Ages of American Capitalism (part 3)

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Here I discuss two chapters of Jonathan Levy’s book that describe the end of what he calls the “Age of Control” and the transition to the “Age of Chaos” that began with the election of Ronald Reagan in 1980. Chapter 17 is called “Ordeal of a Golden Age, and Chapter 18 is “Crisis of Industrial Capital.”

The culmination of postwar liberalism

Readers who are too young to remember the 1950s may not appreciate just how much more structured life was than it is now: A one-size-fits-all family structure predominated, with clearly defined gender roles linking a male breadwinner to an economically dependent female homemaker. Corporations were run by rigid bureaucracies staffed by conforming “organization men.” Management and labor had an understanding in which workers could bargain for better wages and working conditions, but management made the major business decisions. Strict boundaries separated the for-profit, nonprofit and public sectors of the economy. Racial segregation was deeply entrenched.

Underlying these structures were the fixed-capital investments of the mass-production manufacturing economy, which generated strong profits for capital and decent incomes for mostly white, male breadwinners. The system was also supported by the liberal state that regulated business, took action to counter recessions, and provided some measure of income security. All this structure came as a relief after the upheavals of Depression and war from 1929-1945. In contrast, the period from 1945-1970 was a time of relative peace and prosperity, although it was also a time of Cold-War jitters accentuated by the Cuban missile crisis and the Vietnam War.

However, the system—structured as it was—did not work equally well for everyone. It worked better for male breadwinners than working women, better for suburbanites than inner-city dwellers, better for residents of the industrialized Midwest than for residents of Appalachia. Industrial America played an especially cruel trick on Afro-descendant Americans, drawing them into the industrial inner cities only to become trapped there as capital and good jobs flowed to the segregated postwar suburbs.

Things came to a head in the 1960s, when a sustained economic boom raised expectations and highlighted the dissatisfactions of the relatively disadvantaged. Protest movements by minorities and women challenged the existing social structure. When the liberal Kennedy and Johnson administrations addressed the issues with civil rights legislation and antipoverty programs, they shattered the postwar consensus. Americans had broadly supported efforts to maintain full employment and support income security in the aggregate. Maintaining “aggregate demand” for mass-produced consumer goods was at the heart of Keynesian economics. But actions to assist economically distressed subpopulations were a bridge too far for many Americans. While liberals saw problems of inequality as defects of social structure, conservatives tended to blame them on personal deviations from conventional structure, such as the failure of poor men to marry their sexual partners and assume the breadwinner role. The rising urban crime and social unrest of the 1960s led to calls for “law and order” as well as calls for liberal social programs.

Despite its many economic successes, the postwar social system was now failing politically. And it was starting to falter economically as well.

The crisis of industrial capitalism

Postwar economic growth was built mainly on the strength of the manufacturing sector. By the late 1960s, however, manufacturing profits were falling, at least partly due to greater international competition. For the first time in the twentieth century, the U.S. imported more goods than it exported in 1971. That meant that foreigners were accumulating more dollars than they wanted to spend on American goods. The Federal Reserve’s reduction of interest rates to fight the recession of 1969-1970 also made it less rewarding to hold dollars. That posed a problem for the international monetary system created at Bretton Woods, since the fixed price of the dollar in relation to gold kept its value from fluctuating in response to its reduced demand. Facing a run on gold by foreigners who preferred gold to dollars, the U.S. abandoned the gold standard. A new era of floating exchange rates began.

Another problem for the U.S. economy was the rising cost of raw materials on world markets, especially the higher price of oil. This was exacerbated by the OPEC oil embargo in retaliation for American support for Israel in the 1973 war.

In the early 1970s, the rate of productivity growth slowed, suggesting that technological innovations in production were not occurring as rapidly as before. In addition, the productivity gains that were occurring were no longer translating into wage gains for workers.

