American Economic Development since 1945: Growth, Decline and Rejuvenation

The US economy was prosperous for much of the 1920s. However, toward the end of the decade, in August 1929, the economy began to contract. It was not the start of a mild recession. Rather, it was the beginning of the most serious economic depression experienced in the United States. Worldwide in scope, the Great Depression, lasted from 1929 to 1939. This economic catastrophe was the catalyst for the New Deal. While the New Deal federal governmental economic, social and labor policies represented significant new directions in federal policymaking, they did not lead to the end of the Great Depression. Rather, it was not until the country mobilized for war in 1940 that the economy emerged from the Great Depression.

Rapidly increasing military spending during the Second World War pulled the United States out of the Great Depression. The dramatic transformation from a peace-time to war-time economy required a massive mobilization of factors of production.

With the ending of the Second World War, many economists predicted, and many people feared, that the economy would plunge into a depression. Production for war would cease; the federal government would cut back its demand for goods and services. No other source of demand would replace it and overall production levels would decline. This prediction was incorrect. There was a great demand for consumer goods and investment goods, including plant and equipment for replacement, modernization, and expansion, and housing and exports.

With the ending of Second World War, great uncertainty surrounded labor—management relations. Both parties wanted to move from the regulated environment of the war period to a more unregulated “free collective bargaining.” Unions felt wage increases were long overdue, especially given their perception of high levels of corporate profits earned during the war. Management, on the other hand, felt profit margins were too low due to unfair price controls. While both labor and management desired free collective bargaining, the terrain over which bargaining was to occur and the tactics to be used were in dispute. A government convened Labor—Management Conference ended in failure. Agreement could not be reached on the dividing line between labor prerogatives and management rights.

During the Second World War, policymakers in several countries developed alternative frameworks to govern monetary and financial relations between nations after the war. In 1944, representatives of 44 nations met at Bretton Woods, New Hampshire to create a new international monetary system. The Bretton Woods arrangements strongly reflected the preferences of the US government. This was not accidental. The United States was the dominant economic and military power at the time. The dollar was the key currency in the system; its value was tied to gold. All of the other currencies had fixed exchange rates relative to each other and relative to the dollar. But, it would be more than a decade before currencies would become fully convertible.

During the 1960 presidential campaign, one of John F. Kennedy’s favorite themes was the “need to get America moving again.” But he did not believe that there were any major structural problems in the economy, nor did he feel that there were many major domestic problems which needed to be solved. However, this particular theme was not merely campaign rhetoric. It did capture some of the essence of the contemporary economic situation.

The “hard line” of management continued into the early 1960s. Contractually based work rules and noncontractual shop floor practices were in dispute. Employers wanted to increase the use of mechanization and introduce new automated technologies. Workers wished to protect their jobs and their power on the shop floor. Bargaining over compensation took place within the limits set by the guideposts. While the Kennedy administration wished to encourage the growth of collective bargaining, their guideposts set limits on the ability of unions to exercise their bargaining power, thereby reinforcing the hand of management.

Collective bargaining led to higher living standards for many union members, including black and white women and black men who were able to be employed in jobs organized by large industrial unions. But many other women and black men, benefiting little from the postwar economic prosperity, were left out. Many employers and unions persisted in racial and gender discrimination. Some employers, either on their own or in collusion with unions, only hired white men. Others, though willing to hire women and black men, often barred them from the more desirable positions. Even as late as 1960, some American Federation of Labor (AFL)—Congress of Industrial Organizations (CIO) affiliates were closed to blacks. Other affiliates restricted black workers to segregated locals.

During the 1970s, the US economy suffered from stagflation. The simultaneous occurrence of high rates of inflation and high rates of unemployment were the outward manifestation of a more fundamental problem, the decline of the US dominance in the world economy. At the same time as the rate of economic growth was slowing, foreigners were, in effect, increasing their claims on the real output produced in the United States. Western European and Japanese firms were becoming more formidable competitors on the world scene. Oil producing countries were demanding a larger share of world output. If the increased claims of foreigners were to be satisfied, in the context of a slowly growing economy, a noninflationary situation required the claims of those living in the United States to be scaled back (Rosenberg and Weisskopf, 1981).

Given the decline of US dominance in the world economy, the American economy was not growing fast enough to satisfy the claims being paced on it by those living in the country. Labor and management were struggling over the production and distribution of income. American workers wanted higher living standards. Though many were jobless in the 1970s, organized labor still maintained enough bargaining power to push up nominal wages and widen the pay gap between union and nonunion workers. Nevertheless, while nominal wages rose, real wages did not. Employers were trying to improve their real return from profits. Conflicts between labor and management emerged over the work process and the rate of production. Employers were able to maintain profit rates but were not able to raise them to levels existing before the “profit squeeze” of the late 1960s.

Seeking to reverse the economic decline of the 1970s, raise the average rate of profit and improve the overall productive efficiency of the economy, the Reagan administration, having a conservative Republican bent, pursued a policy agenda designed to restructure the economy by freeing up market forces. Ideologically, the federal government was attacked as the most important cause of the economic problems facing the United States, both domestically and internationally. Programmatically, this attack on the state, on the one hand, translated into reducing tax and regulatory burdens faced by businesses along with taxes on the wealthy. On the other hand, it also led to a weakening of the minimal social protection policies benefiting workers in general and the poor in particular. Two thrusts of state labor market policies were apparent. The first was to increase competition in the labor market at a given level of unemployment, by reducing the social wage and lowering the effective minimum wage. The second was to reduce union power through higher aggregate levels of unemployment, increased labor market competition and the reinterpretation of existing industrial relations legislation in a pro-business manner.

In his 1992 run for the Presidency, William Clinton stated that the critical issue of his campaign was the economy. Rather than leading to strong economic growth benefiting the entire population, the policies of the Reagan and Bush administrations contributed to rising inequality amidst economic stagnation. What was needed was a new economic program, one which “put people first,” one which “put America back to work” (Clinton, 1992). He emphasized economic growth, a quite conventional goal, to occur by fostering free enter-prise and free trade, quite conventional means to achieving growth. Nevertheless, in contrast to the Republican push for a more laissez-faire economy, the Clinton program allowed for a more activist government that would spur the economy. Furthermore, if elected, Clinton would force the wealthy to pay their fair share of taxes, thereby reversing some of the excesses of the Reagan years. The middle class would receive tax breaks, and tax credits would provide the poor with stronger incentives to work.