Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Tuesday, February 7, 2012

What Was America's Golden Age?

In comments at Art's place, Gene Hayward asked both Art and me to describe the characteristics of America's Golden Age.

This was the period following WW II, spanning roughly 1950 through the mid 70's, or perhaps a few years later, when the United States experienced robust GDP growth.  Though this growth was far from consistent, it was on average, considerably higher than what we have been able to achieve since.

I've looked a GDP a lot, and in a lot of different ways.  The tag list low in the right hand frame indicates over 40 posts on this blog tagged GDP.  Here is a fairly recent one with a graphic demonstration of how the Golden Age differed from the Great Moderation Stagnation that followed.  A more detailed graph with historical commentary can be found here.

The most important defining characteristic of the Golden Age is this GDP growth record.  The next questions are what were the causes and the results?

For causes, I would consider:

Steeply Progressive Tax Rates
Strong Unions
Social Safety Net
Growing Income in the Labor Force and an increased Standard of Living

Regulations on Businesses
Particularly the Strong Regulations on Banking and Finance enacted during the Great Depression, and most particularly Glass-Steagall.
Fiscal Policies consistent with Keynesian Economics


Robust middle class
Relative equality in income and wealth
Sharp reduction in the number of people in poverty
The Strong Economic Growth that characterized the period

One might consider that the results cycle back into the causes creating a virtuous spiral.  That's how I see it.

Another characteristic of this period was secular inflation.  In this environment, a commodity price shock can send inflation soaring, and that happened twice in the 70's.  I distinctly remember some time in '73 or '74 thinking that nobody would ever look back on that time as "the good old days."  Then disco music came along and sealed the deal, but that's another story.

Shortly thereafter, Volker came along and slayed the inflation dragon.  Since then, we have had secular disinflation.  As you can see in the link above, in this environment, commodity price shocks have not caused inflation spikes.

The Reagan administration vigorously continued the deregulation trend started under Carter, and dramatically changed the tax code (lowering tax receipts relative to GDP, and shifting the burden from the rich to the declining middle class.)

Since then - except for Clinton bucking the trend, at least partially - it's been all lower taxes and deregulation.  This has skewed both income and wealth toward those that already have the most.  The result has been the Great Stagnation, and the slow strangulation of the American Economy.


Gene Hayward said...

Thank you! Very helpful to me and my students. :)

The Arthurian said...

Hi Jazz,

You go to the mid 1970s or AFTER,
I go to the mid 1970s or BEFORE.

I like BEFORE because it takes the inflation out of the Golden Age. In my opinion it wasn't golden if there was all that inflation.

Because you go with AFTER, you have to say "Another characteristic of this period was secular inflation." Again, for me, with all that inflation, the 1970s were not golden years. Personally, for me, yes. But for the economy? For the dollar? For the nation? No.

I think that changes in the post-war economy "somehow" made inflation necessary for growth (by 1965 or '67 certainly). And conversely, suppressing the inflation suppressed the growth. And we've been there ever since.

BadTux said...

The question is this: What does inflation hurt? The answer: Inflation hurts people who want to leave their money stuffed under mattresses, forcing them to take it out from under mattresses and do something productive with it, whether that's investing in a new business, buying a new car, or whatever. Inflation is basically a hoarding tax, pushing money out into the economy and forcing it to circulate because if it doesn't circulate it just loses value.

Frankly, if you look at *any* of the periods of great economic growth in this nation's history, you're going to see inflation. This is true even of the 19th century. Inflation accompanied economic growth, deflation accompanied economic collapse, in a series of wild fluctuations of the business cycle that got calmed somewhat by the creation of the Federal Reserve then almost totally tamed after WW2. What was the difference after WW2? My personal believe is that it was the willingness of policy-makers to maintain and sustain inflation that was the difference.

Of course, it's possible to go *too* far with inflation. When people are rushing from work on Friday with their paycheck to collect wheelbarrows of cash to roll to the grocery store on Friday evening to buy the weekly groceries because if they waited until Saturday morning their wheelbarrow full of cash would have lost half its value, clearly this adds inefficiencies into the economy -- you simply can't make good choices when you have to make them in such a rush. So it's like water, drinking a few glasses of water a day is good, drinking a dozen gallons of water a day will kill you. (No joke, it'll wash all the electrolytes out of your body and you'll die because electrical signals can't make it to your heart muscle to tell it to beat). Just goes to show that too much of a good thing can be, simply put, too much.

- Badtux the Economics Penguin

The Arthurian said...

Tux: "The question is this: What does inflation hurt?"

The economy is not about "who". Inflation hurts the dollar.

If the flag is our nation's political symbol, then the dollar is its economic symbol.

Inflation is the economic equivalent of dragging the flag through the mud.

BadTux said...

Dollars are pieces of toilet paper with pictures of dead people on them, whose sole purpose is to facilitate the trade of goods in the marketplace (a purpose which also results in them being a store of value since if they weren't a store of value for the amount of time that it takes to receive a dollar then use it for another trade, they wouldn't be useful, but a store of value is not why money exists).

Frankly, I'm not concerned about hurting money, it's as stupid as being concerned about hurting toilet paper when I use it to wipe my butt. The purpose of money is to circulate, just as the purpose of toilet paper is to flush it, and being concerned about soiling it in the process of making it do its job is just ridiculous. That whole "symbol" stuff is garbage to begin with (I'm concerned with people, not symbols, symbols are nonsense invented to manipulate people into doing things against their own best interests), but anyhow, if the dollar bill is the symbol of America, we are a sick, sick, sick society in the first place. I prefer to believe America is better than that. Though I must admit that this is a belief that I prefer not to test against actual evidence.

- Badtux the Down-to-earth Penguin

Jazzbumpa said...

Hmmm. I'm supposed to get an email when somebody comments, and that hasn't been happening, so I just found your comments. Things have been a bit odd the last couple of weeks in my life, and probably will be for a while.

Tux -

There is another class who is hurt by inflation - those who lend long, i.e. banks.

As (I think it was) Steve Roth pointed out recently' this is why the Fed fails at their dual mandate. They are bankers and care A LOT about inflation. OTOTH, they don't give a hirsute rodent's hindquarters about unemployment.

Art -

You go to the mid 1970s or AFTER,
I go to the mid 1970s or BEFORE.

I don't relate the end of the golden age to inflation. I relate it to the break point in most time series econ data plotted on a log scale. 1979-80 is very close to median, mean, and mode for such data.

I really would love to be able to pin every bit of it on Reagan, but, alas, I cannot do that.

Still, he can reasonably take the blame for a hell of a lot.