Category Archives: Economics 101

The Rise And Fall Of The American Middle Class – William Lazonick. 

Social Europe

William Lazonick is a Professor at the University of Massachusetts Lowell, where he directs the Center for Industrial Competitiveness. He is also a Visiting Professor at the University of Ljubljana where he teaches a PhD course on the theory of innovative enterprise. Previously he was an Assistant and Associate Professor of Economics at Harvard University, Professor of Economics at Barnard College of Columbia University, and Visiting Scholar and then Distinguished Research Professor at INSEAD.


The ‘fountain pen of money’ – Bryan Gould. 

Steven Joyce, NZ Minister of Finance, has recommended the formal establishment of a committee to help the Governor of the Reserve Bank decide on where to take interest rates, thereby following the example of other central banks around the world.

Also Grant Robertson, Labour’s shadow Finance Minister, has made a similar recommendation concerning a Monetary Policy Committee to help the Governor, but has also followed another overseas example by supporting an extension of the Governor’s remit, so that he would, in addition to restraining inflation, be required to take account of the desirability of full employment.

Most people believe, and it is a belief assiduously promoted by the banks themselves, that the banks act as intermediaries between those wishing to save and those wishing to borrow, usually on mortgage.

In this view, the banks are benefactors, bringing together those with money to spare and to deposit with them, and those who wish to borrow, often for house purchase.

The banks make their money, so it is said, by charging a higher rate of interest to the borrowers than they pay to the depositors, the equivalent of a small fee for the administrative costs of bringing the parties together.

But this benign view of their operations is inaccurate and misleading. The banks do not lend you on mortgage money deposited with them by someone else.

They lend you money that they themselves create out of nothing, through the stroke of a pen or, today, a computer entry.

The banks make their money, in other words, by charging interest on money that they themselves create. Not surprisingly, they are keen to lend as much as possible.

But the consequences of this bizarre scenario go much further. It is the willingness, not to say keenness, of the banks to lend on mortgage that provides the virtually limitless purchasing power that is constantly bidding up the prices of homes in Auckland and, now, elsewhere.

It is the banks that are fuelling the housing unaffordability crisis, a crisis that is leaving families homeless and widening the gap between rich and poor.

So far, the government has washed its hands of this aspect of the crisis.

It is content to leave the crucial decisions on monetary policy to the Reserve Bank.  That way, it can disclaim responsibility and leave the Governor, himself a banker, to carry the can.

Leaving monetary policy (which is usually just a matter of setting interest rates) to the Reserve Bank is usually applauded as ensuring that it does not become a political football. But monetary policy should have a much greater role than simply restraining inflation and has a huge influence on so many aspects of our national life.

Why should the Government be able to hide behind the Governor of the Reserve Bank and duck responsibility for a policy of the greatest importance to so many Kiwis?  Why should ministers not be held to account in Parliament and to the country for failing to deliver outcomes they were elected to deliver?

It is no surprise a former Governor of the Reserve Bank should seek to defend the banking system from its critics. But in denying the accuracy of points I made in the Herald about how the banks operate, Don Brash accused me of “peddling nonsense”.

I made two basic points. First, I asserted the banks do not, as usually believed, simply act as intermediaries, bringing together savers (or depositors) and borrowers to their mutual benefit.

Secondly, I said the vast majority of new money in circulation is created by the banks “by the stroke of a pen”, and they then make their profits by charging interest on the money they create.

If this is “nonsense”, the “peddlers” include some very distinguished economists.

In my original piece, I referred to a Bank of England research paper, published in the bank’s first Quarterly Bulletin 2014, which describes in detail the process by which banks create money.

“One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. That ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. Rather than banks lending out deposits that are placed with them, the act of lending creates deposits – the reverse of the sequence typically described in textbooks.

Bank deposits make up the vast majority – 97 per cent of the amount of money currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money – the so-called ‘money multiplier’ approach, but that is not an accurate description of how money is created in reality.

Banks first decide how much to lend depending on the profitable lending opportunities available to them – which will, crucially, depend on the interest rate set. It is these lending decisions that determine how many bank deposits are created by the banking system.

The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Central Bank.

Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.

For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.”

Commercial banks create money, in other words, by placing loans [or credits] into the bank accounts of borrowers. They then charge interest on, and demand security for and repayment of, those loans.

They have no capacity to create money in any other way or for any other purpose [though the central bank can pursue “quantitative easing” to increase the money supply if it thinks that is needed].

Is it wise to entrust such wide-ranging powers – so significant in their impact on the whole economy – to the banks, and then to arrange that the only person able to regulate that impact was himself a banker – the Governor of the Reserve Bank.

Bryan Gould


Modern Money Theory: Deadly Innocent Fraud #7: It’s a bad thing that higher deficits today mean higher taxes tomorrow. – Warren Mosler. 

Fact: I agree – the innocent fraud is that it’s a bad thing, when in fact it’s a good thing!!!

Why does government tax? Not to get money, but instead to take away our spending power if it thinks we have too much spending power and it’s causing inflation.

Why are we running higher deficits today? Because the “department store”has a lot of unsold goods and services in it, unemployment is high and output is lower than capacity. The government is buying what it wants and we don’t have enough after-tax spending power to buy what’s left over. So we cut taxes and maybe increase government spending to increase spending power and help clear the shelves of unsold goods and services.

And why would we ever increase taxes? Not for the government to get money to spend – we know it doesn’t work that way. We would increase taxes only when our spending power is too high, and unemployment has gotten very low, and the shelves have gone empty due to our excess spending power, and our available spending power is causing unwanted inflation.

So the statement “Higher deficits today mean higher taxes tomorrow” in fact is saying, “Higher deficits today, when unemployment is high, will cause unemployment to go down to the point we need to raise taxes to cool down a booming economy.” Agreed!

Modern Money Theory: Deadly Innocent Fraud #6: ​We need savings to provide the funds for investment. – Warren Mosler. 

Fact: Investment adds to savings.

This innocent fraud undermines our entire economy, as it diverts real resources away from the real sectors to the financial sector, with results in real investment being directed in a manner totally divorced from public purpose. It might be draining over 20% annually from useful output and employment – a staggering statistic, unmatched in human history. And it directly leads the type of financial crisis we’ve been going through.

“The paradox of thrift”

(The paradox of thrift (or paradox of saving) is a paradox of economics. The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving. The paradox is, narrowly speaking, that total saving may fall because of individuals’ attempts to increase their saving, and, broadly speaking, that increase in saving may be harmful to an economy.

Both the narrow and broad claims are paradoxical within the assumption underlying the fallacy of composition, namely that what is true of the parts must be true of the whole. The narrow claim transparently contradicts this assumption, and the broad one does so by implication, because while individual thrift is generally averred to be good for the economy, the paradox of thrift holds that collective thrift may be bad for the economy. Wikipedia)

– In our economy, spending must equal all income, including profits, for the output of the economy to get sold.

– If anyone attempts to save by spending less than his income, at least one other person must make up for that by spending more than his own income, or else the output of the economy won’t get sold.

