Chapter Content
Okay, so, history doesn't repeat itself, right? But it does kind of rhyme, which is weird. Like, there was this period from like, 1945 to 1975 that was this amazing economic boom, this "economic El Dorado," and it kind of rhymed with a similar boom that happened way back from 1870 to 1914. And then, after 1975, things started falling apart, and that kind of rhymed with the stuff that happened after World War One when they couldn't really get things back on track.
So, think about those years, 1870 to 1914. It was like, things were just moving forward super fast. People were getting richer, life was getting easier. Even the poor were doing better, you know, less stressed about basic needs. And the rich? Oh man, they had stuff that even kings and queens from way back when couldn't even imagine. And everyone was just, like, totally confident that things were going to keep getting better. Like, anyone who thought things might fall apart was seen as, you know, kind of crazy. But then, boom, World War One. And then, they just couldn't get things back to normal, things just fell apart, you know?
Now, I gotta be real with you here. This next part, like, the time period we're talking about? It's basically my whole career. I've been, like, involved in this stuff, you know, as a thinker, a commentator, even a little bit as someone trying to make policy. So, I'm kind of arguing with my younger self here, and with all the different voices in my head. You know, historians are supposed to just, like, observe and understand, not, you know, try to push their own agenda. But, trying my best, you know?
After World War II, or, more specifically, like, 1938 to 1973 in North America, and 1945 to 1973 in Europe, there was another one of these boom periods. Again, things were just getting better, super fast. The poor were doing better, they had access to stuff, you know, basic comforts. And the rich? Forget about it, they had stuff that even *they* couldn't have imagined, like, crazy abundance, things you can only dream of. And, social democracy seemed to be working, you know? Even if you lost your job, you'd probably get another one, and it would probably be just as good or better because there was full employment. And, your income was going to be higher than people from previous generations. And, if you didn't like your neighborhood, you could just, you know, buy a car and move to the suburbs, at least if you were, you know, a white guy in the global north.
So, by 1973, everyone was pretty confident, even with the Cold War still going on. People just thought it was crazy to think that this system of progress and rising incomes could fall apart again, like before. I mean, people had two to four times more stuff than their parents did! In America, especially, they were talking about how to deal with, like, the *end* of scarcity, you know? Like, how to use all this wealth to, you know, live better lives, figure out how to use our freedom. Smokestacks weren’t cool anymore, we actually wanted clean air, you know? It was the time to expand your consciousness, like, question everything.
But... things didn't fall apart *exactly*, but the center, yeah, that didn't hold. There was this sharp turn towards... neoliberalism. Away from the old system of social democracy that had been around from 1945 to 1973. By '79, the energy was all on the right, you know? Social democracy was seen as a failure, like it had gone too far. People wanted a course correction, like a complete one, right?
Why, though? Well, in my opinion, it was because things had been *too* good for *too* long. The rapid growth during those "thirty glorious years" raised the bar, you know? People expected to see incomes rising *fast* and relatively equally, and they didn't want any economic uncertainty, especially with prices and employment. If things didn't keep getting better at the same rate, people would want change, you know?
There was this economist, Karl Polanyi, who, if people had listened to him, he could have warned everyone about this. He said that people want their rights respected. And, while prosperity can kind of make up for a lack of respect to some extent, it can only go so far, you know? And, this thing of everyone being treated equal? It's a tricky thing, because many people want to *earn* what they get, they don't want it handed to them, you know? And, a lot of people just don't want the people lower down to be treated as *their* equals.
As people got used to the rapid growth, they needed *more* and *more* growth to keep them happy. The bar just kept rising. And, the economies and political systems of the late 70s just couldn't clear that bar, you know? So people started looking around for ideas on how to fix things.
Honestly, the ideas on offer in the late 70s were kind of... old and tired. On the left, people were saying that things in Russia and China were great. And on the right, people were saying that things were going great until the New Deal and that all of social democracy was a mistake. Like, what?
But there was this general feeling that the system needed to be fixed, that something needed to change, you know?
One big reason for this was that, after '73, economic growth just slowed way down in Europe, the US, Japan. A little bit of this was because of environmental cleanup, we were all trying to shift from polluting to cleaner economies, which required shifting resources. Energy that had gone to producing more now went to producing cleaner, which led to lower wage increases and profits, right? There was also the oil price shocks. Plus we were kind of running out of new ideas that had been waiting to be used. Especially in Europe and Japan, the easy days of catching up after the war were over. And the baby boomers were entering the workforce. Plus, the social democratic promise of constantly increasing prosperity, that just wasn't being kept, you know?
The slow growth was made worse by inflation, not like crazy high inflation, but, you know, 5 to 10 percent a year. The slow growth meant that prices had to rise faster to keep wages rising, you know? So people just got used to expecting inflation, and they built it into their planning, which made it even *harder* to control. This led to stagflation: inflation and no employment.
