What Happened to the US Economy in the Early 1970s?

Over the decades as a professional economist and pundit, I’ve noticed that there are several metrics of US economic health that people offer to bolster whatever government or Fed policy they support. And on many of them, things seem to “go wrong” in the early 1970s—even if the people posting the graph try to pin the blame of the Reagan administration (which didn’t happen until the 1980s) or the US being the global reserve currency (which happened in the 1950s).

In this post, I’ll first showcase some of these popular graphs, and then I’ll offer my own explanation to solve the mystery.

Graphs Showing US Problems Starting in the 1970s

Before jumping in to the charts, let me offer a disclaimer: In this breezy post, I’m not going to write up a full-scale analysis of each metric. There is much that could be said, pro and con, for each of the following, and many would argue that some of the following charts are misleading.

But that’s basically my point in this post: By getting hip deep into the weeds on any of the following issues, we lose sight of the forest. Rather than going to battle over whether a trade deficit is good or bad, or whether charts of “labor compensation” fully take into account employer-provided health insurance benefits, let’s instead just remark on the fact that all of the following charts have the same basic inflection point, in terms of timing.

First we have the US trade balance, annual average, as a share of GDP, from 1929-2024:

From 1946 through 1971, there was only one year (1953) where the US had a trade deficit, and that was a mere 0.2% of GDP. On the other hand, from 1972 through 2024, the US had a trade deficit in every single year except two. (They were in 1973 and 1975.) From 1976 through 2024, the US had an uninterrupted string of trade deficits, with the annual figures averaging 2.6% of GDP over the period.

Now we turn to an alleged disconnect between the growth in labor productivity and worker compensation, which many left-leaning think tanks and pundits mark as beginning in the 1973 recession:

And finally, the economists focusing on income and wealth inequality likewise document a remarkable shift in trends that mysteriously occurs in the early 1970s. From the Roaring ’20s through the Depression and New Deal, inequality (by their metric) was steadily falling. Yet the trend was arrested and reversed beginning in the early to mid-1970s; it was clearly not due to Ronald Reagan’s “tax cuts for the rich.”

The Missing Link

For students of US monetary history, the obvious common link to all of these charts is Richard Nixon’s fateful decision to take the US dollar off of gold in 1971. To understand how that policy decision might affect the above charts, see my video here. For a comprehensive yet accessible treatment of US monetary history, see my free online book.

Conclusion

In this quick post, I am not attempting to quell all doubts concerning my thesis. I am merely pointing out that people on the left and right complain about certain trends in US economic history that all mysteriously get bad right around the early 1970s. It’s not a crazy notion to think that making a fundamental change to US monetary policy might have something to do with it.

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