– Unsold output means excess inventories, and the low sales means production and employment cuts, and thus less total income. And that shortfall of income is equal to the amount not spent by the person trying to save.

Think of it as the person who’s trying to save (by not spending his income) losing his job, and then not getting any income, because his employer can’t sell all the output.

So the paradox is, “decisions to save by not spending income result in less income and no new net savings.” Likewise, decisions to spend more than one’s income by going into debt cause incomes to rise and can drive real investment and savings.

“Savings is the accounting record of investment.” Professor Basil Moore

Unfortunately, Congress, the media and mainstream economists get this all wrong, and somehow conclude that we need more savings so that there will be funding for investment. What seems to make perfect sense at the micro level is again totally wrong at the macro level. Just as loans create deposits in the banking system, it is investment that creates savings.

So what do our leaders do in their infinite wisdom when investment falls, usually, because of low spending? They invariably decide “we need more savings so there will be more money for investment.”(And I’ve never heard a single objection from any mainstream economist.) To accomplish this Congress uses the tax structure to create tax-advantaged savings incentives, such as pension funds, IRA’s and all sorts of tax-advantaged institutions that accumulate reserves on a tax deferred basis. Predictably, all that these incentives do is remove aggregate demand (spending power). They function to keep us from spending our money to buy our output, which slows the economy and introduces the need for private sector credit expansion and public sector deficit spending just to get us back to even.

In fact it’s the Congressionally-engineered tax incentives to reduce our spending (called “demand leakages”) that cut deeply into our spending power, meaning that the government needs to run higher deficits to keep us at full employment. Ironically, it’s the same Congressmen pushing the taxadvantaged savings programs, thinking we need more savings to have money for investment, that are categorically opposed to federal deficit spending.

And, of course, it gets even worse! The massive pools of funds (created by this deadly innocent fraud #6, that savings are needed for investment) also need to be managed for the further purpose of compounding the monetary savings for the beneficiaries of the future. The problem is that, in addition to requiring higher federal deficits, the trillions of dollars compounding in these funds are the support base of the dreaded financial sector. They employ thousands of pension fund managers whipping around vast sums of dollars, which are largely subject to government regulation. For the most part, that means investing in publicly-traded stocks, rated bonds and some diversification to other strategies such as hedge funds and passive commodity strategies. And, feeding on these “bloated whales,” are the inevitable sharks – the thousands of financial professionals in the brokerage, banking and financial management industries who owe their existence to this 6th deadly innocent fraud.

New Zealand’s Neoliberal Drift – Branko Marcetic. 

In New Zealand, neoliberal reforms have widened inequality and undermined the country’s self-image as an egalitarian paradise.

A few years ago, when the 2008 global financial crisis was just one or two years old, a coworker and I were talking about the increasingly common sight of homeless people in Auckland, New Zealand. While homelessness in Auckland was nothing new, we agreed that we were seeing more and more men and women curled up in doorways, draped in layers of old clothes and blankets, and holding up tattered signs asking passers-by for money on Queen Street, the city’s main commercial hub.

It was sad, I remarked, that while the problem seemed to be getting worse, the government seemed to be doing very little to help these people escape poverty. She too expressed sympathy for the poor and stressed the importance of giving them a leg up, but confessed she found it difficult to feel bad for homeless people. After all, New Zealand had a generous welfare state that made sure no one was left behind.

“I mean, if you can’t make it in New Zealand,” she said, “then there must be something really wrong with you.”

Her attitude is not particularly unusual — millions of New Zealanders share it. The image of New Zealand as a kind-hearted social democracy, a Scandinavia of the South Pacific, is deeply engrained in its culture.

In fact, this view extends far beyond the country’s borders. A Kiwi in the United States is likely to field three common queries: questions about the country’s natural beauty, about The Flight of the Conchords, and about how much more progressive New Zealand is than America. (There’s an occasional fourth that has something to do with Lord of the Rings.)

To be clear, New Zealand has earned this reputation. Its quality of life is consistently ranked among the highest in the world. In metric after metric — whether examining corruption or life expectancy — it rates well above average. Perhaps most significantly, New Zealanders themselves report extreme satisfaction with their lives.

All of these accolades cover up another truth, however: New Zealand hasn’t been a social-democratic paradise for a long time now. Often considered a “social laboratory,” New Zealand eagerly adopted radical neoliberal reforms in the 1980s like few countries before or since. Nevertheless, its kindly image persists, in and out of the country.

A Social-Democratic Laboratory

All countries have narratives. In United States, it’s the “American Dream,” the idea that hard work makes millionaires. In New Zealand, it’s the idea that a benevolent, liberal state will look after its people.

This self-image can be traced back to the period between 1890 and 1920, when the country became known as the “social laboratory of the world.” By then, New Zealand already had a long egalitarian streak: it established government life insurance in 1869 to help those who couldn’t afford private plans, assisted new immigrants, and embarked on an expensive public works scheme to lay roads and railway lines. But in 1879, a severe depression dented New Zealanders’ widespread belief in the free market and individualism.

The Liberal governments of Richard Seddon and then Joseph Ward, which first took power in 1893, passed a flurry of social welfare reforms, including distributing free textbooks, improving workplace conditions, establishing food and drug standards, and breaking up large estates to provide land for settlers. The Industrial Conciliation and Arbitration Act of 1894 instituted a guaranteed minimum wage and a system of compulsory arbitration for settling industrial disputes. The 1898 Old Age Pensions Act created one of the world’s earliest public pension schemes, even if it was small, means-tested, and only applied to “persons of good character.” (Much of this came at the expense of the indigenous Maori, who were dispossessed of more and more of their land to make way for English settlers and railroad lines).

Foreign visitors returned with tales of an egalitarian paradise and “a country without strikes”. American Progressives drew on New Zealand’s example to push for similar changes back home.

New Zealand’s reputation for progressive enlightenment continued into the twentieth century, even as consistent labor agitation undermined its popular image. The benefits of its burgeoning welfare state expanded over the years, particularly during World War I, when it began covering widows, the blind, influenza victims, and consumption-stricken miners.

Then, like the rest of the world, the Great Depression devastated New Zealand’s economy. The downturn hobbled the country’s labor movement. Widespread economic suffering — exacerbated by the country’s lack of unemployment relief — swept the Labour Party to power in 1935. Its leader, Michael Joseph Savage, promised New Zealanders a “reasonable standard of living in the days when they are unable to look after themselves.”

The country’s first Labour government gave unemployed workers an immediate Christmas bonus, launched a state housing program, established compulsory union membership, and started a Keynesian scheme of guaranteed prices for exports. The centerpiece of its stimulus package was the 1938 Social Security Act, which established universal superannuation for those sixty-five or older, universal free health care (at least in theory), and welfare payments for the poor and unemployed. Savage died trying to enact this bill, putting off cancer surgery to help get it passed and win that year’s election. (Once again, Maori were left out — the law’s language gave officials wiggle room to discriminate and pay them reduced benefits).

