Les Trente Glorieuses or The Glorious Thirty is how the French named the thirty years from 1945 to 1975 when, in the aftermath of the WW II, the economy grew fast and millions of families entered the middle class. This pattern of economic performance was experienced in practically all free economies, not the least in the United States. The most common characteristic was that productivity growth and real (after inflation) wage growth moved in almost perfect unison.
And then in the 1970s this harmonious relationship came to an end. Capital investment and corporations started to claim the lion’s share of productivity gains leaving wages behind. This had a significant hollowing out of the middle class. In 1970 the fraction of the population considered middle class by income was 61%. By 2021 it had dropped to 50%, a fall significant by the numbers but even more consequential for its deleterious socio-political effects. *
The divergence in the paths of the rewards of capital and labor was not the product of the invisible hand of the market. It came about because both political power and intellectual attitudes shifted in favor of capital investors and business owners and away from labor and the working class.
First, a series of laws and regulations started to limit the rights and powers of labor unions and their ability to represent labor’s interests. (Here, President Reagan’s firing of 10,000 striking air traffic controllers was a pivotal moment in the demise of labor unions.) Next, the development of the shareholder wealth maximization scholarship promoted the creation of corporate value in the name of shareholders as the ultimate standard of success for corporate executives. Quickly this scholarship turned into a practicing philosophy that failed to see through its full consequences for the other stakeholders of business and the economy in general.
The creed of shareholder value maximization promoted the importance of executives and devalued that of labor. The old contract between management and labor had allowed American workers to improve working conditions and claim higher wages. In the new model of shareholder value maximization, labor income became just another cost component that could be controlled through consolidation of the working force at the corporate level or lower wages. Even solid academic work in favor of raising the minimum wage came under attack by business interests and their ideological allies in academia. Angus Deaton gives a good account of the efforts to discredit the work of David Card (Nobel Prize in Economics) and Alan Kruger on the minimum wage (Economics In America).
Two more factors contributed to the stagnation of labor income and the demise of middle-class households. One was automation of the production process. The other was the offshoring of production thanks to international agreements, like NAFTA and WTO. Both allowed businesses to reduce their demand for American workers without having to share the gains with labor in an environment of diminished labor union power.
Neither automation nor offshoring had to produce these negative effects for labor income. They did, nonetheless, because business, and especially big business, had the power and the acquiescence of the political class to refuse a fairer distribution of the corporate gains earned from technological progress and global expansion. And most importantly, there was no countervailing power from labor to bargain for a more equitable distribution.
After four decades of stagnated wages and immense economic inequality, it is time we looked for a better economic paradigm. Thus far, we have prioritized economic policies which we assume will produce the desired economic results. Emblematic of this approach was the trickle-down model of the neoliberal order. It promised that fattening corporate profitability through deregulation and tax incentives would produce better real wages. In the absence of a potent labor movement, it turned out to be an empty promise for the bulk of the working force. Even worse has been the tendency of U.S. governments (Administrations and Congress) to socialize corporate losses by bailing out financial and industrial firms but not the rewards by also spreading out the gains businesses amass thanks to government policies. In other words, the faith in the magic of markets stops at the door of corporate failure at which point the state picks up the losses. However, no equivalent state role is envisioned to ensure labor gets its fair share of the economy’s gains.
Now we hear that imposing tariffs and import restrictions will boost the production and profitability of American corporations and consequently raise American wages. It’s not clear at all why this should happen. For one, the American economy has become more monopolistic than before. Economics suggests that monopolies do not expand production to the maximum point. The concentration of jobs within a smaller number of huge firms has also turned them into monopsonists with more power than workers to negotiate lower rather than higher wages.
Another idea is to create an opportunity economy, where all have an equal chance to participate in the gains of the economy. As American and laudable as this sounds, it still focuses on means rather than ends. Equal opportunities do not necessarily produce fair outcomes. The underlying pathologies of the current American economy – concentration of corporate and market power, weak labor unions, and lagging productivity – will also prevent opportunities to translate into fair outcomes. Leveling the playing field of opportunities is also challenging in the presence of a vast economic inequality. Studying a group of countries, the academics T. Piketty and E. Saez have found that where inequality is high opportunities are fewer.
Therefore, if we wish to make real progress toward a more equitable and thriving society, we need to set our eyes on goals not tactics. Shared prosperity is such a goal. If it happened before, in the post WW II decades, it can happen again. But to bring shared prosperity back we need to follow policies that set the foundations for its attainment. Thus, we need to create more competitive markets and curtail the dominance of few corporations. We need to restore the power and voice of labor. We need to boost educational opportunities for the type of skills (not all requiring a college degree) the economy needs. We need to incentivize investments that boost worker productivity instead of only incentivizing the replacement of workers by machines. (In their book Power and Progress, Acemoglu and Johnson report that despite the enormous investments of American corporations in technology Total Factor Productivity growth is lower now than in previous periods of less mechanized production.) And we need to have policies that boost and protect wages.
The goal of shared prosperity will put a stop to the present mindset that the economy is a zero-sum game of winners and losers. It can also restore the sense of solidarity a sustainable society needs. Finally, goals are not only aspirational; more importantly, they can be inspirational.
*Pew Research Center
Note: These ideas have been developed from what I have read in several books in recent years. So, I need to give them credit by citing them below.
Power and Progress, Acemoglu and Johnson
Economics In America, Deaton
Deaths of Despair, Case and Deaton
The Rise and Fall of the Neoliberal Order, Gerstle
The Middle Out, Tomasky
And a book I know in summary but haven’t read yet People, Power, and Profits, Stiglitz
Let's Reason 