July 2023 - Part 3

The Story of the US economy since 1945

This is a short story about what happened to the U.S. economy since the end of World War II.

There is a lot to unpack but the story arc is pretty simple: Things were first very uncertain, then they were very good, then pretty bad, then really good, then really bad, and now here we are. This is an attempt to link the big events and not an attempt to capture all the details, many of which have been left out.

If you were a Rip Van Winkle type and fell asleep in 1945 and woke up today, you would not recognize the world around you. First, you’ll be amazed to learn that there have been no nuclear attacks since 1945. You’d be shocked to see the wealth in San Francisco and the poverty in Detroit. It would blow your mind to see the prices of homes, college tuition, and health care today. You would struggle to understand the politics today. If you tried to piece together a narrative of what happened, you’d likely be wrong. Most of what happened wasn’t intuitive.

No one saw it coming 78 years ago.

Here's what happened.

1. The World War ended in August 1945

Japan surrendering was “The Happiest Day in American History,” as the New York Times wrote then. The euphoria was quickly replaced with the uncertainty of “what next.” Memories of the Great Depression were still fresh. In 1946 the Council of Economic Advisors delivered a report to President Truman warning of “a full-scale depression sometime in the next one to four years.” Two of the largest economies – Europe and Japan – sat in ruins. America itself was buried in debt, limiting direct government stimulus.

2. So, we did something about it. We lowered interest rates and birthed American consumerism.

Gone were the days of encouraging thrift and saving to fund the war. The US entered an era of low interest rates and high consumer spending. The returning soldiers were able to buy homes, cars, and toys for cheap. The GI Bill allowed them to buy homes for zero down payment and nominal interest. The first credit cards were issued in 1950. And the rest, as they say, is history.

3. Pent up demand led to economic boom.

Americans were ready to splurge after nearly two decades years of depression and war. America had invented cool new things that had gone unnoticed amidst the Depression and then the war. Like TVs, dishwashers and washing machines and cars and phones and electricity. There was a realization that “Wow, we’re really good at inventing things,” and “hey, we could sell a lot of these things.” It is hard to overstate the economic surge after the war. Married, eager to get on with life, and fueled new cheap consumer credit, Americans went on a buying spree like the country had never seen. Economic data from the post war decade is spectacular on every front.

4. The poor become less poor and the rich got slightly richer.

The defining characteristic of the 1950s US economy is that the country got rich by making the poor less poor. Average wages doubled from 1940 to 1948, then doubled again by 1963. The gap between the rich and the poor narrowed by an extraordinary amount. The equality went beyond wages. Women held jobs in record numbers. Minorities gained too. Women and minority rights in the 1950s were still a fraction of what they are today. But the progress toward equality in the post war decade was extraordinary.

Something as simple as there only being three TV stations went a long way to equalize culture. It’s difficult to imagine now, but every night tens of millions of families would sit down together in front of their TV set watching the exact same show, at the exact same time, as their neighbors. What happens now with the Super Bowl used to happen every night. The country was literally in sync. This is an important point that we will revisit later.

5. Debt grew dramatically. But so did income. So, things worked out well.

Household debt to income today is well over 100%. Even after rising dramatically in the 1950s, and through the 1960s and the 1970s, this ratio stayed below 60%: Driving a lot of the debt boom was a surge in home ownership. Home ownership rate in 1900 was 46.5%. It took off, hitting 62% by 1970. A substantial portion of the population was now in debt and they were, for the most part, okay with it.

Let’s pause now to write the narrative, which goes as follows: America started booming after the way. Not only is it booming, it is booming TOGETHER like never before. Americans no longer regarded debt as scary. Although debt grew sizably, it stayed under manageable limits.

Okay, let’s continue now.

6. Things began to crack.

The recession of 1973 brought unemployment to its highest since the Depression. Inflation surged and refused to come down even after interest rates were hiked. If you put this alongside the context of the events before this (Vietnam War, war riots, civil rights riots, assassinations of Martin Luther King Jr and Bobby Kennedy, and impeachment of Nixon), you can imagine the mood of 1970s America. Things looked bleak.

America had dominated the world in the decades after the war. In the 70s, things changed. Japan was booming. China was booming. The Middle East began flexing its muscles.

A culture shared by the Greatest Generation – hardened by the Depression and anchored in patriotism from the war – shifted when Baby Boomers began coming of age. The generational shift hit at the same time the economic tailwinds of the previous two decades ended.

One of the biggest shifts of the last century in the US happened in the 1970s when the economic winds began blowing in a different, uneven direction. People’s expectations were still rooted in a post-war culture of equality. Not necessarily equality of income but equality in lifestyle expectations. There still was the idea that someone earning a 50th percentile income shouldn’t live a life dramatically different than someone in the 80th or 90th percentile. That is how America had functioned for most of the 1945-1980 period. It doesn’t matter whether we think this is morally right or wrong. It just matters that this shift happened.

