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The Top Tenth:
Within the Top Tenth:
The Top Ten Thousand:
Differences in Log Earnings:
Wage Ratios:
Decomposing:
Start with the 1940 distribution:
Change the Xs (characteristics):
Change the betas (prices):
Change the residuals:
Before 1940:
After WWII:
America is:
America is also capital rich, and new capital rich--hence technologically advanced ** The furnace where the future is being forged...
America's Commitment to Education:
America and Unions: The Early Stages:
America and Unions: Craft Unions:
America and Unions: The Great Depression and After:
Rolling Back Unionized America
The situation today: public-sector unions have a powerful edge. private sector unions... not so...
Investment Banking: Routing Around Capital Market Failures:
* Finance After the Great Depression:*
Recent Finance:
Upward Mobility
Horatio Alger and Benjamin Franklin
Europe is supposed to be about who your family is America is supposed to be about who you are--although it was one of Napoleon's generals who said that "I am my ancestors" Abraham Lincoln's belief: anyone who wants to can move up--a combination of: Plenty of room at the top Lots of immigrants to (temporarily) fill in at the bottom A fairly equal distribution of wealth meaning that starts were not too far apart All This Changes in the Middle of the Gilded Age:
The Closing of the Frontier and the Great Immigration Wave
No more free land--direct effects (can't homestead) and indirect effects (immigrants now put downward pressure on real wages) Immigrants: are the "new immigrants" not from northwest Europe American? In the case of Asians, the answer is "obviously no" "Races" in Pennsyvlania in 1910: whites, blacks, slavs, Latins... The peak of American inequality Ending the Gilded Age
Progressives The New Deal picks up the Progressive Era program, and enacts it Immigration restrictions play an uncertain but probably large role Social democracy and social insurance... Minimum wages Unions again Middle-Class America
The Great Compression in wages Unions? Wartime (WWII, that is)? Social changes Supply and demand? Free land again--this time free land to buy a house within commuting distance of anywhere... The Returns to Skill
The overeducated American The enormous expansion of wage inequality since 1970 All of a sudden, position matters a lot The Anemia of Social Democracy in America
America was never as upwardly mobile a place as it thought it was... Europe was never as rigid a place as it thought it was... Increasing risk (but the "risk" of being bankrupt instead of dead is a good thing--as Martha Stewart would say--no? Why Doesn't the United States Have a European-Style Welfare State?
Racism? The myth of Horatio Alger? Another possible answer: it's just taking us a long time to build it up...
World War II:
Origins of World War II
Rough Numbers with Respect to Military Production (as percent of Nazi Germany):
The wonder is not that the allies won given that they decided to fight
50 million dead in World War II
World War II Cured the Depression in the U.S.:
Trying to stop the return of the Great Depression: The Employment Act
Trying to stop the return of the Great Depression: The Marshall Plan
Eichengreen and DeLong's interpretation of the Marshall Plan: key benefit that it allowed the good "mixed economy" guys to win the political struggle in Western Europe
Are Eichengreen and DeLong right?
Postwar:
After the Postwar: Productivity Slowdown and End of the Population Explosion:
Audio: The Great Depression
The Collapse of Real GDP, and Recovery:
Components of Real GDP:
![[Workbook1]Sheet1 Chart 2](http://img.skitch.com/20081013-n6t4ad5bre92gt89kksq5ibxfx.jpg)
The Consumption Function:
![[Workbook1]Sheet1 Chart 2](http://img.skitch.com/20081013-pgt774kfjhw63fajums54ksx1m.jpg)
The Semi-Stabilizing Role of Government:
![[Workbook1]Sheet1 Chart 3](http://img.skitch.com/20081013-t93hesj1hyqc3kks13tpq9t56x.jpg)
Dr. New Deal and Dr. Win-the-War:
![[Workbook1]Sheet1 Chart 3](http://img.skitch.com/20081013-j6xti614b6u6maydmqu21f6n13.jpg)
The Collapse of Private Investment:
![[Workbook1]Sheet1 Chart 3](http://img.skitch.com/20081013-xbddxcpnjturgibryk6b91c4jg.jpg)
The Propagation Mechanism: Three Theories for the Collapse of Investment (and Consumption):
The Impulse:
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1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
Audio: The Coming of the Great Depression
Robert Peel, 1844: My confidence is unshaken that we have taken all the Precautions which legislation can prudently take up against the Recurrence of a pecuniary Crisis. It my occur in spite of our Prescuamay occur in spite of our Precautions, and if it does, and if it be necessary to assume a grave responsibility for the purpose of meeting it, I dare say men will be found willing to assume such a responsibility. I would rather trust to this than impair the efficiency and probable success of those measures by which one hopes to control evil tendencies in their beginning, and to diminish the risk that extraordinary measures may be necessary...
