The goal of this website has always been to dig a little deeper into issues affecting St. Louis City. As I have continued to research and write these articles, it has become clear that the bulk of our problems don’t stem from local mismanagement, despite how good it feels to excoriate our elected officials. I came up against this in my last article about Right to Work laws. I was hoping to settle upon a conclusion, either for or against RTW, in order to guide our votes this coming election season. But what I’ve found was a problem which extends far beyond our reach. Missouri workers find themselves competing in a global labor market against workers in countries where the poverty line is 30 times lower than it is here. The Chinese can survive on $65 per week, and they’ll work 80 hours for that $65. In this environment, it really doesn’t matter whether we legislate RTW laws or not. We simply cannot compete. The macroeconomic disadvantages facing St. Louis are immense. In this series, I’m going to do my best to describe some of these “big picture” disadvantages which have diminished our standard of living.

Disclaimer: This topic is complex. I’m going to try to summarize changes in global macroeconomic and political trends which have led to reduced prosperity here at home. As I started researching this topic, the scope expanded rapidly. Once I started crossing the 7000 word barrier, I decided that I would be merciful and split it up into sections. I’m thinking there will be 4 parts, but we’ll see!

Let’s start with some charts:

What is most obvious from these charts is the abrupt changes that take place around 1970-1980. This period coincides with:

– a decline in the St. Louis region’s population without ever returning to previous levels of growth.

– a flat-line in wages compared to productivity

– an increase in corporate profit margins

– an increase in the share of income going to the top 1%.

Clearly, something big happened in the 1970s.

This big thing was severe inflation. A series of steps initiated by the Federal Government under Nixon, Ford, Carter, then Reagan, along with the Federal Reserve under Paul Volcker then Alan Greenspan ushered in a period of macroeconomic transition not seen since the end of WWII: Bretton Woods collapsed, we opened up trade with China, financial deregulation led to a significant increase in banking disintermediation and securitization, the Federal Reserve shifted its monetary strategies, we adapted weaker interpretations of anti-trust legislation, and global leaders took to heart the idea of a self-regulating free market. These events created the jarring transformation seen on the charts above, and I’m going to touch upon each of them. But before we can understand the full scale of this transition, we have to understand what created the world that existed before 1970.

In the mid-1940s, the shell-shocked survivors of the consecutive crises of World War 1, the Great Depression, and World War II were tasked by history with the responsibility of rebuilding human civilization. The US was the last industrial nation left standing and the sole nuclear power. The economy of every other industrialized nation lay in ruins. Relatively speaking, the immediate post-WWII United States is the most powerful nation to have ever existed in human history. It was in this environment that global leaders set out to restructure the world order in a more stable way. That restructure was the Bretton Woods System, put into place as WWII was winding down. Bretton Woods was a modified gold standard which pegged the US dollar to the price of gold, set at $35/oz. The peg to gold gave the world enough confidence to accept the dollar as reserve currency, meaning all international trade would be transacted in dollars. This put the US into a very enviable position: Everybody wanted dollars, and we were the only place that printed them. I’ll touch upon this aspect again in Part III.

Bretton Woods was the format upon which began the long process of liberalizing trade by relaxing tariffs and creating international trade partnerships. The Marshall Plan primed the global economy’s pump by injecting dollars into the rebuilding economies of Japan and Europe. By selling the products of their cheap labor to the US, who would buy products from them in very valuable dollars, countries could export their way out of poverty. The hope was that global economic prosperity would lend itself towards democracy and stability.

Big changes were enacted on the home front as well. It’s important to remember that the men left rebuilding the world in this era had been witnesses to the absolute devastation of the previous 40 years. They saw the economic devastation of the Great Depression, as a volatile banking sector, a stock market crash, and the resulting austerity measures produced a lingering deflationary episode. They watched as a widespread lack of economic opportunity damaged democratic institutions and tilted power in the favor of despotism, nationalism, and fascism (a trend which appears to be repeating today) leading to the slaughter of millions of people during back to back global wars.

Determined to avoid a repeat of history, they adopted an economic philosophy shaped by John Maynard Keynes. Monetary and fiscal policy was purposely adjusted in such a way as to keep unemployment low and money in the hands of everyday working people. The efficacy of this “demand-side” strategy was borne out by the evidence of its success. It was the Keynesian New Deal stimulus policies of FDR which cut short the Great Depression in the US while the austerity measures of Britain and France had only made the problem worse.

The Keynesian policies of this era created the conditions for an unprecedented period of widespread US economic prosperity (if you were a white man). No doubt there were many factors which kept the economy vibrant during those post-war decades: technological advancements, infrastructure spending, New Deal era regulations and social programs, progressive taxation, and the lack of coordinated overseas competition all contributed towards a red hot economy. Consumer spending was high, unions were strong, inequality was at all-time lows, and the standard of living improved dramatically.

