American Economic History Since World War II

Homework due Friday May 1: Analyze continuities and changes in the United States’ economy and the role of women and minorities from World War II to the present. (two paragraphs typed)

American Economic History since World War II

Part I: 1945-1970: Unprecedented Prosperity

In the quarter century after World War II, the United States experienced steady economic growth that essentially doubled the average American’s standard of living. A number of factors account for this unprecedented prosperity, some of which were put in place before and during World War II. During World War II, the unemployment crisis of the Great Depression was resolved as millions of Americans went to work fighting in and producing for the war effort. Because of wartime shortages and rationing, workers saved much of their pay during the war, allowing for massive consumption in the period after World War II. The decade of the1950s is known for rampant consumerism as millions of Americans bought homes in newly built suburbs; they also bought appliances and furniture for their homes and automobiles for commuting to and from work and for getting around in the suburbs.

Much consumer spending in the 1950s was spurred by the baby boom, a massive increase in the birthrate from 1946- 64, after many couples had put off having children during the years of the Great Depression and World War II. Parents of baby boomers bought toys, diapers, clothes, and books offering child-rearing advice. Another war-related cause of American prosperity was the absence of international competition. Much of rest of the world had been devastated by World War II, but American industries emerged unscathed. The Servicemen’s Readjustment Act – or GI Bill – of 1944 also contributed to postwar prosperity, as it allowed returning soldiers to attend college and increased the overall education level of the workforce. The GI Bill also provided loans so that veterans could buy homes or start businesses.

The Cold War also fueled the economic growth of the postwar years. Massive government expenditures on weaponry created jobs in the aerospace, plastics, and electronics industries. The federal government also financed scientific research and development of new technologies, which helped fuel tremendous increases in worker productivity in the 1950s and 60s.

This era was also a period of cheap energy. The American and European companies that controlled the flow of oil from the Middle East kept prices low. The assumption that oil would always be cheap fueled the growth of suburban car culture and paved the way for the energy crisis of the 1970s.

The postwar prosperity was not shared in equally by all Americans; historical and ongoing discrimination contributed to African-Americans and other minorities experiencing higher rates of poverty than the population as a whole. The growth of the suburbs was often the product of “white flight,” as affluent whites fled urban areas, leaving behind impoverished inner-cities. Persistent inner city poverty and the discrimination that helped to cause it were two of the targets of Lyndon Johnson’s Great Society programs. These programs did help to decrease the poverty rate, but coupled with high military spending during the Vietnam years, they contributed to the inflation of the 1970s.

However, the period from the 1930s to the 1970s is sometimes called the Great Compression by economists. Because of the strength of labor unions, workers took home a much higher percentage of the nation’s income during this period than in any period before or since. However, changes in the structure of the economy and in federal fiscal policies have reversed the great compression. Recent years have seen the highest wealth inequality in the United States since the 1920s. Since 1966, the median income for the bottom 90% of wage earners has been virtually unchanged when adjusted for inflation. Over that same time period, the top 10% of wage earners have seen their incomes increase by over $100,000 per year.

Part II: 1970s: Stagflation

The sustained economic growth of the quarter century after World War II was brought to a halt in the 1970s. Excessive government spending on social programs and the Vietnam War contributed to the “crowding out” of private economic investments. As the unemployment rate ticked up in the 1970s, prices rose dramatically, due both to the inflationary effects of federal fiscal policy and the dramatic increases in energy prices that were caused by the OPEC embargo of 1973 and the destabilizing impacts of the Iranian Revolution of 1979.

As energy prices increased, the price of all consumer goods went up as well. To make ends meet, workers demanded raises from their employers, which further drove up the cost of consumer goods, leading to further demands for wage increases and a situation which economists call a wage-price spiral.

The combination of slow economic growth and rapidly rising prices came to be known as stagflation – a combination of the terms stagnant and inflation. None of the presidents of the 1970s were able to deal with stagflation in an effective manner. Nixon abandoned his initial policy of economic conservatism, declaring in 1971 “I am a Keynesian now in economic policy.” Nixon unsuccessfully attempted to stimulate the economy and enacted price freezes in response to the inflation and wage-price spirals caused by the OPEC Embargo. Price freezes on gasoline contributed to shortages and long lines at gas stations. After Nixon’s resignation in 1974, Gerald Ford took a much more conservative approach to combating inflation, urging voluntary action on the part of businesses and consumers including the wearing of “WIN” buttons, WIN being an acronym for “Whip Inflation Now.” After being elected in 1976, Jimmy Carter had a similar lack of success at dealing with the economic problems of the 1970s. Carter urged Americans to conserve resources by driving less and lowering the thermostats in their homes, a message that was poorly received by most Americans. The continued weakness of the economy, coupled with Carter’s perceived weakness in foreign policy paved the way for the so-called “Reagan Revolution” of the 1980s.

