1869, Ep. 151 with Michael De Groot, author of Disruption

2:06PM Aug 8, 2024

Speakers:

Jonathan Hall

Michael De Groot

Keywords:

cold war

soviet bloc

1970s

eastern europe

world

west

soviet union

oil

soviet

economic

debt

eastern european

united states

socialist

trade deficits

export

soviets

eastern europeans

global economic

big

Hall, welcome to 1869 the Cornell University Press Podcast. I'm Jonathan Hall. In this episode, we speak with Michael DeGroot, author of the new book Disruption: The Global Economic Shocks of the 1970s and the End of the Cold War. Michael DeGroot is Assistant Professor of International Studies at Indiana University Bloomington, where he teaches and researches the international, diplomatic and economic history of the 20th century. We spoke to Michael about his research showing that the global economic upheaval of the 1970s was instrumental in ending the Cold War; how the United States during this time was able to use debt and large trade deficits to its advantage while the Soviet bloc simply could not; and what lessons we can learn from this time period to help us navigate our current troubles today. Hello, Michael. Welcome to the podcast.

Thank you for having me.

Well, it's a pleasure, and I'm excited to be talking to you about your new book, Disruption: The Global Economic Shocks of the 1970s and the End of the Cold War. Tell us the backstory to this book. How did it come to be?

I became interested in the 1970s in large part because that was where the cutting edge of the declassification process was for archival materials in the United States, Europe and Russia. To an extent I remember the first time I went to the National Archives in College Park, and I said that I was interested in international economic affairs in the 1970s and the archivist laughed and said, Good luck, because most of those materials are not yet processed. But over the years, I was able to accumulate quite a lot of of of material from from archives in the US Europe and in Russia. And I was also interested in the 1970s because it was a decade that I really didn't quite understand. Detente had long been the intellectual framework that scholars have used to understand the Cold War in the 1970s but the more I got into the materials, the less I thought that detente explained what was really driving international affairs in the 1970s just to give an example, in the 1950s and 1960s the Cold War looked very, very different than than what it would say in the 1980s and there's something that happened in the 1970s that caused this transformation, and I became interested in figuring out what exactly that was. And the answer that I came up with was that both sides were subjected to global economic shocks in the 1970s economic shocks that transcended the Iron Curtain and pummel industrial states of all ideological stripes. And I was also thinking about this project in the context of the recovery from the 2008 financial crisis, where capitalism had had survived, reimagined itself in some ways. And I began to draw some parallels between the post 2008 environment and the 1970s and began to wonder, why is it that capitalism was able to endure and restructure in the 1970s and 2008 but perhaps hadn't done quite so well in in in the 1930s

Interesting, interesting, and we'll get to it a little bit. There's also some parallels with our modern day right now, but we'll get to that in a little bit. So, yeah, so that's, that's fascinating. You know, you're talking about the Cold War, and people that just, you know, perhaps just follow the news, most people think of the end of the Cold War, they would, they see the headlines or the photos of Ronald Reagan and Mikhail Gorbachev, they think, oh, that's how the Cold War ended, and then those were the major actors. But what I think is fascinating about your book, you say, Hold on, it's actually this global downturn that was that sowed the seeds for the end of the Cold War. Tell us about your research.

Well, Gorbachev and Reagan are both compelling figures with big personalities, so it's not hard to understand why so many have been drawn to to the two of them to explain the end of the Cold War and the events of the night of the late 1980s themselves, Eastern European revolutions are chock full of big personalities and brave protesters pouring onto the streets to demand an end to the to the oppressive communist regimes. But as I as I mentioned a little bit earlier, the more I got into the documents, the more I recognized that the options available to policy makers on both sides of the Iron Curtain had been established based on structural shifts in the previous decades and. So during the 1970s the Soviet bloc and the industrial democracies struggled with a common set of challenges, things such as the exhaustion of the economic growth model, the collapse of the Bretton Woods system, upheaval in the commodities markets, stagflation in the West, or what was called the story or stagnation in the east, and what I found was that the West's ability to adapt to these challenges, that adaptation was imperfect, it was messy, it was very painful, but it was an adaptation that remade the American relationship with the rest of the World and also augmented American power in some unexpected ways. The United States, which had formally disseminated resources to the rest of the world and had very large trade surpluses, it had served as a net creditor to the world since the First World War. In the 1980s those relationships had completely inverted. Now the US was a net debtor, and it ran large trade deficits. But the fact that the United States was now drawing on the resources of the rest of the world meant that it was able to live beyond its means, do things such as invest in a very large military buildup in the first half of the 1980s it could fund, continue to fund, social safety nets. And so even though this adaptation was imperfect, it allowed the the United States and the West more broadly, to continue the Cold War campaign, whereas in the east, the inability to adapt to the global economic shocks of the 1970s circumscribed socialist policy makers options in the 1980s so Gorbachev, even though we can see legitimate new departures in foreign policy, that he initiated initiatives such as the common European home, the so called new thinking and things of that nature, he was still boxed in by economic weakness at home and the the climbing sovereign debt in Eastern Europe. So even though Gorbachev did innovate in some pretty significant ways, the argument that I make in the book, which I think is probably one of the more provocative arguments that I try to make here is that any Soviet leader would have had to deal with these challenges, and the way that he dealt with them had a lot more in common with its predecessors than we, than we typically think, interesting,

