Aftershock: The Next Economy and America's Future (7 page)

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 system 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.

Why did we fail to raise taxes on the rich and fail to cut them for poorer Americans? Why did we fail to attack overseas tax havens by threatening loss of U.S. citizenship to anyone who keeps his money abroad in order to escape U.S. taxes? America could have expanded public investments in research and development, and required any corporation that commercialized such investments to create the resulting new jobs in the United States. And we could have insisted that foreign nations we trade with establish a minimum wage that’s half their median wage. That way, all citizens could share in gains from trade, setting the stage for the creation of a new middle class that in turn could participate more fully in the global economy.

In these and many other ways, government could have enforced the basic bargain. But it did the opposite. Starting in the late 1970s, and with increasing fervor over the next three decades, it deregulated and privatized. It increased the cost of public higher education, reduced job training, cut public transportation, and allowed bridges, ports, and highways to corrode.
It shredded safety nets—reducing aid to jobless families with children, and restricting those eligible for unemployment insurance so much that by 2007 only 40 percent of the unemployed were covered. It halved the top income tax rate from the range of 70 to 90 percent that prevailed during the Great Prosperity to 25 to 39 percent; allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax; and shrank inheritance taxes that affected only the topmost 1.5 percent of earners. Yet at the same time, America boosted sales and payroll taxes, both of which took a bigger chunk out of the pay of the middle class and the poor than of those who were well-off.

We allowed companies to break the basic bargain with impunity—slashing jobs and wages, cutting benefits, and shifting risks to employees, from you-can-count-on-it pensions to do-it-yourself 401(k)s, from good health coverage to soaring premiums and deductibles. Companies were allowed to bust unions and threaten employees who tried to organize (
by 2010, fewer than 8 percent of private-sector workers were unionized). We stood by as big American companies became global companies with no more loyalty or connection to the United States than a GPS device. By 2009, Intel, Caterpillar, Microsoft, IBM, and a raft of other so-called American firms derived most of their revenues from outside the United States, and were hiring like mad abroad.

And nothing impeded CEO salaries from skyrocketing to more than three hundred times that of the typical worker (up from thirty times during the Great Prosperity), while the pay of financial executives and traders rose into the stratosphere. Increasingly, the ranks of America’s super-rich were made up of top business and financial executives.
More than half of all the money that the top one-tenth of 1 percent of American earners reported on their 2001 taxes represented the combined incomes of the top
five
executives at the five hundred largest American companies. Almost all the rest were financial traders and hedge-fund managers.

Significantly, Washington deregulated Wall Street while insuring it against major losses. In so doing it turned finance—which until then had been the servant of American industry—into its master, demanding short-term profits over long-term growth, and raking in an ever-larger portion of the nation’s profits. Between 1997 and 2007, finance became the fastest-growing part of the U.S. economy. The gains reaped by financial executives, traders, and specialists represented almost two-thirds of the growth in the gross national product.
By 2007, financial and insurance companies accounted for more than 40 percent of American corporate profits and almost as great a percentage of
pay, up from 10 percent during the Great Prosperity. Before and after the bubble burst, the biggest Wall Street banks awarded tens of billions of dollars in bonuses.
In 2009, the twenty-five best-paid hedge-fund managers together earned $25.3 billion, an average of $1 billion each. Henry Ford’s legacy was a company that no longer made its money exclusively from selling cars;
in 2007, Ford’s financial division accounted for more than a third of the company’s earnings.

As the financial economy took over the real economy, Treasury and Fed officials grew in importance. The expectations of bond traders dominated public policy. And the stock market became the measure of the economy’s success—just as it had before the Great Depression.

Why did the pendulum swing back? Why didn’t America counteract the market forces that were shrinking the middle class’s share of the American pie? Answers to these questions offer clues about when and how the pendulum will swing in the other direction.

Some argue that there was simply no need for government intervention. The economy did better on its own, those people say, without so much government and with lower taxes on the rich. They point to the great expansion of the 1980s and the long recovery of the 1990s, and to the wildly exuberant bull market of the era. (They blame the Great Recession on the fact that too many people got mortgage loans who had no business getting them, and on too much middle-class debt overall.)

This argument is bunk. It equates the stock market with the economy, and turns a blind eye to the revocation of the basic bargain. The argument does not acknowledge the consequences for an economy when the middle class lacks the means to buy what it produces.

Others see the reversal of the pendulum as the inevitable result of declining confidence in government.
In their view, the era that began with the Vietnam War and continued with the Watergate scandal culminated in the tax revolts and double-digit inflation of the late 1970s—which, according to presidential candidate Ronald Reagan, occurred not because Americans were living too well but “because the government [was] living too well.”

Confidence in government did drop, but proponents of this view have cause and effect backward. The tax revolts that thundered across America starting in the late 1970s were not so much ideological revolts against government—Americans still wanted all the government services they had had before, and then some—as against paying more taxes on incomes that had flattened. When government services consequently deteriorated and government deficits exploded, the public’s growing cynicism was confirmed. Furthermore, the inflation of the 1970s wasn’t due to government spending. It was the result of a twelvefold hike in world oil prices (engineered by the oil cartel), and a drop in value of the dollar. When inflation began to accelerate, federal spending was only one percentage point higher as a proportion of gross domestic product than it had been in the first half of the 1960s.