Karl Marx, 1851: As is always the case, prosperity very rapidly encouraged speculation. Speculation regularly occurs in periods when overproduction is already in full swing... provides... temporary market outlets, while for this very reason precipitating the outbreak of the crisis and increasing its force. The crisis itself first breaks out in the area of speculation; only later does it hit production. What appears to the superficial observer to be the cause of the crisis is not overproduction but excess speculation, but this is itself only a symptom of overproduction. The subsequent disruption of production does not appear as [what it really is,] a consequence of its own previous exuberance, but merely as a setback caused by the collapse of speculation....
The crisis reached its peak... all commercial transactions had come to a standstill. A deputation from the City then brought about a suspension of the Bank Act of 1844, which had been the fruit of the deceased Sir Robert Peel's sagacity.... Since his death Peel himself has been apotheosized in the most exaggerated fashion.... His power over the House of Commons was based upon the extraordinary plausibility of his eloquence. If one reads his most famous speeches, one finds that they consist of a massive accumulation of commonplaces, skillfully interspersed with a large amount of statistical data...
Karl Marx, 1867: The... decennial cycle... of periods of average activity, production at high pressure, crisis and stagnation, depends on the constant formation, the greater or less absorption, and the re-formation of the industrial reserve army or surplus-population.... The superficiality of Political Economy shows itself in the fact that it looks upon the expansion and contraction of credit, which is a mere symptom of the periodic changes of the industrial cycle, as their cause...
Great Depression Problem Set:
Immigration
Education
Inequality
"They control the people with the people's own money." So Louis Brandeis, strong Democratic political activist, wrote of the turn of the century financiers who he saw as controlling the American economy through their domination of the commanding heights of finance. The answer that Brandeis saw was simple: separate ownership from control, so that the bankers who collected the savings of the people through the acceptance of deposits would be unable to use those savings to increase their bargaining power vis-a-vis the managers of American enterprise.
It is doubtful that Louis Brandeis's proposed solution was any solution at all. Large-scale businesses borrow from banks, true. But remove some power to control and infiuence the managers of large-scale enterprises that borrow from the bankers, and where does it go? It fiows to the managers of the oligopolies and the monopolies that no longer have to look over their shoulders to make sure that Wall Street is satisfied; it does not fiow to the "people."
But if Brandeis's cure&emdash;to destroy the "money trust"&emdash;was false cure, it was a response to a real malady. For the United States as of the turn of the twentieth century was a much more economically and socially unequal place than it had been even thirty years before.
On the eve of the American Revolution, the United States-to-be had been a relatively egalitarian society. The richest one percent of households owned perhaps fifteen percent of the total wealth in the economy&emdash;a very low value for such an inequality statistic. Even by the immediae aftermath of the Civil War wealth was still not that concentrated: the top one percent of households appear to have had a little more than a quarter of the wealth of the country.
By 1900, however, the U.S. had become the Gilded Age country of industrial princes and immigrants living in tenements of our political memory. On the one hand, Andrew Carnegie building the largest mansion in Newport, Rhode Island with gold water faucets. On the other hand, 146 largely-immigrant workers dying in the 1911 Triangle Shirtwaist Factory fire in Manhattan because the exits had been locked to keep workers from taking fabric out of the building for their own clothes.
Surveys suggest that in 1929 the richest one percent of U.S. households held something like 45 percent of national wealth, and that the concentration of wealth had been sharply rising in the 1920s. We strongly suspect that World War I had seen substantial deconcentration, as infiation eroded the value of bondholders' wealth and as high demand for labor boosted workers' earnings. It is my guess that the second was stronger than the first; that the concentration of wealth was eroded more during World War I than it was boosted in the 1920s, and that the concentration of wealth in the United States peaked sometime in the twenty years before World War I, with the richest one percent of households owning some 50% or so of total national wealth.
