Economic nostalgia's false promise for Americans

Washington

WE Americans have long been obsessed with economic growth - "prosperity" in everyday lingo. The idea that we have some sort of special aptitude for invention, wealth creation and economic self-improvement is part of our imagined national character. It's who we are. Not only that, but prosperity plays a crucial political role. It enables us to raise living standards and construct a society with greater economic and social justice.

We're not just good at this; we're better than everyone else. Or so we thought. President Donald Trump's popular appeal rests heavily on our loss of confidence in this vision. And it's not only Mr Trump. Though critics reject his remedies (high trade tariffs, huge budget deficits, tax cuts for the wealthy), they share his worry that America is apparently losing its economic vitality.

The change is real. If you examine the basic indicator of the economy's size - gross domestic product or GDP - there clearly has been a break from the rapid growth of the early post-World War II decades. From 1950 to 1973, the economy grew at an average annual rate of 4 per cent, reports the Congressional Budget Office. More recently, growth from 2008 to 2017 - the Great Recession and the recovery - averaged only 1.5 per cent.

When Mr Trump pledges to "make America great again", he is widely thought to be referring to the 1950s and 1960s. There is an understandable urge to retrieve these decades, but the prospect that this is a cure is a mirage. Much of the post-war boom was driven by three economic advantages for the United States that were fated to fade.

First, there was a backlog of new technologies (television, jet aircraft, synthetic fibres, antibiotics, air-conditioning) that boosted both consumer spending and business investment. In 1940, US airlines carried 3.5 million passengers; by 1970, that was 154 million.

Second, the war-time destruction of Europe and Japan left US firms with few serious international competitors. The trade balance was routinely in surplus; the first deficit didn't occur until 1971.

And third, economists seemed to have made progress in stabilising the economy. Post-war Americans feared resumption of the Great Depression, when the unemployment rate hit an annual peak of 25 per cent. In the first decades after the war, the highest annual rate was 6.8 per cent in 1958.

But these favourable forces could not - and did not - continue indefinitely. Japan, Germany and other nations rebuilt; the markets for new products (TVs and the like) became saturated. And most of all, economists discovered the limits of their powers. The crusade to sustain "full employment" led to disastrous double-digit inflation - 13 per cent by 1979.

The trouble is that the explosive prosperity of the 1950s and 1960s has left a legacy. It created lofty expectations that, despite repeated disappointments, increasingly go unmet.

During these early post-war decades, an informal division of labour emerged between government and business. Government would eliminate or mute the business cycle, through the manipulation of the federal budget and interest rates. Influenced by John Maynard Keynes, most economists thought this was mainly a technical matter.

Meanwhile, big corporations (the IBMs of the day) would dominate the global economy and generate innovations. For Americans, these firms would provide stable jobs, rising wages and more fringe benefits (health insurance, pensions). Almost everyone else could still get a job in the "full employment" economy. The very poor, disabled and old would be protected by a generous "safety net".

Quite probably, this is the way that many, possibly most, Americans think the economy still should run. But of course, it doesn't.

The Great Recession and the 2008-09 financial crisis remind us that the problem of the business cycle hasn't been solved and may never be. The invincible US corporations turn out to be vulnerable to upstart firms, here and abroad, and to new technologies. The constant spectre of new competition casts an anxious pall over many workers. The skewing of income towards those at the top compounds the effect.

The gap between how the economy actually works and how we'd like it to work is a breeding ground for discontent and desperate policy agendas. For our economic ills, Mr Trump blames foreigners - immigrants and imports - along with the American officials who, over the years and according to him, engineered disastrous policies.

This is mostly wrong, as perhaps Mr Trump is learning. His various tariff proposals seem to be causing as much, if not more grief, among the US firms that they're supposed to help as among the foreign firms that they're supposed to hurt. But in fairness, many other policy agendas from the left and right aren't much better.

What we all should be learning is that there's a big difference between economic nostalgia and economic policy. WP