The Long Suck
[Huge thank you to Ian Welsh for sending this post along. I was going to use another Pauly Shore photo, but I thought you could all use a break. So you got this one instead. Ian regularly blogs at The Agonist, and is worth a read and a good conversation over a beer or four. — CHS]
I have a ton of charts on my hard drive, and I have reviewed many many more, but this is my favourite chart of all time (yeah, as Hale Stewart would say, how lame is it that I have a “favourite chart”).
The chart shows wages for non-supervisory, goods producing, hourly employees from 1947 to today. It shows, graphically, a point I think needs to be hammered home – you can’t talk about the “post war economy”, as if there is only one. There were two, and the first one ended sometime in the seventies.
Now during the seventies and beyond GDP per capita continued to increase, even though wages for many people weren’t:
Although the growth rate has consistently slowed:
Yes, it does pick up again in the 2000’s, a topic I’ll deal with in a later post. Suffice to say, those gains haven’t gone to ordinary workers either. Both the above graphs are from this online textbook.
Tired of all the graphs? Well, just one more…
This one is courtesy of the Economic Policy Institute. . (For those of you wondering why wages show a drop and income shows an increase – the wages are individual wages, while the income in those charts is household income (i.e. household were able to increase income by increasing the number of people working .)
Still wondering where all your GDP per capita gains went? There was about a 65% average gain in real GDP. The only people who made it were the upper fifth, and that really means about the upper 12% or so. And if you were to extend that chart, you’d find that the top .1% did even better, and the top .01% even better than them, and so on. The last generation or so has been a good time to be rich in America.
Now two main things happened around about the time of the big switch from the first “floats all boats” post war economy, and the second “floats the rich” economy. The first was the collapse of the Bretton Woods agreement, the second was the creation of OPEC and the various oil shocks, stagflation and so on, leading to the recession of the eighties and a generation of central bankers determined to make sure inflation never reared its ugly head again.
The oil shocks caused a big problem, and part of the problem was this – giving lots of money to a bunch of Middle Eastern dictatorships really meant giving lots of money to a very few individuals. When you pay for a barrel of oil from Kuwait or from Saudi Arabia, really that money is controlled by the kings of those countries. When you buy oil from, say Sweden, or Britain or Canada, that money goes into a lot of hands, who then turn around and use their foreign currency bonanza mostly to buy goods.
Well, no matter how many jets or limos you want, there really is a limit to how much even a few thousand noblemen and dictators can spend.
They had lots of money, and when you’re rich and have piles of money, and aren’t a complete moron, you go looking for assets to buy – businesses, real estate and so on that produce returns. Since your own countries are backwards third world economies, even if you want to spend at home, there’s a limit to it. So you go to first world economies. Since oil is bought in dollars, and since the US is the lynchpin world economy, mostly you go to the US (although Europe had to deal with this issue as well, and chose a different path, one of regulating ownership, instead.)
So the US realized that if it didn’t do something, the cutting edge, most profitable industries in the US would be bought up by a very few rich oil princes. In absolute terms their money was small compared to the entire float of the US economy, but it was highly liquid and more than sufficient to buy controlling interests in all the businesses really worth buying. One solution, the one most of Europe chose, was to create laws that said "no, you can’t buy that."
That’s not the choice that was made – the choice made was to make America’s rich enough to compete.
The method was primarily tax policy – marginal tax rates were lowered massively, and rates on unearned income like dividends and capital gains were taxed at a rate even lower than normal income.
When you’re rich, after a certain point, most of your marginal money starts going into investments. Really, after the first few million in conspicuous consumption, there isn’t much else to do.
So the rich started getting really, really, stinking rich. And because investments in assets like stocks were taxed at lower rates than earned income, a generational boom market, the longest since WWII, started up. The beauty of taking extra productivity and creating an incentive to push it into various security markets, from the point of view of economic policy, was that it didn’t cause inflation in goods…
See, while if you’re rich and you get an additional 10% money to spend (or 100%, for that matter) you tend to put most of it into various assets, if you’re poor or middle class you tend to spend it on goods and on real estate. You buy a car or SUV. You go on a vacation. You get a bigger house. You drive up expenditures on real goods, that require energy to create and to use.
You use… oil. And demand for oil had to be kept down, so that there were no more energy driven inflation spikes, such as the ones in the seventies that put the final nail in the coffin of post World War II prosperity. There is no substitute for oil (try putting something else in your gas tank.)
So, in addition to a lot of policies that favoured rent and unearned income over wages, the central banks of the world, including the Fed, became obsessed with what they called “wage push inflation”. The idea was that if widespread increases in wages occurred, that would drive up inflation generally. So whenever it appeared that there were about to be widespread wage increases in the general economy, the Fed would step in, strangle wages, and end the boom.
Anyone who followed economic releases in the 80’s and 90’s will remember the constant obsession with wage push inflation and with NAIRU (the Non Accelerating Inflationary Rate of Unemployment) – which basically meant, the labor market couldn’t be allowed to get so tight that wages started increasing generally.
So, increases in asset prices, like stocks and real estate, weren’t considered inflation. But increases in wages were considered to lead to inflation. This allowed the Fed to pump money into the economy, and have it sanitized through asset markets so that it didn’t cause general goods inflation.
The rich got richer, and it wasn’t counted as inflation, and the middle class and the poor took it on the chin.
There are a lot more details to this, we could talk about Clinton’s codicil to it and how he was able to allow some real wage growth for the bottom four quintiles for a few brief years, and we should talk about trade and balance of payments, and about how the Bush administration used housing to sanitize their excesses and the contradiction between a suburban economy and energy inflation control, but I’ll leave those for another day.
For now the lessons are simple. First – if you want a good economy back, one that raises all boats, you have to solve the oil and energy bottlenecks on the economy. Second- the US had a class war, and the rich won.
1. Why goods producing, non-supervisory, hourly employees? Two reasons, first – I want to show what happens to ordinary, non management, non professional types. Second – wage data is very hard to get going back that far. Most of it starts in the sixties, which doesn’t give the full flavor. However, in general, wages rose for everyone by about the same rate during the 45-75 period.