Growing inequality&emdash;not absolute immiserization of the working class, but a growing (relative) gap between the income and wealth of rich and poor even as industrialization raised living standards of all classes&emdash;was in a sense a natural result of the form industrialization took in nineteenth century America. Rapid accumulation of capital did tend to crowd unskilled labor out of its place in the workforce, and did tend to force unskilled laborers to reduce their relative wages in order to maintain or win back their jobs. In the nineteenth century skilled and educated workers could not easily be replaced by machines; capital could more easily substitute for unskilled workers.
In addition, the opportunities of industrialization increased the share of total product that was paid as rent and profits. As farm productivity increased, the agricultural sector shrank, releasing additional supplies of relatively unskilled workers to the urban and industrial job markets. And tthe waves of mid- and late-nineteenth century immigration included many non English speakers, who found it very difficult to acquire skills or to use the skills that they had.
The distribution of income and wealth in the slaveholding south had always been extraordinarily unequal: how could it be otherwise when one-third of the population are held as chattels? But the distribution of income and wealth in the south did not become much more equal after the Civil War. Blacks remained extraordinarily impoverished relative to whites. And even southern whites were poor relative to northern city dwellers or midwestern farmers. In a sense, the relative impoverishment of the south was to be expected given the economic and political choices southerners made. The pre Civil War south had seen its wealthy accumulate not physical capital but slaves. The acquisition of a machine raises society's total wealth and productive power available per worker. The acquisition of a slave does not: it does not raise productivity, but merely gives the slaveholder an all but unlimited right to exploit the labor of the slave. The Civil War did not impoverish the south: it merely transferred "ownership" of ex-slaves' capacities to labor from masters to the ex-slaves themselves. It did reveal how impoverished the slaveholding south had become.
Choices made after the Civil War did not help. Mechanization did not come rapidly to southern agriculture. Southern governments did not believe in a good system of public education&emdash;particularly not for black Americans. This lack of a skilled, literate, and educated workforce meant that for most of a century northern manufacturers would not risk moving their operations to the south. The south would not begin to close the relative income gap separating it from the rest of the United States until the period after the First World War.
Attempts to count the wealth of the merchant princes themselves reinforce the suspicion that the pre-World War I U.S. was more unequal than at any time before or since. A country of immigrants and plutocrats is very different from the country of yeoman farmers that the United States had been in its Founding Fathers' imagination, and in large part in reality, in the late eighteenth century.
Alexis de Tocqueville, a keen-eyed commentator on American society in the first half of the nineteenth century, had feared the growth of such a class of plutocrats, such an "aristocracy of manufacturers":
The territorial aristocracy of past ages was obliged by law, or thought itself obliged by cutom, to come to the help of its servants and relieve their distress. But the industrial aristocracy of our day, when it has impoverished and brutalized the men it uses, abandons them in time of crisis to public charity to feed them.... Between workman and master there are frequent relations but no true association.
I think that, generally speaking, the manufacturing aristocracy which we see rising before our eyes is one of the hardest that have appeared on the earth....
In the United States the rising concentration of wealth provoked a widespread feeling that something had gone wrong with the country's development. The rich (and many of the native-born not-so-rich) blamed foreigners: aliens born in China, Japan, Italy, Spain, Poland, and Russia who were incapable of speaking English, or understanding American values, or contributing to American society. Many of the middle class, especially the farmers, blamed the rich, the easterners, and the bankers. The "paranoid style" of American politics flourished.
Yet by the end of World War II all this was reversed--and the United States was a more equal country than it had been since the beginning of the Gilded Age.
World War I saw a sharp but short-lived compression of the income distribution. Wages became much more equal in the space of a few short years. But this compression was quickly undone in the 1920's, which saw "very unbalanced technological progress, with productivity advancing faster in automobilesconsumer appliances, petrochemicals, and electric utilities" then elsewhere in the economy. These sectors were skill-intensive sectors. Relative skilled workers, both white collar and blue collar, once again captured the lion's share of the increased incomes made possible by technological change. The property income share also rose somewhat in the 1920's. It is uncertain whether relatively poor and unskilled blue collar workers experienced any rise in their wages adjusted for infiation between 1920 and 1929.
