An Extraordinary Time Read online

  Copyright © 2016 by Marc Levinson

  Published by Basic Books,

  an imprint of Perseus Books, LLC,

  a subsidiary of Hachette Book Group, Inc.

  All rights reserved. Printed in the United States of America. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. For information, address Basic Books, 250 West 57th Street, 15th floor, New York, NY 10107.

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  Library of Congress Cataloging-in-Publication Data

  Names: Levinson, Marc, author.

  Title: An extraordinary time: the end of the postwar boom and the return of the ordinary economy / Marc Levinson.

  Description: First Edition. | New York: Basic Books, 2016.

  Identifiers: LCCN 2016017970 (print) | LCCN 2016018301 (ebook) | ISBN 9780465096565 (e-book)

  Subjects: LCSH: Economic history—20th century. | Economic policy—20th century. | Capital market—History—20th century. | Foreign exchange rates—History—20th century. | BISAC: HISTORY / Modern / 20th Century. | BUSINESS & ECONOMICS / Economic History. | POLITICAL SCIENCE / History & Theory. | HISTORY / World.

  Classification: LCC HC54 .L398 2016 (print) | LCC HC54 (ebook) | DDC 330.9/045—dc23

  LC record available at https://lccn.loc.gov/2016017970

  10 9 8 7 6 5 4 3 2 1

  To Kay, for everything

  Contents

  Introduction

  1 | The New Economics

  2 | The Magic Square

  3 | Chaos

  4 | Crisis of Faith

  5 | The Great Stagflation

  6 | Gold Boys

  7 | Quotas and Concubines

  8 | The Export Machine

  9 | The End of the Dream

  10 | The Right Turn

  11 | Thatcher

  12 | Socialism’s Last Stand

  13 | Morning in America

  14 | The Lost Decade

  15 | The New World

  Acknowledgments

  Notes

  Index

  Introduction

  On Sunday, the fourth of November, the traffic stopped.

  University students spread blankets on the motorway and picnicked to the sounds of a flute. Young children raced through stoplights on their roller skates. From Eindhoven in the south to Groningen in the north, the streets of the Netherlands were nearly free of cars—aside from those of German tourists and of clergy, who, by special dispensation, were allowed to drive to church. Abandoning her Cadillac limousine, Queen Juliana, age sixty-four, cheerfully hopped on a bicycle to visit her grandchildren. To those uninvolved with the difficult decisions behind it, Holland’s first car-free Sunday of 1973 was a bit of a lark.1

  Four weeks earlier, Egyptian and Syrian armies had burst through Israel’s defensive lines, routing Israeli troops and threatening to overrun the entire country in what became known as the Yom Kippur War. When the United States and the Netherlands funneled weapons to Israel, Arab oil-producing countries retaliated. Led by Saudi Arabia, they had already been demanding more money for their oil, raising the official price from $3.20 per barrel in January to $5.11 on October 16. Now they turned the valves even tighter and cut off the Netherlands and the United States altogether.

  Gloom descended across Europe. As storage tanks were drained, the Belgians, the Swiss, the Italians, the Norwegians, even the auto-obsessed West Germans soon faced car-free Sundays of their own. Speed limits were lowered, thermostats turned down, diesel supplies rationed. Indoor swimming pools in Stockholm were closed to save the energy required to heat them, and the Tour de Belgique auto race was called off. Permits for Sunday driving became coveted status symbols. West Germany, imagining itself to be a socially conscious market economy, was challenged by a gas station manager’s brusque explanation of her method for allocating petrol: “People I don’t know don’t get any.”2