The recession of 1973-1975 was, at the time, the worst since the Depression. In 1975, both the unemployment rate and the rate of inflation exceeded 8 percent, an unusual condition that came to be known as “stagflation.” Levy gives a number of reasons for the high inflation. Economists continue to debate their relative importance:

  • the Federal Reserve’s low interest rates, which encouraged borrowing and allowed too much money to chase too few goods
  • expansionary fiscal policy (including government spending on the Vietnam War and social programs), which raised aggregate demand relative to supply.
  • rising commodity prices caused by the pressure of demand on supply
  • the slow rate of productivity growth, especially in the expanding service sector
  • expectations of continued economic instability, which discouraged long-range planning and investment and undermined productivity growth

Stagflation created a difficult choice between measures to fight unemployment and measures to fight inflation. The conventional Keynesian way of fighting unemployment—deficit spending by government—could worsen inflation by overstimulating aggregate demand.

As great cities of the industrial era struggled, a new kind of economy was emerging in the Sunbelt. Levy focuses on Houston, whose economy was based primarily on oil, petrochemicals, and real estate. It was a booming, sprawling, rapidly suburbanizing city with no urban plan and no zoning ordinances. It’s manufacturing labor force was relatively small and nonunionized, but its expanding service economy created many jobs for women. This set up a “postindustrial positive feedback loop”—Employed women needed to buy services they might otherwise have provided themselves, and those services in turn provided employment for women. The 1950s marriage with the economically secure breadwinner and the non-employed homemaker was no longer the norm. Houston was a heavily “privatized” city, with low taxes and limited public services. Levy also calls it a “liquid city”—with the pun definitely intended:

Houston was a liquid city because it sat on wetlands and always flooded, and also because of its great economic premise, oil. But its pattern of development uncannily embodied some of the themes of speculative liquidity preference: an energetic restlessness, the convertibility of once seemingly unlike things, markets for everything, and a busy present with no heed for the long term.

In that sense, Houston was in the vanguard of the “Age of Chaos” to come. The more conservative economic ideas that would come to dominate that era were also born in the 1960s and 70s. The monetary school under the leadership of Milton Friedman rejected Keynesian economics and limited the government’s role in the economy mainly to managing the money supply. The Law and Economics movement questioned whether anything could be accomplished with government regulation that couldn’t be accomplished through market competition. The rational expectations school explained how government policies could be undone by people’s conscious reactions to those policies. For example, interest-rate reductions by the Fed could lead lenders to expect more inflation, which induced them to demand higher interest rates on their loans. The mathematical analysis often got complicated, but the conclusion was simple: “In the abstract, markets were efficient and just—which just happened to agree with what the CEOs of the Business Roundtable already knew in their guts rather than from any mathematical model.” Economists were undermining the intellectual rationale that had justified government influence over markets during the “Age of Control.”

The administration of Jimmie Carter was already moving away from liberal economic policies before he lost the 1980 election to Ronald Reagan. Congress had passed major new pieces of regulatory legislation—the Clean Air Act, the Consumer Product Safety Act, and the Occupational Safety and Health Act—as recently as 1970. But by 1978, “the drift now was not to write better market regulations: even among liberals, it was to throw in the towel on market regulation altogether.” Industries that experienced a relaxation of regulation were airlines, trucking, and banking. By the end of his administration, Carter was placing a higher priority on fighting inflation and balancing the budget than on spending to create jobs. “For the first time since the early 1930s, austerity was back in economic policy making.” Perhaps Carter’s most economically consequential act was to appoint Paul Volcker as chair of the Federal Reserve. His tight control over the money supply brought the rate of inflation down dramatically, but allowed interest rates to rise to astronomical levels, crushing borrowing and bringing on the 1981-1982 recession.

In retrospect, the Age of Control had succeeded, for a time, in creating conditions under which capital would remain productively invested in a mass-production economy. Government had taken many measures to inspire confidence—confidence that the currency would retain its value, that stock investors would have accurate information about a company they were buying, that workers could bargain for a share of the value added by their rising productivity, that retired employees could have a decent income, that depositors could put their money safely into a bank, and that government would borrow and spend to combat recessions. When faced with new economic conditions, like increased global competition for manufacturing jobs, rising oil prices, and demands for inclusion by historically disadvantaged groups, liberal government was overwhelmed. The Age of Control ended, and government increasingly left it to the capitalists and their free markets to make a new economy.


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