The Great Depression, World War II, and the immediate post-World War II period saw a substantial levelling of the income distribution. Skilled urban workers earned ninety percent more than unskilled workers before the Great Depression; they earned some sixty percent more after World War II. Skilled manufacturing workers earned close to double what unskilled workers earned before the Great Depression; they earned only forty percent more after World War II. Similar patterns can be found in the share of income going to property rather than to labor: it, too, dropped by a third&emdash;from thirty percent to twenty percent of total national product&emdash;between the 1920's and the 1950's.
Williamson and Lindert guess that about half of the reduction in wage inequality was due to a shift in the character of technological progress after 1929. Before 1929, productivity growth had been concentrated in manufacturing industry and other sectors that required a relatively skilled workforce. As the economy's structure shifted toward these sectors where productivity was growing most rapidly, demand for and returns to skills and capital rose and demand for unskilled labor fell. After 1929, productivity growth was much more balanced: productivity in agriculture and in service sector jobs that relied on unskilled labor more than skilled labor also grew rapidly. The other half of the levelling comes from demographic factors: fewer children and more education per child both shifts the distribution of skills within the population&emdash;making more skilled and fewer unskilled workers&emdash;and diminishes the supply of unskilled workers.
The levelling of the wage distribution was also encouraged by the growth in the number of jobs that were relatively low-skilled yet also paid high wages. English engineers had always noticed that American manufacturing industries made simpler and rougher goods, used less skilled labor, and seemed to incorporate much more of the knowledge needed to run the process of production into machines and organizations, leaving much less in skilled workers' brains and hands. Some of this was simply economizing on the relevant margin&emdash;skilled workers were exceedingly scarce in America throughout the nineteenth century, and it seemed worthwhile to follow production strategies that used skilled workers as little as possible. Some of this was finding new and more productive ways of doing things.
Mass production carried this "American system" to its extreme. As Henry Ford's engineer Max Wollering said later: "Mr. Fordrealizedthat in order to create great quantities of production, your interchangeability must be fine and unique in order to accomplish the rapid assembly of units. There can't be much hand work or fitting if you are to accomplish great things." Every time a skilled worker is needed to file or adjust an already-made part before it is added to the car under construction, time is wasted.
At Ford in 1913 at most 26 percent of workers were classified as "skilled or skilled operators"&emdash;a substantially lower proportion for a substantially wider job class when compared to the 70% that Daimler employed who were "skilled workers." And Ford could build Fords with a productivity more than ten times that with which Daimler could build Mercedes cars.
Ford minimized his costs by building a capital intensive plant that was very good at building automobiles, and not for building anything else. The increase in capital intensity increased the potential risk. The productivity and profitability of the Ford plant depended on a high rate of production. Anything that threatened the pace of production&emdash;union strike or anarchist sabotage&emdash;threatened to be very expensive. Ford could employ unskilled workers in jobs that had previously required highly skilled craftsmen, but only if he kept his workforce happy.
It was difficult to keep workers happy. The rapid pace and high degree of stress on the assembly line led initially to very high turnover: new hires in a year were four times the average workforce. Ford's workers&emdash;sped-up, automated, short-term, alienated, and about to quit&emdash;seemed obvious fodder for recruitment into the International Workers of the World, and Ford's profits were very vulnerable to IWW-style wildcat action. Ford's solution was to close to triple his workers wages, to $5 a day. The company could ask its workers to become for eight hours a day a part of the production machine that the Ford engineers had designed and refined. The five dollar day assured the company that the essential human appendages to this machine would always be present.
Pre-Depression unions are usually counted as failures. Yet this "union threat" appears to have played a major role in starting the $5 day at Ford, and in setting the pattern for a system of labor relations that would dominate blue-collar assembly lines in the United States for half a century: we will pay you very high wages for unskilled, if difficult and alienating, work, and in return you will not disrupt production or smash the machines: even the likes of Herbert Hoover would, after the $5 day, say that of course firms should share their profits from mass production with their workers. This system was worthwhile for employers because it economized on expensive skilled labor. This system was worthwhile for employees because it paid them high wages. And this system was a significant contributing factor to the mid-twentieth century levelling of the American income distribution.
