World War II finally ended the Depression and proved Keynes right. New Deal deficit spending was too small, too timid to restore the animal spirits of entrepreneurs battered by years of debt deflation. War is the least productive, most destructive of human activities with negative economic benefit, but the US government, by printing money and using it to hire workers knocked unemployment, which had been close to 20 percent in 1938 down to barely over 1 percent six years later.
It is important to understand that making bombs and blowing up cities is not what shrunk unemployment. It was the printing of money, the hiring of workers, the creation of demand by deficit spending. Had the US government spent as much as it had on fighting Hitler on promoting the arts, or building schools or even digging ditches and then filling them, it would have had just as beneficial an economic effect as did the war. Blowing stuff up is the opposite of investment. From an economic point of view, bombs and bullets are purely consumption goods, not nearly as beneficial as education or infrastructure. The reason defence spending has become the common means of stimulating demand is largely political. Conservatives who cannot stomach deficit spending for any other reason are willing to forgo their hard money prejudices in time of national emergency.
When the war ended, policy makers feared that without the stimulus of defence spending, the United States and the world would sink back into recession. The end of wars had been the cause of economic slowdowns in 1818, after the Napoleonic Wars, and in 1919, after World War I, and indeed, 1946 saw the US GDP shrink slightly. But the economy soon recovered and for the next 25 years, the world experienced the greatest growth in its history. The fundamental source of Golden Age growth was rising incomes that brought millions out of poverty and into the middle class. Their demand for luxuries that were fast becoming necessities created a mass consumer market, and corporations grew rapidly by satisfying it. In 1939, 25 percent of Americans didn’t have running water, only 65 percent had indoor toilets, and none had television.
The rich grew richer during the Golden Age, but so did everyone else. Golden Age policies of progressive taxation, unionization, regulation are the opposite of what conservatives advocate today, but they were much more successful than the supply side policies that have dominated our more inequitable era. Inflation adjusted GDP growth was greater in the 1950s, 1960s, and even 1970s, than it ever has been since.
In the 1970s, for a variety of reasons, corporate profitability went south. The positive feedback loop that raised the income of workers and businessmen alike fell apart. The Golden Age depended on capital and labour cooperating, and both profiting. In the 1970s, their social pact fell apart. The inflation of that era can be seen as capital and labor each trying to shift the cost of oil price hikes to the other. At first, organized labour won that battle and grabbed a larger share of the pie. Workers, especially organized workers did well in the 1970s. Wage growth, even taking inflation into account, was greater than it ever has been since. Capital, on the other hand, had a terrible decade. From 1966 to 1982, the stock market fell more than three quarters in real terms. Bonds did even worse. With inflation greater than nominal interest rates, putting money into the bank meant that after a year you had less money than you put in. The 1970s were a bad decade to be rich. No wonder John Lennon sang about working class heroes. No wonder the children of millionaires dressed like farmers or factory workers. In the 1970s, a union cameraman made more money than most stockbrokers. But the glory days of labor were about to evaporate.
In 1980, capital struck back.
by Tom Streithorst, LA Review of Books | Read more:
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