Then, OPEC, you know, they imposed an oil embargo, and the oil market went crazy. High oil prices sent the world economy into a recession. And it pushed everyone to focus on saving energy instead of making more stuff, right? That meant jobs disappeared and new jobs didn't appear. And it made the inflation that was *already* happening even worse.
The high prices passed through the economy again and again. And nobody in charge seemed to care *enough* about stopping inflation, because it would have meant closing factories and laying off workers, and they didn't want to do that.
Controlling inflation meant having a weak economy, low profits, and high unemployment.
Now, look, inflation of 5 to 10 percent isn't the end of the world, and slow growth isn't *no* growth. Productivity was growing, it was lower than it used to be, but it was still growing.
But, after people had gotten used to such high growth from '45 to '73, this slower growth just didn't look so good, you know? And it was accompanied by rising inequality. The rich were still getting richer at the same rate as before, but the middle class, they were only seeing their paychecks grow *slightly*. Plus the social hierarchies were shifting.
So, you had inflation, slow growth, the oil shocks, inequality, sociological upheaval... it made change really likely. The neoliberal turn that happened in the 70s was remarkably quick.
In the US, the Vietnam War didn't help, right? The administration blocked the ending of the war for a better deal, they said. They lied. Then North Vietnam conquered South Vietnam. Domestic discontent didn't help either.
Even *with* all that, things were still pretty good compared to the time between the world wars, or even before World War One. So, why the big shift away from social democracy? The death toll in Vietnam was high, yeah. But inflation was a redistribution, with gainers and losers. The slow growth was disappointing, but wages were still growing faster than ever before, right?
Economists that said inflation wasn't a big deal should have been listening more to Polanyi, right? People don't just want stuff, they want to feel like there's a reason for *them* to get the stuff, and that their prosperity has some kind of rational basis. Inflation took that away, you know?
There were also problems in the eyes of the right, right? Social democratic governments were trying to do *too* many things. And some of the things they were trying to fix weren't even really problems, they were actually necessary to make people behave right, you know? One economist said that policies to lower unemployment caused inflation and that benefits discouraged good things.
He was a good man, right, he was dedicated, he believed all of this, right? It's the idea that order is super important and that “permissiveness” is bad, right? That a country can't just keep spending money that it doesn't have, you know? That the market does what it does for good reasons that we don't understand, and we need to respect it. It's the idea that trying to control the market is hubris, and that it'll lead to disaster.
But some of it was true, right? The social democratic education policy turned out to give fancy kids the right to go to Oxford for free. The social democracies that had all the power didn't use it to make things better, they used it to support failing industries. When you judge it by, like, a super rational and efficient standard, everything looks bad, you know? But the main thing is how widespread and fast the discontent emerged after a decade that, yeah, wasn't that much of a shock in comparison to things like the Great Recession or COVID, you know. That's what gets me. All that growth and still, people didn't feel like it was utopia. So, they wanted to change it.
One historian saw the discontent as justified, right? The system had rigidities, inefficiencies, and wastages. It was necessary to do something. Even left wing historians eventually admitted it.
So, what was everyone going to buy as their reform program? The left didn't have much to offer. Socialism had failed, but people were still trying to explain away the failures. The right *did* have ideas, you know, they were largely from *before* 1930. The right wing's ideas were backed by a *lot* of money. The memory of the Great Depression was fading. And people were calling for financial orthodoxy and austerity again. And the answer was that everything that went wrong was the government's fault.
The memory of the Great Depression faded, leading the middle class to lose faith in social insurance. In an environment of economic stability and growth, the successful could convince themselves that their prosperity was deserved, and the government just taxed them unfairly to give it to the deviant people who lacked industry and moral worth.
From there, the right wing expanded its critique to include everything, right? They said that social democracy was flawed because it treated unequals equally. They said some people deserved to be poor.
Social democracy tried to treat everyone as equals. And those demonstrations, growing in size and insolence, were a sign of things going wrong. Social democracy was economically inefficient and unfair in its universalistic distribution of benefits.
The memory of the Great Depression was bound to fade. Could social democracy have held itself together if the inflation hadn't served as a sign of incompetence? Or was this pre-ordained because someone tried to create something out of thin air? Well, that's what a lot of influential people thought. Might social democracy have survived? It is possible that things could have evolved differently if different people had different thoughts. But the world made a neoliberal turn.
The Chair of the Fed, was always reluctant to use tight money to lower inflation when it risked a recession. The next guy too. Inflation continued. Then the President fired five people and named a new Chair of the Fed.
Apparently, there was not much of an inquiry into this man's policy preferences.
Then this new Chair made it clear: he believed he had a mandate to fight inflation even if it meant a big recession. And he was ready to use it. He raised rates, kept them there, and the United States experienced an economic downturn for which "recession" seems too mild.
