April 13, 2021
By Paul Krugman
I’m a Baby Boomer, which means that I grew up in a society with a much flatter income distribution than, I believe, younger generations can easily imagine. It was a society in which middle managers and well-paid blue-collar workers were more or less equal in financial terms, in which C.E.O.s of major companies were paid around 20 times as much as the average worker, compared with more than 200 to 1 today. It was by no means an equal society — especially if you were female or nonwhite or both; but it was a society in which extremes of both wealth and poverty seemed to have withered away.
And we took it for granted. A more or less middle-class society, almost everyone assumed, was the state toward which an advanced economy naturally evolved.
Not so much, we learned as the boomers turned middle-aged. The future of inequality wasn’t what we expected it to be; America today has more or less returned to Gilded Age disparities in income and wealth.
But then, the past wasn’t what we thought it had been either. That middle-class society I grew up in didn’t evolve gradually and naturally. It was created by public policy over the course of just a few years in the 1940s, mainly during World War II.Continue reading the main story
I’ve read many, many economics papers over the course of my adult life. Few have changed the way I see the world as much as a 1991 paper by Claudia Goldin and Robert Margo titled “The Great Compression,” referring to an event I briefly referenced in today’s column. Goldin and Margo showed, roughly speaking, that America went to bed in 1939 in the Gilded Age and woke up in 1945 as the middle-class nation of my childhood.
You can see the abruptness of the event and what followed in this figure, from a later paper by Goldin and Lawrence Katz, showing two measures of wage inequality (for white men, not because they’re the only workers who matter, but as a way of focusing the question) from the ’30s to 2005:
A sudden plunge in inequalityClaudia Goldin and Lawrence Katz
How did that happen? A lot of the compression of wages in the 1940s can be attributed to World War II, when the U.S. was largely a controlled economy, and wage increases were only allowed under rules that tended to give bigger increases in percentage terms to less well-paid workers. But why didn’t things spring back to where they had been before once wage and price controls had been lifted?Continue reading the main story
We don’t fully understand the persistence of the Great Compression. But one factor, surely, was the rise of unions — also something that happened very quickly. Here’s another figure, from a paper by Richard Freeman:
The rise and fall of unionsRichard Freeman
A strong union movement, it seems, was able to lock in the new wage norms created by the war for several decades after the war was over. And the rise of unions was clearly linked to politics: first the New Deal, then the war, created favorable environments for union organizing.Continue reading the main story
What does this tell us about the future of inequality? On one side, it’s encouraging: high inequality isn’t something unavoidable, the necessary consequence of implacable technological forces: political action can create a much less unequal society. On the other side, both the politics of the New Deal and, even more so, the policy environment of World War II, were pretty unique. Progressives are, in general, delighted with how activist the Biden administration is proving; but despite Republican cries of “socialism,” its actions are far more modest than what happened in the ’30s and ’40s.
The big question is how much of the Great Compression we can achieve through less dramatic policies, in a political environment where spending one percent of G.D.P. on infrastructure seems radical. No, I don’t know the answer.
The Biden stimulus and the Korean War.
Or maybe it will be like World War I, which boosted the economy but didn’t lead to lasting transformation.
Faltering middle-class wages.
I’m shocked — shocked — to learn that corporate lobbying organizations oppose corporate tax hikes.
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