Was Friedman right? The debate on American post-1980 reforms

Interesting debate in the US blogosphere on the pro-market reforms implemented in the US (and other countries including Britain & Ireland) since 1980. Paul Krugman defends the large rise in American living standards pre 1980 liberalisation and contrasts it with more moribund growth there after while Scott Summer highlights the reversal of the American economies (and that of other reformers) relative decline.

Krugman

Read almost any conservative commentator on economic history, and you’ll find that the era of postwar prosperity — the gigantic rise in living standards after World War II — has been expunged from the record.

You can see why: the facts are embarrassing. Here’s a rough-cut version. The blue line, left scale, shows median family income in 2008 dollars; the red line, right scale, shows the top marginal tax rate, a rough indicator of the overall stance of policy. Basically, US postwar economic history falls into two parts: an era of high taxes on the rich and extensive regulation, during which living standards experienced extraordinary growth; and an era of low taxes on the rich and deregulation, during which living standards for most Americans rose fitfully at best.

Scott Summer

Suppose you had gotten a room full of economists together in 1980, and made the following predictions:

1. Over the next 28 years the US would grow as fast as Japan, and faster than Europe (in GDP per capita, PPP.)

2. Over the next 28 years Britain would overtake Germany and France in GDP per capita.

And you said you were making these predictions because you thought Thatcher and Reagan’s policies would be a success. Your predictions (and the rationale) would have been met with laughter

and again

Krugman makes the basic mistake of just looking at time series evidence, and only two data points: US growth before and after 1980. Growth has been slower, but that’s true almost everywhere. What is important is that the neoliberal reforms in America have helped arrest our relative decline. The few countries that continued to gain on us were either more aggressive reformers (Chile and Britain), or were developing countries that adopted the world’s most capitalist model. (According to every survey I have seen HK and Singapore are the top two in economic freedom.)

They are comparing different metrics , Krugman is looking at real median household wages – which increased only very slowly (although per family member, rather more quickly) and Summers relative GDP per capita. One comment caught my eye on Summers blog –

I wonder if opening up markets is like increasing competition in a particular market, where the price (ideally) quickly falls to the marginal cost of producing the good — thus profits head towards (almost) zero. In this case, we open up trade and globalization means that our GDP per capita falls because other countries have lower GDP per capita. Another way, being a manufacturing country isn’t as profitable as it used to be, so we switch to more information technology which still maintains some education barriers to entry (and the US has a pretty good post-secondary system.)

I actually thought this was part of the (unacknowledged) liberal goal in our support of free markets. It is a giant transfer of wealth from the US to other countries, bringing up their living standards at the cost of reducing our own. Sort of like foreign aid, but at levels that would not be politically feasible. I mean 1% of GDP growth??! No way!

Krugman responded to Scott Summer’s argument

Given all that, what do we learn from the fact that since 1980 the United States has more or less maintained its relative GDP per capita, after substantial decline previously? Well, that’s not a simple story. Part of the answer is that our relative decline for 30 years after WWII largely reflected technological catchup by others; by the 80s that catchup was largely over, with all advanced nations at roughly the same technological level, so there was no reason to expect faster growth in Europe and Japan.

This may be true of the USA, but it doesn’t seem like a good explanation for the turn around in Britain’s fortunes. He also argues that since 1980 the trend in European countries has been to use their productivity increases to take more leisure (rather than increase GDP), in the case of the UK this may account for part of the difference (note they didn’t just stop falling behind, but actually increased their relative GDP too).

So since 1980 the UK and the USA have had faster relative GDP growth rates, but, in the USA at least, disappointing growth rates in real median incomes. Ireland, by way of contrast, took a path between the pre & post 1980 approachs. It began liberalising in the late 1980’s, but at the same time formed Social Partnership between business, government and the unions. Ireland then managed to achieve both stellar GDP growth rates and large increases in real wages.

