For what feels like my entire life, I was told and thought the US economy boomed after World War II because all the other countries had been destroyed. We were the last economy standing, and got rich selling our goods overseas. A one-time boom — a historical anomoly.
“I can’t think of any serious economist who believes it.”
Paul Krugman, Trade in the Ruins
It sounded right. Law of supply and demand. If you are the only supplier, you get all the demand.
But postwar only 4 percent of the US Gross Domestic Product came from foreign trade. Why? When a country is destroyed, there’s a lot of need but not much money for “demand”. In fact the Marshall Plan and the rebuilding of all the modern economies may have been more of a drain on the US than the underlying cause of the boom.
Shit. Now I feel bad for not only believing that story, but repeating it to my 11th grade history students and spreading it as my own belief for close to 50 years.
So what caused the “boom?” How about the leftovers of the progressive agenda from FDR and the Depression.
Strong Unions created higher wages. The GI bill created more educational opportunity. Social Security and Medicare and Medicaid lifted the poor and sick out of poverty. High tax rates on the wealthy kept more money circulating with government spending, rather than “locked away” earning interest. Big government projects like US Highways created new opportunities all over the country.
America was also reaping the benefits of early 20th Century technology getting pushed to every corner of the economy — airplanes and flight for travel, the telephone, gas powered motor, spread of electricity to every corner of the nation… The baby boom itself caused more demand.
Why did it start crashing 30 years later? The old standard was competition from Japan and Europe. But that’s probably not true. No one really knows, but it probably had more to do with lack of new technology to spur productivity (until the tech booms of the 90’s and early 2000’s) and an over reliance on foreign oil (remember the gas lines in the 70’s?).
Getting the story wrong — on purpose
So if no economist believes it, why do most people believe the post war boom only came because of the war?
It’s a story spread by people with a political agenda. You can’t tell people only low taxes and no government spur the economy unless you dismiss the economy from 1945-1975.
The idea that only the private sector can create “real jobs” or that high taxes kill growth, or that high wages for workers drive inflation can be believed if we “excuse” that 30 years as only a “one-time thing.” Like if you lived from 1945 to 1980, you were part of a “fake economy” that can never happen again.
Bullshit.
We are in exactly the situation where that “boom” can happen again. But it won’t happen if we don’t adopt the policies that made the boom happen in the first place.
Like 1880-1920, once again we have huge income inequality that locks up money with the cash-hoarding rich and rewards investment over work. Once again we have massive technical innovations that are going to drive productivity in the future (AI, quantum computing, solar and wind power…).
We can shift resources to drive down the costs of housing, education and energy. We can invest in public transportation (Fast trains over airplanes) and rebuild our infrastructure for water, sewers and roads. We can even improve the healthcare system and drive down costs.
But none of that happens without money. Some from the government through taxing the rich. And by rich, I mean people so wealthy, they don’t work. We need to return to taxing the money that makes money. I’m looking at you Carried Interest. We need to increase the estate tax, to avoid thousands of “rich kids” getting billions in inheritance they did nothing to earn. And I’d like to see a transaction tax on Wall Street for any asset that is held less than 180 days to reduce the “gambling” and create more incentive for long-term investment.
It’s not all government money. As we have seen with Biden’s Inflation Act and infrastructure bills and the CHIPS act, when spent strategically, government funding gets multiplied by private investment and creates millions of “private sector” jobs.
I can hear some people howl, “tax and spend”, “deficits and debt” and this will “bankrupt” the country. It could. I would not advocate such shifts at other times.
The tricky part about economics is the political divides and ideologies. We tend to fall or get pushed into low tax/less services for people (not necessarily less spending) versus high tax/more services camps. But the economy isn’t driven by ideology. It’s driven by opportunity. There are times when cutting taxes and encouraging investment is the right thing to do and pulling back on government regulations can spur growth (Argentina right now is a good example).
But for the US, this is not one of those times. This is the time to do what we have done before. Support the middle class, create opportunity for more people and create a tax system that is fair for all.
If we did those things, our economic growth and opportunities could easily dwarf the post war boom.
Oh hell, I don’t know. I think just about any economic policy, whether capitalist, communist, or somewhere in between, can succeed if people are free to express their satisfactions and complaints, and if the leaders of our country stay in touch with what people are saying, needing, and feeling.
Unfortunately, that hardly ever happens, so it’s up to individuals to adapt to the regime in charge and make the most of whatever we have available to work with.
That’s true. But how government responds to what people need (housing, healthcare, food, employment…) is done largely through economic policies.
You say it all right here – “Support the middle class, create opportunity for more people and create a tax system that is fair for all.” Sorry to say I don’t think we’re going to get that out of the current administration or the ultra wealthy they serve. We’ll see. So often it feels like a crapshoot.
Crap shoot indeed.