interesting before, before we we analyze the, you know, the end game of the Cold War. You, you, come up with this really interesting concept of the welfare empire? Could you tell us more about that?

Well, the welfare Empire is a way of describing how both the Soviet bloc and the West operated. It describes a distribution the flow of resources from the superpower to the Allies. This is a different way that we typically think about empires, where the Metropole extracts resources from the colonies, but here, the flow of resources are going in the opposite way, and the reason that both Moscow and Washington put up with this situation, number one, they had margins of prosperity in the 1950s and 1960s that allowed them to afford this, this relationship, and number two, they each believed that it served their own national security. In other words, democratic capitalism could not survive in the United States if it were not allowed to prosper in key areas abroad, principally Western Europe and Japan. And the way to ensure that democratic capitalism and its various forms would prosper in Western Europe and Japan was to provide military assistance, economic assistance, financial assistance and other other forms. And you can see a similar dynamic in the Soviet case. By the mid 1950s or so, after a few years of plundering and exploiting Eastern Europe, the Soviet Union turned to a similar model, in which it began to subsidize the development of Soviet socialism in Eastern Europe, to ensure that Eastern Europe would become strong socialist states, which would in turn enhance Soviet national security. And what I found is that in the 1970s this distributive relationship on both sides became untenable. And you can see a common theme of frustration in both Moscow and Washington as they recognized that they no longer had the means to continue this relationship and the and the terrible thing about it, from both perspective, was that their allies needed assistance most in the 1970s as they began to deal with the with the global economic shocks and this welfare empire. Here in the western case was completely remade in the 1970s and 1980s as I mentioned a little bit earlier, this welfare empire in the US case becomes inverted. So instead of disseminating resources to the rest of the world, as it had in the 1950s and 1960s by the 1980s the United States not only was running trade deficits, the likes of which the country had never seen, but it also would become the world's largest debtor. And the fascinating, remarkable thing about this inverted relationship is that in most cases, when you see countries running huge budget and trade deficits, you would assume that they would not be doing quite so well, but it's because of the very unique American ability to draw on foreign capital, the attraction of American Treasury debt, the security that investors felt placing the money in that in that asset, the booming American market, the resurgence of non inflationary growth allowed this relationship to take hold, and it has existed in one form or another all the way up until the present day. There's a reason that the US sovereign debt right now is north of $34 trillion and yet you have Treasury Secretary Janet Yellen telling the country that it can afford to wage two wars, one in to support two wars, one in Eastern Europe and one in the Middle East at the same at the same time. A lot of the the economic logic crystallized in the late 20th century that has allowed this to move on. The problem for the Soviet bloc, however, for the Soviet Union, is that it never could remake that relationship. So instead of the United States, which would draw on its allies, the resources of its allies, as a source of mutual strength, the Soviet Union could never draw on Eastern Europe as a source of strength. And on the contrary, the continuing economic and political atrophy, the escalating debt crisis in Eastern Europe just weighed more heavily on on Moscow all the way up until it finally broke in the late 1980s

Interesting, interesting. Thanks for sharing all this. It's amazing. We're talking about trade deficits in the trillions now, when it first started in the 80s, you have a quote here in the book that in 1984 it had passed $100 billion mark, and now that's pennies compared to what it is now. And you have this great quote from the British ambassador Oliver Wright, talking in December of 85 saying, if any other country had run its economy the way the United States have run theirs, it would have had the IMF, the International Monetary Fund, brokers, men in long ago. So it would have been seen as a, you know, this is a really big problem, but as you said, the US was able to to do that because of their unique advantages and their size, the size of the market. Moscow couldn't do that with Eastern Europe. It's interesting to see. You know how after World War Two, the US embraces Germany, the US braces Japan its former enemies, and then builds them into markets that help the United States. East Germany could have been potentially that for the Soviet bloc, but it didn't work. Tell us more about why Eastern Europe couldn't do that, and why they were drowning in debt, and they actually were, in fact, dependent on the industrial democracies that were supposedly their enemy in the Cold War. They're actually dependent on the west for their own survival.

