The Price of Civilization_ Reawakening American Virtue and Prosperity - Jeffrey D. Sachs [22]
The rise of inflation at the end of the 1960s and a series of major economic upheavals of the 1970s shook the faith of the public in the ability of government to steer the economy and to fight poverty at a modest cost to society. The two most important events were the collapse of the post—World War II global exchange-rate system in 1971 and the sharp increases in oil prices in 1973–1974 and again in 1979–1980.10 Rather than see the events of the 1970s as temporary aberrations requiring specific problem solving, conservative politicians, with Reagan as spokesperson, argued that they were signs of fundamental failures of the public sector and its role in the economy.
President Jimmy Carter’s one term, 1977–1981, proved to be the transition in every way.11 Big Labor lost its political influence reflecting the rise of Sunbelt power and that region’s antipathy to organized labor.12 The 1978 Revenue Act began the process of cutting capital gains taxation that would be greatly extended during the Reagan years. The tax measure “discarded historic principles of interclass equity and methods of promoting business investment” and was “not simply a triumph of capital, but of financial capital, which was assuming a prominent role in U.S. politics.”13 Japan’s exports to the United States in steel, automobiles, and electronics goods surged, giving the United States a first taste of the tough competition that would arise in the new era of globalization.
Carter also began the processes of deregulation (notably in airlines, trucking, and finance) that would become a hallmark of the Reagan years and after. Many of Carter’s forays into deregulation (for example, in transport) proved to be successful, but the process of deregulation got out of hand in the years that followed, especially in the financial sector. And tellingly, Carter lost his effort to reform the energy sector, tripped up by the power of the oil and gas sector to block his initiatives in alternative energy sources. By 1981, the country was set for a major transformation favoring the Sunbelt, financial capital, wealthy Americans, and Big Oil.
All of this tumult gave an extraordinary opening to the new philosophical assertion that it was “big government” itself rather than new and specific challenges (energy, the exchange rate, and so forth) that constituted the major barrier to prosperity. This was an odd assertion. The major problems that had been experienced were macroeconomic in nature: the collapse of the gold-based exchange system, the budget deficits caused by the Vietnam War, and the oil price shocks. They did not, evidently, relate to the size of government (other than the Vietnam War) as much as to shifts in the world economy.
The assertion that big government had destabilized the economy was doubtful on its face, but Reagan uttered his ideas with such conviction and charm that an unhappy public was ready to vote him into office. Had the evidence been brought to bear, the flimsiness of the claim would have been exposed. Federal tax revenues as a share of GDP were nearly constant from the mid-1950s onward at 17 percent to 18 percent of GDP. Total federal spending as a share of GDP had increased slightly, from around 18 percent of GDP in the late 1950s to around 20 percent of GDP in the late 1960s and 21 percent of GDP in the late 1970s.
There was no evidence then—or now, looking back—that the shocks of the 1970s had much if anything to do with the War on Poverty, social programs, infrastructure investment, science and technology, community development, Medicare, Social Security,