1980 and the disastrous change of direction

I have a hypothesis is that we can divide global economic history since 1945 into two roughly equal halves, the period before 1980 and the period following 1980. Further, I claim that the change of direction undertaken around 1980 has been a disaster.

The period since 1945 has seen unparalleled progress for our world, despite what the US election candidates say. Life expectancy has increased, child mortality reduced, education improved, wars reduced, and material wellbeing increased for almost all, with prosperity spread more widely around the globe. It has been an extraordinary and unprecedented period of development, albeit with its resultant challenges such as global warming.

I think much of this progress has largely independent of prevailing economic wisdom. The driving forces have been technological. Medicine, communications and information technology have advanced so quickly that the world has become rapidly smaller, faster and smarter.

This spread of beneficial technology has driven other great trends. Human longevity is a direct consequence, and globalisation is as well. Urbanisation is a natural development from technology and education. Female emancipation and the great respectful social liberal trends come directly from education, which has reduced war, crime and intolerance.

Many liberal economists claim that these positive trends are accelerated by their policies. They have a point. Regimes paying little or no regard to markets tend to fail. Under communism, Russia lagged badly, and China only started moving forwards once strict communism was abandoned. Authoritarian regimes in Arabic countries have led to slower development, despite mineral wealth and some education. But I think the purists take their arguments too far. The Western democracies entered the period with a large lead. China and other states have not fallen further behind. And, while the modern titans such as Google cluster in the ultra-market-led US, that can be attributed to the size of the market and the beneficial starting position. Besides, why are they all in high-tax California rather than low-tax Texas? And how have the socially democratic Nordics done so well?

So, in assessing the relative success of economic orthodoxy since 1945, we need to see the context of this wonderful development everywhere. We also have to be careful not to pay too much heed to singular events. The collapse of communism was one of these, the oil shocks of the 1970’s another, and the emergence of China a third. So every trend line over 70 years is likely to be overlaid with cycles and the impact from unusual events. But 70 years is long enough to look for trends, and for turning points. That is what I have tried to do.

My hypothesis crystallised from an article in Time a couple of months ago plotting the US national debt since 1945. It was striking to me, in that the trend was of slow growth in debt up to 980 then exploding debt growth from then on.

So I’ve looked at other measures to see if I can see something similar, and indeed I can. The US poverty percentage fell from 13% in 1966 to 9,6% in 1978, but then grew again to 14% by 2010. Labour’s share in national income in the US was almost constant around 50% until 1980, but has fallen to 42,5% since. Global GDP growth was typically about 5% until 1970, but 3% since (the 70’s had the oil crises to explain the earlier turning point). Global GINI drifted upwards (less equal) until 1980 at about one percentage point per decade, but at two percentage points since. US GINI changed from almost flat to growing at two and a half percentage points around 1980. The ratio of CEO to typical worker salaries doubled in the 30 years from 1950, but multiplied six fold in the 30 years since.

These are just examples, and each one will have many causes. But everywhere I looked I saw the same thing, an inflection point around 1980 with a worse trend thereafter.

Of course I am biased, but I put most of this down to a rewriting of economic orthodoxy, or more correctly a rewriting of the political portrayal of economic orthodoxy, just after the time I first studied economics. I remember at the time that the theories, dominated by Keynes, were being challenged by new ideas. The first of these was monetarism, something I never really bought into.

We can characterise economics and economic policy from 1945-1980 by the idea of benign government intervention towards development and citizen welfare, including redistribution. Hence there was active demand management via fiscal and monetary policy, and investments in infrastructure, services and welfare, paid for by strongly progressive taxation.

The upsides of this era remain obvious, with simple examples including the interstate network in the US and the NHS in the UK. But demand management proved insufficient to handle some crises. Further, the emphasis on workers’ rights led to strong trade unions, who overplayed their hand, leading to strikes, inflation, and support for uncompetitive industries.

From about 1980, politicians found economists with theories to challenge this paradigm, and the neo-liberal era began. The key stakeholder moved from citizens to a nebulous group called investors, and government spending was to be minimised by any means possible in the name of markets and national competitiveness. To ensure incentives, taxation became markedly less progressive and welfare less generous.

We can see the results. I would argue that the philosophy has failed even by its own declared standards, since growth has slowed rather than grown. While inflation has been tamed, now we have pervasive deflation in its stead, with no remedy forthcoming from the neoliberals. Inequality has ballooned, starter homes have become unaffordable to any without parental support, competition within most industries has atrophied, new jobs are rare indeed and labour mobility has also collapsed, despite all these so-called incentives. Infrastructure and services have been left to wither. Even the finance sector, the main beneficiary of the policies, has proven unstable and is chronically underfunded, requiring assumptions for investment returns that are not sound. We now have the ludicrous situation that demand cannot be revived because the only people left with any disposable income are so rich that they can’t think of anything to spend on!

Meanwhile, the neoliberal agenda has been sold to the general public via a series of misleading arguments. The crisis of the 1970’s and the collapse of communism were used to claim that markets were infallible. The odious concept of trickle down was used to try to justify the greed of those padding their (reduced tax) salaries. Layabouts and migrants were pinpointed as welfare parasites. And wasteful projects were used to decry all government expense, while tax is portrayed as an unjustified affront to liberty and our effort.

To be fair, the shrinking world changed some things. National competitiveness became more important once trade and capital flows became less constrained – generally a good thing. Some rebalancing towards investors would have been necessary in any case, but not the total bowing down to the god of finance that we have seen.

We can speculate as to the motivation of the economists and politicians who led the change. Perhaps some were well meaning. It was true that unions were strangling development and needed to be constrained. But it is also tempting to accuse the greed of the elites, especially the financial elites, for being behind the change. 1945-1979 was rare in history in seeing earned wealth rising faster than inherited or residual wealth. The wealthy have certainly had their revenge.

Now even the Economist has noticed how broken the prevailing orthodoxy is, and has started advocating for Keynesian fiscal stimulus, especially via investment, for aggressively promoting competition, and also for protecting losers more generously. I don’t yet much appetite for progressive taxation, though they have quietly advocated land taxes as well as carbon ones. Perhaps one day they will come around to a Tobin tax.

The cause is urgent. The neo-liberal era has failed, and a new era is needed. Bernie Sanders has some answers, so does Thomas Piketty, but the various solutions have not yet coalesced. They must soon, for the people have worked out that they have been sold a bill of goods, and are clamouring for change. If that change does not come from a new economic paradigm, it may come from an older, harsher one, built on Trumpian hate and protectionism. Not much would be worse than neo-liberalism, but that certainly would be.