U.S. Performance Didn’t Measure Up to Theory

May 23, 2011

In the latter 1960s and early 1970s when I was studying economics, accepted wisdom swung away from the teachings of Keynes and embraced a neo-classical ideology that encompassed several beliefs.  Renewed faith was placed in market mechanisms as a far superior way than others for deciding the allocation and distribution of goods, services and factors of production in almost all instances.  A smaller role for government was espoused in the public sector’s dual roles as a direct source of supply and demand and its indirect impact as a a regulator of the economy.  The notion of a trade-off between inflation and economic growth was debunked.  Barring outright deflation, very low, stable and predictable inflation came to be viewed as an important pre-condition for maximizing economic activity.  International trade was perceived as a growth multiplier.  Not everyone would benefit equally from freer trade, but an environment of fewer barriers would leave every nation better off than one where the costs of trade are prohibitive.  Analogously, attempts to achieve a less skewed distribution of income and wealth were panned as counter-productive because they would restrain overall economic growth and therefore all slices of the pie to be shared.

The U.S. election of 1980 marked a watershed in U.S. politics in which policy-making and voter sympathies caught up with what had been happening in the discipline of economics over the previous twenty years.  Conservative thinking captured the soul of the Republican Party, and Democrats became increasingly unelectable unless they supported economic policies no more liberal than accepted ways during the Eisenhower and Nixon administrations.  Since January 1981, the White House has been occupied by a Republican for twenty years, about twice as much as the ten and a third years controlled by a Democrat.  More importantly, the conservative shift in popular predispositions led to a more effective Republican congressional counter-weight against the presidencies of Clinton and Obama than congressional Democrats were able to muster against Reagan or Bush. 

These thirty years have generated a body of work to grade the merits of deregulation, lower income tax rates, globalization, and reduced spending for items other than defense and health and retirement entitlement programs.  The table below segments the last sixty-odd years into two broad periods, January 1981 to the present and the thirty years prior to the first Reagan inaugural.  The last 11-1/3 years, that is the period since the cusp between 1999 and 2000, is also broken out as a sub-set of the more recent 30-year period.  The table shows a progressive decline in CPI inflation from 4.2% per annum in 1951-1980 to 3.2% per annum since January 1981 and 2.5% per annum since December 1999.  However, growth in real GDP and employment also slowed contrary to benefits that were predicted to follow an unleashing of a less fettered brand of capitalism.

% per annum Real GDP Employment Consumer Prices
End ’50-End ’80 3.5% 2.2% 4.2%
Since Jan 1981 2.8% 1.2% 3.2%
Since End-1999 1.8% +0.03% 2.5%

The loss of union membership and of worker bargaining power more generally did lead to less even distribution of wealth, wages and other salary benefits, and profits now constitute a greater share of the GDP than before.  The DJIA has advanced 10.1% per annum since a trough of 777 in mid-August 1982, but the net advance over the most recent 11-1/3 years since mid-January 2000 has averaged just 0.5% per annum.  Five other troublesome developments have been

  • The five-year long bear market in real estate,
  • The more-than-40% trade-weighted drop in the dollar since June 2002 despite low U.S. inflation,
  • America’s most deeply entrenched long-term unemployment since the 1930s,
  • A relentlessly rising chunk of GDP consumed by healthcare, and
  • Increasingly unaffordable education yet a decline of America’s world ranking in achievement test scores.

The conservative economic experiment has been running for three decades.  A predictable and impressive burst of productivity growth occurred.  Silicon Valley has transformed not just the lives of American households but also those living in the remotest corners of the world and everything in between.  However, such success has not occurred without notably dreadful blemishes.  At the end of the day, just a few things really ought to matter:  the growth in jobs and real production, the distribution of America’s bounty, and voter satisfaction with their lives, the direction of the nation and the accountability and competence of its political system.  On these basic matters, shortcomings have been revealed, but answers are not being sought in a new direction.  On the contrary, the political pendulum continues to swing in the way that supporters of President Reagan wished. 

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.


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