Many would say that the Volcker disinflation of the early 80s was worth it. After 1984, the US had a stable economy and moderate employment, until 2009 that is. Others insist there must have been a better way.
For the right, there is no question that Volcker was necessary. The charges levied at social democracy included the fact that it lead people to expect an easy life. That encouraged workers to be insufficiently differential and to demand high wages, causing low profits. The government needed to impose discipline by focusing on stability and letting the rates go where they needed to go. There couldn't be a “nanny state” offering everybody a bottle when they cried. And inflation could only be stopped with a small rise in unemployment. And the hierarchy would stay.
But it wasn't just the United States, right? Some strikes convinced the electorate that union power needed to be curbed, and that only the Conservatives would have the necessary resolve. They promised a restoration of order and discipline, and they also promised that they would produce full employment and low inflation.
Such were the circumstances when some politicians came to power. They would remain in power for much of the 1980s, and their shadows would dominate the thinking of the political right.
The domestic policies were, judged from any rational perspective, unsuccessful. There was a large gap between what they promised and what they did. They sought to raise employment and wages by removing regulations. They sought to end inflation by stabilizing money. They sought to boost investment, enterprise, and growth by cutting taxes, especially for the rich. They sought to reduce the size of government by using their tax cuts to force government spending onto a diet. The world could have been such that all of this would have been good.
Many politicians predicted that these policies would be popular and successful. Tax cuts would please electorates. They would also substantially weaken opposition to subsequent spending cuts. More tax cuts would have the added benefit of tilting income distribution in favor of the rich, correcting the excesses of social democracy by reversing its equal treatment of unequals. They would ensure that industry was rewarded and sloth punished.
Yet the predicted good things did not happen, except for the end of inflation, and the tax cuts for the rich, which began the process of destabilizing the distribution of income. Recovery toward full employment was unimpressive. Government did not shrink. Instead, it dealt with lower revenues by running up deficits. Investment, enterprise, and growth did not accelerate. The value of the dollar became excessively high and deranged as a consequence of the large government appetite for finance. The gap between promise and accomplishment was largest in the United States.
The administration planned a massive military buildup, not a contraction. How was greater spending to be reconciled with lower taxes and balanced budgets?
Tax cuts were to be followed by an attack against programs such as farm subsidies and subsidized student loans. The "weak claims" to the federal government's money would get their just deserts. But the administration increasingly pushed the idea that no spending cuts at all would be required. It would be morning in America.
No one with a quantitative grasp of the government's budget ever meant this story to be taken seriously. But the tax cuts, the expansion of the military budget, and the disarray over spending cuts left the United States with large budget deficits throughout the 1980s.
The Reagan deficits diverted about 4 percent of national income from investment into consumption spending. There was the substantial indirect harm done to US economic growth by the Reagan deficit cycle. For more than half of the 1980s the US dollar was substantially overvalued. It was a false signal, sent not by the market’s interpretation of the logic of comparative advantage but by the extraordinary short-run demand of cash to borrow from the US government. The US sectors producing tradable goods shrank. And some of the ground lost would never be recovered. The Reagan tax cuts hammered manufacturing, starting the creation of what is now known as the “Rust Belt.”
Thus the neoliberal turn, in the form it took, did not end the slowdown in productivity growth but reinforced it. Moreover, the size of the government relative to the economy was not improved. The technocratic quality of public regulation was not raised. The major effect was to set the distribution of income on a trend of sharply increasing inequality.
The root problem was that the world did not seem to work as those advocating for the neoliberal turn had predicted.
At the time, economists wrote a book in which they set out to defend their brand of libertarianism. In the book, they made three powerful factual claims, claims that seemed true at the time, but that we now know to be pretty clearly false.
The first claim was that macroeconomic distress is caused by governments, not by the instability of private markets. The second claim was that externalities were relatively small and better dealt with via contract and tort law than through government regulation. Their third and most important claim was that the market economy would produce a sufficiently egalitarian distribution of income.
Alas, each of these claims turned out to be wrong, a fact that wouldn’t become clear to almost everyone until the Great Recession began after 2007.
The story as I have told it so far is one of a social democratic system of governance that ran into bad luck in the 1970s. That bad luck, built-in flaws, and the high expectations for prosperity that had been set during the Glorious Years caused it to lose support. This gave right-wingers their opening.
Neoliberal policies, once enacted, were no more successful than social democratic ones had been. Growth did not resume. Indeed, median incomes declined as the era’s meager productivity growth was funneled into the pockets of the rich, and a Second Gilded Age drew near. By the end of the 1980s, it was clear that the neoliberal project had failed to surpass the bar of expectations.
But the failure did not lead to renewed calls for revolution. Somehow, the neoliberal project became accepted, conventional wisdom—so much so that it gained support from the center-left. It was not the first, but the second President who announced that “the era of big government is over.”