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  • Anon

    You’ve missed Krugman’s key point, I think:

    “We can try to parse whether that’s true — but in any case it’s not a response to my original point. That was about the claim, quite common on the right, that the US economy was stagnant until Reagan did away with those nasty New Deal policies — a claim that is simply, flatly, false. The era of strong unions, high minimum wages, high top marginal tax rates, etc. was also a period of rapid growth and rising living standards. That doesn’t prove causation; it does disprove the widespread dogma that these things are always economically devastating. And it’s telling that so many on the right have airbrushed the whole postwar generation out of history.”

    The Right’s argument, particularly in the US is not a relative argument.

    Secondly, I’d be wary of pushing Britain in there. It had a giant war debt, a giant post Imperial hangover, no equivalent of say, the GI Bill and much more Bolschy Unions. And it really didn’t follow European policy either.

  • Mack

    Secondly, I’d be wary of pushing Britain in there. It had a giant war debt, a giant post Imperial hangover, no equivalent of say, the GI Bill and much more Bolschy Unions. And it really didn’t follow European policy either.

    Relative to the USA – that’s true, but those were issues other European powers were also grappling with.

    And no I didn’t miss the point you highlighted – what made you think I did?

  • Anon

    I don’t believe the European powers had the same problem to the same extent. If the UK had have heavily followed the Germany model after 1980, or the Scandinavian model in a disciplined manner, then i think they would have done better regardless because the pre-Thatcher situation was so poor.

    It’s not that I disagree with some of the reforms necessarily — MTRs were too high or where there were deductions lowering it, too complicated, and some of the privisations worked, mostly where they were well controlled and fairly well regulated (like BT). But there were many bad policy outcomes and I don’t believe its the only way to do it.

    Anyhoo, I don’t believe you covered that point because you didn’t state it and just focused ont he back and forth.

  • Mack

    Ah ok, no I didn’t cover it. Thought you meant I contradicted it somewhere.

    You may be right, but both the Scandanavian and German models are based on a form of economic liberalism albeit with government intervention to secure specific social goals. Which is a fair enough – Britain by contrast was drowning in debt and subsidising unprofitable state run monopolies..

  • Mack

    For more general overview type info on those models see

    http://en.wikipedia.org/wiki/Nordic_model
    http://en.wikipedia.org/wiki/Ordoliberalism

  • Krugman is looking at real median household wages – which increased only very slowly (although per family member, rather more quickly)

    This is the core of the problem. Average household size has shrunk dramatically since the 1960s, so income per household is not a useful measure. Also, one uses the median and the other (GDP/cap) implicitly uses a mean. This is certainly intentional, to emphasise the increase in the rich-poor gap, but perhaps the Gini coefficient might be a better measure of that.

  • halfer

    I think you would need to ask middle aged Argentines and Chileans if they think Friedman was right.

  • Mack

    Or Naomi Klein? Bear in mind that she has said she favours a Swedish type system, and the Swedish economic model is liberal at is core – albeit with a large welfare state. E.g. Sweden introduced a Friedman-like voucher scheme for education in the 1990s.

    Also, I’m not sure Argentina ever had an economic liberal government – and Chile’s economy has experienced very rapid growth over the last 20-odd years. We’re primarily discussing economics here, but I don’t think Friedman himself supported dictators such as Pinochet, despite the ad homenin attacks in the Shock Doctrine.

    You might find this interesting, by the way –

    http://reason.com/archives/2008/09/26/defaming-milton-friedman

  • Mack

    I’ll quote from it

    Exhibit A against Friedman is a quote from what Klein calls “one of his most influential essays”: “Only a crisis-actual or perceived-produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.” This, says Klein, is “the shock doctrine.” In a not-very-subtle short film based on the book, the quote appears over images of prisoners being tortured.

    So did Friedman favour torturing people and inflicting disasters so as to implement change? Hardly.

    The quote is not, in fact, from one of Friedman’s most influential essays; it’s from a very brief introduction to a reprint of his book Capitalism and Freedom. And it is not a rationale for welcoming disasters; it’s about the uncontroversial fact that people change their minds when the old ways seem to fail. Friedman provides a telling example, which Klein neglects to quote: Young Americans joined him in opposing the military draft after the Vietnam War forced them to risk their lives on another continent

  • Also, I’m not sure Argentina ever had an economic liberal government

    What would you call Carlos Menem, then?