  Across the Atlantic, there were no car-free Sundays. Instead, there was panic. The United States was consumed by the price of oil, and Richard Nixon was consumed by the treacherous politics of high oil prices. “We are headed into the most acute energy shortage since World War II,” the US president warned in a televised address on November 7. He asked Americans to lower their thermostats and unveiled Project Independence, a fanciful scheme to end oil imports by 1980. Congress debated whether to ration gasoline and, unbidden, authorized Nixon to allocate petroleum supplies among refiners, bus companies, service stations, farmers, and anyone else with a special claim. As cold weather arrived, truck drivers blocked highways to protest the soaring price of diesel fuel, and homeowners unplugged their Christmas lights in sympathy—or, perhaps, to avoid the opprobrium of their neighbors. Texas, a state floating on oil, gave birth to a popular bumper sticker urging, “Freeze a Yankee.” Gas lines, clogged with drivers desperate to top off nearly full tanks while the precious liquid was still available, symbolized the collapse of the American dream.

  The oil shock upset the equilibrium in Canada, setting off a boom in oil-rich Alberta while crippling import-dependent Quebec. The reverberations were even more disquieting in Japan. As petroleum prices rose through 1973, the Japanese did not anticipate serious trouble; their country had little engagement with the Middle East, and many Japanese companies had even complied with the Arab boycott against Israel. But Japan’s neutrality in Middle Eastern affairs did not spare it from pain when oil prices spiked. The Japanese did not block highways or threaten gas station attendants, but anxiety over the end of cheap petroleum ran very deep: every drop used to fuel Japan’s huge industrial base was imported. As the government slashed its economic growth forecast by half, it rationed oil and electricity to factories and instructed families to extinguish the pilot lights on their water heaters.3

  As tumultuous as it was, the shock was short-lived. By December 1973, it was clear that crude oil was not at all in short supply. Storage tanks at European ports were overflowing, and tankers lined up in the Atlantic waiting their turn to dock at US refineries. Higher prices and conservation measures had cut demand, so some oil exporters, desperate for cash, set their pumps at top speed to raise production and keep their incomes steady. January 1974 brought the last of Europe’s car-free Sundays. In February, Nixon released gasoline from government stockpiles, and the lines at gas stations went away. On March 18, the Arab producers, eager for US help in mediating the withdrawal of Israeli troops, officially abandoned the embargo and turned their attention to averting a price collapse as oil flooded the markets.

  The global oil crisis had passed.4 But from its embers, a crisis that would endure far longer and cause infinitely greater upheaval was just beginning to smolder.

  FROM AN ECONOMIST’S PERSPECTIVE, THE SECOND HALF OF THE twentieth century divides neatly into two. The first period, which began in the rubble of World War II, saw an economic boom of extraordinary proportions across much of the world. A host of new international arrangements to assure steady exchange rates, ease restrictions on foreign trade, and provide economic aid to the poorest countries pointed to an era of global cooperation. As economic growth exploded, people could feel their lives improving almost by the day. New homes, cars, and consumer goods were within reach for average families, and a raft of government social programs and private labor contracts created an unprecedented sense of personal financial sec
urity. People who had thought they were condemned to be sharecroppers in the Alabama Cotton Belt or day laborers in the boot heel of Italy found opportunities they could never have imagined.

  The second period, from 1973 almost to the end of the century, was dramatically different. In Japan, North America, and much of Europe and Latin America, the warmth of prosperity was replaced by cold insecurity. International cooperation turned to endless conflict over trade, exchange rates, and foreign investment. White-collar workers grew nervous. Blue-collar workers could feel themselves slipping down the economic ladder. From the steel towns of Pennsylvania’s Monongahela Valley to the coal-mining districts of northern Japan to the brutal high-rises in the Northern Quarter of Marseilles, communities emptied out as people fled economic devastation. Repeated economic crises devastated countries from Mexico to Russia to Indonesia, destroying the value of old-age pensions, wiping out families’ savings, and slashing the buying power of an hour’s wage. Labor shortages turned into chronic unemployment, and young people were hard-pressed to find anything beyond temporary work. It was an age of anxiety, not an era of boundless optimism.