Perhaps most importantly, however, the government’s commitment to full employment would endure for decades to come. Successive Labour governments paired this policy with a gradually increasing family allowance, culminating in 1946, when a universal benefit for all families with children passed.

By 1949, the International Labor Organization (ILO) claimed the Social Security Act had “deeply influenced the course of legislation in other countries.” English prime-minister-to-be Clement Atlee praised New Zealand as “a laboratory of social experiment.” In 1944, Labour prime minister Walter Nash wrote that the country offered a “practical example” of what “may well become typical of most democracies tomorrow.”

While Labour’s time in power ended in 1949, its policies of government intervention New Zealand endured. The country remained a highly controlled economy with an extensive welfare state and widespread state ownership in various sectors through the 1970s. Government-guaranteed full employment enjoyed bipartisan support. Even Robert Muldoon, who served as the right-wing National Party’s prime minister from 1975 to 1984, once joked that he knew all seventy unemployed New Zealanders by name.

Weird Science

This all changed in the mid-1980s. As in the Depression years, a crisis sparked a political sea change. New Zealand lost a major trading partner with the United Kingdom’s turn to Europe in 1973, while a series of oil shocks through the 1970s plunged the country into recession. In 1965, New Zealand ranked as the sixth wealthiest country per capita; fifteen years later, it fell to nineteenth.

Again like in the 1930s, the Labour Party implemented a major political transformation, making New Zealand once again a “laboratory of social experiment.” But this time, Labour responded to the crisis by deregulating, selling off public assets, and slashing state investment.

The reforms came to be known, somewhat derisively, as “Rogernomics,” after the finance minister Roger Douglas, who would go on to found ACT, a radical free-market party that has recently embraced US Republican-style law-and-order policies. Prime Minister David Lange acted as an affable and charming salesman for the reforms but had little interest in either economics or policy more generally. For the most part, he allowed his team to experiment with the economy however they liked.

Through the 1980s and 1990s — first under Labour, then under National Party rule — New Zealand ushered in neoliberal reform on an unprecedented scale. Controls on wages, prices, rents, interest rates, and more were scrapped. Finance markets were deregulated, and restrictions on foreign investment were removed or relaxed. Based on the belief that welfare helped create unemployment by encouraging dependency, the system was overhauled in ways that the government’s own official encyclopaedia describes as “particularly swift and severe.”

In 1986, Labour slashed the tax rate for high-income earners and introduced a goods-and-services tax. This change effectively hiked taxes on low- and middle-income earners, given that they spend a larger proportion of their earnings on consumption. (Douglas even tried to institute a flat tax, which turned out to be a step too far for Labour.) Legislation in 1991 eliminated hard-fought reforms like compulsory union membership, compulsory employer-employee bargaining, and unions’ special place in this process.

Most state-owned assets were fully or partially sold off, including three banks, the Tower insurance company, shipping companies, the national airline and the country’s main airport, and various energy companies, among many others. In some cases, the results were disastrous, as when National sold off the country’s national rail network to a consortium of financial companies, who soon ran it into the ground forcing a government buyback. It wasn’t the only privatized asset the government later had to rescue. 

Government disinvestment from public services abandoned the most vulnerable citizens. Nearly all psychiatric hospitals closed down by the 1990s, their responsibilities passing on to nongovernmental organizations. University tuition fees shot up by nearly 1,000 percent in 1990 and have climbed steadily ever since. The price of attending college in New Zealand now ranks as the industrial world’s fourth highest. The abrupt end of farm subsidies and protectionist policies hit farmers hard, plunging them into debt and leading to a spate of suicides. One prominent Kiwi recalled seeing a beggar on the streets of New Zealand for the first time in his mid-fifties, an experience he described as “like being kicked in the stomach.”

All of this happened at a dizzying pace. And it had to because the reforms were hugely unpopular.

“It is uncertainty, not speed, that endangers the success of structural reform programs,” wrote Roger Douglas in 1993. “Speed is an essential ingredient in keeping uncertainty down to the lowest possible level.” Douglas would later reportedly advise foreign leaders to keep their equivalent programs hidden from the public and to implement them as quickly as possible to bypass opposition.

New Zealand once again became a global poster child for policy innovation, as Jane Kelsey outlines in The New Zealand Experiment. The New York Times gushed that a “heavily protected, over-regulated, high inflation economy” had been turned into “one of the most open in the world.” The Financial Times claimed New Zealand offered a “blueprint for a shrinking state.” The Wall Street Journal applauded that “this little Prometheus unchained itself from a rock of high taxes, high tariffs, heavy welfare burdens, and pro-union labor laws,” and celebrated that “anybody can follow New Zealand’s example to prosperity.” None praised New Zealand more than the Economist, however, which ran story after story on what it called a “free market experiment in socialist sheep’s clothing” that was “out-Thatchering Mrs Thatcher.”

New Zealand’s neoliberal employment reforms attracted policymakers’ attention internationally. In 1996, Newt Gingrich — then House Majority Leader — sent a congressional delegation to study the country as a “model” for industrial relations deregulation. Powerful neoliberal institutions like the IMF, the Asian Development Bank, and the World Bank exported New Zealand’s grand “experiment,” organizing and funding study trips, speaking tours, seminars, and reports that promoted the program.

Partly thanks to this, countries like Mongolia and Thailand copied New Zealand in their own reforms and worked closely with prominent architects of the experiment. In 1998, New Zealand’s minister of international trade boasted that the “success of New Zealand’s economic reforms” was now as internationally well known as its sheep, its rugby team, and its milk brand.

If you look narrowly at metrics like inflation and government debt, the reforms worked. If you look at more fundamental economic measures like employment, income levels, and economic growth — all of which free-market policies are supposed to boost — they were a miserable failure.

The economy shrank by 1 percent between 1985 and 1992, while other countries in the OECD saw 20 percent growth. Poverty skyrocketed, with one in six falling below the poverty line by 1992. Unemployment jumped, too, and even when it later fell, much of the recovery was in part-time work. Income inequality widened sharpley, with the bulk of income gains going to the country’s wealthiest citizens.

Binging on Neoliberalism

While these reforms profoundly shifted New Zealand’s politics, citizens’ self-image hasn’t kept pace. There remains a prevailing view that their country is an idyllic paradise apart from the rest of the world’s ills that, if anything, is too generous to its less advantaged citizens.

Surprisingly, many business leaders believe that New Zealand is an over-regulated, antibusiness economy hostile to economic success. Complaints that companies are mired in “red tape” never seem to end. CEOs regularly report that fear of regulations keeps them up at night.

These beliefs stand at odds with reality. Three times since 2005, New Zealand has topped the World Bank’s annual “Ease of Doing Business” report, which measures regulations that, at least according to the World Bank, enhance and constrain business activity. Every other year, it’s come third or, more often, second. It ranked first twice during Helen Clark’s Labour government, which often faced accusations that its legislation was making it impossible for businesses to succeed.

