An Extraordinary Time Read online

  During the 1970s and 1980s, as more frequent job loss, slower wage growth, and pockets of seemingly intractable unemployment became the norm, elected officials and economic-policy bureaucrats alike flailed ineffectually. Despite stacks of policy memos and a great deal of fancy mathematics, understanding of why the good times disappeared has not increased with time. Back in the 1990s, the American academic Paul Romer revolutionized thinking about economic growth by insisting that innovation and knowledge matter far more than labor and capital; “endogenous growth theory,” the unwieldy name attached to his work, taught that strengthening education, supporting scientific research, and making entrepreneurship easy would do more to improve economic growth than fretting over budget deficits and tax rates. Three decades after his theory swept through economics departments everywhere, Romer was no longer sure he was right. “For the last two decades,” he admitted in 2015, “growth theory has made no scientific progress toward a consensus.”10

  Such a statement is shocking to modern ears. The idea that the economy is not an instrument that can be carefully tuned, that its long-run course is determined largely by forces not under the control of government officials and central bankers, contradicts the lessons absorbed by generations of students since World War II. More upsetting still is the possibility that the volatile trends after 1973 marked a return to normal, a reversion to the time when productivity, economic growth, and living standards improved haltingly, and sometimes not at all. Political conservatives, whom we might expect to be especially attuned to the power of markets and to be particularly skeptical of government’s ability to control economic outcomes, turn out to be just as infatuated with the power of the government’s hand as progressives. “Making slow growth normal serves the progressive program of defining economic failure down,” the conservative US political commentator George F. Will asserted in a 2015 critique of President Barack Obama’s policies, as if the rate of economic growth were a matter of presidential discretion.11

  IN CHRONOLOGICAL TIME, THE GOLDEN AGE WAS BRIEF. BARELY a quarter-century elapsed from its blossoming out of a world in ruins to its sudden end amid unimagined prosperity, steadily rising living standards, and jobs for all. Scholars have spent the past fifty years struggling to understand what went wrong and how to set it right. But it may be that there is nothing to fix, that the long boom was a unique event that will never come again. Harvard University economist Zvi Griliches, a pioneer of research into productivity, concluded as much. “Perhaps the 1970s were not so abnormal after all,” he mused after decades studying productivity change. “Maybe it is the inexplicably high growth rates in the 1950s and early 1960s that are the real puzzle.”12

  Our inability to restore the world economy to its peak condition has had long-lasting consequences. It radically changed social attitudes, engendering a skepticism about government that has dominated political life well into the twenty-first century. With that change came a shift away from collective responsibility for social well-being; as state institutions were allowed to wither, individuals were asked to assume more of the costs and risks of their health care, their education, and their old age. It is fair to say that the economic changes of the 1970s turned the world to the right. The global political climate warmed to market-oriented thinking because other ideas appeared to have failed. The demand for smaller government, personal responsibility, and freer markets transformed political debate, upended long-established public policies, and swept conservative politicians like Margaret Thatcher, Ronald Reagan, and Helmut Kohl into power.

  In the rich world, the postcrisis years brought a massive shift in income and wealth in favor of those who owned capital and against those whose only asset was their labor. In the poor world, they fueled a boom and subsequent bust among countries eager to join the advanced economies. Anger and frustration fed by stagnant wages, rising inequality, and the fecklessness of public officials swept country after country, reshaping culture, politics, and society. International finance grew explosively, far outpacing governments’ ability to regulate it and, within a decade, bringing economic collapse to emerging economies from Peru to Indonesia. Trade unions lost bargaining power in almost every country, and abrupt shifts in international trade patterns reverberated through industrial towns, decimating the industrial working class that had prospered in the years since the war. Gaping holes opened in the safety nets that had only recently been woven to protect families against risk and offer hope of upward mobility.13

  These developments have been the subject of an outpouring of literature and history, music and film, from the forty or more biographies of Silvio Berlusconi, the Italian media magnate and prime minister, to the angry, poignant songs of Bruce Springsteen, an icon of America’s working-class past. Yet with few exceptions, these works treat the unpleasant changes that began in the 1970s as the product of domestic forces. As the US journalist George Packer described the decade, for example, “What happened, we now know, was the collapse of the American consensus, the postwar social contract founded on a mixed economy at home and bipartisan Cold War internationalism abroad.”14

  This focus on the local news is perhaps unavoidable: few of us are truly globalists, and our understanding of events is shaped by the news reports, political campaigns, and intellectual debates in whatever country we call home. The politicians whose utterances shape the news, of course, often blame other countries for domestic ills. This happened in the 1980s, when US politicians frequently accused Japan of destroying American manufacturing by trading unfairly, and in the 2000s, when immigrants from Poland and then Syria stood accused of causing unemployment in Western Europe. But political leaders frequently understate the connection between large global trends and individuals’ well-being, first so they do not seem hapless while in power and second so they can blame the incumbents for economic troubles while in opposition.