American Economic History since World War II

Part III: “Reaganomics”

The economic policies of Ronald Reagan were influenced by his conservative social attitudes, his hatred of the Soviet Union, and by the work of the influential conservative economists Arthur Laffer and Milton Friedman. Friedman was a “monetarist,” meaning he rejected the Keynesian notion that fiscal policy (taxing and spending policy) was the best method of stimulating a depressed economy, favoring instead the monetary policy of the Federal Reserve. Friedman’s theories paid dividends in the early 1980s, when then Federal Reserve chair Paul Volcker dramatically raised interest rates. While this policy contributed to a severe recession, and the highest unemployment rate since the Great Depression (over 10% unemployment), the inflation of the 1970s and early 1980s was brought to an end by this policy and the economy began growing again in 1982.

GDP Growth Rate, 1978-1983

During the so-called Reagan Recession of the early 1980s, Ronald Reagan received criticism for his perceived insensitivity to the plight of average Americans. At the same time as Congress dramatically slashed taxes on the wealthy (with the top marginal rate decreasing from 70 to 28%), there were cuts to social welfare programs, increasing the suffering of the poor and working class. The tax cuts were based on the theory of supply-side economics, another challenge to Keynesian theory (Keynesian economics is sometimes referred to as demand-side economics because of the government’s role in creating demand during times of economic recession). Supply-side economics is an example of trickle-down theory that posits that the best way to stimulate the economy is to cut taxes on the wealthy so that the benefits will trickle down to the rest of society. According to the economist Arthur Laffer and his LafferCurve, tax cuts – by encouraging people to work more if they could take home more of their income – could actually increase tax revenue.

Reagan’s economic legacy is decidedly mixed. While the economy did grow through most of his presidency, Reagan’s policies contributed to a significant widening of the gap between the rich and the poor. The combination of tax cuts and increased military spending contributed to a tripling of the national debt from one to three trillion dollars, and George H.W. Bush’s derogatory nickname for Reagan’s economic policies from the 1980 - “voodoo economics” - seems to have been an accurate predictor of what would actually result from the combination of tax cuts and increased spending. To his credit, Reagan recognized that his initial policies were unsustainable and raised taxes numerous times during his presidency to attempt to balance the budget.

Part IV: What Hath Globalization Wrought?

One of the major economic trends of the post-World War II era has been globalization. Globalization refers to the increasing levels of interconnectedness and economic interdependence between countries and has occurred due to two main factors.

The first factor causing globalization was the global consensus that emerged after World War II about the benefits of free trade. Woodrow Wilson called for a decrease in trade barriers in his Fourteen Points as a way of preventing future wars by making countries more interdependent on one another, but his idea was largely ignored in the years between the World Wars. However, Wilson’s idea has been one of the motivating factors behind increased levels of economic cooperation such as the European Union. Another factor in creating the global consensus about the benefits of free trade has been the acceptance of the principle that trade benefits both parties involved in the trade and thus the reduction of economic barriers creates benefits for all sides involved. There have been numerous international agreements since World War II that have seen the reduction of trade barriers, including the General Agreement on Trade and Tariffs (GATT, 1947-1994) and the World Trade Organization (WTO), which succeeded the GATT. The United States has signed free trade agreements with numerous countries, including the North American Free Trade Agreement (NAFTA) with Canada and Mexico that went into effect in 1994.

NAFTA coat of arms

The second factor that has brought about globalization has been the revolution in information technology that has shaped life in the late twentieth and early twenty-first centuries. The ability to communicate instantaneously with people all over the world has enabled multinational corporations to conduct business on a truly global scale.

Globalization’s Pros and Cons:

Globalization has had positive impacts on the world’s economy due to the benefits that accrue from the reduction or elimination of barriers to trade. The combination of increased international trade and improved technology contributed to an economic boom in the United States for most of the 1990s. However, the benefits of globalization have not been evenly distributed. The significance of information technology has increased the value of highly educated workers, while at the same time workers with lower levels of education have been hurt. The high cost of a college education in the United States has prevented many people who lack the means to pay for college from improving their status.