Furthermore, Forbes has listed New Zealand in the top three “best countries for business” each year since 2010. It ranked first in 2012. Two years later, Forbes called it best in the world when it came to “red tape.”

Every year since 2009, the conservative Heritage Foundation has put New Zealand in the top five countries for its “Index of Economic Freedom.” Investment banker and right-wing commentator Peter Schiff said he would like to live in New Zealand because of its lack of governmental interference.

Resistance to “the nanny state,” a paternalistic government unreasonably worming its way into every little of detail of individuals’ lives, has also become widespread. This belief most commonly finds its expression in complaints about the welfare program, which many think discourages hard work and desperately needs to be cut back. This narrative took center stage from 1999 to 2008, when Clark’s Labour government went some way toward slowing, though not ultimately reversing, the march of neoliberalism.

New Zealanders would be shocked to find that since 2001 and throughout all of the Labour years, social spending as a percentage of GDP has been on or below the OECD average. New Zealand has consistently appeared in the lower half of OECD social spending, closer to the United States than to countries like Finland, Denmark, Sweden, and even France and Germany, which rank far above it.

Nonetheless, popular myths about New Zealand’s safety net persist. Tales abound of unscrupulous beneficiaries gaming the system and ripping off taxpayers, or of apparently sociopathic parents churning out children just to receive more paltry benefits. Much of this is based on anecdotal evidence and high-profile yet rare incidents that receive heavy publicity. As per usual, it is also heavily racialized — the “dole bludger” that exists in popular imagination is usually Polynesian — even though 44 percent of working-class welfare recipients are Pakeha, or white.

The dramatic changes to the welfare system made by John Key’s National Government, which took power in 2008, are founded on these myths. As of 2012, single parents who wanted to keep their benefits had to start looking for work as soon as their child turned five (previously, they could wait until the child was eighteen); parents who had children while on welfare had to start job-hunting after one year. These changes enjoyed wide approval, even among voters who identified as left-leaning. Two years later the government promised to cut welfare rolls by a further 25 percent.

Meanwhile, charities like the Salvation Army reported a massive strain on their resources as overwhelming demand for food and other assistance outstripped their ability to provide it. Poverty, a normalized, structural feature of the New Zealand economy since the 1980s, has reached shameful levels: a third of the country’s children now live in poverty, and an increasing number of families live out of their cars as rents in cities go up.

Meanwhile, attitudes have hardened. A 2013 bill that would have provided free breakfasts and lunches at schools in low-income neighborhoods failed after the opposition called it “an abdication of responsibility of parenting.” One influential right-wing blogger and pollster mocked the bill as a plan to “replace parents”:

[I]f a family is so incompetent that [it] can’t arrange breakfast or lunch for their kids, then surely we can’t trust them to do dinner also . . . So I think we also need huge state owned dining places where kids can get their dinners for free.

After businessman and one-time Trump prototype Bob Jones said beggars were “fat Maoris” and “a bloody disgrace,” an online poll found that 72 percent of the nearly forty thousand respondents thought begging should be outlawed.

Such views also spurred a recent crackdown on welfare fraud, which saw as many as one thousand people a year being prosecuted for costing the country around $30 million annually. By contrast, less than a tenth of that number are prosecuted for tax evasion, despite the fact that this problem cheats taxpayers of $1 billion annually.

Public services have been further hollowed out over the past nine years. In its quest for budget surpluses, no matter how small and meaningless, the Key government slashed health funding, relentlessly defunded the Department of Conservation, and cut support for education at all levels. It has ramped up privatization over public objections, ignoring the fact that selling profitable state-owned assets for a one-time payment makes little economic sense.

Workers’ rights have also been steadily undermined — a stunning fact for a country once viewed as an international model for its labor laws.

Shortly after coming to office, the National Party introduced a three-month probationary period for all new employees, during which they could be fired for any reason without appeal. A 2010 Department of Labor survey and a 2016 Treasury report found this extra flexibility had done nothing to help employment, but had simply cut “dismissal costs for firms” while creating uncertainty for workers, a fifth of whom had been fired under the provision.

In 2010, the government passed legislation that excluded film workers from the definition of employees. Warner Brothers had threatened to move the production of The Hobbit to Ireland if the change wasn’t made, and the measure had been both publicly urged and privately promoted to top policymakers by the film’s director, national treasure Peter Jackson.

Anti-union sentiment became so bad that a group of global unions issued a joint statement in 2012 calling for “an immediate end to concerted attacks on workers in New Zealand” and “an end to the union-busting measures.” More recently, the government narrowly succeeded in revoking workers’ long-held right to rest and meal breaks.

While the benefits once afforded to workers and the poor are slowly being eroded, it’s never been a better time to be wealthy. Inequality may not be as extreme as in other countries, but as journalist Max Rashbrooke notes, the wealth gap has widened more quickly than anywhere else in the developed world.

Certainly, the National Party’s tax policies have helped: in 2010, the Key government embarked on a series of reforms that gave the biggest cuts to high earners and further raised the goods-and-services tax — a stealthily regressive tax regime that undermined any gains for lower-paid workers.

While New Zealand has been hesitant to welcome Syrian refugees, its doors are open wide if the price is right. It offers the global rich two separate residency visas, one of which — the Investor Plus, introduced in 2009 — has only two conditions: émigrés must invest $10 million over three years and spend at least eighty-eight days in the country in the final two years.

Since then, there has been an uptick in ultra-wealthy individuals gaining residency. As Peter Thiel recently showed, citizenship appears to be easily available to those with a high enough net worth.

Indeed, a recent New Yorker article revealed that New Zealand has become a popular refuge for billionaires preparing for the breakdown of society. But this has been known for years, at least since Robert Johnson told  the Davos World Economic Forum in 2015 that hedge-fund managers were buying farms as “boltholes” to escape increasing unrest over inequality. New Zealand’s absurdly loose rules around foreign property ownership make this strategy possible: buyers don’t need visas and pay no stamp duty. Until recently, it was one of the few developed countries to have no capital gains tax. (Even now, it only applies to houses sold within two years of their purchase.)

New Zealand’s laws benefit the rich in other ways. For years, it operated as a tax haven, allowing foreigners to stash income in anonymous trusts and pay no tax on it. John Key expressly requested this rule, which a top law firm said would put New Zealand on even footing with the Cayman Islands, Luxembourg, and Ireland — all world-famous tax havens. While some have denied this label, the Panama Papers heavily implicated New Zealand and showed that these trusts more than quintupled from two to eleven thousand over a decade.

Ironically, the politicians behind this continued neoliberal rollback all directly benefited from the programs they are now dismantling. The social development minister who cracked down on single parents on welfare was once a single parent on welfare. Former prime minister John Key, whose government sold off thousands of state houses, grew up in a state house. Virtually everyone involved in the reforms that have burdened generations of young people with student debt enjoyed the right of free education.

