The Quiet Upheaval

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

We are now undergoing a profound economic transformation that is barely recognized. This quiet upheaval does not originate in some breathtaking technology but rather in the fading power of forces that have shaped American prosperity for decades and, in some cases, since World War II.


As their influence diminishes, the economy will depend increasingly on new patterns of spending and investment that are now only dimly apparent.


It is unclear whether these will deliver superior increases in living standards and personal security. What is clear is that the old economic order is passing.


By any historical standard, the record of these decades – despite flaws – is remarkable. Per capita incomes (average incomes per person) are now $40,000, triple their level 60 years ago. Only a few of the 10 recessions since 1945 have been deep. Prosperity has become the norm. Poverty and unemployment are the exceptions. But the old order is slowly crumbling. Here are four decisive changes:


First, the economy is bound to lose the stimulus of rising consumer debt. Household debt – from home mortgages to credit cards – now totals about $10 trillion, or roughly 115% of personal disposable income. In 1945, debt was about 20% of disposable income.


For six decades, consumer debt and spending have risen faster than income. But debt can’t permanently rise faster than income. As aging baby boomers repay mortgages and save for retirement, debt burdens may drop. The implication: weaker consumer spending.


Second, the benefits from defeating double-digit inflation are fading. Remember: In 1979, inflation peaked at 13%; now it ranges between 1% to 3%.The steep decline led to big drops in interest rates and big increases in stock prices (as interest rates fell, money shifted to stocks). Stocks are 12 times their 1982 level.


Lower interest rates and higher stock prices encouraged borrowing and spending. But these are one-time stimulants. Mortgage rates can’t again fall from 15% (1982) to today’s 5.7%. Nor will stocks soon rise 12 times. The implication: again, weaker consumer spending.


Third, the welfare state is growing costlier.


Since the 1930s, it has expanded rapidly – for the elderly, the poor, and students. In 2003, federal welfare spending totaled $1.4 trillion. But all these benefits didn’t raise taxes significantly, because lower defense spending covered most costs.


In 1954, defense accounted for 70% of federal spending and “human resources” (aka welfare), 19%. By 2003, defense was 19% and human resources, 66%. Aging baby boomers and higher defense spending now doom this pleasant substitution. Paying for future benefits will require higher taxes, bigger budget deficits or deep cuts in other programs. All could hurt economic growth.


Fourth, the global trading system has become less cohesive and more threatening. Until 15 years ago, the major trading partners (America, Europe, and Japan) were political and military allies. The end of the Cold War and the addition of China, India, and the former Soviet Union to the trading system have changed that. India, China, and the former Soviet bloc have also effectively doubled the global labor force, from 1.5 billion to 3 billion workers, estimates Harvard economist Richard Freeman. Global markets are more competitive; the Internet means some service jobs can be “outsourced” abroad.


Taken at face value, these are sobering developments. The great workhorse of the American economy – consumer spending – will slow. Foreign competition will intensify. Trade agreements, with more countries and fewer alliances, will be harder to reach. And the costs of government will mount.


There are also global implications. The slow growing European and Japanese economies depend critically on exports. Until now, that demand has come heavily from America. But if American consumers become less spendthrift, there’s an ominous collision. Diminished demand from Europe, Japan, and America meets rising supply from China, India, and other developing countries. This is a formula for downward pressure on prices, wages, and profits – and upward pressure on unemployment and protectionism.


It need not be. China and India are not just export platforms. Billions of people remain to be lifted out of poverty in these countries and in Latin America and Africa. Ideally, their demands – for raw materials, for technology – could strengthen world trade and reduce reliance on America’s outsized deficits. If so, exports (and manufacturing) could become the American economy’s next great growth sector.


What’s at issue is the next decade, not the next year. We know that the American economy is resilient and innovative – and that optimistic Americans generally adapt to change. People seek out new opportunities; they adapt to change. These qualities are enduring engines for growth. But they will also increasingly have to contend with new and powerful forces that may hold us back.


The New York Sun

© 2025 The New York Sun Company, LLC. All rights reserved.

Use of this site constitutes acceptance of our Terms of Use and Privacy Policy. The material on this site is protected by copyright law and may not be reproduced, distributed, transmitted, cached or otherwise used.

The New York Sun

Sign in or  Create a free account

or
By continuing you agree to our Privacy Policy and Terms of Use