American Economic Development since 1945: Growth, Decline and Rejuvenation

Published by EH.NET (April 2003)

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Samuel Rosenberg, American Economic Development since 1945: Growth, Decline and Rejuvenation. Houndmills, Basingstoke and New York: Palgrave Macmillan, 2003. xii + 339 pp. $75 (hardback), ISBN: 0-333-34533-9; $23.95 (paperback), ISBN: 0-333-34534-7.

Reviewed for EH.Net by Louis P. Cain, Loyola University Chicago and Northwestern University.

Once upon a time, roughly the late 1970s, members of the American Economic Association received an annual mailing from the AFL-CIO. In simplest terms, it was the “Economic Report of the AFL-CIO” issued, not coincidentally, at about the same time as The Economic Report of the President. It never failed to be fascinating reading — the replaying of familiar events and familiar data through the specific lens of organized labor. In the spirit of one Chicago radio personality, it was like having a union welder review the movie, Flashdance. Samuel Rosenberg’s American Economic Development since 1945 is such a piece. Most of the topics are familiar, but by using the labor lens, he invites readers to revisit what they thought they had seen.

Rosenberg (Roosevelt University, Chicago) divides the postwar period into three phases. The first is the “creation of an institutional framework” built on a platform of “a limited, though growing, governmental role in stabilizing and fostering . . . growth . . .” (p. ix). The second is the inflation of the late 1960s and the stagflation of the 1970s that undermined this framework. The third, begun in the 1980s, is the “recreation” of a conservative institutional structure that restored U.S. hegemony internationally and led to expansion in the 1990s. The book is divided into four parts, and the periodicity of those parts does not match those of the three phases.

Rosenberg begins with a discussion of the Great Depression, an event he attributes to over-investment and an “unsound” economy. Evidence of the latter includes an income distribution that was becoming more unequal, with the savings of the wealthy going into “rampant speculation” funded by growing consumer credit and a “fragile” banking system. It also includes monetary, fiscal, and trade policies that were perverse. New Deal policies helped mitigate the problems to some degree, but, more importantly, they laid a foundation for the framework that was created in the immediate postwar years. Ben Bernanke and Barry Eichengreen inform the discussion, but not Milton Friedman, Peter Temin, or John Wallis. Chapter 1 sets the stage by looking at the economy at war. Rosenberg’s emphasis is clear, “Developing a labor force and stabilizing industrial relations were two important preconditions for armament manufacture” (p. 32). Much is made of the female labor force, but there is no reference to Claudia Goldin. Similar omissions permeate the book.

Discussion of the first phase begins with the Murray-Wagner Full Employment Bill of 1945, a bill Rosenberg describes as “scuttled” by business and “too radical for Congress” (p. 45). While the Whittington-Taft Employment Act of 1946 required the government to “promote maximum employment, production and purchasing power,” Rosenberg alleges the employment goal was subordinate to the other two. Rosenberg documents, but does not comment, that this act indicates the “centrist coalition” no longer endorsed the laissez-faire policies of the 1920s. Monetary policy in the immediate postwar years was constrained by the Fed’s tie to the Treasury. Rosenberg argues that business was interested in discretionary monetary, as opposed to fiscal, policy because it was “more congenial to corporate values” (p. 57). As a result, business pushed for the 1951 Accord; the Fed’s preferences are not discussed.

Rosenberg then turns to business-labor relations, which he describes as “conflict amidst stability” (p. 64). Following an intense period of strikes immediately after the war, the Taft-Hartley Act of 1947 was “a defeat for organized labor and for workers as a whole” (p. 73). Attention then turns to the international arena, beginning with Bretton Woods and the Marshall Plan. Rosenberg notes that the U.S. ran large balance of payments deficits, which provided the world with liquidity, but this was in potential conflict with the government’s willingness to exchange dollars for gold at a fixed price.

The “New Economics” of the Kennedy administration led to the Revenue Act of 1964, the Kennedy tax cut. Rosenberg seemingly would have preferred a government expenditure increase: “This conservative form of Keynesianism emphasizes growth over redistribution” (p. 110). This stimulus occurred when inflation was relatively low, and there was beginning to be concern about the balance of payments deficit. To minimize the inflation problem as the economy expanded, the Kennedy-Johnson wage-and-price guideposts were adopted to provide restraint where “unions had strong bargaining power and firms had strong market power” (p. 111). Indeed, the macroeconomic numbers look good through the middle of 1965, but the worm then turned.

To me, the event that signals the beginning of Rosenberg’s second phase is Johnson’s request for a supplemental budget appropriation for Vietnam at the end of June 1965. Rosenberg notes there was a belief that economic growth would help to finance both a short war and an attack on poverty. The result was stagflation; tighter monetary policy that did not reduce inflation, but it did lead to a small recession that increased unemployment. Rosenberg notes that this led to wage and price controls, but he puts a much greater emphasis on the domestic dimension than is customary. Having introduced the controls, he turns immediately to a discussion of labor conflict and the persistence of inequality, then returns to the international dimension to discuss the “dollar problem” as the real value of international reserves held in dollars fell with U.S. inflation.

Stagflation is customarily attributed to the unique aggregate supply shock that hit the economy in the early 1970s — harvest failures in Europe and OPEC’s ability to control the price of oil. Regardless of when stagflation began, it is clear that demand management was the policy tool of choice throughout the period. Paul Volcker’s tenure at the Fed is customarily believed to have broken the high inflationary expectations that developed, but, notes Rosenberg, “Volcker’s policy was advanced as monetarism…. But, in reality, it was austerity…. The proclamation of monetarism was the political cover for a program of rapidly rising interest rates” (pp. 193-94). Interest rates rose because of inflation, and, when Volcker was finally able to pursue monetarism, the Fed’s intent was to reduce interest rates. The result was an economic downturn that led to a “stalemate” between business and labor.

Rosenberg dates the restructuring of the economy from the first Reagan administration, with “supply-side economics” and monetarism. Arguably, deregulation was a part of this, and the first steps toward deregulation came in the Carter administration, but he does not address that topic. Supply-side economics is alleged to have led to “growing economic inequality and growing economic deprivation” (p. 235), but it seems more reasonable to blame monetarism for that; Reagan’s tax cuts were as likely to have caused aggregate demand to expand as aggregate supply. Rosenberg takes the discussion one step farther; he argues one of the policy’s aims was to weaken the bargaining power of labor — as evidenced by Reagan’s response to the air traffic controllers’ strike. Consistent with this were policies aimed at welfare reform, including actions relating to equal opportunity and affirmative action. In the final chapter, Rosenberg contrasts the expanding economy during the Clinton administration to the “stymied” agenda of the labor movement — the adoption of NAFTA being a case in point.

This book is interesting, thought-provoking reading for those who have a prior familiarity with the history. This is a book with a particular bias, and it is not recommended for those who would have difficulty isolating the consequences of that bias.

Louis P. Cain is Professor of Economics at Loyola University Chicago and Adjunct Professor of Economics at Northwestern University. With the late Jonathan Hughes, he is author of American Economic History (2003) where one can visit alternative biases on these topics.