The restriction of immigration after 1920 also diminished the supply of unskilled, newly-arrived workers competing for low-level urban jobs. This made the distribution of income and wealth within America more equal. Note, however, that many who would have been Americans had the open-door immigration policies of the nineteenth century continued were excluded from the country. For the most part such excluded potential immigrants were far poorer than they would have been had they been allowed to come to America.
In addition to the levelling created by the drawing together of wage levels and the reduction in the share of income going to property, the distribution of income was also made more equal by the actions of the government. The New Deal of President Franklin Roosevelt saw the beginnings of a transfer system&emdash;Social Security, Supplemental Security Income, and Aid to Families with Dependent Chidren&emdash;to provide income to those who could not, for reasons of age, health, disability, or within-household demands on their time&emdash;earn money in the labor market.
The American welfare state was never seen as an income levelling tool in its own right, but only as a "safety net" to provide security against potential disasters: impoverishment in old age, disability, desertion by a husband, and so forth. The New Deal established a "social insurance" rather than a "welfare" state in that the point of the programs was as much to let the employed and relatively well off sleep easier at night by "insuring" them against porential disasters as to help raise the standard of living of the poor. The social insurance state did contribute to the levelling of the income distribution, although this was never its primary purpose. In addition, taxation became progressive. Those in higher income brackets were expected to, and until the 1980's by and large did, contribute a larger proportion of their incomes to the government in taxes than those in lower income brackets.
The post-World War II period also saw tremendous advances in civil rights. Color bars&emdash;restrictions on employment by race&emdash;were severely reduced. In the 1930's, Ford was the only Detroit automaker that would employ America's Blacks, and even Ford restricted them to a few types and locations of jobs. Marriage bars&emdash;policies that women should be fired upon marriage or upon pregnancy&emdash;were also reduced. Equality of opportunity no matter what your race or sex at least became an avowed goal. In southern rural school systems before the Brown v. Board of Education of Topeka desegregation decision, the school year for Blacks typically had only one-third as many classroom hours as the school year for whites. Even though opportunities by the 1970's still depended heavily on class and race, opportunities for upward mobility were significantly enhanced by public educational systems, public colleges, and a federal government formally unwilling to allow your right to hire, serve, or sell to whomever you chose to extended to classifications based on race.
The end of formal and official racism in American society is an enormous accomplishment, and a battle that looks likely to remain won. Right wing voices complaining that federal curbs on the freedom to discriminate damaged federalism, infringed on privacy, or threatened to create economic stagnation grew weaker as time passed. And right wing complaints against equality of opportunity&emdash;that such an "ideal" deserved nothing but scorn: "a world turned upside-down indeed![T]he very idea of such a society is inherently absurd" because upward mobility on the part of the children of the poor required downward mobility on the part of the children of the rich&emdash;were greatly at odds with the consensus belief about the true nature of America. For example, Abraham Lincoln said on the eve of the Civil War:
Southern men declare that their slaves are better off than hired laborers amongst us. How little they know whereof they speak! There is no permanent class of hired laborers amongst us. Twenty five years ago, I was a hired laborer. The hired laborer of yesterday, labors on his own account today; and will hire others to labor for him tomorrow. Advancement&emdash;improvement in condition&emdash;is the order of things in a society of equals
Lincoln's free soil answer was that Blacks in the South were indeed enslaved to the Lords of the Lash, but that workers in the North were not enslaved to the Lords of the Loom, but had their own "capital" in the forms of property, tools, or skills. Their property, tools, and skills made them&emdash;even though they did not own or boss anyone&emdash;much more proprietors of their own capabilities than subjects of some lump of capital: they could always leave one employment and sell their valuable skills elsewhere. Free upward mobility&emdash;both absolute and relative&emdash;if you worked hard was the central promise of America.
