Embracing an Ordinary Economy

In his new book, economist and historian Marc Levinson explains why no one should expect a return to the growth of the post-war boom years.

Ford Motor Company Long Beach Assembly Plant, 1936 (Library of Congress)

In the past half century, many politicians have promised to return the country to the golden years following World War II: an era of continuous, strong economic growth. During that period, American incomes rose sharply, which allowed more families than ever to buy homes and cars and fulfill what many touted as the American dream. But those high growth rates—which were around 5 percent—were an exception, not the norm, according to the economist and historian Marc Levinson. The world will likely never see prosperity expand at that rate again.

It may seem like a bleak prediction, but Levinson argues that promising otherwise is misleading. As my colleagues Alana Semuels and Derek Thompson have noted, it might not even be necessary for the economy to grow as much as some politicians have suggested—and in any event, most politicians (including presidents) can do very little to revive the economy.

In Levinson’s new book, An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy, he provides historical context to explain why Americans—and people across the globe—should expect slower economic growth in the years to come. Levinson spoke with me about why everyone should embrace the “ordinary” economy and the role that the federal government plays in shaping it. The interview below has been lightly edited for clarity.

Alexia Fernandez Campbell: In the book, you argue that productivity growth, not economic policies, is what really makes the economy grow. Can you explain that?

Marc Levinson: Productivity growth is really what fuels economic growth. And economic policy has a very limited effect on productivity growth. That's not to say the government can't do anything, but the major causes of productivity growth are innovations that happen in the private sector. That means inventions, that means new ways of doing business, new ideas, which end up affecting the economy in unpredictable times and in unpredictable ways. And the government just has very limited ability to orchestrate that.

Campbell: Wouldn’t you say this is an era of high-tech innovation?

Levinson: Well, innovation is not the same thing as productivity growth. I've written about the history of container shipping. The shipping container was developed in the 1950s, but it didn’t really start to have a big effect on productivity until the 1980s. Why? Because businesses needed to figure out how to take advantage of it. You don't just close down your existing businesses and do everything differently. It took several decades before businesses began to reshape their supply chains and develop what we now call globalization, because of this change in transportation costs. We spent a lot of money, much of it government money, in the 1940s and 1950s developing computer technology and developing some of the precursors to the internet. That showed up in productivity growth in the 1990s, when there was three or four years of productivity that was not as good as in the '50s and '60s, but much better than we'd had in the '70s and '80s. And so there were government expenditures on technology, and they paid off 30 or 40 years later. And some of the spending on innovation will probably have no impact on productivity.

Campbell: You also argue that while the world experienced its biggest economic boom in the 30 years following World War II, that growth likely won't be repeated. Why not?

Levinson: There was a period of extremely rapid productivity growth in the post-War period. Before, in all of the wealthy countries, millions of people were working farm fields by hand. They were working fields behind horses and mules. Then these people started moving to factories and instantly became much more productive, just by working in front of a machine instead of walking behind a horse. There were low education levels at the start of that period and most people didn't go to high school. By very rapidly increasing education levels around the world during the '50s and '60s, there was this huge growth in productivity.

The roads were generally narrow and quite congested in the period after World War II. We were able to build expressways and dramatically improve speed as well as safety. That meant that businesses could do their work much more efficiently, could sell to larger markets. It meant that workers could take jobs that were further from home. So all of those were great advances, but they were one-time advances, and you can't repeat that story. If you build another exit on the freeway that doesn't do the same thing for productivity as building the freeway in the first place. So this is not to say that government spending on infrastructure or education or research is a bad thing. I think it's a fine thing. But, it's going to have a much more modest economic impact than the spending that it did on these things in the 1950s and 1960s.

Campbell: Can you briefly talk about how Americans' lives changed during this Golden Age?

Levinson: During the post-war period, rapid economic growth brought very rapid income growth. And that played out in higher standards of living. It's pretty hard now to go back and recall the conditions that people lived in. Most farm families at the end of World War II didn't have electricity. A lot of people who lived in the cities didn't have complete plumbing in their houses. People were able to buy cars because their incomes rose so quickly. They were able to go to college, to take vacations. Their living standards really rose remarkably. And this was true in all the wealthy economies, not just the United States.

