Last word (for now) on the Golden Age

by John Quiggin on April 1, 2021

Thanks to everyone who has made useful comments on my recent posts. I need to move on to present concerns, so I’m finishing my writing on the post-War Golden Age (or whatever you would like to call this period). Here are some thoughts I still need to organize

Over the period since 1900 as a whole, there hasn’t been any clear trend in the rate of technological progress for the US. However, from 1950 to the early 1970s, the US economy was closer to the ‘frontier’ determined by technological progress and available resources before or since, and the output of the economy was shared more equally than before or since.

We can’t replicate these things exactly, but we can use a revamped version of the mid-C20 institutions as a starting point for a Green New Deal.

The breakdown of the Keynesian-social democratic moment in the late 1960s and early 1970s was largely the result of mistakes which were probably inevitable at the time, but may be avoided if we learn from them.

What went right

The strong growth in aggregate output from the late 1940s to the late 1970s primarily, though not entirely, reflected the fact that the economy moved from operating well below its technological potential to operating at or near the technological ‘frontier’.

The most important implication is that egalitarian economic policies and social institutions are conducive to good economic performance at an aggregate level. Here’s a list of some of the relevant policies (commenter TM suggested most of these, and I’ve added some)

  • Policy commitment to full employment – important for expectations
  • Keynesian fiscal and monetary policy – helped in accelerating recovery from recessions
  • Progressive taxation and New Deal welfare state – reduced inequality, and provided automatic stabilisation (as employment falls, tax revenue falls and spending rises)
  • Strong unions (reduced inequality and constrained employer class from aggressive anti-worker policies)
  • Public investment and expanded public provision of services – reduced dependence on business confidence
  • Broad access to education at low cost, necessary to achieve productive potential of the economy
  • Low capital mobility and financial repression – kept power of financial capital in check, avoided waste of resources in financial sector

What went wrong

The breakdown of the Golden Age can be traced to a combination of
* Hubris on the part of the technocratic policy elite, reflecting in a belief in their ability to ‘fine tune’ the economy, and to run the War on Poverty and the Vietnam War at the same time
* Mistaken belief on the left that the US and the world were approaching a revolution and that impossibilist demands (particularly, but not exclusively in relation to wages and conditions) could help to bring this about
* The rapid but unrecognised growth in the power and global mobility of financial capital arising from the end of international capital controls and domestic financial repression

Around 1970, these factors combined to produce an inflationary outburst which, in a context of capital mobility brought about the end of the Bretton Woods system of fixed exchange rates (the residual role of the gold standard played an important technical role here). This in turn produced more financial deregulation and more volatility leading to an escalating crisis.

Developments in ideas were also important. Friedman and the Chicago school had correctly predicted the inflationary consequences of policies pursued by Keynesian technocrats in the 1960s, and therefore was well positioned to replace them as guides to both macroeconomic and microeconomic policy. Even though the policies did not restore the strong and egalitarian growth of the Golden Age, they were highly beneficial to the financial sector which rapidly achieved sufficient political and economic dominance to ensure that its wishes prevailed.

What didn’t matter

The 1973 oil shock is often seen as central to this story, but it occurred well after the critical events, including the breakdown of Bretton Woods and the failure of wage-price controls. It was a late development in a general upsurge in commodity prices. More broadly, the idea that the pre-1973 period was one of cheap and abundant energy compared to subsequent decades is only true for oil, which became steadily less important in economic terms after 1973, despite being a continuing focus of geopolitics. Prices and production for coal, natural gas and electricity followed different paths.

{ 23 comments }

1

nastywoman 04.01.21 at 8:39 am

”What went wrong?”

never forget the movement -(of mainly the ”AngloWorld”) to a Predominant ”Service and Consumer Economy – while all of the Predominant Producers and Manufacturers had their ”Golden Age” extended until today where the workers of the Worlds ”First Producers” of Luxury Goods will survive the current economical crisis –
again –
economically –
as well as they did in the economically crisis of 2008.

2

MFB 04.01.21 at 9:37 am

I think I’d agree with every one of your positive points, Prof. Quiggin. I would add a slightly less important but I think quite significant one: military Keynesianism, and especially military Keynesianism which promoted conscription and large-scale low-tech weapons manufacturing.