One of the factors that has led to increasing income inequality in the United States is the practice of outsourcing. Outsourcing involves the shipping of jobs from the United States to other countries where wages tend to be lower. There was a wave of outsourcing following the implementation of NAFTA, as American companies created factories in Mexico called maquiladoras. In the twenty first century, much outsourcing of work has sent jobs to China, India, Bangladesh, Vietnam, and the countries of Central America. The outsourcing of manufacturing jobs is one of the factors that led to the weakening of labor unions, which has contributed to economic inequality. Another factor weakening unions is the fact that many of the jobs that have not been shipped overseas are jobs requiring individual creativity (as opposed to assembly line jobs) where the union approach of collective bargaining for all workers is less applicable.

In recent years, even some formerly high paying information technology (IT) jobs have been outsourced. The possibility of jobs being outsourced, coupled with federal and state government hostility toward labor unions, has undermined the bargaining position of workers and has contributed to wage stagnation. According to Nobel Prize winning economist Paul Krugman, “wages used to rise along with worker productivity, but that linkage ended around 1980. The bottom third of the American work force has seen little or no rise in inflation-adjusted wages since the early 1970s; the bottom third of male workers has experienced a sharp wage decline.”

Part V: “Rights”

Feminism: In 1966 [The Feminine Mystique author, Betty] Friedan and other activists founded the National Organization for Women (NOW). It initially sought to end discrimination in the workplace on the basis of sex and went on to spearhead efforts to legalize abortion and obtain federal and state support for child care centers.

In the early 1970s Congress, the Supreme Court, and NOW advanced the cause of gender equality. Under Title IX of the Educational Amendments Act of 1972, colleges were required to institute “affirmative action” programs to ensure equal opportunities for women. In the same year, Congress overwhelmingly approved the Equal Rights Amendment, which had been bottled up in a House committee for almost half a century. In 1973 the Supreme Court, in Roe v. Wade, struck down state laws forbidding abortions during the first three months of pregnancy. Meanwhile, the educational bastions of male segregation, including Yale and Princeton, led a new movement for coeducation that swept the country. “If the 1960s belonged to blacks,” said one feminist, “then the next ten years are ours.”

By the end of the 1970s, however, sharp disputes between moderate and radical feminists fragmented the women’s movement. The movement’s failure to broaden its appeal much beyond the confines of the middle class also caused reform efforts to stagnate. The Equal Rights Amendment, which had once seemed a straightforward assertion of equal opportunity (“Equality of rights under the law shall not be denied or abridged by the United States or by any State on account of sex”) and assured of ratification, was stymied in several state legislatures. By 1982, it had died, several states short of passage. And the very success of NOW’s efforts to liberalize local and state abortion laws generated a powerful backlash, especially among Catholics and fundamentalist Protestants, who mounted a potent “right-to-life” crusade.

Yet, the success of the women’s movement endured long after the militant rhetoric had evaporated. Women’s growing presence in the labor force brought them a greater share of economic and political influence. By 1976, over half of married women and nine out of ten female college graduates were employed outside the home, a phenomenon that one economist called “the single most outstanding phenomenon of this century.” Most career women, however, did not regard themselves as feminists; they took jobs because they and their families needed the money to achieve higher levels of material comfort. Whatever the motives, traditional gender roles and child-bearing practices were being changed to accommodate the two-career family and the sexual revolution.

The Sexual Revolution and the Pill: The feminist movement coincided with the so-called sexual revolution, a much-discussed loosening of traditional restrictions on social behavior. Young people opposed to the conflict in Vietnam chanted “Make love, not war.” Other members of the counterculture promoted “free love” as an alternative to what they claimed was a repressive, materialistic, capitalist society. Activists promoting more permissive sexual attitudes staged rallies, formed organizations, engaged in civil disobedience, filed suits against prevailing laws, and flouted social norms.

The publicity given to the sexual revolution exaggerated its scope and depth, but the movement did help generate two major cultural changes: society became more tolerant of premarital sex, and women became more sexually active. Between 1960 and 1975, the number of college women reporting having had sexual intercourse nearly doubled, from 27 to 50 percent. What facilitated this change was a scientific breakthrough in contraception: the birth control pill.