Aftershock

by Robert B. Reich

  The Great Prosperity also marked the culmination of a reorganization of work that had begun during the Depression. Employers were required by law to provide extra pay—time and a half—for work stretching beyond forty hours a week. This created an incentive for employers to hire additional workers when demand picked up. Employers also were required to pay a minimum wage, which improved the pay of workers near the bottom as demand grew and employers needed more lower-skilled workers. When workers were laid off, generally during an economic downturn, government provided them with unemployment benefits, usually lasting until the economy recovered and they were rehired. Not only did this tide families over but it kept them buying goods and services—an “automatic stabilizer” for the economy in downturns. (With its anti-union “open shops” and its abundance of farm and domestic workers unprotected by labor laws, much of the South continued to lag behind, however.)

  Perhaps most significantly, government increased the bargaining leverage of ordinary workers. They were guaranteed the right to join labor unions, with which employers had to bargain in good faith. By the mid-1950s, almost a third of all workers were unionized. And the unions demanded a fair slice of the American pie. United Auto Workers president Walter Reuther, among others, explicitly invoked the basic bargain: “Unless we get a more realistic distribution of America’s wealth,” he threatened, “we won’t get enough to keep this machine going.” Employers relented, and the higher wages kept America’s great economic machine going better than ever by giving average workers more money to buy what they produced. And because health and pension benefits were not taxed, big employers added ever more generous provisions.

  Everyone’s pay in a big company, including even that of top executives, reflected bargains struck among big business, big labor, and, indirectly, government. (Postwar, regulators still set many rates and prices, awarded valuable licenses and contracts, and also settled labor disputes.) It would have been unseemly, not to say politically unwise, for executives to take home disproportionately large pay packages. The overall result was that as corporations did better, so did all their employees.

  A college sociology textbook of 1956 titled The American Class Structure noted how far America had come from the class divisions of Middletown in the 1920s, and attributed much of the change to the new organization of production. “All are employees, not owners. Their places in the system depend upon the rules of bureaucratic entry and promotion; business is coming more and more to assume the shape of the government civil service.” The author went on to show how corporate bureaucracies had a leveling effect on incomes, as the bottom rungs were elevated and the top rungs constrained by civil service–like job categories. “Income is determined by functional role in the bureaucracy. The trend of income distribution has been toward a reduction in inequality. Owners have been receiving a smaller share relative to employees; professionals and clerks have been losing some of their advantages over operatives and laborers.”

  Americans also enjoyed security against the risks of economic life—not only unemployment benefits but also, through Social Security, insurance against disability, loss of a major breadwinner, workplace injury, and inability to save enough for retirement. In 1965 came health insurance for the elderly and the poor (Medicare and Medicaid). Poverty among the elderly dropped by half. Economic security proved the handmaiden of prosperity. In requiring Americans to share the costs of adversity, it enabled them to share the benefits of peace of mind. Peace of mind and security freed them to consume more of the fruits of their labors.

  The government sponsored the dreams of American families to own their own home by providing low-cost mortgages and interest deductions on mortgage payments. In many sections of the country, government subsidized electricity and water to make such homes affordable. And it built the roads and freeways that connected the homes with major commercial centers. The interstate highway system—forty-one thousand miles of straight four-lane (sometimes even six-lane) freeways to replace the old two-lane federal roads that meandered through cities and towns—became the single most ambitious public works program in American history. Begun under President Dwight Eisenhower and justified in the halls of Congress as a means of speeding troops, tanks, and munitions across the nation in the event of war, it did much more than that—generating sprawling suburbs and shopping malls, boosting auto sales, vastly enlarging the construction industry, creating an enormously extended trucking industry, and radically reducing the cost of transporting and distributing goods across America.

  Government also widened access to higher education. The G.I. Bill paid college costs for those who returned from war. The expansion of public universities—whose tuitions averaged about 4 percent of median family income during the Great Prosperity in contrast to the 20 percent then demanded by private universities—made higher education affordable to the American middle class. Consequently, college enrollments surged. By 1970, 70 percent of the nation’s four-year students were in public universities and colleges. The federal government, especially the Defense Department, also underwrote a growing portion of university research, particularly in the sciences.

  Cold War defense spending generated what might be called an “industrial commons” that spilled over into commercial production. The military-industrial complex, as Eisenhower so decorously dubbed it, invented small transistors that eventually were utilized in everything from televisions to wristwatches. The Department of Defense also researched and produced hard plastics, optical fibers, lasers, computers, jet engines and aircraft frames, precision gauges, and sensing devices. These found their way into such indispensables of modern life as graphite tennis rackets, remote-controlled television sets, microwave ovens, and cell phones. The Pentagon also gave birth to the nation’s first computers. New fighter jets and engines morphed into commercial jet aircraft. Boeing’s famously profitable 707 began life as the Air Force KC-135 tanker. Eventually, the Defense Advanced Research Projects Agency would give birth to the Internet.