  • Anon

    It must surely be posisble to normalise that data to account for household size. And if you want to be strict, I’d like to see *male* median wage, to filter out the effect of women joining the workforce.

    I’d wager the picture looks closer to Krugman than Summer.

  • Mack
  • Mack

    Fair point.

  • Greenflag

    Mack

    ‘This may be true of the USA, but it doesn’t seem like a good explanation for the turn around in Britain’s fortunes. ‘

    What turnaround ? The UK added 600,000 in the public sector since 1997 . Thatcher’s grocer or services economy can only be said to have succeeded in that it prepared the ground for the ‘arrival ‘ of the much hyped financial services sector which was to be cool Britannia’s domestic engine of economic growth for the next decade or more . ? And where is that ‘domestic ‘ engine now ?

    The major difference between the USA and UK is that in the former the non public sector unions are effectively powerless and individual employees have been reduced to almost ‘economic’ slave ‘ status . The trend has been less in the UK partly because the English could’nt abide with stark Thatcherism . That’s why Cameron finds himself in coalition with a ‘centre left ‘ party instead of being able to garner a clear majority.

    Krugman is mostly right . The wealth benefits of increased worker productivity in the USA since the 1980’s have ended up in fewer hands and mainly in the hands of the top 5% of Americans i.e the elite economic minority . This would not have been the case had the USA had strong private sector unions and more effective regulation of it’s financial sector as well as better consumer protection for those at the bottom of the economic pyramid who proved ultimately defenceless against the predatory financial minority.

    Economies cannot function in a political wasteland or at least cannot function effectively without mass oppression or an absent democracy . The problem for the west is that their financial sectors cared not about the danger of creating a political wasteland . They just kept building up the pyre on which western economies would burn in the hope that they would be able to escape the flames when the torch was eventually lit .

    Some escaped but only with the help of the taxpayer. Any western government that does’nt take note of the anger of taxpayers and the general mood of the public is looking at a long period in opposition if not electoral wipeout.

  • Mack

    I think that’s an overly negative assessment of both the UK and the USA. In terms of the USA the slow growth of real median incomes does tell us that things improved, slowly, even for the poorest. Presumably the improved a lot for workers on above average earnings. It’s not an ideal situation, but it’s still far from ecomonic slave status.

    Krugman is mostly right

    I think there’s a great deal of truth in both positions, the stagnation in growth in real wages in the USA kicked in during the 70’s btw.

    The Scandinavians probably have it right. They are both to the left (more socially minded) and to the right (more classically liberal) of us, just in different areas. I’m inclined to think that they may have had it the right way around.

  • Mack

    Meant to add the Political Compass people put the Lib Dems as centre-rightish. That is both slightly Socially and Economically Liberal (and the Tories and Labour both as more authoritian economic liberals). I’m not sure I agree with their assesment of the DUP.

    http://www.politicalcompass.org/ukparties2010

  • The definition of “centre right” all depends on where you think “centre” should be. I agree completely with the DUP position though – populist authoritarianism has always been their forte.

  • Greenflag

    Mack ,

    ‘In terms of the USA the slow growth of real median incomes does tell us that things improved, slowly, even for the poorest. ‘

    In 2007 100 million americans had a net worth of less than 50,000 dollars and of that 100 million some 41 million had no net worth whatsoever or owed more than their assets and savings . Since then some 8 million have been added to the unemployment figures and house foreclosures have yet to peak Things have not improved for 100 million to 150 million but have actually dissimproved since 2007 for about 75% of the population .

    Technically the 41 million with nothing are not slaves in the political sense but in a country with almost 20 million unemployed and with 3 million behind bars and unemployment benefits that run out after 6 months and a social welfare system that has’nt been reformed since the 1920’s these people are ‘economic slaves’ in all but name .Some of them are beginning to see the darkness.

    It’s true of course that for the top 10 to 20% of American employees there were real increases in income but the biggest increase in incomes was for the top 2% who ran off with most of American labour’s productivity gains in the past two decades .