But a significant part of the population has long since internalized the idea that this is simply the way it has to be. Just prior to Donald Trump’s victory, the New Zealand Listener (the country’s equivalent to Time magazine) criticized Trump and Bernie Sanders for “their unimplementable and often mendacious policy prescriptions.” Some of Sanders’s signature policies included a public health-care system and free college — both of which once existed in New Zealand (and one of which, public health care, still does, albeit in a modified form).

The First Step

Despite adulation from people like Peter Schiff, New Zealand is hardly the libertarian promised land. It continues to have a robust government involved in many aspects of its citizens’ lives.

But neither is New Zealand the progressive paradise that foreign travelers once breathlessly described — or that many of its citizens still believe it is. Perhaps it never was, given that ideas about self-reliance and individualism have always been central to its culture and self-conceptions.

Still, decades of neoliberal reforms have not only hardened social attitudes and eroded some of the country’s greatest legislative accomplishments, but also rolled back many of the elements central to its self-image. A country once proud of its egalitarianism now has higher income inequality than much of the developed world. A country once known for its prosperity now suffers with shameful levels of poverty. A country that markets itself as “clean and green” now must face the reality of its environmental degradation.

For the vast majority of the population, much of this remains invisible, which explains why Kiwis continue to view their country through social-democratic-tinted glasses. Perhaps if they looked more honestly, they could start to solve these problems.

Jacobin Magazine

 

Superpower trade war Looms. How it will affect New Zealand – Liam Dann.

“If America, China relations become very difficult, our position becomes tougher because then we will be coerced to choose.”

It’s a nightmare scenario for a small trading nation with historic cultural and political links to the US, but an increasing economic reliance on China.

A full blown trade war between China and the US could have devastating political consequences for us all.

In this case, it’s not New Zealand’s Prime Minister doing the worrying, it’s Singaporean leader Lee Hsien Loong.

His simple, blunt assessment of the risk posed by Donald Trump’s anti-China trade rhetoric caused a minor uproar in the diplomatically cautious Asian nation.

Here in New Zealand, where we face the same risks, we’re yet to officially confront the issue. And as issues go, it’s a big one: in the year to June 2016, New Zealand’s total trade (imports and exports) with China was $22.86 billion, compared to $16.25b with the US.

Reserve Bank governor Graeme Wheeler has spoken most openly about his fears for the economic risk to New Zealand if the Trump Administration does some of the things it has threatened to do.

In a speech last month, Wheeler suggested that Trump’s Administration represents the greatest source of uncertainty for our economy – both in terms of his impact on the domestic economy and his potential to increase global trade protectionism.

“Rationally speaking, there shouldn’t be a reason we should go into a trade war. But we have to be prepared,” says Auckland University Business School trade economist Dr Asha Sandaram.

China and the US are like Siamese twins, she says. In other words, their economies are now so intertwined that doing damage to one must hurt the other.

“I think they both know that if they start this, they will both go down. So I don’t think it should be a big risk. But the thing with Donald Trump, is you just don’t know. He has been running the most incoherent Administration we have seen,” Sandaram says.

“What he says today is not correlated with what he says tomorrow … and what he’ll actually do. So we have to consider the possibility of an escalating trade war.”

For anyone who relies on global trade, Trump has said some frightening things.

On the campaign trail, he talked about hitting Chinese imports with 45 per cent tariffs and accused China of currency manipulation.

Since becoming President, he has pulled the US out of the Trans-Pacific Partnership free trade agreement.

In a leaked recording, he has talked about imposing 10 per cent tariffs on all imports and is said to be considering border taxes.

His key trade adviser has been China hawk Peter Navarro, author of Death by China: Confronting the Dragon.

And he has nominated Robert Lighthizer – who has accused China of unfair trade practices – as his US Trade Representative.

Bloomberg has surfaced an article Lighthizer wrote in 2011 praising Ronald Reagan’s aggressive trade stance when Japan’s economic rise threatened the US.

There are concerns that Trump may look to follow those Reagan-era tactics, invoking section 301 of the US Trade Act, which allows a President to bestow “unfavourable trading status” on certain nations.

It’s a measure the US hasn’t used since it adopted World Trade Organisation rules in 1995.

And, as the many critics have warned, the world has changed. China is not like Japan, politically and militarily dependent on the US.

Last month, Wheeler told the Herald that his trade concerns deepened after visiting Washington DC at the start of the year.

“I was in Washington recently talking to a number of senior people – very well connected to the Trump Administration. They were saying that the concerns around China are deeply felt. In other words, the Trump Administration has very strong views about currency manipulation and trade practices out of China. I found that deeply worrying.”

Wheeler warns that the Trump risk comes on top of a protectionist trend which is already dampening global trade and threatening growth.

Long-time New Zealand trade advocate Stephen Jacobi agrees.

“Undoubtedly it is a concern,” he says of Trump’s protectionist rhetoric. “It was already a concern. Protection was already on the rise and we had seen a slowing in trade growth as well.”

The advent of the Trump Administration has thrown the spotlight on this he says.

Jacobi, who was head of the NZ US Council as executive director from 2005 to 2014, is now executive director of the NZ China Council, so has a good perspective on New Zealand’s relationship with both economies.

“It is early days for the [Trump] Administration,” he says. “In fact the Administration isn’t even in place yet. We just have to withhold our judgment for a bit, however much it might pain us to do so, to see what actually happens.”

From discussions he has had in Wellington, Jacobi believes New Zealand officials are very much taking that wait and see approach.

That said, the Government has been working on a new trade policy strategy and is expected to release it this month.

It will have to acknowledge the growing risks and look at alternatives to the TPP, Jacobi says.

“But I doubt whether they will have given up on the US just yet.

“So concern, yes. Panic no,” he says.

Professor Natasha Hamilton-Hart, with the Department of Management and International Business at Auckland University, says one of the direct risks to New Zealand is the prospect that Trump scores an own goal with his economic policies.

“I know the markets seem to be pricing in good times on the horizon but I’m pretty sceptical that that is going to last.

She doesn’t see a sustainable growth trajectory coming out of either the tax or infrastructure programme.

Things like border taxes and tariffs would be distortionary and depress consumer spending, she says.

“We will see an increase in military spending and with the tax cut will start to see an increase in the deficit, which is going to have implications for US interest rates.

“There are potentially quite contractionary processes in the medium term. They just don’t seem to have a coherent, workable plan.”

Then there are the diplomatic risks around a President who tweets his midnight thoughts to the world.

Trump’s impact on Asia-Pacific trading relationships is a serious concern.

“This might be overly optimistic,” Hamilton-Hart says. “I’m doubtful that it will come to a 45 per cent tariff on Chinese exports because that would be so disrupting and damaging to US firms and US consumers. It’s going to double the price of everything in Walmart.”

“What I think is more likely is that we will see a stronger line of creeping protectionism … so cancelling the TPP, looking at alternatives to dispute settlements outside the WTO, that kind of thing.

“I imagine we’ll see a lot more of that. And I imagine that is what China is gearing up for. So yeah, a less rule based trading system.”

