This post looks at an article very much worth reading. The author does something rare among sociological or political analysts: showing how current problems (sometimes) result from past reforms. This post sketches out his reasoning, not just to understand the origins of the destructive increase in US inequality of wealth and income — but also to as an example of how we should approach other problems.
“Nostalgianomics “, Brink Lindsey, Reason, June 2009 — “Liberal economists pine for days no liberal should want to revisit.” This is a summary of “Paul Krugman’s Nostalgianomics: Economic Policies, Social Norms, and Income Inequlity“, CATO Institute, 9 February 2009.
Lindsey’s opening quotation from Paul Krugman, the Nobel Prize–winning Princeton economist and New York Times columnist, in his recent book The Conscience of a Liberal.
“The America I grew up in was a relatively equal middle-class society. Over the past generation, however, the country has returned to Gilded Age levels of inequality. … The middle-class America of my youth is best thought of not as the normal state of our society, but as an interregnum between Gilded Ages. America before 1930 was a society in which a small number of very rich people controlled a large share of the nation’s wealth.
… Middle-class America didn’t emerge by accident. It was created by what has been called the Great Compression of incomes that took place during World War II, and sustained for a generation by social norms that favored equality, strong labor unions and progressive taxation.
Lindsey explains some of the factors creating the large US middle class:
The Great Compression is a term coined by the economists Claudia Goldin of Harvard and Robert Margo of Boston University to describe the dramatic narrowing of the nation’s wage structure during the 1940s. The real wages of manufacturing workers jumped 67% between 1929 and 1947, while the top 1% of earners saw a 17% drop in real income. These egalitarian trends can be attributed to the exceptional circumstances of the period: precipitous declines at the top end of the income spectrum due to economic cataclysm; wartime wage controls that tended to compress wage rates; rapid growthin the demand for low-skilled labor, combined with the labor shortages of the war years; and rapid growth in the relative supply of skilled workers due to a near doubling of high school graduation rates.
Yet the return to peacetime and prosperity did not result in a shift back toward the status quo ante. The more egalitarian income structure persisted for decades. For an explanation, Krugman leans heavily on a 2007 paper by the MIT economists Frank Levy and Peter Temin, who argue that postwar American history has been a tale of two widely divergent systems of political economy. First came the “Treaty of Detroit,” characterized by heavy unionization of industry, steeply progressive taxation, and a high minimum wage. Under that system, median wages kept pace with the economy’s overall productivity growth, and incomes at the lower end of the scale grew faster than those at the top.
The paper he refers to is “Inequality and Institutions in 20th Century America“, Frank S. Levy and Peter Temin (both MIT Professors), 27 June 2007 — a must-read for anyone interested in this important issue. Abstract:
We provide a comprehensive view of widening income inequality in the United States contrasting conditions since 1980 with those in earlier postwar years. We argue that the income distribution in each period was strongly shaped by a set of economic institutions. The early postwar years were dominated by unions, a negotiating framework set in the Treaty of Detroit, progressive taxes, and a high minimum wage – all parts of a general government effort to broadly distribute the gains from growth. More recent years have been characterized by reversals in all these dimensions in an institutional pattern known as the Washington Consensus. Other explanations for income disparities including skill-biased technical change and international trade are seen as factors operating within this broader institutional story.
However, in the 1960’s the major trends reversed — social, technological, political, and economic factors all combining to increase inequality in wealth and income (and also, although not discussed here, decrease social mobility). The most commonly cited fall into two groups, each with different public policy implications.
Under the conventional view, rising inequality is a side effect of economic progress — namely, continuing technological breakthroughs, especially in communications and information technology. Consequently, when economists have supported measures to remedy inequality, they have typically shied away from structural changes in market institutions. Rather, they have endorsed more income redistribution to reduce post-tax income differences, along with remedial education, job retraining, and other programs designed to raise the skill levels of lower-paid workers.
