't go overboard with (housing) speculation like California, Florida and Nevada, so it's not nearly as bad now.''

Conversely, during the 1980s, Nebraska, Iowa and other agricultural states found themselves right at the epicenter of the nation's economic quake.

Why was that downturn so deep here?

Ironically, it was the bursting of another real estate bubble — this one based on agricultural land — that contributed mightily to the Midlands' troubles.

Agricultural producers enjoyed some boom years during the 1970s, and those led many farmers, rural banks and investors to sharply bid up the price of farmland. There was a belief that values were always going to rise.

“Does this sound familiar?'' ISU's Orazem said. “It's exactly what happened in the housing markets in the places that have seen the worst of this recession.''

The resulting crisis was exacerbated at the time by a major shift in federal monetary policy.

The oil shocks of the 1970s led to a long period of stagnation and double-digit inflation, annual inflation hitting double digits in 1979. In national polls, inflation was considered one of the biggest problems facing America.

To try to wring inflation out of the economy, the Federal Reserve tightened up the money supply and significantly raised interest rates. The prime rate more than tripled, topping 20 percent — a level not seen since the Civil War. That compares with today's prime of a little more than 3 percent.

Weidenbaum, who supported the policy of ultra-high interest rates after Reagan came to office in 1981, still says it was the right thing to do. “We broke the back of inflation,'' he said.

But a side effect, he acknowledged, was the recession of 1980, which months later was followed by the recession of 1981-82.

The two recessions — in economic terms, a classic double-dip downturn— would wipe out millions of jobs, but they hit especially hard in the nation's heartland.

Even in the best of times, agriculture is heavily affected by interest rates, because agriculture is among the most capital-intensive of industries. But this time, the interest rates shot up just as agricultural land values were crashing.

Commodity prices also plummeted. Thousands of producers were left with land worth less than what they owed on their loans and reduced income to make their payments.

“Wealth eroded pretty severely,'' said Bruce Johnson, an agricultural economist at the University of Nebraska-Lincoln. “We took ag land to 40 cents on the dollar from its peak.''

The crisis on the farm spilled into town.

Regulators stepped in to shut down dozens of rural banks in both states. Retailers and the states' many agriculture-related businesses and manufacturers were also heavily affected, including companies in Omaha and Lincoln. State and local governments faced massive budget cuts.

Bob Kerrey remembers those days — not only when he was shuttering banks and slashing university budgets as Nebraska's governor, but even before then as an Omaha businessman. When interest rates spiked in 1979, the monthly payment on his $400,000 business loan shot up from $3,700 to $12,000.

“If we had not been able to raise more capital and refinance, I would have been bankrupt,'' said Kerrey, now president of the New School University in New York City. But many other small business owners and farmers couldn't avoid that fate, and those failures also rippled through the economy.

Though the two early 1980s recessions, on the national level, were separate and distinct, with a complete jobs recovery between, in Nebraska and Iowa they took the form of one nearly continuous four-year jobs free fall.

The two states began shedding jobs in the summer of 1979 — nine months before the nation as a whole. Though there was some job improvement in late 1980, both states recovered only a fraction of their job losses before then diving into the second dip of the downturn.

By early 1983, Nebraska had lost about 32,000 jobs from its 1979 peak. In sheer numbers, that's about the same number lost in this recession.

But because Nebraska's employment base has grown more than 50 percent over the past three decades, those losses, on a percentage basis, were well more than one-third higher than in this recession. Nebraska's losses during the second dip of the downturn alone equal those seen in this recession.

Iowa lost 115,000 jobs during the long downturn, an astonishing 10 percent of its job base and more than double its percentage loss in this recession. In fact, each dip of the downturn on its own cost Iowa more jobs than this recession has. The nation would have to lose millions more jobs in this recession before its percentage job loss would approach Iowa's peak losses in the 1980s.

The job losses hit families hard. At one point in 1982, a charity in Omaha asked local corporations to sign a pledge to abstain from layoffs until after Christmas.

The unemployment rate ultimately would hit 6.7 percent in Nebraska and 8.6 percent in Iowa. Peak unemployment rate is one measure where the nation fared worse than Nebraska and Iowa during the '80s downturn, the national rate topping out at 10.8 percent. In fact, even in this recession, the nation has yet to top that rate, in part because the country went into the 1980s recession with a rate that was already above normal.

The housing markets in Nebraska and Iowa also were hit harder during the 1980s recession than now. Peak housing value declines in Nebraska were almost three times greater than they have been so far in this recession; Iowa's were almost six times greater than now.

“It was just one body blow after another,'' said Don Leuenberger, who at the time served as Nebraska's top budget administrator and as state tax commissioner. “The slide was precipitous, and we didn't come out of it for quite a while.''

Indeed, even when the job losses finally ended, Nebraska and Iowa had almost no net job growth between 1984 and 1986, even while the nation raced ahead at a healthy clip. Major corporate departures actual and threatened, including the decision by Omaha's Northern Natural Gas Co. to move to Houston, had residents in both states feeling they were being economically left behind.

“We were in a bad fix, financially and psychologically,'' said Vard Johnson, a former state legislator from Omaha. “People were questioning whether there was a future here.''

Many decided there wasn't. Residents left the states in droves, with Nebraska seeing a net out-migration of 100,000 people during the decade, said Jerome Deichert, a University of Nebraska at Omaha demographer. That contrasts with this recession, where Nebraska is gaining through migration, including people coming from more troubled states.

Unlike in this recession, there was not much of a national policy response to the 1980s downturn. Because it became more of a regional problem, said the Federal Reserve's Wilkerson, “we were kind of left to work through it on our own. It was just kind of muddling along.''

As painful as the 1980s were for the region, in those years you can find the roots of change that would help the states fare so much better during this downturn.

The surviving farmers learned a lesson. Even during recent boom times in agriculture that were reminiscent of the 1970s, farmers avoided getting overleveraged and kept their books in line. In fact, farmers' debt-to-asset ratios are the lowest on record.

That left them in a much better position to weather the storm when the current recession finally came to the farm last year. “A lot of producers have got themselves into a pretty good situation,'' said UNL's Johnson. “The market for ag land is pretty resilient right now.''

State officials in Nebraska also learned from the experience, Kerrey and Leuenberger said. Budget and tax reforms left the state in a much better position to cope with future downturns.

The state also for the first time got involved in economic development in a big way, passing major tax incentives intended to solidify its business base and attract new employers.

“There was a change in the ethos of state government, a decision that the state had a proactive role to play in shaping the economy,'' Leuenberger said. “The economy in urban areas is much more diverse than it was in the early 1980s and is therefore much more recession-resistant.''

Indeed, some recent studies that have found Omaha to be among the nation's most healthy cities during this recession have cited the city's economic diversity as a major strength.

Obviously the pain from this recession isn't over yet, but most economists aren't expecting it to get a lot worse. Job losses in Nebraska, Iowa and the nation have flattened out in recent months.

“We're starting to see signs of recovery throughout our region,'' Wilkerson said. “All indications are we should continue to rebound with the nation.''

And even if we haven't seen the bottom, it's still not likely economic conditions will reach the point here that they'll be worse than those nationally.

Weidenbaum, now an economics professor at Washington University in St. Louis, said he's happy to hear Nebraska and Iowa are faring so much better this time around.

“You served your penance in the 1980s.''

Contact the writer:

444-1130, henry.cordes@owh.com

« Metro/Region

Share