The irony of Trump’s trade deficit obsession is that running big deficits is what actually gives you power on the global economic stage, Hamilton-Hart says.

In other words, a big net importer is the customer and the customer is always right.

“So if you stop running those trade deficits, then you no longer have the ability to throw your weight around. If Donald Trump were to significantly withdraw the US from world trade by putting up barriers and shrinking the US economy … that can only go with a reduction in US influence.”

China, for its part, doesn’t appear keen on a trade war and isn’t rushing to fill the trade leadership void left by the US .

For example, it appears to be carefully maintaining the strength of the Renminbi to avoid inflaming US currency hawks.

“They certainly do not want a trade war,” Jacobi says. “They’ve got enormous economic interests with the United States. And I think you can rely on the Chinese to manage all of that in a very sensible way.”

What worries Jacobi more is the risk of America over-playing its hand on security and sovereignty issues – like Taiwan.

“That’s much more worrying because you can’t always guarantee how a nationalistic China might react,” he says. “When you touch on issues of national sovereignty with the Chinese, you don’t get the same sort of reaction that you do on other things.”

Jacobi does have faith that the US system, with its constitutional checks and balances on executive power, will work – in time.

“But he [Trump] has a lot of power to do things in the short term. While congress catches up.”

Likewise, there will be powerful lobbying forces in the US business community who will push back at things he might want to do.

“But they also take time,” Jacobi says.

“I’m confident that over time the right decisions should be made. But what damage will be done in the meantime is a bit of an unknown.

“And the world has lost a whole lot of leadership around open markets and free trade.”

So where does that leave the New Zealand and its Asia-Pacific trading partners?

The remaining TPP signatories head to Chile later this month to discuss what, if anything, is salvageable without America.

The Americans have said they will send a representative to that meeting, although it’s not clear who that will be or what level of interest they will take, say Jacobi.

“And China will also be around. Because there is a Pacific Alliance meeting [a Latin American trading bloc] and the Chinese have been invited to that.”

There is a need for quiet diplomacy behind the scenes and New Zealand could play a key role in that, says Jacobi.

But we need to be careful not to upset the other members of the TPP.

Particularly the Japanese who, says Jacobi,  “are in a very invidious position”.

“They had this ballistic missile sent from North Korea the other day. They have got real security concerns, for which they have to rely on the US. They are not going to be drawn to take issue with the United States unnecessarily.”

China is already a member of an alternative multilateral trade group – the  Regional Comprehensive Economic Partnership (RCEP), which also includes New Zealand.

If completed, that free trade agreement (FTA) would include the 10 member states of ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and the six states with which ASEAN has existing free trade agreements (Australia, China, India, Japan, South Korea and New Zealand).

There have been suggestions that China may look to push this deal as a TPP alternative.

But China hasn’t yet shown any signs of taking the lead, says Jacobi.

On the one hand, we’ve heard rhetoric from Chinese President Xi Jinping about China’s global leadership, but the reality is that they haven’t taken a major role in multilateral negotiations yet, Jacobi says.

“Maybe it’s time. They do have an enormous ability now to fill a vacuum.”

It is a different game now, says Hamilton-Hart, who believes the TPP is effectively dead.

“So do we make a much better effort to get on board with RCEP?”  she says. “Or are we going to hang in there and hope that we could do a bilateral with the US … which I think would be a bad thing to do as we’d be massively disadvantaged in the negotiations.”

Jacobi agrees that the bilateral path is problematic.

“We can’t afford not to push on any open door,” he says. “But the reality is that is bloody hard going. Look at the experience we had with Korea, very complicated.”

Trump has said he’ll do bilateral deals with TPP partners. But we would want dairy concessions and the US would want a lot of movement on medicines, says Jacobi.

And neither would play well politically for either nation.

“We’ve got to talk, but will we be high up on the list? And will it be better than TPP? Most unlikely”

“I don’t want to be too pessimistic,” says Auckland University’s Sandaram. “There may be some opportunities as a small country where you could fly under the radar. It’s harder for a big country to be non-aligned.”

This could be a unique opportunity, she says. “We could try and stay neutral and expand into both markets.”

Sandaram, who has been based in New Zealand for only a year, feels New Zealand is sometimes overly cautious about Chinese sensitivities.

“It’s not a traditional link like the UK or Australia, so maybe it is because it is new that we are so cautious.”

Jacobi believes the Chinese have a good understanding of our deep political and economic ties with the Western nations, and particularly the US.

“In fact, one of the positive aspects they see in our relationship is that we are an interesting interlocutor because of our attachment to the West,” he says. “But they also know our trade and economic ties are towards China. So whether that will amount to cutting slack … I’m not sure.”

Both Sandaram and Jacobi believe we have more options than we did a generation ago.

“We need to diversify,” says Sandaram. “China is decelerating. But we have Asian powers that are fast growing economies. India, Malaysia, Indonesia – with the emerging middle class there is going to be demand for goods that New Zealand exports.

“That’s a great opportunity I think we’re uniquely placed.”

New Zealand, both at a government and a business level, has to be proactive about trade, now more so than ever, says Jacobi.

“This is not something that New Zealand can just sit back and observe. We don’t have that luxury. This is about our economic livelihood and we have to have a say in it.”

NZ Herald

How economic boom times in the West came to an end – Marc Levinson. 

Unprecedented growth marked the era from 1948 to 1973. Economists might study it forever, but it can never be repeated. Why? 

The second half of the 20th century divides neatly in two. The divide did not come with the rise of Ronald Reagan or the fall of the Berlin Wall. It is not discernible in a particular event, but rather in a shift in the world economy, and the change continues to shape politics and society in much of the world today.

The shift came at the end of 1973. The quarter-century before then, starting around 1948, saw the most remarkable period of economic growth in human history. In the Golden Age between the end of the Second World War and 1973, people in what was then known as the ‘industrialised world’ – Western Europe, North America, and Japan – saw their living standards improve year after year. They looked forward to even greater prosperity for their children. Culturally, the first half of the Golden Age was a time of conformity, dominated by hard work to recover from the disaster of the war. The second half of the age was culturally very different, marked by protest and artistic and political experimentation. Behind that fermentation lay the confidence of people raised in a white-hot economy: if their adventures turned out badly, they knew, they could still find a job.

The year 1973 changed everything. High unemployment and a deep recession made experimentation and protest much riskier, effectively putting an end to much of it. A far more conservative age came with the economic changes, shaped by fears of failing and concerns that one’s children might have it worse, not better. Across the industrialised world, politics moved to the Right – a turn that did not avert wage stagnation, the loss of social benefits such as employer-sponsored pensions and health insurance, and the secure, stable employment that had proved instrumental to the rise of a new middle class and which workers had come to take for granted. At the time, an oil crisis took the blame for what seemed to be a sharp but temporary downturn. Only gradually did it become clear that the underlying cause was not costly oil but rather lagging productivity growth – a problem that would defeat a wide variety of government policies put forth to correct it.