Of your negative points, the “hubris” in the part of the policy elite had been present for the past three decades (running the Korean War and the Marshall Plan at the same time, for instance) without notable failure. I suspect that it wasn’t so much “hubris” as a change in planning and policy.

The only people on the left who expected a revolution in the late 1960s and 1970 were extreme leftists who had, essentially, no power and no capacity to implement any policies, and were also very ill-informed. Blaming them for the crisis of the early 1970s is, sorry to say this, absurd. You might as well blame President Nixon’s pet hedgehog.

The rapid growth of financial mobility seems to be a major factor, perhaps the most important, and there I think you are spot-on.

You are also probably right that the surge in the oil price was more a symptom than a cause of the problem.

I wonder whether the perceived decline in power of the USSR, and the Sino-Soviet split, might have played a role in empowering the ruling classes in the West? I would imagine that they tolerated things like powerful trade unions only so long as they really believed in some kind of external leftist threat. But I suppose that’s a bit vague.

3

eg 04.01.21 at 12:32 pm

If the timing of the oil shock is such that it cannot be a primary driver, might it not at least have been what discredited the Keynesians for good, giving the Monetarists a free hand?

4

Tim Worstall 04.01.21 at 1:19 pm

An entirely alternative reading of these same facts can be presented.

“The strong growth in aggregate output from the late 1940s to the late 1970s primarily, though not entirely, reflected the fact that the economy moved from operating well below its technological potential to operating at or near the technological ‘frontier’.”

OK, yes, I’ll agree to that. But that statement entirely conflicts with this one:

“However, from 1950 to the early 1970s, the US economy was closer to the ‘frontier’ determined by technological progress and available resources before or since, ”

You have stated both that the economy moved from operating well inside the envelope to the limit and also that the economy was at the limit throughout. Both are – umm – unlikely to be true.

The alternative explanation. There was – ish, ish – no economic growth between say 1930 and 1945 in the US. OK, too strong a statement but accept it as an opening position.

There was still technological advance during those years. Substantial technological advance. Which leaves room to argue that the excellent growth of the next 20 to 30 years was that move from well below technological potential to that limit.

OK, I tend to agree.

But that means that, possibly at least, all those things like equality, strong unions, Keynesian economic management etc etc were coincident with that growth, not the cause of it.

That is, if we accept the argument that the growth was, primarily, a result of catch up to technological potential (something that seems likely after a depression and a world war) then how much room have we left for the argument that it was all those nice policies of that period of time that caused the excellent growth?

5

notGoodenough 04.01.21 at 1:29 pm

JQ @ OP

I think this seems pretty reasonable. On a purely personal note, I would be tempted to also emphasise access to healthcare too. Not only in terms of affordability, though of course that is one of the most significant, but also family planning and contraception might well play interesting roles.

While much of this has been undermined over the intervening decades, there are some not-completely-apocalyptic signs. There are many criticisms one can make of Biden’s latest bill, it does seem to include increased taxes on corporations, infrastructure spending, neutralises “right to work” laws in 27 states and helps increase protection for workers – while far from perfect, I think some of this seems to align well with the list given by yourself and TM (I’d be interested to see a bit of a breakdown, should there ever be time!).

Of course, this is merely a small step compared to decades of going in the wrong direction, but I think one would be hard pressed to argue against this being an improvement with respect to the last 4 years (though I can’t help but feel certain commentators will either try, or completely ignore the point in favour of their preferred narritives).

6

marcel proust 04.01.21 at 2:17 pm

Two other points about what went wrong/right.

Wrong: the supply side tax cut in the JFK CEA (Heller/Tobin CEA), from 91% to 77%. This started a trend that we are still living with of cutting top marginal tax rates, which fell as low as 28% at the end of the Reagan administration. High tax rates, when effectively enforced, reinforce the role of unions in discouraging the rich and powerful from Hoovering up as much as they can.

Wrong: weakening of unions. High labor costs encourage innovation and productivity growth. A problem comes when unions are not widespread internationally (or domestically – see the history of the US textile industry), so that outsourcing to non-union regions substitutes for productivity growth.

