In 2002, I heard an economist characterizing this figure as containing a valuable economic insight. He wasn’t sure what the insight was. I have my own answer.
The economist talked of the figure as a sort of treasure map, which would lead us to the insight. “X” marks the spot. Dig here.
The graphic below tells three stories.
First, we see two distinct historic periods since World War II. In the first period, workers shared the gains from productivity. In the later period, a generation of workers gained little, even as productivity continued to rise.
(Note: This table has been updated with more recent years after this blog was posted.)
The second message is the very abrupt transition from the post-war historic period to the current one. Something happened in the mid-70’s to de-couple wages from productivity gains.
The third message is that workers’ wages – accounting for inflation and all the lower prices from cheap imported goods – would be double what they are now, if workers still took their share of gains in productivity.
A second version of the figure is equally provocative.
(Note: This table has been updated with more recent years after this blog was posted.)
This graphic shows the same distinct historic periods, and the same sharp break around 1975. Each colored line represents the growth in family income, relative to 1975, for different income percentiles. Pre-1975, families at all levels of income benefited proportionately. Post-1975, The top 5% did well, and we know the top 1% did very well. Gains from productivity were redistributed upward to the top income percentiles.
This de-coupling of wages from productivity has drawn a trillion dollars out of the labor share of GDP.
Economics does not explain what happened in the mid-70s.
It was not the oil shock. Not interest rates. Not the Fed, or monetary policy. Not robots, or the decline of the Soviet Union, or globalization, or the internet.
The sharp break in the mid-70’s marks a shift in our country’s values. Our moral, social, political and economic values changed in the mid-70’s.
Let’s go back before World War II to the Great Depression. Speculative unregulated policies ruined the economy. Capitalism was discredited. Powerful and wealthy elites feared the legitimate threat of Communism. The public demanded that government solve our problems.
The Depression and World War II defined that generation’s collective identity. Our national heroes were the millions of workers, soldiers, families and communities who sacrificed. We owed a national debt to those who had saved Democracy and restored prosperity. The New Deal policies reflected that national purpose, honoring a social safety net, increasing bargaining power for workers and bringing public interest into balance with corporate power.
In that period, the prevailing social contract said, “We all do better when we all do better.” My prosperity depends on your well-being. In that period of history, you were my co-worker, neighbor or customer. Opportunity and fairness drove the upward spiral (with some glaring exceptions). Work had dignity. Workers earned a share of the wealth they created. We built Detroit (for instance) by hard work and productivity.
Our popular media father-figures were Walter Cronkite, Chet Huntley, David Brinkley, and others, liberal and conservative, who were devoted to an America of opportunity and fair play.
The sudden change in the mid-70’s was not economic. First it was moral, then social, then political, ….. then economic.
In the mid-70’s, we traded in our post-World War II social contract for a new one, where “greed is good.” In the new moral narrative I can succeed at your expense. I will take a bigger piece of a smaller pie. Our new heroes are billionaires, hedge fund managers, and CEO’s.
In this narrative, they deserve more wealth so they can create more jobs, even as they lay off workers, close factories and invest new capital in low-wage countries. Their values and their interests come first in education, retirement security, and certainly in labor law.
We express these same distorted moral, social and political priorities in our trade policies. As bad as these priorities are for our domestic policies, they are worse if they define the way we manage globalization.
The key to the treasure buried in Figure 1 is power relationships. To understand what happened, ask, “Who has the power to take 93% of all new wealth and how did they get that power? The new moral and social values give legitimacy to policies that favor those at the top of our economy.
We give more bargaining power and influence to the wealthy, who already have plenty of both, while reducing bargaining power for workers. In this new narrative, workers and unions destroyed Detroit (for instance) by not lowering our living standards fast enough.
In the new moral view, anyone making “poor choices” is responsible for his or her own ruin. The unfortunate are seen as unworthy moochers and parasites. We disparage teachers, government workers, the long-term unemployed, and immigrants.
In this era, popular media figures are spiteful and divisive.