  Notwithstanding all this, the nation also found the time and the money in these years to rebuild Western Europe and Japan—spending billions of dollars to restore foreign factories, roads, railways, and schools. “The old imperialism—exploitation for foreign profit—has no place in our plans,” President Harry Truman magnanimously pronounced in his Point Four program of technological assistance to developing nations. “What we envisage is a program of development based on the concept of democratic fair-dealing.” (He might have added: “and the containment of the Soviet menace.”) The effort proved an astounding success. The years 1945 to 1970 witnessed the most dramatic and widely shared economic growth in the history of the world, which contributed to America’s Great Prosperity. In helping to restore the world’s leading economies and thus keep communism at bay, the new global system of trade and assistance created vast new opportunities for American corporations—far richer, larger, and more technologically advanced than any other country’s—to expand and prosper.

  Government paid for all of this with tax revenues from an expanding middle class whose incomes were rising rapidly. Revenues were also boosted by those at the top of the income ladder. Income tax rates on America’s top earners remained as high as if not higher than they were during World War II. The top marginal tax rate during the war ranged from 79 percent to 94 percent. In the 1950s, under President Dwight Eisenhower, whom few would call a radical, it was 91 percent. In 1964, the top rate dropped to 77 percent. It was 77 percent again in 1969, when Richard Nixon became president. Even after exploiting all possible deductions and credits, the typical high-income taxpayer during the Great Prosperity paid a federal tax of well over 50 percent of his earnings. But contrary to what conservative commentators had predicted would happen, the high tax rates did not reduce economic growth. To the contrary, they enabled the nation to expand middle-class prosperity, which fueled growth.

  The Great Prosperity that lasted for a quarter century after World War II grew out of an economy profoun
dly different from the one that led up to the Great Depression of the 1930s. During the Great Prosperity, government enforced the basic bargain—using Keynesian policy to achieve nearly full employment, giving ordinary workers more bargaining power, providing social insurance, and expanding public investment. Consequently, the share of total income that went to the middle class grew while the portion going to the top declined. But here’s the interesting thing: Because the economy expanded so buoyantly, just about everyone came out ahead—including those at the top.

  Public support for government’s new role had been founded in the Great Depression and World War II, in whose wake Americans shared a larger sense of common purpose. We were all in it together, rising or falling together, connected to one another in ways we had barely noticed before the Depression. None of us could prosper unless prosperity was widely shared. The historian James Truslow Adams coined the phrase “the American dream,” and defined it as “a better, richer, and happier life for all our citizens of every rank.”

  America of that era still harbored vast inequalities, of course. The very poor remained almost invisible. Through much of the era, blacks were still relegated to second-class citizenship. Few women dared aspire to professions other than teaching or nursing. (In 1957 United Airlines proudly announced that its “executive” service between New York and Chicago featured comfortable slippers, a steak dinner, and “no women on board except for two stewardesses.”) But such barriers would eventually weaken or disappear. And although the era also engendered a blandness, uniformity, and materialism that many found abhorrent—as Mad Men, the television drama about advertising executives in the early 1960s, demonstrates brilliantly and outrageously—the Great Prosperity offered more Americans more opportunities than ever before to make whatever life they wanted. And it proved that widely shared income gains were not incompatible with economic growth; they were, in fact, essential to it.

  * In fact, Nixon didn’t actually say this. He said, “I am now a Keynesian in economics.” The famous “We’re all Keynesians now” came from a cover story in the December 31, 1965, edition of Time magazine, which attributed the quote to Milton Friedman. Even this wasn’t precisely accurate. In a commentary appearing in the February 4, 1966, edition of Time, Friedman clarified that he had actually said, “In one sense we are all Keynesians now, in another, nobody any longer is a Keynesian.”

  7

  How We Got Ourselves into the Same Mess Again

  As secretary of labor in the 1990s, I traveled a great deal across America. Everywhere I went I met families working harder than ever but becoming less economically secure. The pendulum was swinging back to the America Marriner Eccles had written about before the Great Depression. As I said earlier, the reversal had actually begun in the late 1970s and gathered momentum through the 1980s, 1990s, and 2000s. Middle-class wages stopped climbing even though the economy continued to expand and jobs were abundant. And almost all the benefits were again going to the top.

