By Dan Kervick
A dogma can be a very powerful thing. When dogma is sufficiently powerful, the people in its grip can lose sight of who they are, where they have come from, and how they got from the place where they started to the place they now occupy. Americans during the past few decades have been in the grip of an especially strong dogma, the dogma of Market Fundamentalism. Falling in with the preachers and zealots of this charismatic sect, they have convinced themselves that their once lofty economic place in the world was primarily due to an American preference for miniscule government coupled with the visionary leadership of free-wheeling entrepreneurial heroes, latter-day secular saints who were able to set the economic agenda and pursue it unencumbered by regulatory ties. For some Americans, this mythic free enterprise utopia, bestridden by business titans, represents the very essence of American freedom. And so the free market faithful have pursued a neoliberal political agenda in order to see to it that the tablets of this magnificent ancestral wisdom are carried down unbroken into the present all-too-errant age.
But the creed is bunk. It is a fictive concoction filled with tales of an imagined past that never existed. And yet, the more enthusiastically the apostles of Market Fundamentalism have attempted to put the spurious creed into practice, the further they have taken us away from historical truth and the real-world sources of our actual prosperity. We need to drop the totemic legends and look that real history squarely in the face, so we can remember who we really are.
Here is a graph of annual real gross domestic product for the United States during the period starting in 1929 and ending in 1959:
The most noteworthy portion of the graph is the highlighted period running from 1939 to 1944, and closely lining up with the years of the Second World War. We see that during that short time period, the US economy roughly doubled in size. The economic performance of Americans during those years was truly extraordinary. Emerging from a decade during which the country experienced a severe depression that slashed the size of the economy by one quarter, followed by a period of recovery that accomplished no more than returning the economy to its previous size before stalling out once again, Americans worked together during the war years to engineer a vast industrial machine and make a staggering economic surge forward. Following the war, we then see a sharp one-year drop as the country partially demobilized, followed by a three-year period of stagnation. But then followed a decade of steady economic progress during which time the economy grew by another 50%. And although it is not shown on this graph, the 60s were a similarly strong period as the US economy increased in size by about another 1/3rd from 1959 to 1969. So altogether, the US economy roughly quadrupled in size during the 30-year period lasting from Great Britain’s entry into WWII until Neil Armstrong’s first steps on the moon. This period in US history constitutes a modern economic miracle.
What drove that growth? Solidarity and organized national purpose. Americans worked together as a team during the war, and that solidarity contined into the postwar decades, behind an engaged and economically pro-active government. Here is another chart, showing federal government consumption and gross investment (CGI) as a percentage of GDP from 1929 to the present day:
The term “consumption and gross investment” refers to government purchases, whether of consumption goods or capital goods. It excludes transfer payments: direct cash disbursements that are not purchases of goods or services. So government consumption and gross investment as a share of GDP measures the government’s direct role in the economy as an employer of people and a purchaser of our national output.
What we see in the above chart, then, is that the great wartime economic surge was produced by a gigantic increase in the federal government’s role in the US economy. At its peak in 1943 and 1944, the government’s role as either a direct producer of our national output or customer for that output reached about 45%. The US was indeed close to a planned economy during the war years. Notice what happened next: Government CGI fell to about 10% of GDP and stayed there during the period of postwar stagnation, and then surged in the early 50s up to levels between 15% and 20%. Throughout the 50’s and 60’s, and continuing into the early 70’s, the US consistently maintained CGI levels well above 10%. What followed afterward was a period during which CGI held steady for the most part at around the 10% level until the end of the Reagan administration.
Interestingly, a period of recession and stagnation set in following the end of the Vietnam War, as CGI fell to between 9% and 10%. It was Ronald Reagan, despite his ostensible claims that government was the problem, not the solution, who was responsible for boosting the government’s consumption and investment expenditures solidly back up over 10%. Perhaps not surprisingly, the economy performed well during that period. Since 1988, however, we have seen a sharp secular reduction in the role of government.
What has this decline in the economic role of the federal government meant for US growth? I think the pattern is quite evident. Here is a graph of year-over-year changes in real gross domestic product from the time of the Great Depression to the present day:
Just as we have seen a long secular decline in the role of the Federal government, we have seen a similar downward trend in growth. The years since 2000, with federal government CGI as a percentage of GDP averaging only 7.4%, have had anemic average real GDP growth of only around 2%.
I believe the message is clear: The planned economy of WWII was the economic rocket that finally launched the United States out of the depression era and into the prosperous future decades that followed. That period, you might say, was America’s “great leap forward.” Americans in the postwar period, justifiably impressed with the power and success of activist government, kept up very strong levels of government economic participation and agenda-setting. We know the litany: highway programs, educational investment, a space program, and all of the many components of military-industrial complex.
And yet, this is the picture we see only when we look at government CGI. If we look at the total volume of federal spending, we read a somewhat murkier story. Here are annual federal government current expenditures as a share of GDP, again from 1929 to the present day:
We see a consistent upward trend until the early 80’s, a decline during the Reagan adminsitration, and an even more powerful decline during the Clinton adminsitration. The government peaked in size as a portion of GDP around 1983, and has been roughly declining in size since then, but interrupted significantly by the war spending of the two Bushes, and by the countercyclical stimulus package that was enacted in 2009 under Obama following the onset of the Great Recession.
