An Overall Sketch of the Economy: Part I A Historical Overview
This is my most ambitious blog series ever. I plan to do four things. First, I will offer a potted history of the global economy during the twentieth and twenty-first centuries. That alone might seem totally daunting, but, in fact, it will be a summary of an already potted history published by my eldest son, Jeremy, in an essay in Foreign Policy in this past Sunday’s issue (20 November 2016). His article is entitled, “Donald Trump Is Declaring Bankruptcy On The Post-War World Order,” and subtitled “The global system of peace and prosperity was already on life support before the U.S. president-elect decided to pull the plug.”
The article is well worth reading in its entirety and can be found online at http://foreignpolicy.com/author/jeremy-adelman/. Jeremy is a professor of history at Princeton University where he chaired the department for about a decade and now directs the Global History Lab there. He is an economic historian who holds the Charles Lee Chair as well as the Walter Samuel Carpenter III Professorship of Spanish Civilization and Culture. You might also want to read his essay in the May/June issue of Foreign Affairs entitled, “What Caused Capitalism.” If you are much more ambitious, you might also want to read his book, Worldly Philosopher: The Odyssey of Albert O. Hirschman which I reviewed over a number of blogs last year and which can be found under my name online at wordpress (https://howardadelman.com/).
The second goal I have is to offer a distillation of the current state of the global and the American-led economy, largely drawing on my reading on this issue over the past months and my attendance at two seminars on the current state of the economy. Third, drawing from those two sources, from Donald Trump’s economic pronouncements, promises and performance thus far, and from the general economic behaviour of most populists, I will try to adumbrate the effects of the latter on the current economy. Fourth, I will offer my personal plan for dealing with these expectations.
Jeremy’s essay starts off with a reference to Robert Graves (Good-Bye To All That) and the efforts after WWI to make Britain great again by restoring a bygone economic era of imperialism and British economic leadership through “throwing up trade barriers, turning currency into weapons, plunging the world into depression, and then deporting, or later exterminating, foreigners as well as their own citizens.” If it seems reminiscent of the situation we are now in, that is no accident. Donald Trump is on the verge of turning the post-WWII economic order in which the U.S. was the great stabilizer (generally) on its head; the U.S. is about to become the great destabilizer. Of course, the ground had been well prepared for Donald Trump as America’s role as the chief economic hegemon has faded.
That role began after WWII when the U.S. economy at the end of WWII was larger than the economies of Britain, and the rest of Europe, of Japan and the USSR combined. America was the postwar Leviathan, but a very liberal one that operated not primarily through coercion but through its intellectual and material influence. But Donald Trump has given voice to those nostalgic for this old role of leadership in a context where it is no longer possible. Nostalgia is perhaps the worst foundation upon which to construct an economic policy.
After WWII, America laid the foundations for the economic order that would rule the world over the following seventy years based on global cooperation versus the protectionism that led to the Great Depression combined. This international economic leadership combined with national policies that created safety nets for those negatively affected by the enormous economic dislocations of a co-operative international economic order. The latter half was intended to manage risks and shelter castaways though educational and welfare nets that caught the human byproducts of the enormous institutional, commercial and technological changes underway. The first half of that order depended on agreed upon norms, principles and rules for free trade. As Jeremy wrote, “The result was a boom. From 1950 to 1973, world per capita incomes grew by 3 percent per year — powered by a trade explosion of 8 percent per year. Cooperation triumphed; interdependence brought prosperity.” Borders were not only opened for goods and services, but for the movement of people as well.
According to Jeremy, both pillars of the new economic order gradually started to crumble and eventually collapse altogether. Trumpism is merely the wake following that collapse with all the dislocations and sorrow that such a tsunami will bring. The most significant victims are an era of tolerance and relative stability. The catalyst has been the decline in America’s leverage to allocate resources, co-ordinate the management of currencies, dismantling traded barriers and setting the standards for the post-WWII economic order. But success undermined that leadership role as competitors rose and America’s percentage of world activity fell. China today is responsible for 10% of world trade and has replaced America as the leading trade country. One of the consequences has been a trade imbalance in which the U.S. imports far more than it exports.
The 1979 recession was the first major blow to the system. But the deregulation of the banks with the consequent enormous increase in credit based on very inventive mechanisms for providing credit, offered a new lifeline. When combined with relatively cheap fossil fuels, the global economy received an enormous shot in the arm. But not in the feet. The upper torso would become too enormous for the spindly legs to support it. The most serious effects were the repercussions on this planet; the environment could not sustain the enormous growth. Further, no global system was in place to manage and offer a new foundation for badly needed leadership. The U.S. was not only no longer an economic hegemon, but was the repository of the largest number of climate change deniers in the world. What is worse, many of them occupied positions of power and the Trump election meant that they have reached the zenith of that power.
Why and How? The problem was not only the incapacity of the planet nor the system in place to manage a fossil fuel monetized economic order, but the welfare state had disintegrated alongside this development. As one protection after another fell for those negatively affected, as a whole class of citizens had their expectations and hopes crushed at the same time as the rug of security was snatched from under their feet, a large populist pool of discontent and barely simmering rage had been developed, one that could and would focus on the greatest symbol of the new immigration, the rising tide of minorities and the decline in the hegemony of white working class males.
The effort to continue to free up markets, the ability to coordinate various aspects of this economic system by the Reagan and Thatcher administrations came at great cost to the working class, which subsequently experienced 35 years of economic stagnation and, even more, a seeming indifference to this state of affairs by the political leadership of this new era of “greed is good.” The deregulators and privatizers had given a second boost to the new economic order, but it came with an enormous sacrifice by the working class. The social contract had been shredded. As Jeremy put it, “Public services and protections softened market risks before 1973; in the decades afterward they were replaced by the private comforts of combustion and monthly credit card bills.”
The carbon and credit economy got a further boost with the disintegration of its collectivist rival, the U.S.S.R., in 1989. America was once again the global hegemon. Instead of doubling down, deregulation under Clinton was accelerated. Then, under the Bush regime, America’s economic and moral leadership were sacrificed in the endless warfare in the Middle East. These events paved the way for a bankrupt casino operator coming into power. Barack Obama was merely a hapless intervener trying to hold back the tides of change and disintegration while assaulted within by a Republican-controlled Congress and challenged externally by the diminution of America’s role in the world.
The ground had been prepared for America to shift from a role as the great stabilizer to that of the great destabilizer. “The long cycle of integration and relative tolerance forged by U.S. leadership since World War II is now headed in reverse.”
With the help of Alex Zisman