At long last, American workers may be getting a break. Better still, it’s a break that is likely to last for decades. Looking back, historians may call it the Great Reversal. After half a century of insecurity and inadequate wage increases, we may now be starting a long period where workers — all workers — will enjoy nicely rising pay.
Our corporations will need to reward work with higher wages. The middle class will fear less for its future. And, believe it or not, the financing of our government is likely to improve.
Both political parties will claim credit, of course, but the turnaround won’t be the result of visionary politicians working economic magic. It will be the consequence of huge global shifts. Just as major changes reduced the power of American labor from 1970 to the present, new major changes will restore that power.
Yes, those are big claims.
But I believe the case is powerful and worthy of our attention. In this column, I’ll be laying out how we got to where we are today. In the next, I’ll be citing the forces that will cause the Great Reversal. In the third, you’ll see why we’re likely to deal with things better than other countries.
The beginning of the end
Most observers like to point to 1970 as the beginning of troubles for American workers.
I prefer an earlier starting date.
Late in 1967, Houghton Mifflin published economist John Kenneth Galbraith’s The New Industrial State.
Galbraith’s book described an economy controlled by large corporations. In that world, corporations saved and invested while people, guided by advertising, did their jobs and consumed. It was portrayed as a stable relationship. Workers had job security and pensions. Corporations had reliable profitability.
The New Industrial State was written with wit and lucidity. The public loved it. If nothing else, his fellow economists were impressed with Galbraith’s hefty royalties.
But there was a problem.
The new industrial state was entirely retrospective. All the relationships described would be in tatters less than a decade later, driven by technology, geopolitics and finance. Then, in 1968, The New York Times, noting the record number of shareholders, declared that we had become a nation of capitalists.
That, it turned out, was another retrospective view. In much of the next decade, more people sold stock mutual funds than bought them.
The Carterphone decision, also in 1968, was less noticed, but it ended the monopolistic control American Telephone and Telegraph had on telecommunications. Add the existence of MCI, founded in 1963 to send phone messages by microwave radio signals, and the door to rapid technological change was knocked off its hinges. Lots more was coming.
How workers lost out
If there is a single poster-child graphic that explains what happened to workers over the last half-century, it is a graph comparing the growth of productivity in the postwar period to the growth in workers’ wages. It clearly shows that while wages and productivity rose in close concert for many years, indicating that workers shared in productivity gains, the two lines diverge sharply in the early 1970s.
There are arguments about this chart, as there are about virtually all economic statistics.
During the same period, corporate profits as a percent of GDP rose significantly, indicating that gains in productivity were contributing to higher profits and increased earnings for executives and high-skilled workers.
In 1970, Intel introduced the first commercial random address memory chip, opening the door to vastly lower-cost memory in computers. In 1971, it introduced the first computer on a chip. The combination ushered in the world of microprocessors, personal computing, rapid software development, a major democratization of information and a wave of innovation.
We are still riding that wave.
In July 1971, President Richard Nixon announced he was opening the door to relations and trade with China. While he, and others, may have expected the benefits of low-cost imports from China and an expanded market for American machinery, the broader impact was the equivalent of dumping millions of low-wage workers on the global market. It put pressure on wages throughout the industrialized world.
If any single event killed the imagined New Industrial State, it was the availability of millions of Chinese workers eager to work in the same conditions the American union movement was trying to eliminate.
One month later, Nixon “closed the gold window,” ending the convertibility of dollars into gold. The move made the U.S. dollar a fiat currency and ended a system of payments that had prevailed since the end of World War II.
At the same time, fearing inflation that had risen to 5%, Nixon declared a regimen of wage and price controls.
In 1973, the Organization of the Petroleum Exporting Countries began an embargo on oil exports to the United States after we supported Israel in the Yom Kippur War. The direct result was a near-quadrupling of oil prices from $3 a barrel to nearly $12 a barrel. Between the price and shortage of fuel, inflation surged, the economy sank, the stock and bond markets crashed, and American automobile manufacturers were pushed to the edge of bankruptcy.
The first money market mutual fund was created in 1971 and was quickly duplicated by other mutual fund companies. Money market funds bought large certificates of deposit — certificates in amounts that were too large for the vast majority of small investors and savers. The shares were sold in amounts small savers could buy.
Money market mutual funds amounted to an end run on Regulation Q, a rule that limited the interest rate banks could charge on small deposits and certificates. Many economists believe that the combination of federally insured mortgages and low interest rates worked to fuel the expansion of homeownership and the growth of middle-class net worth that followed from rising home prices. Even today, most Americans have the bulk of their net worth in home equity.
The change brought rapidly rising interest rates to home mortgages.
As the worst stock market decline since the Great Depression worked toward a climax in 1975, a multitude of worker pension funds for some of our largest corporations became disastrously underfunded. The event marked the beginning of the end for private company worker pensions.
Since then, corporations have replaced pensions with employee savings plans, 401(k)s, job security has evaporated and real wage gains have been scarce. Workers with less education have been affected most. For many workers, perhaps most, prospects look pretty dim.
But just as all good things must come to an end, so must all bad things. It’s a great irony that COVID-19, another bad thing, has revealed how difficult it is to find workers. One result: rising wages.