- Part I: “A New Golden Age: Why Your Grandparents Lived Larger Than You Do”
- Part II: “A New Golden Age: The Path to Prosperity”
- Part III: “A New Golden Age: The Basic Income Guarantee”
THESE DAYS, 20-year-olds need amazing resumes just to get unpaid internships; 30-year-olds either are underemployed or work nonstop, terrified if they leave the office early, they might get fired; 40-year-olds look over their shoulders convinced that somebody younger and cheaper is after their job. A generation or two ago, most people had staff jobs allowing them to count on a steady income. Now more and more of us are freelance, vacation pay or sick leave a thing of the past. If we screw up or get injured or even just annoy a superior, the corporation doesn’t have to fire us — it just forgets our name and hires somebody else. Risk has shifted from the firm to the individual. In a good year we freelancers manage to pay our bills but none of us can feel certain of the future. We worry that next year our wages could collapse. Who is better off: you or your parents when they were your age?
This is not as easy a question as it seems. Today we are better fed, more fashionably clothed, and more extravagantly entertained than any humans in history. Your parents didn’t have Tinder or iPhones or access to every television show ever made — but the professional security they took for granted is long gone. This is the paradox of the 21st century. On the one hand, tastier food, cooler clothes, better toys are cheaper than ever before. On the other, professionally, many of us are tightrope-walking over a cliff.
Economic insecurity has been growing for so long we have become inured to it, but it doesn’t have to be this way. You don’t have to be a fan of Charles Bukowski to notice he never had a hard time finding a job. Usually drunk, utterly unreliable, in his autobiographical stories from the 1950s, he’d get hired, skip work or show up late, go out for a liquid lunch and never come back, and it would be weeks until his boss cottoned on and got rid of him. And getting fired was no big deal. The drunken layabout would get hired somewhere else pretty much straight away. Today, a man with Bukowski’s work ethic, bellicose attitude toward authority, and penchant for alcoholic obliteration would be dumpster-diving rather than so easily finding gainful employment.
Once upon a time, before you were born, there was a Golden Age. You didn’t need an amazing resume to find a job. Even the lazy and ignorant got hired. And best of all, pay kept going up. One man working an ordinary job could support his entire family in middle class splendor. And he didn’t have to work all that hard. Office workers left on the dot of five and factory workers got paid overtime. Getting drunk at work, if not de rigure, was certainly commonplace. And still everybody made more money than his or her parents. Everybody lived better than they had dreamed possible when they were kids.
Corporations hired more than fired. Firms were happy to train new workers. A 30-year-old saw his earnings double by the time he hit 50. If you gave your youth to the firm, they generally took care of you until you retired. And when you did retire, your pension, which both the government and your employer recognized as your earned and sacrosanct right, was safe and generous. Millions escaped poverty. The middle class grew and grew until it was almost everybody. Inequality shrank.
This isn’t a fairy tale. Economic historians call the post-war years, 1950 to 1973, the Golden Age because those were the years the US and world economy grew faster than ever before or since. Neoliberalism’s dirty secret is that its policies don’t work that well. It isn’t just since the financial crisis that growth has been stagnant. Even the boom was mediocre. The best year since the election of Ronald Reagan was 1999, when the economy grew an impressive 4.8 percent. Sounds good until you realize that economic growth was higher in 1950, 1951, 1955, 1959, 1962, 1964, 1965, 1966, 1968, 1972, 1973, 1976, and 1978. Even the 1970s, a byword for stagflation and economic turmoil, saw better growth than any decade since.
According to today’s conventional wisdom, the policies of the Golden Age should have doomed our economy to pathetic performance. Tax rates were spectacularly high, regulation was omnipresent, unions were strong, the financial sector miniscule. And yet the economy grew faster, with fewer recessions during the Golden Age than even during the best days of our late misbegotten boom.
If such impressive growth had occurred during our current pro-business era, we would be seeing books proclaiming how empirical evidence supports the Reagan/Thatcher consensus. The Economist would have a special section congratulating neoliberal theorists on their good sense. Instead, it was the more egalitarian, more worker-friendly era that provided spectacular growth.
The success of the Golden Age was based on a feedback loop where strong consumer demand increased corporate profits, which stimulated investment, which increased productivity and so allowed higher wages, leading to even more consumer demand.
Let’s begin with demand. World War II put money in workers’ pockets, but rationing meant they couldn’t spend it. After four years of war and 10 years of depression, the American working class was filled to the brim with unsatisfied needs. With money in their pockets, they were ready to spend. In 1939, a quarter of American homes didn’t have running water, 35 percent didn’t have flush toilet, half didn’t have a phone. Close to 50 percent of all Americans still cooked on wood or coal fired stoves and more than half had iceboxes rather than refrigerators. In the fundamentally closed economy of 1945, that demand was expended on domestic manufacturers. So worker demand generated sales, boosting corporate profits. With demand high and profits rising, corporations invested in increasing productive capacity.
These days, we think the word investment means buying a house and hoping its price goes up, or buying a stock and waiting for a bigger fool. Traditionally, however investment implies the purchase of capital goods in order to make workers more productive. Buy me a computer, I can write faster (and better) than with a quill pen. Give a steel worker a modern factory, he can make more steel than he can with an anvil, forge, and hammer. Increasing the ratio of capital per worker means that each worker will be able to produce more.