  We in the Clinton administration tinkered. We raised the minimum wage and guaranteed workers time off from their jobs for family or medical emergencies. We tried for universal health care. We offered students from poor families access to college, and expanded a refundable tax credit for low-income workers. We tied executive compensation to company performance. All these steps were helpful but frustratingly small in light of the larger backward lunge. Federal Reserve chief Alan Greenspan—who was no Marriner Eccles—insisted that Clinton cut the federal budget deficit rather than deliver on his more ambitious campaign promises, and Greenspan reciprocated by reducing interest rates. This ushered in a strong recovery. By the late 1990s the economy was growing so quickly and unemployment was so low that middle-class wages started to rise a bit for the first time in two decades. But because the rise was propelled by an upturn in the business cycle rather than by any enduring change in the structure of the economy, it turned out to be a temporary blip. Once the economy cooled, most family incomes were barely higher than before.

  During the Great Prosperity of 1947–1975, the basic bargain had ensured that the pay of American workers coincided with their output. In fact, the vast middle class received an increasing share of the benefits of economic growth. But after that point, the two lines began to diverge: Output per hour—a measure of productivity—continued to rise. But real hourly compensation was left far behind, as you can see in Figure 2.

  FIGURE 2

  Growth of Average Hourly Compensation and Productivity, 1947–2008

  It’s easy to blame “globalization” for the flattening of middle-class incomes. Yes, large numbers of American manufacturing workers began to lose their jobs in the late 1970s as factories started opening in Mexico and then in China, and by the 1990s, the jobs of even some well-trained professionals were being outsourced. But that’s not the whole story. Trade also gave Americans access to cheaper goods from around the world, and it created new markets for American exports of everything from wheat to Hollywood films. Global investors also flocked to the United States to set up firms that employed millions of Americans.

  The problem was not simply the loss of good jobs to workers in foreign nations but also automation. New technologies such as computerized machine tools could do the same work people did at a fraction of the cost. Even factories remaining in the United States shed workers as they automated. I remember being invited to speak at the opening ceremony of a new factory that had been lured to a midwestern state by a governor who had spent millions of taxpayer dollars subsidizing the project. When I arrived, the factory was humming at full capacity. But when I went inside to see workers performing all the new jobs, I found only about a dozen people sitting at computer terminals, typing instructions to the computerized machine tools and robots that cut, drilled, and assembled various parts into finished products. Once outside again I tried to put the best face I could on the situation. I remember stumbling over my words. “This factory marks a … major … millstone, er, milestone.” I congratulated the governor and got out of there as fast as I could.

  Remember bank tellers? Telephone operators? The fleets of airline workers behind counters who issued tickets? Service-station attendants? These and millions of other jobs weren’t lost to globalization; they were lost to automation. America has lost at least as many jobs to automated technology as it has to trade. Any routine job that requires the same steps to be performed over and over can potentially be done anywhere in the world by someone working for far less than an American wage, or it can be done by automated technology. By the late 1970s, all such jobs were on the endangered species list. By 2010, they were nearly extinct.

  But contrary to popular mythology, trade and technology have not really reduced the number of jobs available to Americans. Take a look at the rate of unemployment over the last thirty years and you’ll see it has risen and fallen with the business cycle. Jobs were plentiful in the 1990s even though trade and automated technologies were pushing millions of workers out of their old jobs. The real problem was that the new ones they got often didn’t pay as well as the ones they lost. That largely explains why the median wage flattened between 1980 and 2007, adjusted for inflation. Over the longer term, the problem is pay, not jobs. Surely for many Americans, the most traumatic consequence of the Great Recession has been the loss of a job. The good news is that more jobs will become available, eventually. The bad news is that many Americans who obtain these jobs will have to accept lower pay than they received before.

  Meanwhile, as the pay of most workers has flattened or dropped, the pay of well-connected graduates of prestigious colleges and MBA programs—the so-called talent who reach the pinnacles of power in executive suites and on Wall Street—has soared.

  The real puzzle is why so little was done in response to these forces that were conferring an increasing share of economic growth on a small group at the top and leaving most other Americans behind. With the gains from that growth, the nation could, for example, have expanded our educational sy
stem to encompass early-childhood education. It could have lent more support to affordable public universities, and created more job retraining and better and more extensive public transportation.

  In addition, the nation could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service—big-box retail stores, restaurants and hotel chains, and child and elder care, for instance. We could have enlarged safety nets to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay dropped, transition assistance to move to new jobs in new locations, insurance for entire communities that lose a major employer so they could lure other employers. We could have financed Medicare for all. Regulators could have prohibited big, profitable companies from laying off a large number of workers all at once and required them to pay severance—say, a year of wages—to anyone they let go, and train them for new jobs. The minimum wage could have been linked to inflation.