    Stagnation in the 1970’s resulted from the aftermath of the first oil crisis and the failure of western governments to deal effectively with the resultant hyper inflation . The neo con 1980’s low tax -deregulation and small government (theoretical revolution ) was in retrospect an over reaction to the then perception of a declining west versus the very real communist threat which had strong support in some western european countries .

    The Irish Government merry go round 1973 to 1987 was a perfect example of a long period of issue avoidance in the hope of electoral reaffirmation by the punters . Maggie Thatcher’s response was without equivocation as the 4 million plus on UK unemployment lines at the time will remember .

    The Scandinavians are not without their problems but I would go one further . If we Irish want to sort out our ‘property mess ‘ and avoid a future repeat we should look to Denmark -so too should the Americans . As for common sense practical health care the Dutch and Swedes are probably worth learning from . But then neither the Dutch nor Swedes get hung up on the histrionics of religious and societal values when it comes to dealing with issues such as abortion etc . Which is why the Dutch have a much lower rate of abortion than either the USA or the UK .

  • Mack

    Dutch option on health looking unlikely now – http://www.rte.ie/news/2010/0527/vhi.html

    but the biggest increase in incomes was for the top 2% who ran off with most of American labour’s productivity gains in the past two decades

    There was a change in renumeration structure during that period – not for the best. Workplace salaries are now tournament like – winner takes all. The goal being to incentivise workers to work harder to get promoted to attain the next level of higher salary (with widening gaps between each level). The harder it is to tell who the best workers are, the wider the gaps must be, to force aspirant promotees to work hard enough to make their boss notice them above the others. I.e. Bob puts in 80 hours a week, but Melissa does 85. Melissa gets the promotion – Bob and 10 other collegues stays gets the same as if he had put in 40 hours, the company gets 400 hours for free (minus whatever extra they pay Melissa).

  • Anon

    The assumption that 85 hours is better than 80 is a dodgy one to say the least. And I still think you’ll have severe problems if people are turning in a lot of extra hours and not getting rewarded for it. It’s crushing for morale.

    But you are pursuing this a work reward theory and I don’t really think that’s where the problem lies. Salaries for say, entry or mid level It don’t vary that much really. The problem is the highest levels of management can and have paid thmeselves vastly more, Lots of people work hard, do shedloads of extra hours in jobs where they;ll never make serious money.

  • Mack,

    I don’t see how this development substantially affects the FairCare plan. I’d support James Reilly in his concerns about VHI being too big, but this is something that IIRC he had already planned for. It would be more difficult to break up VHI after privatisation than before, but not impossible.

  • Mack

    Anon –

    The tournament theory is so called because the structure works out like a tournament – the winner gets a huge prize, second place doesn’t do so bad, maybe the top 16 still get a good whack, but say finishing 100th or so and the winnings aren’t so great.

    The 80 vs 85 hours is just an illustrative example. But it’s magnified everywhere – if you think of entry level minimum wage jobs, the next step up is maybe to a team leader over 6 or 7 people / or a maybe a manager in a shop. For any of the 6 or 7 to get that promotion (in jobs where it exists) they’ve got to really distinguish themselves in some ways. And the gap isn’t even so big, as it would become further up the scale. But the effect is the same – the company pockets the efforts of the unsuccessful as profit and pays the single successful candidate more. So now they’re a team leader in a call centre or manager in McDonalds. Now they’ve a different set to compete with to get onto the next rung – and the pay rise is probably bigger again. But the same dynamic – they’ve got to stand out – all of them try – 1 succeeds, the company pockets the others efforts as profit. And so on, up the pyramid – with the ‘winners’ salary increase becoming ever larger – and less and less earned by their own efforts..

  • Greenflag

    Mack,

    ‘ at Government Buildings, officials from the Department of Health said it did not expect premiums to change, or the 900 jobs at VHI to be affected.’

    Well they would say that would’nt they ? I recall similar bland statements being made prior to the property bubble burst . i.e The Minister expects that the economy etc etc .