People always adjust to reality slower than the rate at which reality changes. The economy had changed into something less equal, less egalitarian but the people’s expectations were still anchored in the past.

7. The boom resumes but this time it’s different.

Ronald Reagan declared triumphantly in 1984, “It’s morning again in America. Today more men and women will go to work than ever before in our country’s history.” It wasn’t hyperbole. America’s GDP growth under Reagan had exceeded even that of the 1950s. By 2000, Bill Clinton boasted, “We have built a new economy.” This is an important and true statement. It WAS a new economy.

The biggest difference between the economy of the 1945-1973 period and that of the 1982-2000 period was that although both had the same amount of growth, the growth found its way into entirely different pockets.

You’ve probably heard these numbers but they’re worth rehashing. Between 1993 and 2012, the top 1 percent saw their incomes grow 86.1 percent, while the bottom 99 percent saw just 6.6 percent growth.

8. The Big Stretch

Rising incomes in a smaller and smaller group of people led to that group breaking away in lifestyle. These were Americans who became legitimately rich but it fueled aspirations among the rest who could only watch as the divide got bigger and bigger.

Now you can see the problem.

Joe, an investment banker making $900,000 a year, buys a 4,000 square foot house with two Mercedes and sends three of his kids to Yale. He can afford it.

Pete, a bank branch manager making $80,000 a year, sees Joe and feels a subconscious sense of entitlement to live a similar lifestyle, because Pete’s parents had told him that Americans’ lifestyles weren’t supposed to be different even if they had different jobs. His parents were right during their era. But that was then. And this now. Peter lives in an entirely different world. But his expectations haven’t changed much from his parents, even if the facts have.

So what does Pete do?

He takes out a huge mortgage. He has $45,000 of credit card debt. He leases two cars. His kids will graduate with heavy student loans. He can’t afford the stuff Joe can, but he’s pushed to stretch for the same lifestyle. It is a Big Stretch.

This would have seemed preposterous to someone in the 1930s. But we’ve spent nearly a century evangelizing and fostering a cultural acceptance of household debt.

The average American home now has more bathrooms than occupants. Homes have grown considerably bigger. You know what happened to student loans and car loans. Household debt-to-income ratio climbed and climbed and then some more.

These things tend to lead to ugly moments, which is of course what happened in 2008.

9. Once the train is out of control, it is hard to stop it from going off the cliff.

After 2008, a lot of debt was shed. Interest rates plunged. Debt-to-income ratios now are at the lowest levels in over three decades. The government and the Fed did a bunch of things to stop the train from going over the cliff. They backstopped corporate debt. Tax cuts over the last 20 years have predominantly favored the rich. None of these things are necessarily morally right or wrong in and of themselves. It is not easy to stop a runaway train from going off the cliff.

This story isn’t about why it happened. It is just that these things happened.

People are yet to let go of their expectations of equality that once prevailed in 1950s America. In fact, Americans want it back.

10. Tea Party, Occupy Wall Street and the rise of Donald Trump

People today are yelling, “Stop the train. I want off.” We have exited the era when Americans believed that things were working. We are now firmly in the “this isn’t working” era. By “things working,” Americans continue to cling to a belief that things should work equally well for everyone as they once did.

Linking the rise of Trump to inequality alone would be overly simplistic. These phenomena are usually multi-layered. But there is a large group of people who not only want to get off the train but some are even okay with setting fire to the train.

Take this anger and raise it to the power of Instagram where you can scroll through and see how the rich live. It is gasoline on the flame.

11. In Conclusion

I’m not being pessimistic. I’m not being an alarmist. Economics is the story of cycles. Things come. And things go.

Unemployment is now the lowest under Biden than it’s been in decades. Wages are now actually starting to grow faster for low-income workers than the rich. Grants are filling in to alleviate college costs. If everyone looked at advances in modern medicine, telecommunications, transportation, and civil rights since the 1950s, my guess is most of us wouldn’t want to go back to that era.

The point of this story is that expectations always adjust slower than reality changes on the ground. The new generations - millennials and Gen Z - now believe that the odds are stacked against everyone but the rich.

Even if a middle-class boom started today, it will take time before people adjust their expectations. So, this era of “this isn’t working” may well stick around for a while. It has already led to a “we need something radically different, and we need it yesterday” mind set. If you think about it, this is often the sort of attitude that leads to World Wars. Which is exactly where we started.

History, as they say, is just one damn thing after another.

Have a great week ahead. God bless America.