By contrast, Krugman sees the rise of inequality as a consequence of economic regress — in particular, the abandonment of well-designed economic institutions and healthy social norms that promoted widely shared prosperity. Such an assessment leads to the conclusion that we ought to revive the institutions and norms of Paul Krugman’s boyhood, in broad spirit if not in every detail.
Lindsey then shows that there were a deeper set of social policies which supported a large middle class.
- Cartelization of businesses — One of the major policy objectives of the new Deal, mostly done through a web of regulations which limited the ability of smaller companies to gain market share through business or technical innovation.
- Cartelization of labor (unions) — Another major objective of the New Deal, which limited competition among workers.
- Trade Barriers, formal and informal — Also limited business competition (from foreigners), allowing high business profits and high wages.
- Racism — Restricting many minorities access to education and training, limiting labor competition.
- Sexism — Ditto.
- Limited immigration — Another powerful mechanism to limit labor competition and support high wages.
- Social conformism — Mechanisms enforcing social norms, limiting individuals’ ability to extract the maximum gain from their position in the economy.
Initiatives by both left and right have weakened or totally dismantled these. Greater inequality is the inevitable result.
- That does not mean that these reforms were bad things.
- That does not mean that public policy measures cannot mitigate (or even reverse) these trends.
- It does mean that too much analysis of the problem is superficial and hence likely to be (at best) ineffective.
We tinker with our society like a child banging on a keyboard, usually with little thought of the net (i.e., holistic) effect of our reforms. Lindsey’s article is powerful illustration why this does not work very well. I recommend reading it.
About the author
Brink Lindsey is vice president for research at the Cato Institute, which published the policy paper from which this article was adapted.
Afterword
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
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For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
Posts on the FM site about solutions, ways to reform America:
- Diagnosing the Eagle, Chapter III – reclaiming the Constitution, 3 January 2008
- Obama might be the shaman that America needs, 17 July 2008
- Obama describes the first step to America’s renewal, 8 August 2008
- Let’s look at America in the mirror, the first step to reform, 14 August 2008
- Fixing America: shall we choose elections, revolt, or passivity?, 16 August 2008
- Fixing American: taking responsibility is the first step, 17 August 2008
- Fixing America: the choices are elections, revolt, or passivity, 18 August 2008
- What happens next? Advice for the new President, part one., 17 October 2008
- What to do? Advice for the new President, part two., 18 October 2008
- How to stage effective protests in the 21st century, 21 April 2009
- Sources of inspiration for America’s renewal, 23 April 2009
- The first step on the road to America’s reform, 29 May 2009
Great stuff. This is the sort of big-picture analysis we need more of, rather than a collective memory that goes back only to the last presidential administration. While I would take issue with some of the specifics, and add quite a few other chapters to the narrative, I won’t do so here. The overarching thesis is sound: that various well-meaning, individual “reforms” can have far-reaching unintended consequences. True of most fields of endeavor, particularly one as complicated as an entire society.
To me the elephant in the room as regards his thesis is the fact that in the initial post-war period every other industrial power of consequence had literally been reduced to rubble, penury, or both. While the internal social and legal changes are important, the devastation of all possible global competitors must surely contribute (glossed over by Lindsay with the usual stock phrases about “rising competition”). I believe that this, together with the alienation of the socially conservative working class from political activism during the 1960s (as well as their complacency given the gains already achieved) are additional factors.
Further not all “reforms” were meant altruistically. The attack by business on unions was quite conscious, and decidedly not undertaken for the greater good of the worker.
OK, I can see I’m rapidly abandoning my pledge of not quibbling with specifics so . . . To me the question is whether it is possible to return to something like the early post-war system without the nastier bits. Lindsay, like a good legislator, subtextually bundles the unpleasant with the unobjectionable and makes it a package deal (“oh, you liked having a large middle class, and blue-collar workers who could afford to take vacations, well then you also have to be in favor of racism and sexism!”).
For instance, out of your list of 7 factors, it seems like we could bring back 1, 2, 3 and 6 (limited but without psuedo-racial quotas) without significant moral hazard.