Well, the story that I'm that I'm telling in the book is in some ways a very structural story. But there are also key moments when human agency and political decisions matter quite a lot, and we can see this in the Eastern European decision to turn to debt led development in the late 1960s and early 1970s as a solution to the growing recognition, to the growing recognition that the economic growth model that the Soviet bloc had used during the post war period was finally running out of steam. So in quantitative terms, qualitative a little bit different, but in quantitative terms, the Soviet bloc economic growth rates were compared favorably to those in the West, with the exception of Japan, who is blowing everybody else out of the water, but compared to Western Europe, they're doing quite well. Then something begins to happen in the late 19 somewhere in the late 1960s depending or mid 1960s depending on which country we're talking about, the one time industrialization push kind of runs out of steam. Reconstruction runs out of out of steam. At a certain point there are no more idle resources and and peasants to ship to to the new to factories during the industrialization push. And the question, the vexing question that is. Uh, confronting all socialist policy makers is, what do we do now to ensure that economic growth can continue? And it's important to stress that this is not just an economic issue, but this is a serious political, uh, social and ideological issue as as as well. If the if social Soviet socialism claim to legitimacy is that it can provide a superior, or at least compelling alternative model of organizing society to decadent, exploitative capitalism in the West. Well, then you lose a source of legitimacy when your economic growth rates begin to drop and living standard, the gap in living standards between the West and the Soviet bloc begins to grow. So this is a huge problem with enormous implications for the ideological Cold War, and the decision that the Eastern Europeans make, more or less across the board, is that the key to reigniting growth would be to draw on the west for its technology, to to some extent, for its consumer goods. Apply those technologies in socialist in socialist states, rely on cheap raw materials from the Soviet Union and apply the superior Socialist Labor model. And once these three factors are combined, the Eastern Europeans would develop robust industrial factories that can produce goods that the West will want to buy. You ship those goods back to the West in order to pay off the debt that you needed to import the technology and the goods in the first place. So this is a big bet that this is going to work. The problem for the Eastern Europeans is it doesn't. And as the process goes on, the debt continues to climb. You have one of two paths. Number one, you can turn to austerity and try to live within your means. But as I already mentioned, this is this is a big political problem. You're asking the the working class, the very constituency that the the proletarian dictatorships are supposed to represent, to accept likely drops in their living standards. The easier political choice was to kick the can down the road and continue to take on this debt, to draft very ambitious and really impossible export targets sometime in the future and assume that it's going to work out. But again, the problem is that it doesn't. And so this cycle continues. And by the late 1970s a lot of the countries are taking on loans not to pay for not just to pay for new resources, but to help pay off old loans. And so this is a cycle from which they're never able to get out and the late and the 1989 revolutions in Eastern Europe, I think, are best seen as, as the consequence of a debt crisis. Wow, wow.

You would, that's fascinating. You mentioned the, you know, the possibility that Eastern Europe could export, you know, get that, get out of their debt through exports. And you remember the Yugo, the car from Yugoslavia, yeah, sure. Or even the trabajan, like these products weren't going to make it in the West, compared to, you know, Mercedes Benz or BMW. It's, kind of sad to see that this inversion within the Soviet bloc, with it for the economy of the for the welfare empires, it just just wasn't going to work. And your research shows that

one of my favorite statistics here is that East Germany, which is, by most standards, the most advanced industrialized economy, one that was focused on building machine tools, chemical products and things of that nature. So the epitome of industrial success in the Soviet bloc, by the early 1980s only about 10% of its exports to the non socialist world was manufactured goods. In contrast, I think around 30, 35% was re exported oil from the Soviet Union. Oh, my God, you can see how this country, again, supposed to be the most advanced, uh, industrialized country in the Soviet bloc was was struggling on the world market. And this at a time when global capitalism was surging, and so there was a lot of there was a lot of demand, interesting,

interesting, and petroleum you described in the book that the Soviet bloc was, in a way, a petrol empire. Tell us a little bit more about that.

