Last Word on the Golden Age (for now)

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John Quiggin
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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 at Crooked Timbe 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.