Pivotal Decade: How the United States Traded Factories for Finance in the Seventies

Published by EH.NET (August 2010)

Judith Stein, Pivotal Decade: How the United States Traded Factories for Finance in the Seventies. New Haven, CT: Yale University Press, 2010. xvi + 367 pp. $32.50 (hardcover), ISBN: 978-0-300-11818-6.

Reviewed for EH.NET by Joshua C. Hall, Department of Economics, Beloit College.

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According to the preface of Pivotal Decade, historian Judith Stein decided to start writing the book after learning ?that the 1970s was the only decade other than the 1930s wherein Americans ended up poorer than they began? (p. xi). Curious about the source of this fact, I flipped to the back expecting to see a citation to The Statistical Abstract of the United States or perhaps some secondary source. Instead the endnote provided only further detail about the claim, namely that earnings for nonagricultural workers fell by nearly 13 percent during the decade. While this is true when real money earnings are adjusted for unemployment (see, for example, Lebergott 1993), it is in large part a product of the endpoints, given that 1980 was during a recession and 1970 was not. My dissatisfaction with this small point is symptomatic of my perspective on the entire volume, namely that it is long on information but short on analysis.

This is not to say that the raison d??tre of the book is bad. In fact, I applaud Stein for pushing back against purely cultural and political explanations of changes in economic policy that came out of the 1970s (see, for example, Schulman 2001). Exploring the reasons for the decline in Keynesian-style economic policy in the United States is an interesting idea for a book, given the wide variety of possible reasons and weights that can be given to factors such as ideas and ideology. For example, what role, if any, did the breaking up the neoclassical synthesis within the economics profession have on economic policy? ?Unfortunately, Stein?s in-the-moment style of writing does not provide much insight into that question.

Pivotal Decade is divided into eleven chapters, each of which focuses on a particular theme and period of time, although when necessary Stein backtracks in later chapters in order to fill in the necessary background information. The first chapter (?The Great Compression?) and the last chapter (?Age of Inequality?) bookend Stein?s thesis, which is that the 1970s is when the United States transitioned from an ?age of compression? to an ?age of inequality? as a result of changes in underlying economic principles that guided economic decision-making. The title of the first chapter comes from the famous Goldin and Margo (1992) article explaining the compression of the wage structure in the United States during the post-World War II period. While Goldin and Margo attribute the great compression to several factors, including increases in the supply of educated labor, high demand for unskilled labor, and strong unions and minimum wage laws, Stein makes clear that she thinks it is the result of Keynesianism. ?The Keynesian idea that the state could promote employment fostered policies that produced the Great Compression,? she writes on page 3. Here Stein engages a bit in comparative analysis by showing how Keynesian policies pervaded Europe and Japan as well.

Chapters 2 through 9 fill in the story of the politics and economics of the 1970s. Chapter 2 on ?Affluence Challenged and Restored,? for example, deals with the election of Richard Nixon in 1968 and his general continuation of Keynesian policies (except perhaps for the decision to float exchange rates). Stein praises Nixon on page 50 for his wage and price controls that caused inflation to fall to 3.2 percent and argues that the ?president?s actions … rejuvenated the politics of the affluent society [Keynesian liberalism] for at least another election.?

I found Chapter 3 on the 1972 presidential election to be the most interesting chapter in the book. Stein details several very important electoral changes that had occurred within the Democratic Party prior to the 1972 election of which I was previously unaware. For example, prior to the 1972 election, state parties controlled between two-thirds to four-fifths of all delegates. Beginning with the 1972 election, however, state central committees were only allowed to appoint ten percent of the delegates. The entire section on the post-1968 Democratic Party reforms (pp. 51-57) is really interesting and seems to me to be quite useful in explaining the nominations of both George McGovern and Jimmy Carter.

