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Index
Preliminaries
Review from last class
- Britain becomes dominant political and economic power in 19th century
- committed to classical economic liberalism
- develops a liberal parliamentary democracy
- advocates and structures a global economic system built on empire, free trade, comparative advantage and the free market
- negative consequences of capitalism responded to by trade unions, liberal reformers, and social activists
Reform movements challenges and consequences
- reformists call for greater government intervention - protecting workers’ rights, regulation of monopoly, constraints on capital
- in US - Progressive Era, some efforts at socialism
- in Europe - socialism ... but takes two routes:
- socialist/communism (revolution in Russia, later in China, etc.)
- social democracy in western Europe after 1945 and the rise of the Welfare State
- Increase in taxation? Costs to capital? Looking for cheaper labor and less taxes?
The 20th Century
Broad Changes:
- End of 19th c. UK challenged by US, Germany, Japan, France, etc. as capitalism takes off in these countries
- WWI collapses European Great Power dominance
- 1920s & 30s Fascism, great Depression
- Nationalism
- Economic Nationalism
- Militarism
- Collapse of World Trade
- Concern that capitalism is always prone to crisis
- under-consumption crisis
- it makes a lot of stuff, but it can’t pay its workers enough to buy that stuff
- government control = demand management
WWII and Post 1945
- War destroys Europe and Japan
- Soviet Union and Cold War
- US dominant economic power - assumes mantle of hegemony of global economic system under liberal free-trade regime
- caused construction of newer, more modern factories
- response to assumed causes of WWII
- stabilize financial system
- reduce tariffs
- develop and promote liberal ideas and values
- United Nations - collective security
- comments:
- in the 1940s & 50s, US economy was the only game in town
- capitalism is good if you’re the biggest economy on the planet
Immediate Post War System
- Marshall Plan to rebuild Europe
- humanitarian
- resist Soviet Union
- develop markets for US goods
- US controls system in West
- NATO and Cold War
- Emerging European Union - setting up free trade in the EEC
- treaty of Rom 1957-58
- bond Germany and France
- Bretton Woods System
- goal: to stabilize exchange rates and create liberal international institutions
- convened in US in Bretton Woods in 1943-44
- included Soviet Union
Digression on the Gold Standard and other instruments of policy
- a country’s currency in circulation cannot exceed the value of gold reserves set at some fixed value of gold
- e.g., after WWII the US dollar was set at $35/ounce of gold
- provides faith in a country’s currency
- stabilizes currency value, thereby controls inflation
- encourages exports
- stops countries from just printing money
- automatic control of balance of payment problems
- however:
- makes economy only valued by amount of gold, not productivity
- cannot use interest rate changes to increase or decrease money supply
- all countries need to be on gold standard
- limits economic growth because available capital has to be backed by gold
- no one is on the gold standard any longer
Economic Policy Instruments
Broadly there are two ways a government can manage economic policy:
- Monetary
- changes in the central bank interest rate
- in US "discount rate" = the interest rate that Reserve Banks charge commercial banks for short-term loans
- reserve requirements
- portions of deposits that banks must hold in cash, either in their vaults or on deposit at a Reserve Bank
- a decrease in reserve requirements is expansionary because it increases the funds available in the banking system to lend to consumers and businesses
- open market operations
- buying and selling of US government securities
- "printing" money, i.e., borrowing against itself
- "quantitative easing"
- interest on reserves
- newest and most frequently used tool
- given to the Fed by Congress after the Financial Crisis of 2007-09
- interest on reserves is paid on excess reserves held at reserve banks
- Fiscal
- largely Keynesian
- spending and tax policy by governments to influence aggregate demand by manipulating tax rates to encourage or discourage investment/borrowing and spending
Bretton Woods
- Reaction to:
- competitive devaluations of 1930s
- economic protectionism and tariffs
- cause of war?
- Sought to:
- promote economic growth under liberal trade regime
- create international reserver currency - the $
- stabilize exchange rates - fixed exchange rates
- prevent or alleviate balance of payments
- Set up:
- International Monetary Fund (IMF) help developed countries with balance of payment problems by lending them money
- World bank comprised of
- international development association
- ...