Richard Heinberg and the like would tell you that it was the mass produced internal combustion engine and oil that leveled the classes. Without it there would be much lower productivity with picks and shovels. Think WPA.
And of course, we are going back there soon.
One of their themes seems to be the loss of globalization. I believe that ships could run on coal, and as long as their is electricity, there will be globalization. You don’t need oil to run a factory, or fiber optics to a call center.
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Fabius Maximus replies: I’ve read Heinberg. Almost total nonsense. For an analysis of similar theories see Peak Oil Doomsters debunked, end of civilization called off, 8 May 2008).
One of the problems with the tinkering with our social systems is the unscientific manner in which changes are made. Science only enters the picture long after the changes are made, in an attempt to explain and quantify their effects on society. At this point its typically too late to undo any changes and several generations may have been negatively affected.
Truly effective management of society would require omniscience or greatly expanded hindsight (ie historical records from the future describing the modern day). As these are impossibilities, we are most likely stuck with our current level of tinkering, although it would be nice to see it attempt to embrace the scientific method occasionally.
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Fabius Maximus replies: This is a case of the perfect being the enemy of the good. While the wonder-analysis you describe is not likely in any reasonable timeframe (if ever), we can make far better use of our existing tools. Far better than the current spinning the dials like children, an almost total lack of analysis.
This is one of the silliest bits of analysis I’ve read. But first, credit to Phageghostfor pointing out the obvious thing missing in it — lack of competition in the post-war period from former industiral competitors. Once our allies and enemies were back on their feet, profits became much harder to come by for American businesses. Now, on to specifics:
1) “Cartelization of businesses — 2) Cartelization of labor (unions) 3) “Trade Barriers, formal and informal 4)”Racism — 5)Sexism. 6)Limited immigration 7) Social conformism
Most of these are dubious as empirical descriptions of the economy from 1935 to 1965, none were official public policy, and none have any explanatory value for the rise and decline of the middle class over the last fifty years. For example, take the factor of “sexism”. The writer implies that single earner families of the fifties and sixties were a cause of middle class prosperity, rather than a result, and that introduction of women into the workforce was the cause of decline, rather than the result of stagnant wage growth and rising prices.
Everywhere the writer seems to get it backwards, as in implying that social conformis, was a cause, not a result, of middle class prosperity, and that the “cartelization” of labort deprived workers of choice, by which logic the attempts starting with Reagan to diminish the power of unions were a case of business shooting itself in its own foot.
Buried beneath these pseudo analyses one hears the whine of hackneyed old right-wing social attitudes, hardly worth the trouble to bring to light.
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Fabius Maximus replies: I don’t see any basis for these criticisms.
(1) The unifying thread in these were restrictions on supply and competition — affecting both business and labor. Increased supply and less regulation — both formal and informal — has increased competition, resulting in concentration of wealth and income. Winners and losers. Why do you find that unclear?
(2) The focus of the article was on the changes in equality. WWII increased US prosperity, but need not have decreased equality. During the gilded age America’s aggregate wealth and income increased, but so did inequality.
(3) “none were official public policy,”
No public policy support for racism? Restrictions on immigration? Growth of unions? You have got to be kidding.
(4) The role of social norms was, as I noted, not discussed in this excerpt. You do not appear to understand his logic. I suggest reading the article.
(5) “cartelization” of labort deprived workers of choice, by which logic the attempts starting with Reagan to diminish the power of unions were a case of business shooting itself in its own foot.”
This totally misunderstands the author’s reasoning. The New Deal complex of policies benefited both labor and corporations. Which gave it stability. Dismantling key components weakened both sides. We saw a result recently with the bankruptcy of Chrysler and GM, and the resulting layoffs. We saw this in the last 30 years as competitors weaked corporate giants like IBM.
This does not mean that these changes were bad. Merely that they had unanticipated side effects, which we must understand in order to make the next series of public policy initiatives.
From the Lindsey article: “7. Social conformism — Mechanisms enforcing social norms, limiting individuals’ ability to extract the maximum gain from their position in the economy.”