Well, so. The Soviet Union. It's it's cash cow then, as as now, was its energy industry, particularly oil, and to a lesser extent, natural gas. And oil played a big role in the Eastern European debt led development plan. As I mentioned, we have really three factors, technology from the West, cheap raw materials, particularly oil, from the Soviet Union and then what they saw as superior Socialist Labor Organization. So oil was a key, was a key good that the Soviet Union subsidized to help build socialism in Eastern Europe. The problem for the Soviets is that they really didn't want to continue to subsidize oil because they had their own growing economic problems. And during the 1960s and the early 1970s the subsidy that the Soviets offered Eastern Europe wasn't all that low, wasn't all that big, because of the way that they determined pricing in in the Soviet block in the comic con, one that took a delayed average of world market prices during during the previous few years. And the subsidy wasn't that big, because oil prices in the capitalist world were were fairly steady in the in the post war period, all the way up until the early 1970s and particularly the oil shock of 1973 and then the second one toward the end of the 1970s and the Soviets were confronted with a with a really difficult problem, because on one hand, they were providing subsidized Oil to their Eastern European allies, on whom, on whose success the Soviets depended for their national security. But on the other hand, the opportunity cost of continuing to subsidize that oil is that there were far more profitable opportunities to export that oil to the capitalist world, where you would pay hard currency at world market prices. And so over time, in the late in the in the 1970s and into the early 1980s the Soviets were dealing with the frustration of this, of this, of this trade off.

Wow. Well, you had mentioned earlier on the parallels that you saw with the economic downturn in 1970s with the economic downturn of 2008 and now we're looking at also a parallel with our current day. Now, again, we don't have the oil shock of 73 but we're battling inflation, a lack of faith in democratic political institutions, we've essentially entered a new Cold War since the invasion of Ukraine. What lessons can we bring for the 1970s that will help us navigate these difficult times?

Well, the 1970s beckon in a lot of ways. Is a useful historical analogy, and there are a lot of parallels, whether it's inflation, we can look at 2022, the spike of oil prices after, after the Russian after the second Russian invasion of Ukraine. Mentioned a lack of faith in democratic political institutions, geopolitical tensions around the world. So I think it is quite attractive. I think that the best use for historical analogies, however, is not to draw on the similarities, but instead to identify the differences. Because if we, if we dwell too much on the similarities, then we may end up applying a policy prescription that that may have worked to an extent in one era, but is misaligned in the current So to give an example, there are a lot of calls for the Federal Reserve to take a draconian stance to the rise of inflation in the early 2020s looking back at the 1970s but the economic situation Today is different than what we had in the 1970s the causes of inflation, in other words, were different in the 1970s than they were, than they are in the in the in the 2020s but that's not to say that I don't think that we can learn, that we can learn nothing from from the Cold War. I think one of the enduring lessons of the Cold War is the importance of ensuring that democratic capitalism and its various forms work effectively. And this goes back to how I try to reframe the Cold War, not so much as a as a military conflict, but instead thinking about it as a competition between two ways of organizing political economy. So we need to think about not only contesting the projection of Russian power where it doesn't where it doesn't belong, but we also need to think about tackling issues such as you. Increasing inequality as as as geopolitical issues. These are not simply economic and social issues, but these are issues vital to to national security. And this is a, this is a an issue that I think contemporaries of the Cold War understood, and it's something that we need to be cognizant of as we navigate the great power conflicts of the 2020s

Interesting, interesting. Wow. Well, this is a fascinating time period, again, with parallels to our current age. But anyone that's interested in and who has, even you know, lived through the Cold War and the end of the Cold War, I think they'd be really interested in learning more about your research, and I would strongly encourage anyone that liked this interview to read Michael's new book, Disruption: The Global Economic Shocks of the 1970s and the End of the Cold War. It was a pleasure talking with you, Michael,

Thanks for having me.

That was Michael DeGroot, author of the new book Disruption: The Global Economic Shocks of the 1970s and the End of the Cold War. You can purchase Michael's new book as an affordable paperback at our website, Cornell press.cornell.edu, and use the promo code 09 pod to save 30% off if you live in the UK, use the discount code csannounce and visit the website combined academic.co.uk Thank you for listening to 1869 the Cornell University Press podcast.