Chapters 4 and 5 explain the rise of OPEC and its effect on U.S. trade policy as well as domestic politics. A considerable amount of Chapter 4 is of the ?here is what happened? variety, while Chapter 5 deals with domestic policy battles over how to deal with higher oil and food prices during the 1973 to 1976 period. In Chapter 6, Stein discusses the battle over the 1976 presidential nominations in both major parties and the eventual election victory of Carter. This chapter is a great example of where I feel the book could have benefitted from a little more theory, as an understanding of the literature on political business cycles (Heckelman 2001) would have provided a better framework with which to understand the role of the economy in the 1976 election.

The remaining chapters before the conclusion deal with the conditions under which Keynesian economic policy began to lose favor in the United States from 1977 through 1980. Chapter 7 discusses its decline in international affairs, Chapter 8 is about domestic affairs, and Chapter 9 revolves around the economics and politics of the 1979 oil crisis. While these chapters are good at describing what was going on at the time, they really do not help the reader to sort out why certain ideas won out. One of my biggest frustrations with the book became apparent at this point when I noticed that Stein continually discusses the most important issue of the day — inflation and unemployment — but never once mentions the mental model underlying some policymakers? views of macroeconomic policy at the time, the Phillips Curve. ?For a book on changes in economic policy during the 1970s to not mention the Phillips Curve seems to me to be an unpardonable sin.

Chapter 10 discusses Paul Volcker?s raising of interest rates in 1979 and the surprise with which this caught the Carter administration. Here the author is focused almost exclusively in the very short-run. For example, she continually criticizes the Volcker Fed for the economy of 1979 and 1980 without any consideration of the long-run effects of their anti-inflationary stance. ?The president was disappointed that Volcker?s monetarism did not reduce inflation. And, as many predicted, the domestic economy lost out? (p. 227). She goes on to note on page 236, ?If monetarism had been graded at the end of 1980, it would have received an F.? Perhaps one reason for Stein?s negativity is that she does not believe that high inflation is bad for long-term growth (p. 282). Finally, Chapter 11 concludes by talking about what Stein calls the ?age of inequality? that has existed since Reagan first took office and that has persisted through both Republican and Democrat administrations.

I cannot recommend Pivotal Decade for three main reasons. First, the level of analysis never gets beyond describing what happened and what arguments people involved might have made for a policy. That is not analysis, it is journalism. Second, to the extent that the author uses the economic literature, she does not use it in a manner that tries to convince the reader who is not already predisposed to her argument. For example, nowhere in the chapter ?The End of Equality? does she use the work of Picketty and Saez (2003), who she briefly cites in an endnote in Chapter 1. In addition, beyond facts about rising CEO compensation, she doesn?t really present any data that things were getting less equal (which the work of Picketty and Saez and others suggest is the case). Third, the failure to even mention the Phillips Curve or to grapple with the fact that the failure of simplistic Keynesian models to explain stagflation created a vacuum that generated entirely new schools of macroeconomic thought — such as New Classical and New Keynesianism — is such a glaring omission that it makes it hard to take seriously anything else in the volume.

References:

Claudia Goldin and Robert Margo, ?The Great Compression: The Wage Structure in the United States at Mid-Century,? Quarterly Journal of Economics 107 (1992): 1-34.

Jac Heckelman. ?Historical Political Business Cycles in the United States,? EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL http://eh.net/encyclopedia/article/heckelman.political.business.cycles

Thomas Piketty and Emmanuel Saez. ?Income Inequality in the United States, 1913-98,? Quarterly Journal of Economics 118 (2003): 1-39.

Stanley Lebergott, ?Wages and Working Conditions,? in David Henderson, editor, The Fortune Encyclopedia of Economics. New York: Warner Books, 1993: 503-07.

Bruce Schulman, The Seventies: The Great Shift in American Culture, Society, and Politics. New York: Simon and Schuster, 2001.

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Joshua C. Hall is an assistant professor of economics at Beloit College and, most recently, the co-author of the Economic Freedom of the World: 2010 Annual Report.

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