7

Aardvark Cheeselog 04.01.21 at 6:09 pm

I wonder whether the perceived decline in power of the USSR, and the Sino-Soviet split…

The “ruling classes of the West” were fully invested in the notion of the Soviet Union as an existential threat right up through the collapse of the Soviet Union itself. Witness the foundering aimlessness of the GHWB Administration’s response to the events of 1989-90.

Possibly there was a reduction in some quarters of the perceived threat of revolution (as opposed to Soviet aggression) by the 1970s, as a consequence of the success</> of the New Deal, and the “ruling classes” came to have the attitude “why are we budgeting these resources for preventive maintenance on things that haven’t broken,” which is a recurring folly among ruling classes.

8

John Quiggin 04.02.21 at 12:33 am

Thanks to all commentes

@1 Shift to service economy is a big deal. I have a lot written on this that needs work

@2 I need to think more about military Keynesianism. It doesn’t work in explaining growth in Germany and Japan

@3 Yes, it dramatised the breakdown of the Bretton Woods order

@4 As you point out, I’ve been a bit inexact. The US caught up to the technological frontier in the 1950s and was at or near the frontier in the 1960s.

“That is, if we accept the argument that the growth was, primarily, a result of catch up to technological potential (something that seems likely after a depression and a world war) then how much room have we left for the argument that it was all those nice policies of that period of time that caused the excellent growth?”

The catchup wasn’t automatic. At a minimum the institutions were consistent both with catchup and with a more equal distribution of the benefits, which is more than can be said for the alternative institutions that prevailed before and after

@5 As I’ve mentioned in an earlier post, Biden has done much better than I thought possible. A lot of what I was going to advocate has already been done or announced

@6 Good points. Heller was the prime example of technocratic hubris

@7 Biden is reframing the Cold War threat as autocracy vs democracy. Again, I’m impressed

9

Peter T 04.02.21 at 2:56 am

On military Keynesianism: think of World War II as an enormous exercise in re-training and socially re-orienting the workforce (most military don’t fight – they make, repair, supply – and the same is more so of the millions drafted into the industrial workforce), while also inculcating a high degree of social solidarity, a rapid degree of promotion on merit and a great leap in lower class confidence in themselves. As true for Japan and Germany as for the others – factories can be re-built quickly, machines made, but the skills and social relations needed to run them effectively take decades to grow in peacetime.

On where the frontier is now – two things worth mentioning are

the demographic transition well under way across most of the world – Africa largely excepted. The EU is projecting a small increase to 2040 and thereafter decline – large declines across much of eastern Europe.
the many constraints now evident on the environmental front (not just climate, but also ecological disruption, chemical over-load, species loss…a long list, the answer to most of which is to produce much less harm – which often means producing much less.

10

Hidari 04.02.21 at 7:21 am

@6

I read somewhere (lost the link) that one of the key advantages of having really high tax rates on businesses (corporation taxes and the equivalent) in the 1950s was that businesses were forced to reinvest profits as (e.g.) investment in R and D etc. before the taxman took it.

Nowadays, on the other hand, due to low tax rates and the ease with which money can be squirrelled away in off-shore tax havens, it makes more sense just to hold on to the money, rather than invest it in serious projects that might make sense and might make serious products that people actually want to buy.

It’s amazing how many people have swallowed the myth that ‘our era’ (by which I mean the last 10 years or so) is one of increasing and accelerating technological change. It’s so obviously not.

https://www.nesta.org.uk/blog/innovation-slowing-down/

When I was young, there were fundamental and transformative technologies happening more or less every year. And in my father’s age too (TV, radio, (cheap and easily available) motorcars, jet aircraft, the personal computer etc.

But the last truly transformative technology that has. been introduced, at least in the West, is the smartphone (invented in 1992, according to Wikipedia). (By transformative I mean, transformed the lives of millions of ordinary people, in the way that cars or planes did).

Apart from that, all we’ve seen is vapourware with good PR (self-driving cars, rocket ships to Mars etc.) which either will never happen, or will only happen for a select few, and function mainly as vanity projects for bored billionaires, or else as tax right-offs. Other allegedly transformative commodities (3-D printers, robots (e.g. carpet cleaning robots)) remain niche products without mass appeal.

