The Welfare State Goes Corporate, Pt I: The 1973 Oil Crisis

Update 12/13/2021: Hello spammers. It seems you visit my site to promote your products – camper couches, motorhome blinds, men’s hairstyles, van roof, bus furniture, bus part, van slideouts, camper renovation, motorhome cabinets, motorhome remodel, truck roofing, commercial dent, trailer seat, truck furniture, commercial washing, RV maintenance, etc. This blog site is for people legitimately interested in the topics written about here. Spam comments are blocked. 

This is the first of a series of blog posts about the U.S. corporate welfare state or plutocracy we live in now and how it came about.

Historical background: We begin with the Great Depression of the 1930’s. The U.S. gets up off the canvass and soars economically for about 4 decades. The consumer society takes off like a rocket. Blue-collar factory jobs pay enough for a single breadwinner to buy a home in the suburbs and send the kids to college. The U.S. is a superpower and can afford to rebuild Europe and Japan after WWII, so these countries grow even faster than the U.S. The postwar boom period, like all booms, can’t last forever. The stability starts falling apart with cultural upheavals and “revolutions” ranging from civil rights to war protests to feminism. The Bretton Woods global economic system with the U.S. starring as global hegemon starts to unravel. As the civil unrest carries Americans into the 1970’s, the economic and political shit really hits the fan. Lots of crises pile up and the 1973 OPEC oil embargo is just one among many crises of this period. The basic “big government” support of the economy gets hammered by the collective pile of these crises (Bretton Woods collapse, stock market plunge, surging inflation and unemployment, crop failures, increased dependence on OPEC oil). Thus, the old liberal “big government” philosophy becomes passé and the “free market” philosophy as espoused by ideologues like Milton Friedman and Friedrich Hayek takes center stage in the 1970’s. Even before Reagan, the political and economic tide turns and the big corporations start assembling their own welfare state and dis-assembling the welfare state that has been battered by those crises.

43 years ago, on October 6, 1973, Syria and Egypt, with support from other Arab nations, launched a surprise attack on Israel, on Yom Kippur. For the first three days it seemed to Israeli leaders that their worst fears were coming true, to be overrun by the Arab nations surrounding them. Egypt’s president, Anwar Sadat, had met with Saudi Arabia’s King Faisal on August 23 and was rumored to have told him he intended to attack Israel. Immediately after Sadat departed, Faisal warned the U.S. that Saudi Arabia would limit its oil supplies, declaring: “America’s complete support of Zionism against the Arabs makes it extremely difficult for us to continue to supply the U.S. with oil or even to remain its friend”.

The big U.S. oil companies, So-Cal, Texaco, Mobil, and Exxon still owned Saudi Arabia’s major oil company, Aramco at this time. They were afraid of losing their access to the Saudis’ oil and chose sides. Texaco, So-Cal, and Mobil publicly demanded that the U.S. government change its Middle East policy to oppose Israel. President Nixon disagreed, authorized Operation Nickel Glass, a strategic airlift to deliver weapons and supplies to Israel, after the Soviet Union began sending arms to Syria and Egypt.

On October 16 OPEC raised the price of oil 70% to $5.11 a barrel in response to American aid to Israel. The next day OPEC announced oil production would be cut 5% a month until Israel withdrew from all occuppied territories. On October 18, Saudi Arabia ordered a 10% cut in its oil production.  On October 19, Nixon requested Congress to appropriate $2.2 billion in emergency aid to Israel, including $1.5 billion in outright grants. This $2.2 billion decision triggered a collective OPEC response. Libya immediately announced it would embargo oil shipments to the United States. Saudi Arabia and the other Arab oil-producing states joined the embargo on October 20, 1973. OPEC blocked all oil deliveries to the U.S. as a “principal hostile country”. In December OPEC set the oil price at $11.65 a barrel, a 468% increase over the 1970 price. The embargo hurt the American and global economy, but not the oil companies. In the case of Saudi Arabia it was the U.S. oil companies that acceded to the Saudis’ wishes. Plus, these oil companies did not accept lower profits but complied with the price hikes and passed these on to American consumers by raising gas prices. In an incredibly short period of time, control over arguably the most important resource in the world changed hands from the oil companies to the oil nations.

The larger significance of The 1973 Oil Crisis is that it marks the ending of what some scholars call “The Golden Age of Capitalism”, the post-World-War-II boom period where the U.S. was the sole major player in WWII not left in rubble and able to fund the rebuilding of Europe and Japan after the war. Ironically, author Neil Davidson notes that the “Great Boom between 1948 and 1974” was a “time of deep frustration for multinational capital”. The New Deal and Great Society programs in the U.S. and welfare states of Europe apparently frustrated the capitalist ruling class (bourgeosie) and the neoliberalism era was ushered in. The term “neoliberalism” indicates the free market philosophy favoring freedom from government intervention in the economy. But the unmentioned aspect of this is the government intervention on behalf of the corporations like tax breaks and subsidies and removal of laws helping workers, consumers, and the environment. The postwar boom period is more accurately described as regulated capitalism and this regulation allowed the non-wealthy to prosper and increase their standard of living along with the wealthy.