But nothing good lasts forever. Inflation began to ratchet up in the late 1960s and continued into the 1970s. Why this happened is up for debate. The oil embargo of 1973 quadrupled the price of oil. Since oil is necessary for transporting our goods, this meant that the price of everything else shot up with it. In addition, the economic vibrancy of the post-war era meant that workers were able to continually request pay increases. With more money in the average person’s pocket, eventually spending surpassed the ability of the economy to actually produce goods. With less goods for money to chase, prices went up. This, along with massive spending by Congress on the Vietnam War, triggered the uptick in inflation.



source: tradingeconomics.com

It was a great time for debtors. If you were a baby boomer taking out a mortgage in the early 1970s, much of that debt was eaten away by inflation. However, if you were an investor or saver, then you faced a problem: How could you be sure that the return on your investments would outpace inflation? You might invest into a business expecting a 10% rate of return, but if inflation increased at 13%, you were technically losing money in the process, the reason being that the purchasing power of your money would end up less than when you invested it. Likewise, why would you save money in the bank if inflation was high? You might as well burn it for warmth. These factors further incentivized spending, which contributed towards inflation. In short, investors faced huge risks. These risks created a situation where not enough money was being invested into new business or innovation. A lack of investment led to economic stagnation and unemployment.

According to the Keynesian playbook, when unemployment increased inflation was supposed to decrease because people would have less money to spend and prices would be forced to come down. However, unexpectedly, inflation kept going up in spite of the unemployment. This phenomenon, called stag-flation, was completely unexpected. It was a direct contradiction to the Keynesian playbook, and it had the effect of discrediting an economic philosophy which had guided policy for 30 years. This philosophical void was quickly filled with different ideas.

The stag-flation of the 1970s marks the beginning of a period in time where power tilted away from the working class and towards the investor class. With Keynesianism seen to be discredited and stag-flation freaking everybody out, in walked Ronald Reagan and Milton Friedman (along with Margaret Thatcher in the UK) with a bold new strategy. Whereas the Keynesian philosophy of the previous 30 years accepted some inflation as a byproduct of a vibrant economy, the new Monetarist philosophy of Milton Friedman reshaped monetary policy so as to protect against inflation at all costs. The US Federal Reserve was given new tools to clamp down on the money supply. By protecting against inflation and ensuring that the value of money remained stable, creditors would finally have the confidence they needed to invest their money without the fear of it being inflated away. On the other hand, inflation was no longer going to eat away half of your mortgage. Creditors benefited, debtors lost out.

In addition to changes in monetary policy, our government in the 1980s also took a different perspective towards business regulation and fiscal stimulus policies. Keynesians argued that the best way to stimulate the economy in an economic downturn was to hold down unemployment with public works projects and fiscal stimulus and, therefore, increase consumer demand by putting money into the pockets of people most likely to spend it. This would, in turn, convince investors that there was money to be made. Milton Friedman, on the other hand, believed that unemployment occurred because the price of labor was artificially held above its natural market value. The only solution, in Milton’s opinion, was for labor to lower its price until it matched up with the market’s valuation. If you kept prices for labor artificially high through public works projects and strong unionization, then the result would be price inflation, a phenomenon which only led to economic stagnation and more unemployment in the future. What more proof did he need? That’s exactly what was happening.

What Milton Friedman argued was essentially that there was no way for the government to produce a stable economy or to take the pain away from unemployment. The market had to be left free to balance out at an optimal set of prices. Any attempt to increase the price of labor took the market out of balance and inevitably led to problems. Government intervention created asset bubbles which necessarily ended in economic crashes. In short, the market was the ultimate arbiter of truth. If you wanted stability, your best bet was to just let the market do its thing until it reached optimal levels, no matter how wretched the condition of working people might become. The only role left for government was to protect price stability by holding off inflation.

From this belief in the optimally efficient market springs pretty much the entire conservative agenda of the last 40 years. Conservatives tend to believe that the market has a single, optimal state which it will reach if left alone. Once in this optimal state, the market will be more stable and productive than it could be under any other circumstances. The best thing you can do in a struggling economy is to cut taxes, cut social services, cut regulations, liquidate public assets, dismantle unions, and remove every barrier to the market that you can. Any other action is not only ineffective, it’s actually damaging and leads to worse outcomes.

Now, I vehemently disagree with this view of the market. I think it’s a disastrous and simple-minded philosophy which completely disregards human nature and the reality of how markets and society interact. Furthermore, there’s plenty of evidence that the proposed austerity measures of the conservative agenda do more harm than good. However, I’m going to save that criticism for another post because, frankly, it’s an idea which deserves to be isolated and destroyed on its own merits. That will be a fun topic to take on once we get closer to the midterm elections. I look forward to making a progressive argument.

But suffice it to say, the efficient market hypothesis has done some fairly severe damage to working families.

In conclusion to part I, we’ve seen how the turmoil of the 1920s, 30s, and early 40s led our government to create a Keynesian world order which believed in fiscal stimulus, work programs, unionization, and other demand-side support for the working class. Those policies created an economically vibrant golden age. Then, oil prices, war spending, and too much of a good thing created the inflation and then stag-flation of the 1970s. The response to this inflation was a readjustment of monetary policy to protect against inflation at all costs to the benefit of creditors and at the expense of debtors. In addition, a philosophy of an ultimately efficient market led our government to discard the demand-side policies of Keynesianism, to the further detriment of working people.

In part II, I’ll show how the efficient market hypothesis has led to the weakening of anti-trust laws, the growth of capital markets, and how these two factors have further consolidated power in the hands of creditors and the business elite. In part III, I’ll talk about how the opening of trade with China and the status of the US Dollar as reserve currency has led to trade deficits and the loss of jobs and industry. There may or may not be a part IV where I wrap it all up.

Part II here

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RECOMMENDED READING

Austerity: The History of a Dangerous Idea

Mark Blyth