If, by this statement, Lindsey means that people in the 20th century were more inherently conformist than now, then I’d like to see how this is proven. If Lindsey simply means that there were social norms against being a workaholic, then I don’t see how this was a bad thing, and feel it is really a social norm which ought to be brought back.
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Fabius Maximus replies: That is not at all what he means. You have to read the article to understand this point.
Re FM comments on # 4:
I wondered if I was completely missing the point of this article, since it seemed to bizarre to me. For example, labor (its strength, its wages, its success in prying concessions from business) has been under constant attack since the seventies. If labor strength was a component of middle class and business prosperity, why has business been attacking it? “Business cartelization” — what post-war industry demonstrates this? How many auto companies have vanished since 1950? Cartelization, or anti-competition, or monopolization is rather the trend of the present than the past, and it’s certainly not bringing business prosperity.
It’s a cliche that labor costs are considered a drag on business profitability. That’s why so many businesses have put their factories overseas. Is this writer actually going against conventional wisdom and saying business was wrong to dismantle labor unions?
At the same time, is he recommending that exclusion of non-white races, females and immigrants from the labor pool would be a positive thing? That’s like saying cars would be more efficient if we took the seats out of them. The point of a car is to transport people. The point of a democracy is to include all its citizens.
If this is typical of Cata Institute thinking, they need to get out in the world a bit more.
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Fabius Maximus replies: It probably is bizarre to you, as appear apply a good guy – bad guy cartoon version of life to a complex social reality. This blinds you to its key dynamics.
(1) The political and economic literature about the New Deal and its effects consistently stresses that cartelization of capital and labor were among its higher priorities. The MIT Levey-Temin paper gives a nice overview. I suggest you read it.
This cartelization allowed both high wages and high profits. As the “Detroit Treaty” broke down competition increased. This damaged both major sides in the affected industries, both labor and capital. For evidence look at the post 1975 results for the steel, airline, railroad, and automobile industries. Despite you insistence on seeing this as a zero sum game (between capital and labor), both sides lost.
(2) “At the same time, is he recommending that exclusion of non-white races, females and immigrants from the labor pool would be a positive thing?”
Both the article and my post explicitly say the opposite. What makes this valuable is that the author does what you seem unable to do: understand that good changes can have some bad side-effects, and that we must understand the actual dynamics in order to make effective public policy changes.
I will repeat the conclusions, which you appear either to have overlooked.
Analysis is okay and supports Krugman’s arguments. The disagreement with Krugman is manufactured and misses Krugman’s point, which is “policy matters.” The author is quiet as to whether or not “policy matters” and many of his arguments are not simply economic but cultural. Unfortunately Cato seems to have missed the 60’s.
The one area that seems to be Krugman’s weak spot is immigration. Lindsey contends that limited immigration (supply) kept wages high. Why is this issue not explored more and seen as a policy option? this is the question that should be force fed to Economists like Krugman.
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Fabius Maximus replies: This comment does not appear to grasp Lindsey’s primary point. Both he and Krugman agree that “policy matters.” Krugman says that the decline of the middle class results from abandonment of New Deal policies. Lindsey agrees that this has played a role, but that is far too narrow an analsysis. Other political and economic policy changes have played a role in this — as have broader social changes.
To over-simplify, the decline of the Middle Class has resulted from a wide range of changes — some of which are powerful reforms (e.g., fighting racism and sexism), but have had some undesirable side-effects. This message is unacceptable to a wide range of Americans, for whom good policy changes cannot have bad side-effects. That appears to be the position of senecal on this thread (if I correctly understand his objections).
Mankind is the business of the President by JFK
While not an objection, one question I have is whether or not the income and wealth inequalities discussed are the same between various age groups over the time periods involved. In other words are we seeing a “permanent” change or are we seeing inequality data heavily influenced by a couple of well off generations as they go from youth to old age?