Federal debt has continued to climb despite the fall in the size of government, driven perhaps by the dramatic tax cuts under Reagan and Bush II. We see this if we look at either gross Federal debt, or Federal debt to the public. (The latter is gross debt minus that portion of the debt that consists only in the obligations of one part of the Federal government to another):
Despite contemporary bouts of public debt hysteria to the contrary, the current Federal debt and level of debt service seem sustainable, even on very conventional understandings of “sustainable.” And the total size of the Federal government is actually quite modest by the standards of the rest of the developed world. But it is worth thinking about the contrast between the clear long term decline in the government CGI share of GDP and the murkier trend in the overall size of government.
Sustained government spending despite falls in CGI is the result of safety net spending. We began building those safety net systems in the 40’s, 50’s and 60’s, and they are a glory of enlightened social thinking and activism. But we have begun to rely on them more as inequality has grown. My contention is this is the outcome of a deliberate, elite-driven process I have called “charity-state liberalism”. Political and economic elites have increased the distributions of remedial income support to the bottom of the income structure while at the same time hollowing out the middle class, building a plutocracy and creating staggering new levels of inequality and predatory exploitation powered by the financial system and other well-connected stakeholder systems. US inequality is now, by far, the worst in the developed world. Increasingly the US looks like a neo-feudal society in which the role of government has been shifted away from productive investment, and toward the administration of Poor Laws which do nothing but stabilize the status quo to the benefit of the very rich, and insure the latter against social conflict and redistributive politics. Instead of broad prosperity, with the fruits of strong growth distributed widely and fairly across the whole spectrum of society, we now have a horrific and dysfunctional plutocratic Versailles economy buying itself more time with its politically fraught social insurance programs. One of the benefits of charity state liberalism, from an elite standpoint, is that it creates resentment among the stressed, working middle class, and prevents the development of effective political solidarity among the non-elite strata of society.
So what is to be done? We need to expand the active role of government in our economy once again, and shift spending back from the “safety net” to mission-driven public investment and government consumption expenditures on public goods. By no means should this shift be accomplished by Tea Party-style destruction of social insurance programs and abandonment of the needy and vulnerable to the kind of “tough love” Social Darwinism favored by the right. Such a program is as cruelly barbarous as it is economically destructive. Rather, we need a new government commitment to full employment and the provision of socially important and economically needed jobs to every person who is willing and able to work but who is not employed by the private sector. A dramatic expansion of public enterprise will lead to a natural and socially healthy reduction in the role of the government safety net, and will also help in the process of restoring solidarity among Americans. And public enterprise employment is the natural accompaniment of the type of mobilization for progress that is now needed.
This is not a pitch for re-militarization and a re-commitment to the US war machine. The point of the above historical lesson is that the United States and its people were mobilized by the war, and by the Cold War imperatives that followed. And the result was stunningly rapid economic development and progress in the areas of life that people of that time regarded as most important to the nation’s mission and ambitions. Those years were full of teamwork, can-do spirit and powerful government engagement. But they were also terrible times of global war, fear, the growth of secrecy and the security state, and the omnipresent threat of nuclear annihilation. But why must national mobilization take a military shape? Progress in the 21st century will not look like progress in the 20th century, and the most urgent imperatives of our time are not the imperatives of a past world doing battle with Nazi expansion and then entering into Cold War struggle. In the 21st century our mission is to transform the ways in which we obtain energy resources and utilize them to live on the Earth in a sustainable way, and to reform our society, material infrastructure and politics in ways that allow us to live harmoniously and sustainably as equals.
It may even be that standard GDP-based metrics for progress as “growth” are outmoded, and that new measures are needed. But whether we quantify our progress under the traditional rubric of growth or not, we know progress must be made. And the kinds of progress we need are so far-reaching that we cannot expect them to emerge haphazardly from the scatter-shot entrepreneurial hubbub. We are going to need new infrastructures for social living and transportation; new education systems; new forms of energy technology, health technology, financial technology and information technology; and all must be executed and organized thoughtfully and in optimally efficient and rational ways. This is going to take an enormous amount of work and intelligent strategic planning, as well as a lot of discussion, debate and experimentation. It is thus also going to require innovative new forms of democratic participation, deliberation and consensus building. And it is vital that as new infrastructure is created, the public retains ownership of the key systemic elements of that infrastructure instead of letting them fall into the hands of monopolists and oligopolists. Dismantling the plutocracy is itself part of the generational challenge.
Young people living today – the people with the most energy, tenacity, creativity and optimism – are desperately ready to engage in this project, and need to be liberated from the gloomy, dystopian pessimism and unimaginative indolence of our current crop of leaders and elders. But instead they are being crushed under unemployment and debt, and held prisoner by a generation that seems to have talked itself into a cowardly worldview of pre-fated decline and failure.
Our political culture awaits the great mobilization that is both needed and inevitable. Young people must be feeling intense frustration at the fetid and useless stew of confusion, cowardice and corruption that has been mixed up for them so far by the generations who still cling to political power, and by the lame proffers from the economically comfortable of mere market-based band-aids for massive systemic injuries and diseases. But they should at least know that Americans have in the past risen above stupidity, and mobilized themselves to accomplish amazing things. They did these things together, without waiting for some sequined and white-hatted entrepreneurial cowboy to leap off the glossy covers of the business magazines to save them.
Cross-posted from Rugged Egalitarianism