    ‘ Minister for Health Mary Harney said it was her priority to make sure that insurers treat their customers equally, irrespective of age or health.’

    Good luck with that from Mary . GIven the for profit ethic underlying private health insurance practice this is a bit like Moses handing down the 10 commandments to the chosen people and telling Jehovah /Yahweh/or the Burning Bush that he would make sure that the people would obey each and every commandment at all times .

    Whether American , Irish , British or Russian the private health insurance industry exists for the financial benefit of these companies and their shareholders . The ‘patient’ becomes something like your ‘tournament ‘ pawn above – a material resource to be squeezed every which way for revenue stream . Further up the pyramid medical staff , nurses , doctors etc are also ‘squeezed ‘ until such time as they reach the top of the pyramid/reverse ponzi and then they too join the squeezers of both the patient and the public purse .

  • Greenflag

    Mack .

    ‘Not for the best ‘ . It’s actually slavery by another name made possible by the absence of any trade unions or worker’s defence organisations . In many of the USA’s larger corporations the tournament ‘losers’ are covered by what is called ‘dead peasants ‘insurance . So if any tournament loser decides to keep working himself or herself to an early death then the corporation makes a second killing on the insurance payout . It is probably possible for some actuary to calculate that exact point in a ‘losers’ life when the future profit return on the labour of the loser becomes less than the value of the ‘dead peasants ‘ insurance payout .

    At which point it would become very profitable for the corporation to kill it’s employee if it could find a way to do it . This would of course please shareholders who would see their share price rise over time if enough ‘losers’ could be killed or forced to commit suicide after the required minimum service time is passed as per ‘dead peasants’ insurance contract .

    One way of course to get the ‘losers’ to kill themselves is by encouraging them to work 80 hour weeks – deprive themselves of a social life – break up marriages – destroy family life and contacts and make sure they have no time to even question their predicament ? The ‘loser’ lifestyle will thus increase the prevalence of physical , social and psychological ills such as obesity , financial insecurity , high rates of divorce , promiscuity , drug use and an ever increasing number of people in jail as those who refuse to play by the rules of the ‘tournament ‘ find other ‘pathways’ to the top 🙁

    There is also another add on in terms of the longer term societal impact of ‘tournament’ pay structures and that is that the more intelligent of the ‘ losers ‘ will ‘breed ‘ out of the ‘slave ‘ population and willl make it even more necessary to bring in desperately poor and uneducated immigrants preferably illegal who can be exploited even more so than the indigenous ‘losers’

    The ‘tournament ‘ system represents a new stage in market capitalism in that a corporation can now increase it’s profit and thus desirabilty to the investor community and shareholders generally by getting it’s employees to work themselves to death .

    As I said earlier – slavery= by another name

  • Greenflag

    Of course it’s not just in market capitalist lands that worker exploitation has increased in recent decades – In the competing land of ‘authoritarian ‘ capitalism some employees of american/taiwanese owned or licensed supplier corporations have apparently decided not to wait around to be ‘losers’ but have instead commit suicide rather than work 80 hour weeks to earn a living wage . In China however there are hundreds of millions of willing replacements .

    http://www.pittsburghlive.com/x/pittsburghtrib/business/s_682907.htm

    A blog reply from a west coast american gives an indication that for many americans the chinese ‘treatment ‘ sounds like ‘paradise ‘

    lohn S says:
    May 23, 2010 at 6:57 PM
    The Longhua facility sounds like paradise compared to the new normal here in the U.S. I’ve recently joined the 25 million unemployed and the want ads are enlightening. A local company has four 6 week temporary openings: 12 hours a day, 7 days a week (working through the 4th of July holiday) for a princely $9.25 hr. Didn’t bother to apply, they were already swamped by the desperate.

  • Greenflag

    apologies that link should read

    lihttp://timiacono.com/index.php/2010/05/23/chinese-worker-suicides-mount/

  • Greenflag

    %#@%^&*&*#@#!!!!!!!!

    http://timiacono.com/index.php/2010/05/23/chinese-worker-suicides-mount/

    If that doesn’t work I may have to consider a ‘longhua ‘ strategy ;(