Very good article. I wonder if we take out the increase in wealth of the financial sector, which took place towards the end of the observed time period, if the distribution would appear any better. Every policy has a positive and a negative effect and we, the people, should weigh them to see if they fit into our priorities. Of course the people have not done a good job on the priorities side of late as has been discussed much on this site. We periodicaly go through this it seems. The rise of anti-trust concept came about with the concentration of money and power in large coroporations in the late 1800’s. Another interesting time period in America.
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Fabius Maximus replies: I don’t have it handy, but the research I’ve seen suggests that the effect of the financial sector has been to increase inequality, due to the high concentration of wages within it.
It’s easy to forget the system as it actually functioned after WWII. Service records including I.Q. test scores routinely followed G.I.’s into the commercial world. My dad was the second smartest man on the battleship Missouri, (Told to him by the smartest guy, who gave the tests). These records caught up with him as a file clerk in the Veterans Administration. His boss called him into his office and insisted dad apply to college under the G.I. bill, even helped him do the paperwork.
What are the chances of this happening in today’s P.C. world? Back then,large corporations like G.E. routinely administered I.Q. tests to all job applicants, and used the data to acquire talent ignoring social status. An Old Boy network still ruled as an overlay, but second tier management was a pretty level playing field. There is a pretty straight line erosion of this Spartan meritocracy to the modern day.
As usual, the operators of keyboards have neglected to account for the practical skill sets that enabled the financial success of the post WWII middle class. The ability to make a sustaining and reliable wage processing, machining, and assembling tangible objects is a foreign concept to academics who relate Labor Effort in terms of pounds of paper and wealth distribution.
To wit; The modern worlds planner’s consternation when informed that a bolt has two ends and requires two wrenches, not just the one he authorized in his budget and the contemporarily educated office newhires’ confusion that keystrokes do not result in that bolt becoming installed in a proper fashion.
Some time in the early 70s US society devalued physical effort for the softer environment of the paper world. Large manufactures abetted by federal and state, education policies offloaded the production end of business to external operators. The domestic workforce was trained to become adept at financial manipulation, defining new illnesses, and regulating anything and everything in the service reducing risk to humanity. Did these solution sets generate problems? Indeed they did.
The US wealth distribution system has a hole in it. The three thinker/typers above are unlikely to have spent much of their lives within 100 yards of an individual with dirt under their fingernails or a grease spot on their shirt. One reason might be that there are so many fewer of those individuals per capita today. As the great wash of furloughed paper types dash about in search of financial sustenance, they find that even if they possessed the skillsets there is no place to go. There is no leg of the economic stool to tide us through the rough patches except government. While academics dither and pontificate, my sincere hope is that it will not take a war to re-invent the requirement for the skills and the intellectual knowledge for making tangible things.
The requirement exists for both.
I am glad you mentioned the loss of manufacturing jobs as having an impact, SSSailor. It was the first thing that struck me as a big miss in what these two gentlemen were saying.
There is something else that occurred in the early 80’s that I believe had an impact on lower wages. In our quest to follow the Japanese in their “Quality First” efforts, more decision making was moved to lower and lower levels of organizations. Organization charts started to flatten out dramatically. While this started in manufacturing firms primarily, it moved into non-manufacturing environments as well, excepting of course the Government, who never quite grasped the concept. While these efforts improved our productivity, it also resulted in fewer supervisory and management positions. Moving responsibility down and out, also reduced what would have been future salary increases from promotional opportunities that just went away.
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Fabius Maximus replies: Broadly speaking this is not correct, IMO. Dept of Labor — and much other evidence — shows that the overhead of administrators, supervisors, and managers has increased since the 1970’s. Organizations talk of flattening the hierarchy, but few have in fact done so.
I get a strong sense that people like Lindsay, which is to say economic fundamentalists, are enjoying a new sensation these days. Fear. I detect a certain desperation in this attempt to conjoin sexism and racism with a large and prosperous middle class. Lindsey seems to be an idealogue of the highest order. Institutionalized racial barriers began to fall in the 1950s with the integration of the military under Truman, and the integration of public schools under Eisenhower. As for sexism, who can forget Rosie the Riveter during WW2. And “flappers” before even that, not to mention the Suffragettes.
