Global Journal of Human Social Science, E: Economics, Volume 21 Issue 4

right-wing economists pushed for adoption of “free market” or neoliberal solutions. Throughout the 1970s, capital became increasingly concerned that the labor market had become too “rigid,” wages were too high and government regulations impeded corporate profits. II. B ackground: T he P ostwar C ompromise As discussed above, the postwar compromise included an agreement between capital and labor (“Treaty of Detroit”) that ensured that wages would rise along with increases in productivity growth. Business had reluctantly agreed to this framework, given that there were serious concerns about the viability of the capitalist system, given the Great Depression that had preceded World War II. In support of this initiative, the government utilized macroeconomic policies in support of full employment and supported organized labor in its negotiations with capital. From 1945 to 1970, real wages and productivity rose rapidly supporting growth in aggregate demand. There were several other aspects to the success of the postwar compromise that included constraints that were imposed during the Great Depression on banks and other financial institutions. In particular, the Banking Act of 1933 (Glass-Steagall Act of 1933) included provisions that mitigated the types of speculative behavior that had contributed to the collapse of the banking system in 1933. Banks and other financial organizations were compartmentalized; interest rates were regulated by the Federal Reserve (Regulation Q); and commercial banking was separated from investment banking, helping to ensure that banks did not utilize insured deposits to engage in destabilizing speculation. The Banking Act also provided banks with deposit insurance that ended panicked “runs” on bank deposits. In short, banks operated under the 3-6-3 rule (borrow at 3%, lend at 6%, and be on the golf course by 3:00 pm). Finally, banks were subject to extensive regulation and supervision. This system generated a quarter century of financial stability as banks operated as servants to productive capital. Success for a bank was closely aligned with its clients meeting their goals. The Bretton Woods Monetary Accords were the final component to the postwar compromise. The U.S. dollar became the reserve currency, linked to gold at a price of $35 per ounce. The exchange rates of other currencies were in turn linked to the U.S. dollar. This fixed exchange rate system, in combination with capital controls, accomplished several objectives. First, it restricted global flows of speculative capital that undermined exchange rates during the 1920s and 1930s; second it provided flexibility to nations to formulate macroeconomic policies that worked in their interest; and third, it provided fixed exchange rates that could be adjusted under specific conditions. This agreement helped facilitate the recovery of Western Europe and Japan from World War II. Table 1 MACROECONOMIC DATA: VARIOUS PERIODS Real GDP Growth Unemployment Unit Labor Costs Output Per Hour 1948-1973 4.1% 4.8% 2.5% 2.80% 1974-1979 3.0% 6.8% 7.7% 1.40% 1980-2020 2.5% 6.2% 2.2% 1.90% 2010-2020 1.8% 6.4% 1.6% 1.20% Volume XXI Issue IV Version I 2 ( E ) Global Journal of Human Social Science - Year 2021 © 2021 Global Journals Transforming Financialization and Inequality in a Post-Covid World In terms of macroeconomic performance, annual economic data from the postwar period (1948- 1973) is compared with the post-1980 period in the chart below. Real GDP growth was 1.5% higher under the postwar compromise and the average rate of unemployment was 1.4% lower. Unit labor costs rose by more in the postwar period (relative to its average rate of increase since 1980), despite low inflation, given the link between productivity growth and wage increases. And output per hour was 0.90% higher than it has been since 1980. Income inequality declined sharply under the postwar compromise and financial markets were remarkably stable. Source: FRED,Author The election results in the UK (1979) and the US (1980) effectively buried the postwar compromise. Government has been transformed over the past forty years from a countervailing force to markets that balanced the needs of labor and capital (under the postwar framework, aka, managed capitalism) into a full-fledged facilitator of financial markets and capital. At his first inaugural address, Reagan memorably stated: “Government is not the solution to our problems; government is the problem.” This claim and the policies that have followed have reallocated income and wealth from the bottom to the top, while eroding faith in the ability of government to deliver collective solutions. Another result has been the emergence of populist solutions on both the left and right.