There are obviously reasons for this, but one key reason is that, as I say, firms simply lack the financial incentive to bring products to market any more. As Ian Hislop once said on Have I Got News for You, companies like Apple (post Jobs), Google, Facebook etc, are not tech companies that happen to engage in tax avoidance, they are tax avoidance companies that dabble in tech. Or else see the Panama Papers (swiftly memory-holed) which showed that tax avoidance is not an ‘add on’ to the system: it is the system itself. Companies which obey the law and which pay their taxes are the outliers, not the other way round.

This is yet another example of why the ‘corporate-ocracy’ in which we live is actually bad for the corporations themselves. it would be better for everybody to radically raise taxes on corporations, in order to force them to innovate ( and hire staff). But our worship of the alleged Gods of (e.g.) Silicon Valley prevents us from doing this.

11

Robespierre 04.02.21 at 8:20 am

@Tim Worstall:
unless you are using “economic growth” in a very idiosyncratic way, there was a largd increase in production between 1930 and 1945 (and it all occurred during the war). I don’t know what you are saying.

12

MisterMr 04.02.21 at 9:12 am

My two cents: in another thread Hidari mentioned Picketty.

IIRC Picketty speaks of 3 threads:

1) increase in income inequality
2) increase in wealth inequality
3) increase in the wealth to income ratio

Of these, 3 is IMHO very important but often neglectet, because people have problems distinguish between stocks (wealth, quantity of money/debt) and flows (real output, nominal income, inflation).

An high wealth to income economy is likely to be a very leveraged economy, and this causes all soorts of problems VS social mobility, maximum sustainable wage share etc.

The wealth to income ratio fell mostly during the interwar period, that totally was not a golden age.
When after the war reconstruction began, high marginal taxes and rising (rising, not just high) inflation kept the wealth to income ratio low but they didn’t lower it.
After the neoliberal turn in the 80s the wealth to income ratio started to crawl up again.

I believe that it is almost impossible to lower the wealth to income ratio just through tax policy, because it means to tax people more than what they earn (at some levels of income), that is unthinkable.
Even if most of the wealth is fictitious financial wealth, any politician that came out with the idea “let’s tax people just because I want to bring the wealth to income ratio down” would be kicked out of office immediately, not just by evil financial elites but by common people too, since saving is supposed to be a moral good.

This is IMHO the core problem.

13

Gorgonzola Petrovna 04.02.21 at 10:01 am

@10 “This is yet another example of why the ‘corporate-ocracy’ in which we live is actually bad for the corporations themselves. it would be better for everybody to radically raise taxes on corporations, in order to force them to innovate ( and hire staff).”

I don’t know if raising corporate taxes would force corporations to innovate and hire staff, but raising corporate taxes (effective rate) everywhere is not in the cards. In a global economy, countries compete for investments by (among other things) lowering corporate taxes. Corporations will just migrate (on paper anyway) to some corporate tax haven (Ireland, Singapore). This is another game technocratic administrators can’t win.

14

Tim Worstall 04.02.21 at 10:53 am

“The catchup wasn’t automatic. At a minimum the institutions were consistent both with catchup and with a more equal distribution of the benefits, which is more than can be said for the alternative institutions that prevailed before and after”

That would require a reasonable estimate of how far we are from the edge of the technological possibility right now, wouldn’t it?

“unless you are using “economic growth” in a very idiosyncratic way, there was a largd increase in production between 1930 and 1945 (and it all occurred during the war).”

Yes, idiosyncratic. Building stuff to blow it up, or to use it to blow other stuff up, does not an increase in living standards create.

15

Tony Zbaraschuk 04.02.21 at 4:32 pm

I would say, also, that there’s a major external factor here.

In 1950-1960, much of the rest of the industrial world was ruined after World War II (city destruction in Germany, Italy, Japan, and Russia; lack of civilian investment and war damage among many other powers), and so US producers had a lot of room to make stuff to fill 20 years of pent-up demand.

Once China and Southeast Asia industrialized, and Europe rebuilt after World War II, there was a LOT more available production driving down the Golden Age opportunities. It wasn’t just a matter of internal managerial changes in the West.

