Today's Stagflation: What's to Blame?
of course, I know best
What has gone wrong with the economy? What happened to the big growth years of the post WWII era? David Stockman, famous as President Reagan’s budget director produces this log-scale graph of personal income after transfer payments.
As you can see, the slope of the graph keeps getting lower and lower, and after COVID has pretty well gone flat.
What happened? Who’s to blame? Well, there are all kinds of possibilities. Let’s list a few. First of all:
Nobody is to Blame
Back in the day, before the Industrial Revolution, there was virtually no annual income growth, as I show with my Great Enrichment page at usgovernmentspending. com.
You can see that back in 1800 per-capita real GDP was flat from year to year. Then it started to grow. Then in the 1930s, it hiccuped. Then after World War II per-capita GDP growth peaked. Then after 1970 it started to decline. Given that David Stockman’s graph started in 1960, you can see that the two graphs agree.
So what is going on? Maybe, possibly, this is a long-term thing, that the increase in prosperity of the last 200 years is starting to flatten out. What we are seeing is what experts call “an S-curve.” And I read someone recently that said that all curves are S-curves. As in Stein’s Law: “if something cannot go on forever, it will stop.”
It’s the Entitlements
Again, from my usgovernmentspending.com, here is my Entitlements Page.
Now, Ben Franklin said that when you give the poor money they will respond by working less. Do you mind if I correct old Ben and suggest that if you give anyone free money they will work less?
Now, my graph shows Government Pensions, Government Healthcare, and Government Welfare as a percent of GDP. As you can see, it all started at nothing in 1920, and now has reached about 17 percent of GDP. And the real growth started in about 1970.
One thing to notice is that welfare is not the big item. And in recent years pensions have flattened out somewhat. It’s health care that is the big entitlement growth item. But does free health care encourage people to ease off on work? I’d say that, probably, people don’t organize their working life around health care. If it’s available they take it; if not they do without.
Neoliberalism Did It
If you listen to educated-class liberals they say that the Reagan revolution of 1981 ending the post-WWII growth era. La Wik.
[Neoliberalism] is generally associated with policies of economic liberalization, including privatization, deregulation, globalization, free trade, monetarism, austerity, and reductions in government spending in order to increase the role of the private sector in the economy and society.
If you read other people they tend to equate neoliberalism with globalism and “financialization.”
One thing. What “austerity?” What “reductions in government spending?” If we look at federal spending as a percent of GDP from usgovernmentspending.com,
we can see that federal spending has been at or around 20 percent of GDP since 1950. And defense spending as a share of federal spending has gone down since the peak of the Cold War in the 1950s and 1960s. Our liberal friends like to think that everything changed in 1980. I tend to think that almost nothing has changed. Liberals were the rulig class in 1980 and they are the ruling class now.
War on Unions
Another explanation for the decline in wage growth is the decline of private-sector unions. Back in the prosperous 1950s workers were unionized in industrial unions and were paid good wages because corporations had no choice but to pay them what they were worth. The counter-argument is that labor unions priced American workers out of a job. Our you can say that unionized corporations like auto companies got fat and lazy and were out-competed by Japanese and then Korean auto companies. Or you could say that developing countries like Japan and South Korea and now China combined the low-priced labor of workers just off the farm with 20th century technology and just out-competed US firms.
You make the call.
US Hegemony in Decline
It was Keynesianism that kept worker wages going up. That’s what David Graeber asserts in Debt: the First 5,000 Years.
To put it crudely, the white working class of the North Atlantic countries… were offered a deal. If they agreed to set aside any fantasies of fundamentally changing the nature of the system, then they would be allowed to keep their unions, enjoy a whole variety of social benefits… and… know that their children had a reasonable chance of leaving the working class entirely [through public education institutions].
But after Reagan, the deal was off. Everyone would have political rights, but they were meaningless. Productivity went up, but wages stagnated. The old Keynesianism was off.
My Take
I suspect that the decline in wage growth has a lot to do with the power of the educated class, through regulation and increased government spending, to curb the freedom of Americans — workers, businessmen, technology inventors — to implement their ideas on the market without getting permission.
And there is the fact that after World War II the US bestrode the world like a colossus and didn’t have to emerge from the rubble of war like Europe did. But as other countries got into the international economy their lower wages and more recently built factories made life a lot tougher for US workers and corporations.
Then there is the growth of government itself. Government spending really doesn’t add to national income; it subtracts, because everything the government does is an imposition, by force, on the normal day-to-day buying and selling and building and consuming of ordinary people.
Then there are the economy-scale errors, like going off the gold standard, puffing up housing prices with subsidized 30-year loans, zero-interest rate policy after 2008 that puffed up stock prices but not wages.
And so we come to my Four Laws. If you mess with prices you mess with prosperity; if you administer the economy with government mandates you warp and diminish the economy; if you regulate the economy you get “regulatory capture” of the regulators. And if you give people free stuff, you can never take it away.
Fact is: human society is a mystery; the market economy is a complicated, complex thing, and nobody knows what is going on.