The great boom began in the aftermath of the Second World War. The peace treaties of 1945 did not bring prosperity; on the contrary, the post-war world was an economic basket case. Tens of millions of people had been killed, and in some countries a large proportion of productive capacity had been laid to waste. Across Europe and Asia, tens of millions of refugees wandered the roads. Many countries lacked the foreign currency to import food and fuel to keep people alive, much less to buy equipment and raw material for reconstruction. Railroads barely ran; farm tractors stood still for want of fuel.

Everywhere, producing enough coal to provide heat through the winter was a challenge. As shoppers mobbed stores seeking basic foodstuffs, much less luxuries such as coffee and cotton underwear, prices soared. Inflation set off waves of strikes in the United States and Canada as workers demanded higher pay to keep up with rising prices. The world’s economic outlook seemed dim. It did not look like the beginning of a golden age.

As late as 1948, incomes per person in much of Europe and Asia were lower than they had been 10 or even 20 years earlier. But 1948 brought a change for the better. In January, the US military government in Japan announced it would seek to rebuild the economy rather than exacting reparations from a country on the verge of starvation. In April, the US Congress approved the economic aid programme that would be known as the Marshall Plan, providing Western Europe with desperately needed dollars to import machinery, transport equipment, fertiliser and food. In June, the three occupying powers – France, the United Kingdom and the US – rolled out the deutsche mark, a new currency for the western zones of Germany. A new central bank committed to keeping inflation low and the exchange rate steady would oversee the deutsche mark.

Postwar chaos gave way to stability, and the war-torn economies began to grow. In many countries, they grew so fast for so long that people began to speak of the ‘economic miracle’ (West Germany), the ‘era of high economic growth’ (Japan) and the 30 glorious years (France). In the English-speaking world, this extraordinary period became known as the Golden Age.

What was it that made the Golden Age exceptional? Part of the answer is that economies were making up for lost time: after years of depression and wartime austerity, enormous needs for housing, consumer goods, equipment for farms, factories, railroads and electric generating plants stood ready to drive growth. But much more lay behind the Golden Age of economic growth than pent-up demand. Two factors deserve special attention.

First, the expanding welfare state. The Second World War shook up the social structures in all the wealthy countries, fundamentally altering domestic politics, in particular exerting an equalising force. As societies embarked on reconstruction, no one could deny that citizens who had been asked to sacrifice in war were entitled to share in the benefits of peace. In many cases, labour unions became the representatives of working people’s claims to peacetime dividends. Indeed, union membership reached historic highs, and union leaders sat alongside business and government leaders to hammer out social policy. Between 1944 and 1947, one country after another created old-age pension schemes, national health insurance, family allowances, unemployment insurance and more social benefits. These programmes gave average families a sense of security they had never known. Children from poor families could visit the doctor without great expense. The loss of a job or the death of a wage-earner no longer meant destitution.

Second, in addition to the growing welfare state, strong productivity growth contributed to rising living standards. Rising productivity – increasing the efficiency with which an economy uses labour, capital and other resources – is the main force that makes an economy grow. Because new technologies and better ways of doing business take time to filter through the economy, productivity improvements are usually slow. But in the postwar years, productivity grew very quickly. A unique combination of circumstances propelled it. In just a few years, millions of people moved from low-productivity farm work – more than 3 million mules still plowed furrows on US farms in 1945 – to construction and factory jobs that used the latest machinery.

In 1940, the average working-age adult in western Europe had less than five years of formal education. As governments invested heavily in high schools and universities after the war, they produced a more educated and literate workforce with the skills to produce far more wealth. Advances in national infrastructure gave direct boosts to national productivity. High-speed motorways enabled truck drivers to carry bigger loads over longer distances at higher speeds, greatly expanding markets for farms and factories. Six rounds of trade negotiations between 1947 and 1967, ultimately involving nearly 50 countries that signed the General Agreement on Tariffs and Trade (GATT), brought a massive increase in cross-border trade, forcing manufacturers to modernise or give up. Firms moved to take advantage of technological innovations to operate more productively, such as jet aircraft and numerically controlled machinery.

Between 1951 and 1973, propelled by strong productivity gains, the world economy grew at an annual rate of nearly 5 per cent. The impact on living standards was dramatic. Jobs were just for the asking; in 1966, West Germany’s unemployment rate touched an unprecedented 0.5 per cent. Electricity, indoor plumbing and television sets became common. Stoves burning coal or peat were replaced by central heating systems. Homes grew larger, and tens of millions of families acquired refrigerators and automobiles. The higher living standards did much more than simply bring new material goods. Retirement by 65, or even earlier, became the norm. Life expectancy jumped. Importantly, in Western Europe, North America and Japan, people across society shared in those gains. Prosperity was not limited to the urban elite. Most people began to live better, and they knew it. In the span of a quarter-century, living standards doubled and then, in many countries, doubled again.

The good times rolled on so long that people took them for granted. Between 1948 and 1973, Australia, Japan, Sweden and Italy had not a single year of recession. West Germany and Canada did almost as well. Governments and the economists who advised them happily claimed the credit. Careful economic management, they said, had put an end to cyclical ups and downs. Governments possessed more information about citizens and business than ever before, and computers could crunch the data to help policymakers determine the best course of action. In a lecture at Harvard University in 1966, Walter Heller, formerly chief economic adviser to presidents John F Kennedy and Lyndon B Johnson, trumpeted the success of what he called the ‘new economics’. ‘Conceptual advances and quantitative research in economics,’ he declared, ‘are replacing emotion with reason.’

Wages and investment were private decisions, but Schiller hoped government guidelines would contribute to ‘collective rationality’

The most influential proponent of such ideas was Karl Schiller, who became economy minister of West Germany, Europe’s largest economy, in 1966. A former professor at the University of Hamburg, where his students included the future West German Chancellor Helmut Schmidt, Schiller was a centrist Social Democrat. He stood apart from those on the Left who favoured state ownership of industry, but also from extreme free-market conservatives. His advice called for ‘a synthesis of planning and competition’. Schiller defined his philosophy thus: ‘As much competition as possible, as much planning as necessary.’

Most fundamentally, Schiller believed that government should commit itself to maintaining high employment, steady growth and stable prices. And it should do this all while keeping its international account in balance, within the framework of a free-market economy. These four commitments made the corners of what he called the ‘magic square’. In December 1966, when Schiller became economy minister in a new coalition government, the magic square became official policy. Following Schiller’s version of Keynesian economics, his ministry’s experts advised federal and state governments how to adjust their budgets to achieve ‘equilibrium of the entire economy’. The ministry’s advice was based on an elaborate planning exercise that churned out five-year projections. In the spring of 1967, the finance ministry was told to adjust taxes and spending plans to increase business investment while slowing the growth of consumer spending. These moves, Schiller’s economic models promised, would bring economic growth averaging 4 per cent through 1971, along with 0.8 per cent unemployment, 1 per cent annual inflation and a 1 per cent current account surplus.