The policies did not take over the same way they had with the social democratic turn. Both sides called for the market rather than the government to guide industrial development. To do more would be to return to outdated social democratic command-and-control planning initiatives that had supposedly demonstrated their failure.
Social democracy had worked in the 1960s and 1970s. And, neoliberalism had done no better at generating growth, and a lot worse at generating equitable growth, than social democracy had in the 1970s. What gives?
Centrist and left neoliberals understood themselves as advocates for achieving social democratic ends through more efficient, market-oriented means. Left-neoliberals understood themselves as advocating for this crowdsourcing and the carrot, where it would be more effective.
Rightist neoliberalism was much harder edged. A much steeper slope in the distribution of income and wealth was not a bug but a feature. They deserved to have societal power in the market. And to tax them was immoral.
That this did not seem to actually work was not much of an obstacle to belief.
From my perspective, this pattern of empirical failure followed by ideological doubling down was reminiscent of what we are told of religious politics late in the First Temple era. The prophets said: No! Trust not in your own swords, and especially not in those of foreign allies who worship strange and false Gods! Trust in a single entity! And when armies returned defeated, the prophets said: Your problem was that you did not enforce the worship strongly enough!
The neoliberal turn was successful in restoring the growth rate, and more, of the incomes and wealth of those at the top.
THE ERA OF THE neoliberal turn did deliver one thing out of what its salesmen had promised: a rapidly rising share of the rich in the distribution of national income.
The numbers associated with income distribution are not the incomes of tagged individuals or households. People make more money when they age. The per capita measured income average was nearly twice as much at one point in time as it had been in a previous point in time. A great many things of substantial use value were available cheap.
Rising inequality begs caveats. Such as a very high percentage of households having things like air conditioning, washing machines, microwaves, cell phones, etcetera in one point in time. The American working and middle classes were richer. The United States was not increasing the educational level attained by the young, not investing in public infrastructure, and not keeping the government from partially draining the pool of savings that would have otherwise flowed to finance private investment. Productivity growth was only half what it was. Equitable growth was no longer being delivered. But there was still growth.
Still, many things that people had taken to be indicia of middle-class status seemed more difficult to attain. Plus, a person's relative status shifted.
French economist described the differences in pre and post world war global north. After the upheaval of World War II, everything changed.
And then things shifted back.
Economist's point was that this was normal. It is normal for inherited wealth, a plutocratic elite, and this puts a drag on economic growth.
The neoliberal era lasted due to the Cold War victory, or rather, the end of it. The manifesto failure of ideas was being uniquely sold by the right.
The most striking feature is how inevitable the decay and decline of the system was. German sociologist did not have to see what happened to understand how history was going to go. He looked back at episodes in which entrepreneurship and enterprise had been replaced with bureaucracy and wrote that where bureaucracy gained power it did not disappear, there was going to be no Marxist withering away.
Others thought that the bureaucracy would be efficient, even if anti-entrepreneurial. Neither predicted the waste, the bread lines, the irrationality of economic organization, and the centrality of corruption. Neither predicted the result in neighboring regions.
The Soviet Union and its satellites turned out to be poor. The allocation of consumer goods inefficiency produced allocation for inefficiency. By 1960, it had attained a global-north level of health, education, and life expectancy. In the 1970s it appeared to have created a strong military but it did so by devoting a very high percentage of its income compared to another country's.
Late economist liked to tell the story of the failure through the lenses of grain and oil. Essentially someone said that in a peasant country, it is impossible to extract grain by force and the response was that someone was going to do it anyways. The failure became apparent when another country started shipping world oil which resulted in the position of the Soviet Union not earning enough to buy enough grain to feed everyone.
The neoliberal turn was very successful in restoring the incomes and wealth of those at the top.
America's true upper class went from an average to an extreme average. The next percentile went from one range to another. These are the incomes associated with the ranked slots in the income distribution, not the incomes of tagged individuals or households. The per capita terms were twice as much one year as another.
The right wing hoped to win the war in a place, and was ultimately lifted because of how that war went.
The claims at the start of the neoliberal turn was that the previous golden age pace of growth could be restored by governments and societies turning to serve the imperatives of the market. The claims were dashed. Growth continued, but at a slower pace.
Distribution had shifted. Inclusion meant that the incomes of white men did not keep pace with the average. The neoliberal turn accomplished its goal of transferring income and wealth to the top of the distribution. The claim had been that thus incentivizing the rich and the superrich would induce them to work harder.
This was disturbing to the male ethnicity working and middle classes. The rich got richer, the unworthy and minority poor got handouts. Hardworking white men who deserved more did not get them. A critical mass grew to distrust the system.
When the recession came along, and when recovery was delayed, the government seemed to not care.
So, that's the story, you know? That’s kind of what happened.