The Economy Since 1970

Abstract Despite almost three decades of strong and stable growth after World War II, the US economy, like the economies of many developed nations, faced new headwinds and challenges after 1970. Although the United States eventually overcame many of them, and continues to be one of the most dynamic in the world, it could not recover its mid-century economic miracle of rapid and broad-based economic growth. There are three major ways the US economy changed in this period. First, the US economy endured and eventually conquered the problem of high inflation, even as it instituted new policies that prioritized price stability over the so-called “Keynesian” goal of full employment. Although these new policies led to over two decades of moderate inflation and stable growth, the 2008 financial crisis challenged the post-Keynesian consensus and led to new demands for government intervention in downturns. Second, the government’s overall influence on the economy increased dramatically. Although the government deregulated several sectors in the 1970s and 1980s, such as transportation and banking, it also created new types of social and environmental regulation that were more pervasive. And although it occasionally cut spending, on the whole government spending increased substantially in this period, until it reached about 35 percent of the economy. Third, the US economy became more open to the world, and it imported more manufactured goods, even as it became more based on “intangible” products and on services rather than on manufacturing. These shifts created new economic winners and losers. Some institutions that thrived in the older economy, such as unions, which once compromised over a third of the workforce, became shadows of their former selves. The new service economy also created more gains for highly educated workers and for investors in quickly growing businesses, while blue-collar workers’ wages stagnated, at least in relative terms. Most of the trends that affected the US economy in this period were long-standing and continued over decades. Major national and international crises in this period, from the end of the Cold War, to the first Gulf War in 1991, to the September 11 attacks of 2001, seemed to have only a mild or transient impact on the economy. Two events that were of lasting importance were, first, the United States leaving the gold standard in 1971, which led to high inflation in the short term and more stable monetary policy over the long term; and second, the 2008 financial crisis, which seemed to permanently decrease American economic output even while it increased political battles about the involvement of government in the economy. The US economy at the beginning of the third decade of the 21st century was richer than it had ever been, and remained in many respects the envy of the world. But widening income gaps meant many Americans felt left behind in this new economy, and led some to worry that the stability and predictability of the old economy had been lost.