What is interesting, is Lindsey’s reference to the era of almost unrestrained individual freedom, embodied as it still is today in the “Me Generation.” Is there some point at which our unbridled quest for unlimited permission to “do our own thing” becomes something more akin to permission to act irresponsibly? Or even recklessly? Is there a connection between the burning of draft cards, the death of The Organization Man, and the rise of modern (or post-modern as Lindsey seems to prefer) conservatism? I’m not sure, but I get a strong feeling that we are approaching a moment of truth in the USA, around precisely these issues.
As I came of age during the 1980s, I have seen one or another chapter in a relentless war against the future itself, all conducted behind an ideological veil very similar to the one Lindsey hides behind. Lindsey does correctly point out that both political parties have helped us down this road, but only to the degree that they really share a common ideology in the first place. Have a look at trade policy and deregulation in general and one begins to discern that the differences between the major parties revolve around gun ownership, abortion, and stem cells. This suggests to me that Krugman is at least partially correct in identifying these social issues as mere distractions, or at best the marginal differentiation of two political parties operating under the policy guidance of a common master.
I am more inclined to see the current situation as just what it looks like: class warfare justified by a fragile ideological framework, and financed by borrowing against the future incomes of Americans yet to be borne. Reckless irresponsibility, no matter how well couched in ideology, is still reckless and irresponsible. It also seems over-generous to me to assume that the impending death of the middle class is an unintended consequence, when I see for example that the latest UAW contract with GM will start new workers at $12-$14 per hour, while older workers will continue to make around $65,000 annually. While it goes by many names, free trade, globalization, personal freedom, supply-side economics, etc., these are merely marketing terms to describe simple inter-generational theft. They are philosophical justifications which allow people like Lindsey to rationalize the policies they support, most especially The Cato Institute’s love of the WTO, and so called “free trade.” I am disappointed that the great Fabius Maximus would consider the ideological contortions of Lindsey’s article to be worthy of remark, let alone of praise.
Sorry to er. . .vent/ramble/rant. This type of historical bickering really gets my blood boiling.
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Fabius Maximus replies: I have no problem with a rant. Hopefully you feel better. But did you say anything? This looks like guesswork of the lowest kind, unrepsonsive — perhaps unknowning — of his theory. You tell us that you don’t like a great many things, but as for your evidence and reasoning — to call it gibberish would be too kind. I will single out one line as an example:
“While it goes by many names, free trade, globalization, personal freedom, supply-side economics, etc., these are merely marketing terms to describe simple inter-generational theft.”
Right, dude. Whatever.
Richard R: not a “rant” at all, but perceptive and necessary observations. I agree with the idea of a war against the middle class, but not sure if you mean that is the same as a “war against the future.” Maybe, in the sense that the middle class has no future!
I like the ambiguity you point out in your second paragraph, where left meets right, and hippie dropouts sound like Jeffersonian agrarians. The common denominator, and the main reason I am a loyal reader of this site, is alienation from the modern state and the ideologies that support it. FM (Captain Contrarian) is pretty good on this subject, though he still believes there is a real democracy latent within the sham one.
Re, #14. I’m not a member of a “class,” I’m an individual. True, some of my needs are common with others in similar situations, but many are not. I don’t perpetuate “warfare” on other “classes.” I employ some individuals (as, for example, when I needed specialized tradesmen to help build my house, and who were happy to get paid to ply their trades). Mostly I sell my ideas and labor to my employers.
If there is any “class warfare” going on it is the permanent “class” of professional government bureaucrats picking my pocket and “warring” on my enjoyment of a life which harms no one, and in fact, helps a few people. Personal freedom is not synonymous with “intergenerational theft,” nor is it an abstract idea.
Intergenerational theft = “Looting the treasury, printing money, and borrowing knowing that you won’t be able to pay it back, in order to get reelected.”
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Fabius Maximus replies: Politics is a matter of group mobilization and action. If you act alone — or don’t act, alone — you are just prey. Or a domesticated person. Depending on your metaphor of choice.