  This depiction may seem puzzling. After all, the 1950s were the years when primary-school students learned to duck and cover in the event of nuclear attack, when much of Europe was imprisoned by an Iron Curtain, when war in Korea brought armies from fifteen countries face to face with Chinese troops, when war in Algeria destroyed the French Republic. In the 1960s, the United States was convulsed by protests against racial discrimination and the Vietnam War, the Troubles turned Northern Ireland into a war zone, and student revolts and labor unrest shook governments around the globe. Inflation became a worldwide concern in the early 1970s, and workers took to the streets to protect their hard-won gains. These were not years when farmers peacefully tended their flocks and grapevines, satisfied in their blessings.

  Yet the turbulence of those decades can be understood only if we remember that economic conditions were getting steadily better in many parts of the world—not just for the rich, but for almost everyone. The very fact that life was so good—that jobs were easy to find; that food was plentiful and decent housing commonplace; that a newly woven safety net protected against unemployment, illness, and old age—encouraged individuals to take risks, from marching in the streets to joining the antimaterialist counterculture. Rising living standards and greater economic security made it possible for many people in many countries to join in the cultural ferment and social upheaval of the 1960s and early 1970s, and arguably engendered the confidence that brought vocal challenges to injustices—gender discrimination, environmental degradation, repression of homosexuals—that had long existed with little public outrage.

  Then, quite unexpectedly, growth stalled. As economic conditions turned volatile, the sense of limitless possibilities gave way to fear about the future. Turning on, tuning in, and dropping out were unaffordable luxuries; now it was time to get a job and cling to it. If technology entrepreneurs and Wall Street buyout artists were getting ahead, everyone else seemed to be treading water. The public mood turned cynical and sour.

  The divide between these two eras is stark. Between 1948 and 1973, the world economy expanded faster than in any similar period, before or since. According to the careful estimates of British economist Angus Maddison, income per person, averaged across all residents of Planet Earth, grew at an annual rate of 2.92 percent from 1950 to 1973, enough to double the average person’s living standard in about twenty-five years. Certainly, prosperity was far from universal; in numerous countries a tiny proportion of the population captured most of the gains, and many individuals were left behind. Even so, never before in recorded history had so many people become so much better off so quickly.5

  In wealthy countries, the trend was even more remarkable. Employment, wages, factory production, business investment, total output: almost every measure of vitality increased year after year, at a rapid rate, with only brief interruptions. Bank failures were rare, bankruptcy rates low, inflation restrained. Societies seemed to be growing more equitable, income more evenly shared. “A continuation of recent trends will carry us to unbelievable levels of economic activity in our own lifetimes,” a top official of the US Census Bureau pronounced in 1966, joining the many serious thinkers who were genuinely worried that society might not offer sufficient opportunity for consumers to spend their rising incomes.6

  The amazing trajectory of the postwar economy reached its apogee in 1973, when average income per person around the world leaped 4.5 percent. At that rate, a person’s income would double in sixteen years, quadruple in thirty-two. Average people everywhere had reason to feel good.7

  And then the good times were over. The world would never again approach the economic performance it had enjoyed in 1973. Volatile conditions became the norm, stability the exception. In Europe, Latin America, and Japan, average incomes would grow not even half as fast through the end of the twentieth century as they had in the years leading up to 1973, and the steady improvement in living standards was no longer so readily apparent. In much of Africa, incomes would hardly grow at all, and the same was true for much of that period in North America. The almost universal feeling of prosperity faded quickly. As economies sputtered, jobs grew scarce, and inflation raged, confidence in the ability of governments to make life better began to melt away.

