A 21st-century green Marshall Plan may help us to enter a new golden era
Capitalism’s high point came in the two and a half decades after the Second World War. The years between 1948 and 1973 were the “golden age”, a period of high growth and low unemployment, “a world in which everything was shiny and new”, as Alan Greenspan and Adrian Wooldridge write in Capitalism in America.
US gross domestic product grew at an average of 3.8 per cent a year between 1946 and 1973 (3 per cent today would be a cause for celebration) and real household incomes rose by 74 per cent, three times as much as in the past 25 years. America dragged the rest of the world behind it. Britain roughly matched the boom in US productivity, such that Harold Macmillan, the prime minister, was able to say in 1957: “Let’s be frank about it, most of our people have never had it so good.”
Catch-up growth in the defeated nations of Germany, Italy and Japan was even more remarkable. Globally, GDP per person in advanced economies grew by 3.8 per cent a year between 1950 and 1973, more than treble the rate in the previous century, data from the CORE digital economic textbook shows.
What made those years “golden” wasn’t merely the pace of growth but that the bounty was shared. It was a capitalism in which everyone had a stake. Behind the benign economics was rampant productivity, which enabled employers to raise wages in real terms, while protecting profits. Living standards soared. Everyone was a winner.
Today’s economic thinking is drifting back to those postwar glory years, when taxes were high and governments were big. “Trickle-down economics has never worked. It’s time to grow the economy from the bottom up and middle out,” President Biden said this weekas he promised to raise taxes on business and the wealthy. He wants to share out capitalism’s proceeds, but, as the past decade has shown, the problem has been less one of redistribution and more one of failed growth. Productivity has been weak everywhere and without it there is no way to lift the living standards of the poor other than taking from the rich.
The lesson from the golden age was not that equality delivers success — the low level of inequality was a consequence of growth — but of the power of productivity and investment. Globally, the capital stock — all the houses, factories and machines built — grew by 5.5 per cent a year on average between 1950 and 1973, almost twice as fast as between 1870 to 1913. But what drove the investment?
That question is perhaps the most important one of all, as the answer could unlock the magic of a self-reinforcing productivity spiral. A simple answer might be aggregate demand. Thatcherism was an experiment with that, cutting personal taxes and democratising debt to put more money into consumers’ pockets. It had a degree of success. More recently, governments have tried cutting corporation tax, but evidence suggests that the impact is limited at best. Wendy Carlin, professor of economics at University College London, has another idea; that investment is driven by optimism and certainty.
In one sense, the point is so obvious that it almost doesn’t bear mentioning. But the golden age taught us that optimism is not just a lucky break. It can be generated. The backdrop to the 1950s, after all, was war and, before the war, the Great Depression.
What lifted the world economy in the 1950s was a single-minded and globally co-ordinated objective; to rebuild. In America, President Eisenhower launched a programme of public works. The US Marshall Plan, an aid package that totalled more than all foreign US aid until then combined, laid the foundations for western Europe between 1948 and 1952. Global institutions such as the International Monetary Fund were created to co-ordinate the project.
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Today we have another single-minded objective that has global backing and a muscular “golden age” fiscal mindset behind it; tackling climate change. All leading governments are committed to reducing emissions and most plan to do so through infrastructure investment. “When I think about climate change, I think jobs,” Biden said, channelling Eisenhower. So does Boris Johnson, as do leaders across the world.
Businesses know exactly what the parameters are, the Paris accordand net zero pledges have defined those. Investment in green projects, or decarbonising existing ones, will be rewarded. Green innovations will make people’s fortunes. A Treasury impact assessment estimates that the bill for net zero will come to £651 billion for Britain over 30 years. But rebuilding the west was not free and, more importantly, the investment may boost productivity.
Carlin’s work with David Soskice, of the London School of Economics, has shown that increasing consumer demand is not enough to raise investment. It “expands employment, [but] without a shift to the optimistic scenario about future growth, investment and productivity do not revive”. What’s needed is a narrative shift to change the “co-ordinated beliefs of firms around expectations for market growth”.
The 2008 financial crisis may have embedded a cautionary pessimism, the authors wrote. Capital deepening, the rate of increase in produced capital per worker, has crashed everywhere since 2010 to a fraction of levels seen in the two decades before the crisis and productivity has fallen in tandem. UK data this week showed that “total produced capital stocks”, everything from homes to machines to research and development, doubled between 1995 and 2007 but has increased by only 50 per cent since.
The pandemic may make things worse by entrenching uncertainty. On the other hand, governments have shown that they will be an insurer of last resort. That should give households the confidence to spend and businesses the confidence to invest. For what is insurance if not risk transfer?
For a new golden era, Carlin and Soskice argue that businesses need something to believe in collectively, and that when they do investment will shift upwards, irrespective of borrowing costs, taxes or consumer demand. That something, whether you believe in climate change or not, could be a 21st-century green Marshall Plan.
Philip Aldrick is Economics Editor of The Times
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