- General Agreement of Tariffs and Trade (GATT)
- 1947 legal agreement between many countries, whose overall purpose was to promote international trade
- Balance of Payments and Current Accounts
A Bit More History
- Entwined Politico-Strategic and Economic Developments 1945-71
- US economic dominance under Bretton Woods
- Cold War
- Re-emergence of Western Europe - the EEC - EC - EU, and Japan
- Decolonization - 3rd world, Cold War competition
- Rise of the Multinational Corporation (MNC)
- Emerging Economies
- BRIC = Brazil, Russia, India, China, South America
- Liberal reform and social democracy in Europe
- Vietnam War and inflation
1970s: Worse than just Disco!
- 1970s usher in big changes and challenges
- Arab/Israeli conflict, OPEC, and global economic crisis
- inflation "stagflation"
- crisis in Europe - Cold War and Eurocommunism
- expansion of US and now MNCs
- shift from manufacturing to service economies in the West
- changes in political power bases domestically in US
- Thatcher/Reagan and new-liberalism
- beginning of the decline of the US as the world leader
End of Bretton Woods
- 1971 Nixon ends Bretton Woods — “New Economic Policy”
- Under the Bretton Woods system, the external values of foreign currencies were fixed in relation to the US dollar
- ...
- Nixon sets tax cuts and a 90-day freeze on prices and wages
- suspends the dollar’s convertibility into gold
- ...
Post Bretton Woods
- after the collapse of the Bretton Woods system, the major powers authorized the IMF to widen the trading bands so that changes in currency values could more easily reflect the supply and demand of currencies
- the oil shocks of the 1970s helped preserve the dollar’s status as top currency, as OPEC demanded ever-greater quantities of dollars to purchase OPEC oil
- OPEC nations placed many of these “petrodollars” in Western banks
- petrodollars were loaned out to developing countries which substantially increased their debt
- paid to OPEC, which put them back into US and European banks
- comments
- cost of oil quadrupled
- incentive to look for oil in other places
- becomes economically viable to extract our own oil, predominantly in Texas
- shifted political forces to the Southwest
- shifted politics, e.g., to Bush family
- Northeast influence declined
- countries borrow money to pay OPEC from Western banks
- circulation of petrodollars
- creates massive indebtedness
- impact is huge across the globe
- huge debt crisis in Mexico, Africa
- changes the politics in US
- in Europe, economies in tailspin forces socialistic governments to borrow money to support those programs
- development of North Sea oil, which leads to development of Scotland
- also leads to inflation, e.g., mortgages in the teen percents
- suddenly America was getting poorer
- Japan was "attacking" economically
- stagflation = concurrent inflation and unemployment
- prompted US to raise interest rates to combat domestic inflation, which contributed to global recession
- this economic downturn motivated a turn away from Keynesian orthodoxy in favor of a return to classical liberal "laissez-fair" ideology under Thatcher in the UK and Reagan in the US
- concerned about the growth of communism in Latin and South America, the IMF and World Bank under US pressure provided opportunities for developing countries to reschedule their debts (accrued during the petrodollar boom) in exchange for agreeing to structural adjustment policies (SAPS)
- by 1985, the US had become the world’s biggest debtor nation, causing many to argue that the US dollar was overvalued
Discussion: So what do you think of all this?
- 1980 mortgage was 16.5%, then decreased to 8%
- so how do you get from high to lower interest rate?
- high rates slow inflation
- "trickle down" economics
- military build-up creates jobs
- less low-skilled jobs
- unions became weaker
- 1950s 35% in US, 85% in Europe
- today 7% in private sector, more in public sector
- end of UAW
- unspoken deal: we’ll give you higher wages, but don’t go on strike and don’t become communists
- remember that Reagan fired air traffic controllers, and Thatcher did similarly
- economics and politics interact dynamically
- the 1970s were thus the beginning of the end of US power
There is almost nothing that is fully American anymore
- everything is international
- what is the future of work as things become more automated?
- so what’s the value of education?
- concern for our grandchildren
- huge need for retraining
How can we organize society and economy to work better?