Historian Warns Policymakers to Avoid 1970s Mistakes
Dr. Judith Stein, CCNY Professor of History, calls for policy changes to revive America's manufacturing sector and lower unemployment.
Focus on Deficit Has Parallels to Inflation-Fighting Strategy That Wrecked Manufacturing Sector, Says Professor Judith Stein
U.S. policymakers could repeat mistakes made 30 years ago if they opt to focus on reducing the federal budget deficit instead of job creation, a City College of New York historian warns. Back then, fighting inflation trumped reducing unemployment, and the strategies that were deployed wrecked America’s manufacturing sector, contends Professor Judith Stein.
Calls to reduce the federal deficit have been coming from several sources, of late. Most recently, the Republican Study Committee, a conservative bloc within the U.S. House of Representatives, proposed cutting spending by $2.5 trillion over the next ten years.
“The Fed’s approach to fighting inflation in the late 1970s – restraining the growth of the money supply to produce high interest rates – was the worst strategy for the long-term well being of the U.S. economy,” says Professor Stein, whose new book, “Pivotal Decade: How the United States Traded Factories for Finance in the Seventies” (Yale University Press, 2010), was published a few months ago.
If policymakers opt for reducing deficits over unemployment, America could wind up with an economy that mirrors New York City: a sliver of highly paid professionals at the top and everyone else working at low-end jobs in the service economy, she warned in an op-ed published recently at www.commondreams.org. “It won’t revive the middle class and it won’t be sustainable, unless we are willing to accept 10 percent unemployment as the new normal.”
In her book, Professor Stein argues that the United States’ current economic crisis has its roots in decisions made in the 1970s. That decade marked the end of an era of postwar liberalism, created by the New Deal, which produced high wages, economic growth and greater income equality.
During the 1970s, high oil prices and increased competition from Europe and Japan hammered the U.S. economy. But instead of fighting unemployment and promoting economic growth, the government focused on lowering inflation and trying to balance the federal budget.
High interest rates in the 1980s attracted an inflow of money into the United States, which strengthened the dollar relative to other currencies. This made U.S. exports more expensive while making imported products less costly to U.S. consumers. Coupled with policies promoting free trade, this killed off manufacturing, she explains.
“This extreme austerity wasn’t necessary,” Professor Stein points out. “Other countries confronted with inflation were able to limit the damage to their economies. It may have taken longer to reduce inflation, but eventually it would have occurred as the principle causes – rising oil and food prices and high interest rates – receded.”
Professor Stein’s book does not single out the Federal Reserve for criticism. She takes on leaders in the Democratic Party for their failure to adhere to economic positions that had sustained the party’s political dominance at the federal level. Many of the Democratic leaders who emerged in the 1970s cut their teeth on issues such as the Vietnam War and civil rights and abandoned the working class that sustained their majorities.
Fixing today’s economy and creating jobs calls for a manufacturing renaissance, Professor Stein argues. She cites automobiles, high-end steel, capital goods, as well as green jobs as potential avenues for growth. However, the policies that led to the huge trade deficit in manufacturing need to be changed to rebuild U.S. industrial leadership, she adds, and it remains to be seen whether the Obama administration and Congress will adopt such reforms.
To restore manufacturing prosperity, Professor Stein advocates “Buy America” provisions, lowering the value of the dollar, worker training, support for industry clusters and tax policies that encourage domestic production. These techniques are similar to those used by Germany, France and Japan, as well as China, to stimulate growth, she notes. “Taxation and trade policies are tools that modern states use to shape their economies. Everyone does it but the United States.”