An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy
November 11, 2016
Marc Levinson has written an incredibly smart and unideological economic history of the post-World War II boom, how it skewed our idea of what normal economic growth looks like, and how responsible government is for it.
An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy by Marc Levinson, Basic Books, 336 pages, $27.99, Hardcover, November 2016, ISBN 9780465061983
Americans had a pretty stark choice to make this week: one candidate that has dedicated her life to public service and believed in using the levers of government as an agent for economic growth, and one that ran an essentially anti-government campaign, stating that he wanted to “drain the swamp” of Washington, D.C., turn government on its head, cut the taxes that fund it and slash the federal programs it administers to set the free market loose to grow the economy and administer health care on its own. The latter argument won.
Marc Levinson's new book, An Extraordinary Time, makes a case that says neither approach is likely to work. Government, he suggests, may be largely ineffectual when it comes to economic growth, because the kind of growth and prosperity we've come to expect as the norm, that which occurred during the industrial boom in the aftermath of World War II and until 1973, was anything but normal. And cutting taxes and slashing the social safety net government provides is not going to bring it back.
The punditry pinned the results of this week's presidential election on a palpable anger in the country, and there is certainly anger out there. But I would posit it has more to do with pain, anxiety, and fear—all of it essentially economic—and all of it blamed on the government to the point that it’s seen as anathema to economic wellbeing, even the enemy of the people. In this view of the world, the most popular policy prescriptions for returning our economy to the glory and spectacular growth of the boom years that followed World War II are deregulation, lower taxes, smaller government, privatization, and overturning the welfare state. But those ideas have been around for a long time, and have been tried before, most notably and aggressively in the 1980s. There are two reasons they are misguided.
The first is that they didn’t actually work. Thatcher and Reagan rode a message of optimism and hope that made a lot of people feel better about the future, but their economic records and legacies are, well, as Levinson puts it… “far from stellar.” Levinson discusses the complicated and uneven results of that era’s push toward privatization, and how lower taxes and more market-oriented policies failed to bring back the growth and prosperity of the postwar boom. Things did get better on Wall Street, and for the wealthy, but average workers did not share in any of those gains. In fact, the effects of the Reagan administration’s supply-side economics led to massive budget deficits, lured in foreign investors to finance American debt, and led almost perversely to a stronger US dollar that decimated manufacturing as imports began to pour in and exports dried up.
Traditionally, imported manufactured goods had played a relatively minor role in the US economy; in 1980 their total value equaled only 5 percent of the economy’s total output, versus more than 15 percent in Europe. Thanks to the muscular dollar, which made imports much cheaper, the value of goods imported into the United States rose by 40 percent between 1981 and 1986, while the value of US exports declined. Factory towns were devastated as jobs disappeared and incomes fell …
The second reason those prescriptions are misguided is that the birth of the welfare state preceded the postwar boom, and in many places was being built before or as the Second World War still raged. For instance:
A December 1944 law in Belgium, approved as the Battle of the Bulge raged almost within earshot of the legislators in the Palace of the Nation, created national pension, health, unemployment insurance, and vacation pay schemes and provided cash allowances for families with children.
Such schemes helped form the social contract that acted as the underpinning of the explosion in productivity that followed. And, yet, that boom was still anything but certain to occur. It happened only as governments signed free trade agreements, built underlying economic infrastructure like the interstate highway system, and unleashed market forces through a series of carefully orchestrated policy prescriptions and financing programs like the Marshall Plan. And, because of the successes in that era, it has largely been assumed that governments could guide the invisible hand and herd the animal spirits of the economy, assuring steadier growth and greater stability. And, for three decades, that largely held true. The growth persisted for so long, so steadily, that it “created a near-universal faith in the capacity of governments to keep their economies on a steady course, with jobs for all.” But it all started to unravel in 1973:.
October 6, 1973, was Yom Kippur, the Day of Atonement, the most sacred day of the Jewish calendar. If the long postwar run of economic growth could be said to have reached its apex on a single date, there is no better candidate than that Yom Kippur.
It was the day the Yom Kippur War began. The 1973 oil crisis that occurred during that war affected the entire industrialized world, and runs as a thread throughout the book’s narrative, but there were underlying shifts in industrial economies that were occurring at the time that would affect us all in ways that mirrored that crisis, but occurred more slowly and steadily over time, and government was powerless to stop them.
Governments eager to restore past glories did not like the fact, but the industrial economy was slowly yielding to the information economy, and no amount of government assistance was going to bring it back.
The postwar industrial engine was sputtering, and the welfare state, which Levinson describes as a remarkable accomplishment that brought dignity to millions, he says “became as much a burden as a benefit.” Levinson is equally clear-eyed in evaluating other morally complicated and complex economic policies. Proclaiming the great benefit to public health and wellbeing that environmental laws and regulations have given us, he also explains how companies footing their fair share of the bill to address environmental damage has diverted investments from new plants and greater production to pollution control—which lessened productivity and slowed growth. And it is that productivity, Levinson posits, that powers economic miracles like the one we witnessed in the two-and-a-half decades after World War II. Governments are not “mere bystanders” in that process, in that they can fund research, and have education and immigration policies that increase the pool of talent a nation has to draw from over the long-term, but most monetary and economic policies are good only for short-term fixes and stimulus in the face of recession. And many of the artificial efforts to grow economies without gains in productivity have lead to further crises, like the financial crisis that spread across the world in 2008.
We’ve all heard the popular prognosis on the perils of regulations and free-trade agreements, technology and immigration, on the American worker. And if the phenomenon was specific to the United Stated and the American worker, that claim could perhaps make sense. But that isn't the case:
While the social and political implications were different in every country, the phenomena of slower wage growth and widening disparities were global, affecting every high-income country and many middle-income countries.
The more important consideration, says Levinson, is “labor share,” which can be most simply understood as the proportion of a nation’s income that goes into workers' pockets in the form of wages, rather than into owners’ pockets or the coffers of government. Levinson describes how the labor share began to fall in the second half of the 1970s—not just in America, but globally—and has continued that trajectory since. Along with it, manufacturing declined, got smaller, spread out, and moved to markets with cheaper labor to keep profits high.
Economically, the struggles of the factory sector were challenging. Psychologically, they were devastating.
And that psychological devastation was manifest this week. But, as valid a concern and no matter what any politician might promise or proselytize on the campaign trail, those jobs aren’t coming back.
The surge in postwar productivity was the result of a social contract between capital and labor—a contract that benefited both at the time. The shifts in labor share and the transition from an industrial economy to a knowledge economy essentially nullified that contract. We need a new social contract for the knowledge economy that helps rebalance that labor share. Levinson doesn't go as far to suggest how we do that. He simply provides an economic history of how we arrived at the present global moment, and an understanding that the exceptional growth the world took for granted and began expect is incredibly unusual, and not easily replicable or guided by government.
Government has a leading role to play in laying the groundwork as “the difficulty of writing a social contract able to respond to demographic change and technological innovation” takes place. Our leaders in government and legislators can and should act as arbiters in writing that contract through the laws they write and pass. They can even make investments in workers and infrastructure and enact policies that encourage productivity, growth, and international cooperation over the long term, as they improbably did just after two world wars and a worldwide depression devastated much of the world in the last century.