But in an economy that was overwhelmingly privately run, government alone could not reach perfection. Four or five times a year, Schiller summoned corporate executives, union presidents and the heads of business organisations to a conference room in the ministry. There he described the economic outlook and announced how much wages and investment could rise without compromising his national economic targets. Of course, he would add, wages and investment were private decisions, but he hoped that the government’s guidelines would contribute to ‘collective rationality’. Such careful stage management cemented Schiller’s fame. In 1969, for the first time, the Social Democrats outpolled every other party. The election that year became known as the ‘Schiller election’.

Schiller insisted that his policies had brought West Germany to ‘a sunny plateau of prosperity’ where inflation and unemployment were permanently vanquished. Year after year, however, the economy failed to perform as he instructed. In July 1972, when Schiller was denied control over the exchange rate, he stormed out of the cabinet and left elected office forever.

Schiller left with the West German economy roaring. Within 18 months, his claim that the government could ensure stable prices, robust growth and jobs for all blew up.

The headline event of 1973 was the oil crisis. On 6 October, Egyptian and Syrian armies attacked Israeli positions, starting the conflict that became known as the Yom Kippur War. By agreeing to slash production and raise the price of oil, Saudi Arabia, Iraq, Iran and other Middle Eastern oil exporters quickly backed the two Arab countries. Shipments to countries that supported Israel, including the US and the Netherlands, were cut off altogether.

Oil-importing countries responded in dramatic fashion. Western European countries lowered speed limits and rationed diesel supplies. From Italy to Norway, driving was banned on four consecutive Sundays in order to save fuel. The Japanese government shut down factories and told citizens to turn out the pilot lights on their water heaters. US truck drivers blocked highways to protest high fuel prices, and motorists queued for hours to top off their gasoline tanks. In a televised address, the US President Richard Nixon warned Americans: ‘We are heading toward the most acute shortages of energy since the Second World War.’

Faced with higher petroleum prices, economic growth in 1974 collapsed. Around the world, inflation soared. When oil prices receded, the world economy failed to bounce back. Double-digit inflation dramatically undermined workers’ wage gains. From 1973 to 1979, average income per worker grew only half as fast as it had before 1973. Help-wanted signs vanished as unemployment rose. The economic experts, only recently so confident that their rational mathematical analysis had brought permanent prosperity, were flummoxed. Stable economic growth had given way to violent gyrations.

The underlying problem, it turned out, was not expensive petroleum but slow productivity growth. Through the 1960s and early ’70s, across the wealthy world, productivity had risen a strong 5 per cent a year. After 1973, the trend shifted clearly downward. Through the rest of the 20th century, productivity growth in the wealthy economies averaged less than 2 per cent a year. Diminished productivity growth translated directly into sluggish economic growth. The days when people could feel their living standards rising from one year to the next were over. As the good times failed to return, voters turned their fury on political leaders. In fact, there was little any Western politician could do to put their economies back on their previous tracks.

To give a short-term boost to an underperforming economy, central banks and governments have a variety of tools they can use. They can lower interest rates to make it cheaper to buy a car or build a factory. They can lower taxes to give consumers more money to spend. They can increase government spending to pump more cash into the economy. They can change regulations to make it easier for banks to lend money. But when it comes to an economy’s long-term growth potential, productivity is vital. It matters more than anything else – and productivity growth after the early 1970s was simply slower than before.

Turning innovative ideas into economically valuable products and services can involve years of trial and error

The reasons behind slowed productivity growth had nothing to do with any government’s economic policy. The historic move of rural peoples to the cities, around the world, could not be repeated. Once masses of peasant farmers and sharecroppers had shifted into more productive work in the cities, it was done. The great flow of previously unemployed women into the labour force was over. In the 1960s, building thousands of miles of superhighways brought massive economic benefits. But once those roads were open to traffic, adding lanes or exit ramps was far less consequential. In rich countries, literacy had risen to almost universal levels. After that historic jump, the effects of additional small increases in average education were comparatively slight. If higher productivity growth were to be regained, it would have to come from developing technological innovations and new approaches to business, and putting them to use in ways that allowed the business sector to operate more effectively.

When it comes to influencing innovation, governments have power. Grants for scientific research and education, and policies that make it easy for new firms to grow, can speed the development of new ideas. But what matters for productivity is not the number of innovations, but the rate at which innovations affect the economy – something almost totally beyond the ability of governments to control. Turning innovative ideas into economically valuable products and services can involve years of trial and error. Many of the basic technologies behind mobile telephones were developed in the 1960s and ’70s, but mobile phones came into widespread use only in the 1990s. Often, a new technology is phased in only over time as old buildings and equipment are phased out. Moreover, for reasons no one fully understands, productivity growth and innovation seem to move in long cycles. In the US, for example, between the 1920s and 1973, innovation brought strong productivity growth. Between 1973 and 1995, it brought much less. The years between 1995 and 2003 saw high productivity gains, and then again considerably less thereafter.

When the surge in productivity following the Second World War tailed off, people around the globe felt the pain. At the time, it appeared that a few countries – France and Italy for a few years in the late 1970s, Japan in the second half of the ’80s – had discovered formulas allowing them to defy the downward global productivity trend. But their economies revived only briefly before productivity growth waned. Jobs soon became scarce again, and improvements in living standards came more slowly. The poor productivity growth of the late 1990s was not due to taxes, regulations or other government policies in any particular country, but to global trends. No country escaped them.

Unlike the innovations of the 1950s and ’60s, which were welcomed widely, those of the late 20th century had costly side effects. While information technology, communications and freight transportation became cheaper and more reliable, giant industrial complexes became dinosaurs as work could be distributed widely to take advantage of labour supplies, transportation facilities or government subsidies. Workers whose jobs were relocated found that their years of experience and training were of little value in other industries, and communities that lost major employers fell into decay. Meanwhile, the welfare state on which they had come to rely began to deteriorate, its financial underpinnings stressed due to the slow growth of tax revenue in economies that were no longer buoyant. The widespread sharing in the mid-century boom was not repeated in the productivity gains at the end of the century, which accumulated at the top of the income scale.

For much of the world, the Golden Age brought extraordinary prosperity. But it also brought unrealistic expectations about what governments can do to assure full employment, steady economic growth and rising living standards. These expectations still shape political life today. Between 1979 and 1982, citizens in one country after another threw out the leaders who stood for the welfare state and voted in a wave of more Right-wing politicians – Margaret Thatcher, Reagan, Helmut Kohl, Yasuhiro Nakasone and many others – who promised to tame big government and let market forces, lower tax rates and deregulation bring the good times back. Today, nearly 40 years on, voters are again turning to the Right, hoping that populist leaders will know how to make slow-growing economies great again.

More than a generation ago, the free-market policies of Thatcher and Reagan proved no more successful at improving productivity and raising economic growth than the policies they supplanted. There is no reason to think that the populists of our day will do much better. The Golden Age was wonderful while it lasted, but it cannot be repeated. If there were a surefire method for coaxing extraordinary performance from mature economies, it likely would have been discovered a long time ago.

Aeon