  Approaching economic and social change in this way means we tend to ascribe causality to factors within the control of a national government, whether a tax provision or a tariff reduction, a welfare program or the electoral rules that allowed a particular leader to gain power. Clearly, such things matter. But it is equally clear that the economic stagnation and political reaction of the late twentieth century were not just the consequences of domestic conditions and choices. Social contracts were rewritten not just in the United States, but in Japan and Sweden and Spain and dozens of other countries, each following its own mix of social and economic policies. The forces at work transcended national borders, and we can understand the era only by viewing them in a global context.

  “Globalization,” a word not yet coined, was both a cause and a consequence of the harsher economic climate that developed after 1973. An unimaginable increase in the amount of money moving around the globe vastly complicated governments’ efforts to control exchange rates, inflation, and unemployment, not to mention the stability of the banking system. As economic growth slowed, politicians spent freely to create jobs and stimulate consumer spending, assuming that the downturn would be brief. When that failed, they desperately agreed to try measures that would have been labeled radical only a few years before. The regulatory strings that had given governments tight control over the transportation, communications, and energy sectors were gradually cut away. Steps to dismantle state-owned monopolies and sell off state-owned companies soon followed. Deregulation and privatization left no end of losers among workers who had enjoyed ironclad job security in communities that thrived in the presence of state-owned factories, but they opened the way to a faster-changing, more innovative economy. The state got the Internet started, but had it been left up to the established telephone monopolies to administer, we would still be waiting to reap the rewards.

  The world, of course, does not revolve around money alone. Many factors influenced the development of the late twentieth century, from the worldwide movement for gender equity to an intense East-West confrontation that spawned proxy wars across the globe, from the revival of religious fu
ndamentalism to the reunification of Europe following the collapse of the Iron Curtain in 1989. And, of course, every country had its unique political and social concerns. It is these—affirmative action in the United States, the battles over language and separatism in Canada and Spain, the re-establishment of democratic governments in Korea and across South America—that tend to fill the airwaves and the history books. Yet in a way that has generally gone unappreciated, these factors played out in the wake of sweeping changes that buffeted the global economy and left citizens anxious and ill at ease.

  These pages trace a transformation that was neither swift nor painless. In the third quarter of the twentieth century, even the most calcified companies prospered; in the fourth, venerable manufacturers and banks would meet their end in large numbers, unable to adjust to the changing times. Workers’ professional capital, the skills acquired over decades of labor, was valued and sought-after in the 1950s and 1960s; a few years later, that knowledge would become all but worthless as technology transformed the workplace. Regions that flourished in the industrial expansion of the postwar years would struggle to adjust to new conditions in which the ability to deliver services and ideas mattered more than the ability to weave cloth and stamp metal. In some eyes, a merit-based society that rewarded creative ideas and an appetite for risk replaced a stultified society that encouraged passive acceptance of the established order. In other eyes, a postwar social contract binding business and government to improve the welfare of average people was shredded, replaced by coldhearted market relationships that offered far less protection against job loss, illness, or old age.

  Perhaps the most important thing that vanished along with the Golden Age, though, was faith in the future. For a quarter-century, average people in every wealthy country and in many poorer ones had felt their lives getting better by the day. Whatever their struggles, they could live confident that their sacrifice and hard work were building a strong foundation for their children and grandchildren. As the Golden Age became a memory, so did the boundless optimism of an era of good times for all.

  CHAPTER 1

  The New Economics

  Only a real optimist would have thought that Arlington, Texas, had particular promise. Straddling the Texas & Pacific Railroad line between Dallas and Fort Worth, on the plains above the winding Trinity River, Arlington was still a dusty farm town after World War II. Its best-known landmark was a gazebo, erected in 1892, sheltering a mineral water well at the intersection of Main and Center. Its best-known business, Top O’ Hill Terrace, was famed far and wide for its high-class entertainment and its illegal basement casino, replete with hidden rooms and passage-ways offering escape in the event of a police raid. Arlington was not a notably poor town, but it was certainly not notably rich. A third of all adults had left school by the end of eighth grade. The men worked construction, welded metal, and clerked at the retail stores, while the women mostly kept house. One home in four lacked a private bathroom.

  Save for the little airstrips where pilots in training had practiced takeoffs and landings during the war, Arlington in 1946 wasn’t all that different from Arlington in the 1920s. It had grown a bit, to around five thousand people, and Franklin Roosevelt’s Depression-fighting programs had paved a few streets. But not even a promoter with a Texas-size imagination would have bet that by the early 1970s this dusty burg would boast an automobile plant, a vast amusement park, a four-year state university, and a major-league baseball team—much less that pastures and pecan orchards would give way to street upon street of ranch houses with brick facades and two-car garages to accommodate a 2,000 percent increase in population.1

  Such transformations were not unusual in the years after the Second World War. The French called this period les trente glorieuses, “the thirty glorious years.” The British preferred “Golden Age”; the Germans, Wirtschaftswunder, or “economic miracle”; the Italians, simply il miracolo, “the miracle.” The Japanese, more modestly, named it “the era of high economic growth.” In any language, economic performance was stellar.