16

J, not that one 04.02.21 at 5:29 pm

It occurs to me that Galbraith’s formula “private affluence and public squalor” is an odd tag to apply to the society described in the OP (and I think that description is correct), although they are the same society. The fact that his and similar books were popular, suggesting a low point in egalitarian sharing of the goods of society, at the period when equality and prosperity were actually at their height, may or may not be attributable to “an excessively utopian left.” To me it suggests that increasing egalitarianism wasn’t the only thing going on, though there may be other explanations.

(1) Increasing money and power going to segments of the population that were needed more than in previous decades; (2) increasing money and power going to segments of the population that possessed more or less egalitarian subcultures; (3) more equal distribution overall as a result mostly of (1) but not for its own sake: seems like a good start. That might go some way to explaining why someone like Thomas Frank could think more power and influence for people like him is the same as egalitarian socialism.

17

Peter T 04.03.21 at 1:05 am

“Building stuff to blow it up, or to use it to blow other stuff up, does not an increase in living standards create.”

It does if you pay unemployed people to do it, or train people in new skills (and pay them more). They do, after all, eat better, move out of their tar-paper shack and can now go to the movies. It helps that you are mostly making airfields, trucks, merchant ships, smelters, oil refineries, machine tools and all the other basics of industrial warfare, all immediately employable after the war.

18

Tim Worstall 04.03.21 at 11:31 am

“It does if you pay unemployed people to do it, or train people in new skills (and pay them more). They do, after all, eat better,”

That would be why everywhere, even the US, had at least some form of food rationing during this period?

19

Hidari 04.03.21 at 12:11 pm

In case anyone is wondering how much money firms are holding onto, essentially for no reason, it’s four trillion dollars. Not billion. Trillion. Please remember this the next time someone tells you ‘we can’t live beyond our means’ and ‘your ideas are wonderful but how are we going to pay for it?’

‘Our estimates suggest that 79% of the increase in foreign cash is due to a combination of declining international tax rates and active tax minimization behavior by U.S. corporations. While global uncertainty may be elevated, precaution doesn’t explain why some corporations are sitting on more than $100 billion dollars each. Taxes do.’

‘https://hbr.org/2020/01/why-are-companies-sitting-on-so-much-cash

20

Fake Dave 04.05.21 at 9:11 pm

I’m wondering if the “impossibilist demands” mentioned in the OP might not actually be another point for the “does not matter” file. I’ve never been convinced that things like extravagant pensions or job programs were really what crippled economies. That seems part of the zero-sum logic of national economies in competition (“getting eaten alive by the Japanese”) and ignores the long-term gains that come from investing in one’s own populace instead of the short term gains of “beating” rivals. It does seem that the more progressive reforms were treated as “impossible,” the more fragile the economy became. Perhaps people in the Golden Age were right to dream big. How far from a “frontier economy” are we now and how did we get there? Would returning to 5ge frontier be beneficial? If so how do/did we get there? Is it a policy? An ethos? Mere circumstances? If it’s the latter, how might the pandemic force us toward a new frontier and what “impossible” policies might return?

21

Tm 04.06.21 at 8:01 am

“raising corporate taxes (effective rate) everywhere is not in the cards. In a global economy, countries compete for investments by (among other things) lowering corporate taxes. Corporations will just migrate (on paper anyway) to some corporate tax haven (Ireland, Singapore). This is another game technocratic administrators can’t win.”

The global tax avoidance race is one of the big issues of our time. I disagree however that governments are powerless. If the biggest economies coordinate effectively, they should very well be capable of fixing this. Again, Biden is making the right noises.

https://www.nytimes.com/2021/04/05/business/raising-taxes-corporations.html

22

Tom 04.06.21 at 2:08 pm

What TM said @21.

It is surprising (or is it?) that we thought we could export democracy to Iraq (by bombing it!) but we think we are incapable of fighting money laundering in Panama and Bermuda. What a contrast!

23

Gorgonzola Petrovna 04.06.21 at 9:56 pm

“If the biggest economies coordinate effectively, they should very well be capable of fixing this.”

Tax havens are usually in smallest economies, like Delaware among the US states. But sure, good luck. And what could go wrong? Obviously corporate lawyers and lobbyists got no chance against politicians and government bureaucrats.

Comments on this entry are closed.