6.2: Post WWII Economy

The League of Nations could not stop the aggression of nationalist leaders in Germany and Japan in the 1930s. This eventually led to WWII (1939-45), which completely destroyed Europe and Japan, leaving the U.S. as the only undamaged economy. Its huge production had fueled the Allied war effort and by the end of the war it accounted for half of all world output. The U.S. Marshall Plan of financial aid helped Europe recover, and the world economy and individual incomes grew quickly across the board from the 1950s through the 1970s with regulated free markets. One factor was the spread of the freight container in the 1960s. By eliminating slow, labor-intensive loading and unloading, containers made shipping much cheaper and faster. Today, ships can unload hundreds of containers in hours.

However, in the early 1970s, the U.S. faced problems with trade deficits resulting from more competition from foreign imports, the costs of the Vietnam War, and more dollars overseas than there was gold to support them. In response, in 1971 Nixon set a 10% tariff, cut the dollar from gold and let the exchange rate float.

Later, in the mid- and late 1970s came a large rise in oil prices. The first increase came during and after the 1973 Arab-Israeli War, when Arab countries carried out an oil embargo against the U.S. and other Israeli allies. Oil prices quadrupled, gradually fell and then rose again after the 1979 Islamic Revolution in Iran further reduced supplies. Gasoline shortages, mile-long lines at service stations and higher fuel costs resulted in higher prices and a slower economy, or stagflation. Poor countries were even harder hit. High oil prices forced them to borrow large sums from the World Bank and IMF.

In response, Europe and Japan reduced their oil dependency through conservation and nuclear power (and later, wind and solar). Today, they use one half the energy that the U.S. does do per unit of production and Germany is a leader in solar power. The U.S. conserved and focused on renewable energy for a few years until Reagan came to office in 1980 and threw out Carter’s policies for energy independence. (Symbolically, Reagan took down the solar panels that Carter had put on the White House.)

Meanwhile, from 1977-81, the U.S. Federal Reserve Bank steeply increased interest rates to cut inflation. This increased the price of the dollar, increasing both the price of U.S. goods abroad and the trade deficit, while causing a deep recession at home. Furthermore, Reagan’s tax cuts for the rich led to record budget deficits, a tripling of the national debt and increased inequality. His attacks on unions and increased international competition flattened wages. During the 1980s, increased trade and budget deficits and declining productivity, growth, trade and research and development compared to other countries eroded U.S. status as the dominant world economic power. With the rise of other countries, a multilateral world economy had arrived.

The next big event was the breakup of the USSR in 1991. After the breakup, Russia followed the advice of neoliberal U.S. economists to engage in so-called shock therapy of instant privatization to overcome the stagnation of their government-owned and centrally-planned economy. Despite predictions of an economic boom, the actual result was that the economies of the USSR and its Eastern European satellites collapsed, as a few well-connected officials and businessmen used government bank loans to buy huge amounts of government-owned property and natural resources for pennies on the dollar. Russia defaulted on its debts, the ruble became worthless, production decreased 40%, most of the population got poorer, and organized crime grew very powerful. Some countries (e.g. Poland, Estonia, the Czech Republic) later took advantage of good economic policies, low labor costs and good computer and other technical education to grow their economies, but most of the countries of the former Soviet Union (including oil-and-gas-dependent Russia) are poor and corrupt.

In Asia in the 1970s and 80s, Japan had served as a successful mercantilist/protectionist model of government-supported-and-guided industrialization, subsidized exports and protection of local industries with import tariffs. By 1980, Taiwan, South Korea, Hong Kong and Singapore were booming with these policies. Since then, China, India, Indonesia, Malaysia, Mexico, Turkey, Vietnam and others also began to grow their economies using similar models. However, many of the economies in Central and South America and in Africa, the Middle East and Southwest Asia are falling behind.

In the 1990s, Clinton’s economic policies of increasing taxes on the rich and giving tax breaks to poor working families stimulated the economy, changed U.S. budget deficits to surpluses, reduced unemployment, maintained low inflation and added 17 million new jobs. However, Clinton also supported free trade policies, leading to the approval of most-favored-nation status for China (which meant low tariffs on Chinese imports), approval of Bush 1’s NAFTA free trade agreement with Canada and Mexico, and the formation of the World Trade Organization. These agreements did increase trade and keep prices low. But this also meant more foreign imports, while U.S. jobs went to countries like China and Mexico with much lower pay.

U.S. influence in the World Bank, IMF and G7, the size and stability of the U.S. market, and the credibility of the dollar reinforced American economic power. However, free trade and high oil imports meant that the U.S. trade deficit remained high, while competition from low-wage countries depressed the pay of U.S. jobs.

After 2001, Bush 2’s tax cuts for the rich again led to record budget deficits, and allowing China into the WTO helped increase trade deficits to a record 10% of total GDP. One result of all this was a 40% decline of the dollar against the Euro and other currencies. One third of U.S. manufacturing jobs went overseas in just eight years.

The lower dollar made U.S. exports cheaper and more competitive, but further increased the trade deficit because it took more now-less-valuable dollars to buy imports. The dollar has since risen because of comparative weaknesses of other economies, but the U.S. continues to buy more from other countries than it sells.

The 2008 financial crash, the result of speculation in the U.S. housing market and on Wall Street, destroyed the credibility of the U.S. model of deregulated finance and free trade by causing huge investor losses and a worldwide recession. China and other countries say that this disaster proved that their systems of state capitalism and the mercantilist model of government intervention and managed trade were superior methods for economic development.

International Political Economy Today

As wars between great powers become less frequent, economic power and competition (‘soft power’) have become more important, affecting jobs and standards of living. Furthermore, international trade has expanded faster than domestic economies, so it has become a larger factor for all countries. Global trade is now over 50% of the world economy. About 2/3 of it is within the Global North (North America, Europe, East Asia).