The argument that America is a middle-class society, not a society of workers and capitalists, recurs throughout American history. Around 1900 German sociologists had a furious debate on why the United States had no socialist party; in the 1920's, AT&T ran advertisements showing a housewife in an apron peeling potatoes, with the caption "one of the owners of the Bell System." There is a great deal of truth in this "American ideology." But it is more true today, when college professors earn, on average, a little less than twice the average wage, then it was back in 1900 when college professors earned perhaps six times the average wage.
The levelling of the income distribution had important social consequences in the United States. It was the driving force behind a severe reduction in class distinctions. In 1900, the largest gap in social status and class was between the rich on the one hand, and the middle class and poor on the other. By the post-World War II era this had changed. America had become a "middle class society"&emdash;meaning that the major gulf lay between the poor and the rest, middle class and rich.
Around 1980 the income differential takes a substantial leap upward. In no more than five years, by far the larger part of the 1929&endash;1950 equalization of the U.S. income distribution is reversed among young workers. This shift toward greater inequality should not be overstated. So far the shift to inequality is much greater among workers with less than ten years' employment experience than among older, more experienced workers. Perhaps the gap will narrow as the present group of young workers ages. Moreover, while class and education-based income differentials have widened, status and race-based differentials have continued to fall at least through the end of the 1970's.
Moreover, this shift should be viewed with some skepticism: it is not certain that the college-high school wage differential plays the same role in the American economy today as the skilled-unskilled wage differential had at the beginning of this century. And it is not certain that the shift will be permanent. It is, however, clear that there is no longer any reason to believe that the wage distribution will narrow in the future. In the first two thirds of the twentieth century, both market forces&emdash;a shift to more balanced technological change and a declining ratio of less-skilled to more-skilled workers&emdash;and wage setting institutions&emdash;minimum wage laws and a strong union movement&emdash;worked to reduce income differentials. This allowed the relatively poor and unskilled would share fully in modern economic growth.
The determinants of the sudden upward leap in income inequality, especially among the young, in the 1980's are also somewhat uncertain. There are three possible causes: a rise in the relative numbers of the unskilled, the near-collapse of the private sector union movement under the pressure of the 1982 recession and of governmental hostility, and the large shift in the U.S. pattern of trade that came about in the 1970's and 1980's and led to the transfer to overseas of jobs for the less-skilled (and the transfer to the United States of jobs for the more skilled). Whichever of these factors is most important, there is no reason to expect the near future to see any reversal of the leap in inequality. International trade is likely to continue to increase, further reducing the employment of the less-skilled in high-wage sectors. The union movement is unlikely to recover. And the labor force is likely to continue to see a disproportionate growth in the numbers of the less skilled.
The 1970's and 1980's also saw rapid growth in the number of Americans whose households did not have access to the labor market. Divorce reduced the number of adults per household and multiplied the number of households. People choose to get divorced, and would most likely not appreciate being forced to stay together. But two households cost more to maintain than one; divorce is usually followed by a substantial drop in living standards for women and children (and a rise in living standards for men); and one parent living as the sole adult in a household trying to raise children has a very difficult time taking advantage of whatever opportunities can be found in the labor market. The declining economic position of lesser-skilled males, coupled with the rise in female-headed households with no access to the labor market and with reductions in public sector support together caused something extraordinary to happen in the 1970's and 1980's: the proportion of the population living in poverty increased.
The "poverty" line, as calculated by the U.S. government, does not shift upward as time passes and as expectations of what is needed to maintain a minimum decent standard of living rise. The poverty line is that amount of money required to purchase a fixed basket of commodities: the proportion living in poverty is the proportion of the population that do not attain a fixed absolute level of material well being. The proportion of the U.S. population falling below the poverty line in 1990 was about 13 1/2 percent&emdash;as large a proportion as it had been in 1966. The two decades from 1949 to 1969 saw the poverty rate using the official definition fall from about 32 percent to about 12 percent; the two decades of the 1970's and 1980's saw the poverty rate remain stagnant or rise.
This was the first two decade period in United States history in which anything at all similar had happened: previous decades that saw poverty rise, like the disastrous Great Depression-ridden 1930's, were followed by decades like the 1940's which saw tremendous economic growth and poverty reduction. The 1970's and 1980's marked the first time when, over the span of a generation, the rising tide of economic and productivity growth had failed the lift the boats of America's poor.
From Shafts to Wires:
