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Is this what ended the American Dream?

As often as I repeat and document (here, for example) the fact that real incomes for middle- and low-income Americans plateaued in February 1973 (and incomes for middle- and low-income families and households before the end of the 1970s), I’m still puzzled as to why that happened.  Rick Perlstein offers an explanation in today’s NYT

His narrative seems to be that in the 1970s, after the shellacking of George McGovern by Nixon in 1972 and the re-writing of the Democratic delegate selection process that gave Carter the nomination in 1976, liberalism in the Democratic Party changed its agenda.  It became less about the bread and butter issues of economic security and shared prosperity and more about civil rights, the environment, getting out of Vietnam, and honest and transparent government.  The Humphrey-Hawkins legislation in 1978, which nominally requires the Fed to keep both inflation and unemployment low, was so watered down that the Fed has never let itself be influenced in the slightest by the unemployment half of the mandate.  Humphrey-Hawkins, like Pickett’s Charge, marks the end of an era instead of a consolidation of gains. 

It has seemed to me unlikely that we would ever find a single event, policy change, or market shift that explains the persistent stagnation of real middle and low incomes starting in the 1970s.  If there had been such an occurrence, surely it would have become obvious by now, wouldn't it?  Still Perlstein’s explanation—that there was a great political realignment and all of the endless string of tactical defeats for America’s middle and lower class incomes flow from that—seems rather plausible to me. One reason it seems plausible is that it’s a fair description of my own attitudes as a life-long Democrat.  I was not friendly to labor unions but saw them as more powerful than they needed to be, corrupt, bigoted, and on the wrong side about Vietnam, the environment, and civil rights.  I was a “business Democrat,” then a wary DLC follower, a New Democrat, and even a supporter of Pete Peterson's Concord Coalition.  In short, I was a part of the wing of the Democratic Party that took over.  I regret now what we did to the rest of America. 

In addition to these changes in the Democratic Party, I would think that the August 1971 Powell Memo to the US Chamber of Commerce and how big business and conservatives reacted to that was also very important.  They organized a generations-long ideological fight using think tanks, media control, curriculum influence, campaign finance, etc., and the opposition was never organized and to a shocking degree didn’t notice there was a game on. 

What do you think blew up the American Dream? 

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Reader Comments (16)

A couple of years ago spencer at A.B. posted about labor not sharing in productivity growth gains over the last several decades.


He doesn't mention Humphrey-Hawkins, and I think that by itself cannot account for such a shift. Look at tax policy changes, which have strongly favored the rich and corporations over people, especially the lest well off.



Also CEO compensation has gone from about 30 x worker compensation to about 500 x.

It's all of piece.

Lo siento,

May 29, 2011 | Unregistered Commenterjazzbumpa

the american dream was an aberration of post WWII social coalescence; we've just returned to the plutocratic social formation that has dominated societies throughout history

May 30, 2011 | Unregistered Commenterrjs

What about the impact of technology and (later) globalization on wages, unemployment and the concentration of income at the top? Since the 1970s information technology has progressed almost incomprehensibly.

Computers and robots are getting better and better. More jobs are being done by software, often incorporating artificial intelligence or machine learning. There was a recent piece in the NYT about teams of lawyers being replaced by e-Discovery software.

This is going to ACCELERATE in the future. A company called Heartland Robotics is working on a $5000 robot; that means an employer can buy a robot for the price of a couple of months wages.

What happens when robots like that start taking even burger flipping jobs? It might not happen in the next few years, but SOMEDAY it is GOING to happen. Then what? McDonalds is already introducing touch screen self-service ordering sytems.

As jobs at all levels, from McDonalds to college-educated knowledge-workers, are increasingly automated, there will be more unemployment, more downward pressure on wages, and especially even more income inequality as the owners of capital realize even more gains.

For a great overview of this, see this book:

"The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future"


A free PDF is also available here: http://www.thelightsinthetunnel.com

Also see the author's blog at http://econfuture.wordpress.com.

I think the issues raised in this book are among the most important that we will have to confront as a society. I encourage everyone to read it...

May 30, 2011 | Unregistered CommenterSteve

You miss one of the seminal events of the 20th century - an event that began in the late 1960s and ran until Volcker killed it in the mid 1980s. I'm talking about the Great Inflation. I think this is a huge reason why wages have remained stagnant for decades.

I've only recently come to this thinking - and only after reading Alan Greenspan's "Age of Turbulence." In his book, which is interesting for many reasons, not the least that he is the architect of our current woes, there is a hum of anxiety whenever he detects wage increases - the fear that increases in wages will lead to crippling inflation once again.

We've not seen that terrible, crippling inflation since Volcker, but we haven't seen increases in wages either. We've seen monetary policy designed to curb inflation; we've got business leaders eager to get the most out of its workforce for the least amount of wages; we've seen our financial sector focus its efforts on investing in their bonuses, rather than in business and industry.

It's been a perfect storm that's battering the majority of Americans.

Curious to hear your thoughts on this.

May 30, 2011 | Unregistered CommenterMain Street Muse

Wealth consolidation followed the consolidation of the money creators.

Small finance was replaced by big finance on main street.

Community banks no longer keep financial profits local.

May 30, 2011 | Unregistered CommenterWinslow R.

Steve: I agree tech advances increase productivity and tend to displace labor, but that's not at all a new phenomenon. It actually seemed more palpable to me in the 60s and 70s than in the 00s, and there were then more books (but maybe no movie like Wall-E) than now speculating what it would be like to have all work done by robots. So, I've been looking for some other cause(s) specifically starting in the mid-70s and continuing.

Main Street Muse: The attitude you describe toward inflation fits well the Perlstein narrative. Nixon imposed wage and price controls in August 1971 because of anxiety about rising inflation. Later in the 70s, we had fiscal overstretch to pay for the Vietnam War and new social programs, 2 oil price shocks, and maybe some other things I've forgotten. We got both high unemployment and high inflation, "stagflation," which wasn't supposed to happen because the Phillips Curve in the dominant economic model said that if one went up the other had to go down. There was a huge political battle leading up to Humphrey-Hawkins about which of the two problems government (and the Fed) should prioritize. Inflation and the political struggle about it opened a schism between labor Democrats and business Democrats, I would say in retrospect. Humphrey-Hawkins tried to paper it over with the dual mandate, but the anti-inflation faction won and has been in control ever since. For them, unemployment is a feature, not a bug. When labor markets got tight in the late 1990s, there was upward pressure on wages and rising concern amongst the inflation hawks. I don't know how much that increased concern led to our full embrace of trade with China, but I do know that Fed chairman Alan Greenspan said he was counting on the substitution of lower-priced imported goods to hold inflation down and allow a loose money policy that inflated asset prices instead of wages and prices in the real economy. (See, e.g., this article from 1998 http://www.aei.org/article/9088.)

Thanks for your comments, all.

May 30, 2011 | Unregistered CommenterSkeptic

Steve is more correct than you (and many others) realize. The mid-1970's marks the the beginning of the invasion of industrial manufacturing by Computerized Numerical Controlled (CNC) machining centers. CNC machines are not at all what most people would visualize when they think of "industrial robots," but that's exactly what they are, and they have displaced an extraordinary amount of human labor. I watched this invasion unfold while working for the Department of Defense as a type of liaison to manufacturing industries in general. From small firms to large, the invasion was massive and pervasive, and it continues to this day. See also http://en.wikipedia.org/wiki/Numerical_control, and especially, http://en.wikipedia.org/wiki/Numerical_control#Proliferation_of_CNC, for more information.

May 30, 2011 | Unregistered CommenterMike

Don't forget that the biggest change in the US (and global) economic systems in the last 100 years occured in 1971, when the US went off the gold standard.

This event de-regulated credit creation, which fed a sustained rise in the private debt:GDP ratio due to a rise in the ratio of household debt:income. The big beneficiary was the FIRE economy (Finance, Insurance and Real Estate economy) and the big loser was everyone else.

This is not an argument for returning to the gold standard, but rather for credit creation to be directed at *real investment*, rather than speculation in stocks, property and financial products.

May 30, 2011 | Unregistered CommenterBT

The wage inflation targeting look plausible to me, but technology and trae don't look plausible because if there is the political will there is no reason why increases in productivity cannot go to workers too.

I have a different set of explanations, For me the the major one is political, and is related to inflation targeting:

* The prosperous working class of the 50-60s have become landlords and rentiers. These were largely the up-and-coming irish/italian/jewish working classes who eventually dominated the Democrats. Even now, as a legacy phenomenon, lots of major names in the Democrats have those ethnic names. That segment of the working class have bought nice sbuerban homes, have got their union pensions, their 401ks is a bit younger, and all they want is TAX FREE CAPITAL GAINS and LOWER WAGES. Because if/when they retire their income are largely dependent on capital rents, and their costs are largely depend on labor costs. They want high asset prices inflation and low consumables and service inflation, lots of imports from China and lots of immigration.

The second biggest reason is:

* In the 1970s the USA had their peak-oil event and net imports grew and grew as consumption increased as production declined. Oil production means a lot in terms of reduced fiscal pressure, and reduced pressure on having to export.

The third biggest reason is:

* In the 1990s the USSR collapsed and western elites no longer needed to share the goods with the population to prevent fifth columns from arising as in the vold war. There was no need anymore to buy the goodwill of the populace by sharing the spoils of the system with them.

Other factors:

* The WWII generation has shared a common purpose and story and experiences, across class lines. When a rich guy and a poor guy are both digging latrines in the jungle they share something, and in particular the rich guy discovers that the poor are people too, not just squalid cattle or revolting parasites.

* As partially remarked above, and mentioned by Brad deLong, that the switch of the Democrats from a party of interests to a party of values meant that the remaining working classes perceived liberal government as the protector of minorities instead of themselves.

Some events are more symptoms than factors:

* The overreaching and crushing of the unions by Reagan and Thatcher in the 1980s.

* The ZIRP started by the bank of japan in the 1990s.

* The Contract On America congressional majority in the 1990s.

May 30, 2011 | Unregistered CommenterBlissex

In response to Steve and Mike I posted an update a few minutes ago so that I could include a graph. Please take a look.

May 30, 2011 | Registered CommenterSkeptic

I didn't make my whole position clear in my comment about CNC machines and the elimination of manufacturing jobs. Actually, I agree with Robert Reich's position, as expressed here: "Starting more than three decades ago, trade and technology began driving a wedge between the earnings of people at the top and everyone else. The pay of well-connected graduates of prestigious colleges and MBA programs has soared. But the pay and benefits of most other workers has either flattened or dropped. And the ensuing division has also made most middle-class American families less economically secure." Automation made higher-paid manufacturing employees excess, but most certainly did not keep the economy from growing overall. Hence, more but lower-paid employees, and a lesser share of the overall economy for the lower and middle classes.

But I also agree with your position, too: "I was not friendly to labor unions but saw them as more powerful than they needed to be, corrupt, bigoted, and on the wrong side about Vietnam, the environment, and civil rights. I was a “business Democrat,” then a wary DLC follower, a New Democrat, and even a supporter of Pete Peterson's Concord Coalition. In short, I was a part of the wing of the Democratic Party that took over. I regret now what we did to the rest of America." Been there, done that, think that myself.

I think both automation/technology and attitudes toward unions, the less-privileged, etc., are very important in explaining what has happened to the lower and middle classes. I don't believe we should necessarily single out one as more important than the other.

May 30, 2011 | Unregistered CommenterMike

Mike: This dialog highlights an interesting issue: Does introducing technology and automation drive up wages for those who use these machines because they need more training and skills, which is what I've been assuming? Or does automation drive down wages because the workers who use them don't have to be as highly skilled, as Reich seems to assert. Or does automation in some cases push wages of those using the new equipment in one direction and the opposite direction in other cases? Which did you see in the field?

May 30, 2011 | Registered CommenterSkeptic

Skeptic: What I saw in the field was that CNC machining centers drove most wages down. Each one of the machining centers replaced multiple highly skilled machinists. It's true that people were still required to service the machining centers--that is, to bring new items to the centers to be worked, take away finished items, change worn tool bits, etc.--but those personnel required only modest skills, and so their compensation was less than that of machinists. Also, since each of the attendants could service multiple machining centers, there ended up being many fewer of those attendants than there had been machinists.

Now, those who programmed the machining centers qualified as highly skilled, and they were therefore reasonably well paid; but in most cases, they were initially drawn from the ranks of those who had been machinist supervisors. In other words, they were mostly existing supervisory employees who were given an additional skill and then "re-purposed." And, as time went on, and the firms they worked for became increasingly "CNC-ized," their numbers--both relative and absolute--started to decline. After all, once a program has been written, it can be reused again and again and again.... And, yes, new programs are required every so often; but, once a firm's existing "repertoire" of items has been initially programmed, then the demand for additional programs drops sharply, and so therefore does the need for CNC programming labor.

May 30, 2011 | Unregistered CommenterMike

Thank you, Mike. Very clear. So the answer is "both." The required skill level for a few go up. The required skill level for many go down, and (I'm assuming) most of the people aren't needed at all. The net result is it takes the middle out of the skill spectrum and, eventually at least, out of the wage spectrum.

Still the median wage trajectory seemed to turn on a dime in February 1973. http://www.realitybase.org/journal/2009/3/10/the-american-dream-died-in-february-1973.html This automation process wasn't that abrupt, was it?

May 30, 2011 | Registered CommenterSkeptic

Skeptic: No, the automation process wasn't that abrupt (although it was fast-moving). Neither, though, were the political/attitudinal shifts, and their effects, that you and I agree about. There were, however, some rather pronounced oil-related shocks to the economy at about that time (as I'm sure you're aware). Perhaps those acted in such a way, along with the effect of the other two issues we've been discussing, as to give the appearance of an abrupt turn, when, without those shocks, we might have seen a more gradual pattern developing. However, that's just speculation. This is obviously a subject fit for further exploration.

May 30, 2011 | Unregistered CommenterMike

Mike: Excellent!. I still am inclined to be skeptical that a single event explains the sudden and persistent hit to wages. However, the Perlstein narrative centers on a political realignment that seems to have occurred rather abruptly at about the critical time and has not been reversed.

My working hypothesis is that the traditional concerns of economics such as technological change and opportunities/threats of cross-border movements of labor, capital, goods, and services are real and limit how the future may play out but do not by themselves determine outcomes. Outcomes are also critically affected by how political systems react to those changes--or don't. Neither a traditional economic analysis nor a traditional political analysis can adequately explain what happened or predict our future. Indeed, we probably have to look well beyond economics and politics to understand the "economy."

May 30, 2011 | Unregistered CommenterSkeptic
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