In the postwar 1947-1973 period the U.S. had the fastest and most widely shared economic growth of any long period in U.S. history.  The postwar real family income growth (inflation taken into account) was shared among all income strata: The top 5% increased 86.7%, the top income quintile- 99.6%, 2nd highest quintile- 112.6%, middle quintile- 108.6%, Second lowest- 103.0%, Lowest- 131.4%.  The economic growth from 1979 to 2007 was 74.0% for the top 5%, 51.7% for the top quintile, 28.2% for the 2nd highest quintile, 18.0% for the middle quintile, 11.0% for the 2nd lowest, and 0.6% for the lowest quintile. From 1933 to 1973, the overall economy (GDP, Gross Domestic Product) grew 600% with an average annual growth rate of 4.88%. From 1973 to 2015 the U.S. GDP grew 202% with an average growth rate of 2.77%.

In 1973, the median male worker earned just over $49,000 when adjusted for inflation, while in 2010 that worker made about $1,500 less. Yet, in the same period, the output of the economy has more than doubled, and the productivity of workers has risen steadily. Statistics for income typically include female workers under the rubric “family income” which obscures the fact that over a 40+ year period the median male income decreased beginning in 1973.

The confluence of early 1970’s crises marked the transition from a social welfare focus of the U.S. government to corporate welfare. In response to these crises, the major corporations revolted and started building the plutocracy we have now, with profits flowing up and austerity flowing down. The 1973 Oil Crisis was just blow among many against the American economy.  At the same time the Stock Market was crashing. The Dow Jones had peaked at 1, 051.70 on Jan. 11, 1973 and plummeted to 577.60 by Dec. 1974. Measured in constant dollars the Dow Jones was below its early 1950’s level. Corporations at that time were in a profit trough were profits averaged 0.1% from 1966 to 1979 while wages and salaries rose 3.0% annually.

In 1974 and 1975 the American economy was mired in a deep recession, the severity of which was exceeded only by The Great Depression of the 1930’s. The 600 percent increase in the price of oil was translated into an inflation rate of 10%, a post-World-War-II high; and unemployment was 8.5%, the highest since 1941, a major drop in the GNP (gross national product), and an oil import bill that shot up more than 300% from $7 billion in 1973 to $23.4 billion in 1974. Industrial production fell for 21 consecutive months, accounting for a drop of 13%. Contributing to these economic woes was the 1972-3 agricultural price explosion.  Wholesale agricultural prices rose 18.8% from November 1971 to December 1972, having been exempted from Nixon’s price controls.   The Soviet Union suffered a massive disaster in grain production, leading to a huge increase in imports from the U.S. Farm crises continued as the U.S. soybean crop was damaged by wet weather in Spring 1974. With the explosion of embargo-induced oil prices, the effects rippled through the whole economy and inflation topped 10% during the final phase of Nixon’s wage and price and controls. All the adverse events and attempts to remediate them created chaos and despair for Americans.

The 1973 crises mark the turning point where the traditional Keynesian “big government” policies could be blamed and the free market trickle-down philosophy could gain political momentum. The fact remains that all boom periods have an ending and that no government tinkering with the economy is flawless. Many mistakes were made, especially by the Nixon administration, and these came on the tail of the collapsing Bretton Woods system created in 1944, that also had flaws (to be described in later blog posts). The crises caused the political shift from “big government” to free market policies whereby the U.S. morphed into a crony capitalist welfare state, where big corporations get representation in government, tax breaks, subsidies, and the pretense of this corporate welfare trickling down to the non-wealthy seems to justify this dysfunction. The former United States of the postwar era with all strata of society experiencing unprecedented economic growth cannot seem to escape the epithets of “big government” or “nanny state” proclaimed by devotees of free market capitalism (as if the “free market” actually existed outside the imaginations of Austrian/neoclassical economists). The key distinction I see is between welfare for all the citizens or just the welfare for the wealthy citizens. The dismantling of the 1933-to-1973 social democracy and its replacement by a plutocracy has been a lengthy complex process.

There are many other factors, cultural, economic, and geopolitical that contributed to the American shift from social democracy (welfare for all) to plutocracy (welfare for the wealthy). The Yom Kippur War beginning on Oct. 6, 1973 and the ensuing OPEC embargo and oil crisis are key events to begin an examination of how the welfare of all collapsed and was replaced by welfare for the wealthy. The other factors will be discussed in more blog posts on “The Welfare State Goes Corporate”.

References: How Revolutionary Were the Bourgeois Revolutions by Neil Davidson

The Shock Doctrine by Naomi Klein

Economics: The User’s Guide by Ha-Joon Chang

Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan

Masters of the Universe: Hayek, Friedman and The Birth of Neoliberal Politics by Daniel Stedman Jones

The Tyranny of Oil by Antonia Juhasz

The Rise and Fall of Neoliberal Capitalism by David M Kotz

The Strange Non-death of Neoliberalism by Colin Crouch

The American House of Saud by Steven Emerson

The Oil Kings by Andrew Scott Cooper 

The Supply-Shock Explanation of the Great Stagflation Revisited by Alan S. Blinder & Jeremy B. Rudd, National Bureau of Economic Research