  That confidence had been grounded in the evident ability of economists, planners, and operations researchers—technocrats, in the lingo of the time—to steer their countries along a path of steady economic growth. Their increasingly sophisticated models, depicting entire national economies as a lengthy series of equations, spat out policy prescriptions, and for a quarter-century it seemed that politicians merely needed to follow their instructions to assure everyone a job. But as full employment vanished and incomes stagnated, the technocrats lost much of their stature. The standard remedies that had, by all appearances, kept the major economies in rude health since the late 1940s—raising interest rates a bit, or lowering them; cutting back on taxes, or increasing them; building some dams or highways to deal with a bit of unemployment—no longer had curative power. Politicians, unable to deliver prosperity, were left to rail haplessly against currency speculators, oil sheikhs, and other forces they could not control.

  In earlier years, no one would have blamed public officials for failing to keep everyone employed, for that had never been seen as the responsibility of governments. Emperors and presidents were not assumed to have the least control over the droughts and floods, much less the bank failures and bubbles of overinvestment that, when they eventually popped, could spread misery and bring commerce to a halt. When the economy turned down, government officials could do little more than offer inspiring speeches while praying the gloom would pass. Difficult times were the norm, not the exception: between October 1873 and June 1897, the US economy spent more months contracting than expanding, even if the overall trend was positive growth.8

  It was during the Great Depression of the 1930s that governments first took on responsibility for economic revival. Masses of jobless workers threatened political instability, making it imperative to create employment quickly. Travelers to the Soviet Union, where everyone worked for the state, reported zero unemployment in a communist economy; idealists imagined that job creation by government could have the same benefits elsewhere. And a new development of the Depression era, the creation of statistics to describe unemployment and national income, made government intervention unavoidable. Once unemployment was reported as a percentage of the labor force rather than simply as a nebulous problem, politicians came under immense pressure to demonstrate their effectiveness by driving the rate lower. They could no longer stand on the sidelines and wait for the problem to solve itself.

  So when the world economy abruptly took sick late in 1973, democratic nations looked to their leaders for a cure. The truth, though, was that neither the politicians nor their economic counselors had any idea what was caus
ing the ailment. They acted because they were under pressure to act, not because they had confidence in their prescriptions. From a political perspective, doing something, anything, was better than admitting ignorance about what to do. Predictably, their actions failed to bring back the world that had been, the world in which jobs were a birthright and prosperity a constant.

  Many factors that might have caused this downshift in the world economy were readily apparent: the cost of energy, a critical input for industry, was sharply higher; exchange rates were quite volatile, adding to business uncertainty; consumer demand for cars, homes, and appliances suddenly weakened; population growth was beginning to slow. But beyond these obvious factors lurked a more pernicious problem. Productivity, the efficiency with which economies put resources to use, was no longer advancing smartly year after year. Fast productivity growth, the result of better-trained workers, heavy business and government investment, and technological innovation, had made the postwar boom possible. If productivity growth was lagging, then economies would be less able to raise families’ incomes and create new jobs.

  There was no handbook for fixing the productivity problem, which left the door open for politicians of every stripe to tout their favored tax and spending policies as solutions. Tax breaks for factories and equipment to stimulate business investment and help families with education costs, stronger patent protection to encourage inventors to come up with ideas that would make the economy flourish, greater spending on scientific research, more seats at universities, expanded vocational training: all were repackaged as measures to make productivity grow faster by speeding the pace of innovation, said to be the critical factor in economic growth.9

  In the political arena, meanwhile, governments came under conservative fire for causing the productivity slowdown by disrupting market forces. Venerable small-government policies were now promoted as solutions to the problem. Regulations concerning pollution, occupational safety, working hours, business licensing, initial stock offerings, and dozens of other matters came under heavy attack for making the economy less efficient. Introducing competition into state-dominated sectors like railroads and telecommunications sectors would enable their customers in the business world to cut costs and improve productivity. Laws protecting labor unions and some social insurance programs, notably unemployment benefits, were criticized for interfering with an efficient labor market. Yet where such purportedly onerous policies were reformed, any salutary effects were hard to find in the productivity data. Political measures were of little help against a problem whose fundamental cause, technological change, was beyond government control.