Our policies have made all workers feel contingent, at risk, and powerless. Millions of part-time workers must please their employer to get hours. Millions more in the gig economy work without benefits and have no job security at all. Recent college graduates carry so much debt that they cannot invest, take risk on a new career, or rock the boat. Millions of undocumented workers are completely powerless in the labor market, and subject to wage theft. They have negative power in the labor market!
We are creating a new American aristocracy, with less opportunity – less social mobility and weaker social cohesion than any other advanced country. We are falling behind in many measures of well-being.
The dysfunctions of our post-1970 moral, social, political and economic system make it incapable of dealing with climate change or inequality, arguably the two greatest challenges of our time. We are failing our children and the next generations.
X marks the spot. In this case, “X” is our choice of national values. We abandoned traditional American values that built a great and prosperous nation. Our power relationships are sour.
We can start rebuilding our social cohesion when we say all work has dignity. Workers earn a share of the wealth we create. We all do better, when we all do better. My prosperity depends on a prosperous community with opportunity and fairness.
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Dec 6 2017 at 12:16 PM
Anyone notice how this coincided during the Nixon years? ( Henry Kissenger ) Also, remember that Nixon did away with and ended the Bretton Woods agreement, which set the structure in place we had from the end of WWII. Bretton Woods was set up by FDR, with no banks in the room when it was agreed to. And after Nixon ended it, things started changing.
Aug 1 2019 at 8:56 AM
I agree with everything said but think it’s only talking about a minor part of the problem.
What’s missing is a discussion of the impact of technology. In the 50’s the work in factories was done by workers, not machines. Not because business wanted to be equitable to workers but because the machines hadn’t been invented yet. If they had, workers would have been out the door back then.
Look at the impact of technology on pumping gas, shopping for anything (Amazon impacts), checking out at the grocery store. Wait til self driving trucks hit the road. A million plus drivers will be out of work.
This has nothing to do with morals, it is a sea change in our economy. We better figure out how to respond or a future President will make Trump look wonderful.
Sep 3 2019 at 1:13 AM
News: Real Estate, Risk, Economics. Aug. 27, 2016 | PropertyPak.com®
[…] ⇧ ‘X’ Marks the Spot Where Inequality Took Root: Dig Here | Economic Opportunity Institute […]
Nov 28 2019 at 11:42 AM
I agree the original impetus was moral, but the author never follows up on this point. Ask yourself, which group defined the culture’s moral compass before then (1975-6), and which one took over after then? And are they at all known for things like greed, narcissism, hyperpartisanship and selfishness?
Sep 5 2020 at 8:23 AM
I realize I am late to this conversation; In Autumn 2019, (pre-COVID) the Business RoundTable all but admitted that their influence over Congress and the business curricula in American universities since 1972 has been a failure. Their quest to elevate leadership’s wealth resulted in eroding the very economic backbone of our financial security; the working classes. This group also opened the door to allow and protect the worst of the business leadership in the push for profit at any costs. In October 2019 the BRT issued a new “Statement of the Purpose of a Corporation”, (https://s3.amazonaws.com/brt.org/BRT-StatementonthePurposeofaCorporationOctober2020.pdf) in which almost all of the 200+ member CEOs signed off on the document. If these people walk their talk, it may take up to a decade to fully implement – that is IF the pandemic, economy, climate change disasters and supply chain failures are addressed immediately. After all, what’s on the ground affects all the best laid plans and intentions. We have needed a new paradigm in culture and equitability for many years, perhaps CIVID will be the ‘gift’ that motivates banks and corporate leaders to actually come into line with B Corps missions. Business schools, corporate HR departments, Congress and Banks adopted a ‘dark ages’ mentality that posited “if I have more then I win” position. History has demonstrated time and again that this does not work well. Even the CEOs participating and ‘winning’ like this know that their own “fall of Rome” is pending, but justify that the wealth whey accumulated will help them weather the coming collapse. Maybe, but that wealth may not rally be as helpful as they imagine. By raising up the lowest in the village, we are all elevated. What will it take to make these changes happen in our culture?
Sep 8 2021 at 9:25 AM