Campbell: Why is adjusting interest rates, taxes, and spending not enough? Is there anything policymakers and politicians can do to really make a difference?

Levinson: In the short term there's a lot that the government can do. If there’s suddenly a big surge in government spending, it's going to bring the unemployment rate down for a little while. But government's ability to do that sort of thing for very long is quite limited. You can't really use those kinds of tools to raise your long-term economic-growth rate. Long-term growth really depends on productivity growth, and a government's ability to affect productivity growth is at the margin. Yes, an improved education system leads to more qualified workers, and that will improve productivity growth. That's a great thing, but we're talking about a fraction of a percent here, not the very large gains in productivity seen  in the '50s and '60s and early '70s. So I'm not going to tell you that government is powerless here. I'm going to tell you that government is much less powerful than people like to think.

Campbell: Why do you think so many Americans—when it comes to elections—put so much hope in the idea that politicians are going to revive the economy?

Levinson: This is not just in the United States. If you look around the world, you’ve seen this trend globally before, and again now. In the post-war period, most of the governments around the world were of a social-democratic sort, what we would call liberal in the United States. And they believed in a major role for government; the government had a very substantial part of the economy. Many of these countries engaged in intense economic planning, figuring that they could permanently stabilize the economy and put an end to unemployment. And that worked fine up to 1973, or it seemed to. Then, when economic growth slowed around the world, voters blamed these governments for their inability to get things back to where they had been.

And so, in one country after another, you saw voters turn to more conservative politicians, who were promising different approaches to restart economic growth. This was the era of Margaret Thatcher, and this was the era of Ronald Reagan, and Helmut Kohl, and Yasuhiro Nakasone in Japan. And the sales pitch was that these people were going to use free-market mechanisms to produce higher productivity growth. Well, that didn't work either. People forget that now, but productivity growth under Margaret Thatcher in the U.K. was no higher than it had been before she came into office. The same was true during Reagan's time as president of the United States.

So, voters look for change when they don't think the government is delivering the goods. And I think we're seeing that now. In many countries in the world, voters are expressing their dislike, their distrust, of their government. They want to try something different, and they're hoping that somehow what they're trying is going to bring them better economic conditions. I'm afraid that they're likely to be disappointed, because I think governments have very little ability to deliver these things. Governments can affect the distribution of income. And we're having an interesting discussion about that in the United States. But I think governments have much less effect on the rate of economic growth.

Campbell: Can you talk more about how governments can affect the distribution of income?

Levinson: If you consider an economy that's growing at 5 percent a year—which was the norm in the rich world between 1948 and 1973—if one person is seeing his income grow faster than that, somebody else might be seeing his income grow slower. But still, they're both coming out pretty well. If we're looking at economic growth of 1.5 percent, it's a different story. If one person is experiencing good income growth, then somebody else may be experiencing none at all. So, income distribution becomes a much more contentious issue. And now, there’s slower economic growth in all of the wealthy economies and in many of the developing countries, so you've got people fighting over a pie that's not growing very quickly.

Campbell: How does the government play a role in that?

Levinson: The government can use a variety of policies to fix that. The government can adjust the tax system to even out the distribution of income. The government can use spending programs to channel more income to certain people. There are many policy options for evening out the distribution of income. Although I've got to say the evidence is that the worsening distribution of income is not just a U.S. problem. You see this in many other countries too. It's probably more extreme in the United States, but if you look at Japan or Germany or Spain, you see a large number of people who are just on the edge of the economy. They're not doing very well. And their incomes are not growing compared to everybody else. And so this is really a global trend, and it's been difficult for countries to combat it.

Campbell: It sounds like you're saying that people should lower their expectations. Is that true?

Levinson: I think they need to set the bar lower in terms of what to expect of our governments by way of economic growth. Expectations are based on an experience from a particular period of time, and it's going to be extremely difficult to repeat that. That doesn't mean that the government can't provide a more even distribution of income. So, if people want to advocate changes in the tax system or if people want to advocate better social benefits for this group or that group, perhaps it will be possible to achieve that without hurting economic growth. But those things aren't going to change the fact that the economic pie overall is expanding at a pretty slow rate, and governments really can't do much to speed up that rate.