During the Golden Age, productivity gains, created by corporate investment, quickly translated into higher salaries for workers. And as worker salaries rose, so did aggregate demand. Workers were able to produce more, but since their wages were also rising, they were able to afford to buy all their extra production. Here is the feedback loop: consumer demand—>higher corporate profits—>more investment—>higher productivity—>higher wages—>increased consumer demand.
Today, productivity continues it unstoppable rise but wages no longer move up in step. Since the financial crisis, close to 95 percent of the benefits of productivity gains have gone into the pockets of the top 1 percent. And since the rich don’t have to spend all their income, inequality drains the system of demand. Our problem today is that with wages stagnant but productivity increasing, the economy’s ability to supply far exceeds workers' ability to consume. Our problem is we can make more goods and services than our underpaid workers can afford to purchase. Supply outstrips demand.
Every year, technology advances, making labor more productive. That means we can make more stuff with fewer hours of work. During the Golden Age wages rose along with productivity. As workers got paid more, they could afford to buy the extra goods and services they were able to make. But since Reagan and Thatcher, wage gains have become divorced from productivity gains.
Barry Eichengreen, the foremost economic historian of the Golden Age in Europe, tells us the essential source of Golden Age growth was a social pact between labor and management — a deal by which workers would not demand wage increases greater than productivity increases, while firms would forgo large dividends and instead invest profits in labor-enhancing capital goods.
Everybody wins. Firms invest, workers become more productive, their wages rise commensurately, which increases their spending power, which raises corporate profits, allowing further investment in capital goods. Workers get richer but so do shareholders.
In the 1970s this social pact fell apart. After the war, workers were grateful for any job. Prosperity increased far faster than anyone expected. But after a few decades, workers became complacent and demanded more. 1970s inflation can be seen as a battle between labor and capital as to which would pay the cost of the OPEC oil price increase. In the 1970s, labor, especially organized labor, won. Wages went up more than inflation.
Owners of capital, however, did very badly. If you had bought stocks in 1966, by 1982 you would have lost ¾ of your inflation-adjusted capital. Owners of bonds did even worse. Inflation murdered bondholders: interest rates were lower than the inflation rate. And corporate profitability continued to fall.
Reagan in America and Thatcher in Britain can best be understood as the counterattack of capital. In 1980, they raised interest rates until the economy screamed, engineering the most brutal recession since the Great Depression. Unemployment and bankruptcies soared. Both union and business leaders pleaded for a rate cut. But Volcker in America and Lawson in Britain were implacable: cutting inflation was worth the pain. When they fear for their jobs, workers don’t ask for cost of living increases. And so the 1980s recession broke the back of worker power and also broke the back of inflation. It fell from 14 percent in 1980 to 3 percent in 1983 and has stayed low ever since.
Reagan and Thatcher also went after the legal basis of union power. By crushing the air traffic controllers here and the miners' union in Britain, they showed all organized workers they were not indispensable. If air controllers could go on strike and get fired, and planes didn’t fall out of the sky, then union truck drivers, factory workers, and cameramen were forced to recognize they too could be replaced.
Before Reagan and Thatcher, wages went up steadily, but corporate profits were falling. After, corporate profits rebounded but wages did not. On a micro level, cutting wages is a brilliant way to raise profits. Pay your workers less, shareholders get to keep more. But since workers are also consumers, on a macro level, stagnant wages mean consumers will spend less.
The key macro economic dilemma of the Reagan-Thatcher era was how to maintain demand despite stagnant wages. The answer, as all of us know, was increased debt. Private sector debt as a percentage of GDP more than doubled between 1982 and 2007. By borrowing more, consumers were able to keep spending even as their wages stopped rising.
The financial crisis destroyed this unstable paradigm. Banks stopped lending, overstretched consumers started paying back rather than increasing their debts. Our economic policy makers keep shoveling money towards the banking sector, hoping it will trickle down to the rest of us. They hope to manufacture another bubble, so we can party like it is 2005. So far it isn’t working.
The truth is that the 30-year-old Reagan-Thatcher economic paradigm is well past its sell by date. From 1982 to 2007, low interest rates, higher asset prices, and increased borrowing allowed demand to grow even as wages did not. But today debt-fueled consumption is no longer sufficient to create enough demand to keep the global economy growing. We can do better. Remember Golden Age policies created faster, steadier, and more equitable growth than the neoliberal Reagan-Thatcher policies that replaced them.
For those of us harkening back to the Golden Age, the obvious solution then is higher wages. Progressive politicians regularly call for an increased minimum wage or for a living wage. The problem, unfortunately, is that today we need fewer workers. The drunken Bukowski was able to get work because workers were in short supply. Employers were desperate for workers. In America, Mississippi sharecroppers moved north to assembly line jobs. The Germans imported Turks, the British imported West Indians, the French imported Algerians. The multicultural Europe of today is founded on post-war labor scarcity.
Today, technology is rapidly eliminating jobs. According to Martin Ford, in his fascinating Rise of the Robots, 47 percent of all current jobs could be eliminated by automation and smart software within the next two decades.
Here then is our dilemma: Technological progress allows us to make more stuff with fewer workers. Without workers getting paid, we cannot afford to buy all the stuff we are able to make. And if we force firms to pay workers more, they will automate even faster, eliminating more jobs and so further starving consumer demand.
There is a solution. It is relatively painless but it does require a rethink of many of our economic assumptions. Technology and capitalism have largely solved the problem of supply. We are more productive, able to create goods and services with less labor and capital than ever before. Our only problem is creating enough demand to absorb all we are able to supply. In Part II of this essay, I will explain how we can create a new Golden Age.