  It was, in fact, the most remarkable stretch of economic advance in recorded history. In the span of a single generation, hundreds of millions of people were lifted from penury to unimagined riches. At its start, two million mules still plowed furrows on US farms, Spain lived in near-total isolation, and one in 175 Japanese households had a telephone. By its end, the purchasing power of the average French wage had quadrupled and millions of passengers were jetting across the ocean each year, some of them in supersonic jets that made the trip in less than four hours. The change in average people’s lives was simply astounding.2

  TO UNDERSTAND THE MAGNITUDE OF WHAT WAS TO FOLLOW, IT is worth considering the starting point. As World War II drew to a close in 1945, prospects were grim. Over vast stretches of Europe and Asia, refugees wandered the roads by the millions, seeking a future amid the rubble of shattered cities. Between widespread miners’ strikes and wornout machinery, just producing enough coal to provide heat through the winter was a challenge everywhere, and in the chaos that prevailed in lands torn by war, producing anything else was almost impossible. Many nations lacked the foreign currency to import food and fuel to keep people alive, much less to buy equipment and raw material for reconstruction. France’s farms could produce only 60 percent as much in 1946 as they had before the war. In Germany, many of the remaining factories were carted off to the Soviet Union as reparations. Inflation ran rampant in Europe and Japan as mobs of people competed to buy the few goods that were to be had. Even in North America, where there was no physical destruction, turning bomber plants back into automobile plants would take years, not months. As shoppers mobbed stores seeking nylons, coffee, and real cotton underwear, prices soared, decimating the buying power of workers’ pay and bringing yet more labor unrest. By one estimate, 4.5 million US workers were on the picket lines in 1946. And while most of the shooting had stopped, tensions between the Soviet Union and its former allies raised the specter of another conflict. The postwar world was not a hopeful place.3

  Yet in many countries, those austere, even desperate years ushered in a political sea change: the welfare state. The idea that governments should be responsible for their citizens’ economic security was not new; German Chancellor Otto von Bismarck had introduced a national pension scheme in the 1880s to stave off socialist demands for more radical social change. Sixty years later, though, hundreds of millions of people in the advanced economies still lacked old-age security, medical insurance, and protection against unemployment or disability. War fundamentally altered the politics. As they entered coalition governments or resistance organizations in the name of national unity, socialist and Christian parties insisted that citizens who had been asked to sacrifice in war now share the benefits of peace. An official 1942 report by British economist William Beveridge set the tone, calling for the United Kingdom to establish a comprehensive system of social insurance “to secure to each citizen an income adequate to satisfy a natural minimum standard.” Beveridge proposed no fewer than twenty-three different programs, from training benefits for displaced workers to universal funeral grants, all to be financed by contributions from workers, employers, and the state. “A revolutionary moment in the world’s history is a time for revolutions, not for patching,” he declared.4

  Such programs blossomed even before the war’s end. In 1944, the Canadian Parliament authorized a “baby bonus” to be paid monthly for every child up to age sixteen—Canada’s first nationwide social-welfare program. A December 1944 law in Belgium, approved as the Battle of the Bulge raged almost within earshot of the legislators convened in the Palace of the Nation, created national pension, health, unemployment insurance, and vacation pay schemes and provided cash allowances for families with children. France’s postwar coalition government enacted family allowances and old-age pensions within months of the German Army’s withdrawal. The British Parliament agreed in 1945 that every family should receive five shillings per week for each child
after the first, and in 1946 it added unemployment insurance, old-age pensions, widows’ benefits, and a national health service. In the Netherlands, a “Roman-Red” coalition of Catholic and socialist parties created a universal old-age pension and a national program of relief for the poor. In Japan, a 1947 law proclaimed, “national and local governments shall be responsible for bringing up children in good mental and physical health, along with their guardians,” inserting the state deeply into what had always been private affairs.5

  The birth of the welfare state did not magically create prosperity in a shattered world, for overwhelming problems stood in the way of recovery. Haunting images of ruined cities notwithstanding, physical destruction was not the main obstacle to revival. The war had done no damage to factories in the Western Hemisphere and surprisingly little in Europe. Even in Japan, where 90 percent of chemical-making capacity and 85 percent of steel capacity had been destroyed by US bombing, most of the railroads and electric plants still functioned. The urgent need to rebuild roads and bridges, restore farm production, and house millions of refugees and demobilized soldiers meant no lack of work. But three daunting factors stood in the way of economic recovery. The costs of battle and occupation had exhausted the reserves of gold and dollars once owned by European countries and Japan, leaving them unable to import machinery to restart factories or meat and grain to feed their people—and depriving the United States and Canada of export markets. Price and wage controls, imposed during the war to stanch inflation and channel resources into critical industries, discouraged farmers and manufacturers from bringing goods to market and led to endless labor unrest as workers agitated for pay raises that employers were not permitted to grant. Political turmoil deterred investment that might have revived growth, especially in Europe, where Communist parties directed by the Soviet Union squeezed out democratic parties from Poland to Yugoslavia and tried to do the same in Greece, Italy, and France. Wherever the Communists took power, expropriation of privately owned businesses and farms soon followed. The world seemed poised to follow a global war with a global depression.6