The Great Compression

Tyler Cowen gives his jaundiced view of what caused the great compression of the American income distribution in the 1937-47 period:

Crush the incomes at the top and then make the fat cats pay much higher wages to protect the world and become a superpower. Impose wage and price controls as well. See how long it takes before these distributional effects -- which don't exactly match the distribution of economic talent-- reverse themselves in the aggregate.

I don't really buy that, but it does seem that whatever elements of the World War II era policy climate laid the groundwork for the relatively egalitarian thirty postwar years are unlikely to be repeatable short of some comparably scaled world-historical calamity. On the other hand, the more important issue analytically may really be the post-war policy climate, which was much more catastrophe-free, that sustained the compressed distribution.

Comments

I suppose one possible explanation is that the war created an environment where people had faith in the government. America basically ran as a communist country for the years 43-45, and, for whatever miraculous reason, it worked over that time frame. So people came out of it believing that massive state action could correct the world's wrongs.

Posted by Andrew Edwards | September 23, 2007 9:53 AM

The biggest factor in the income, and even more importantly the asset distribution trend is that the top has done exceedingly well. They have done exceedingly well because of the ability of the financial system to manufacture and then inflate the prices of financial assets.

Huge portions of these financial assets now are fictitious. Priced to make believe and are now carried on the books at full value on a wing and a prayer.

The so called sub prime crunch now ongoing is the slightly visible evidence of a much larger and growing financial crisis that is invisible because of equal parts : sight of hand, blind faith, and denial.

If the financial system dislocates further is unknown. If it does the question is will the top maintain their relative gains vs the bottom 90%. I am betting they will as the entire political ground as established by the 'conservative' movement over the last 30 years has been in service of guaranteeing that the top stay on top no matter what.

*Within the next few weeks you are going to hear how some money market accounts can't give you back 100% of your money right now, never mind the accrued interest. If this doesn't happen I'll gladly accept the crackpot label.

Posted by rapier | September 23, 2007 10:31 AM

I'm hardly an expert on this, but I think this revisionist history of World War II is probably a lot of bunk. I think a lot of people made a lot of money with war contracting and development -- being from the West I think Henry J Kaiser and California real estate. I also think the military and related support activities opened up a lot of opportunities to people who had been excluded before (think Jews and Catholics, like my dad's law firm).

Finally, could we just retire the incredibly silly stuff about rewards and the distribution of economic talent. I've worked in executive support, not just academia, so I'm pretty aware just what a piece of crap that it.

Posted by Gene O'Grady | September 23, 2007 11:13 AM

"America basically ran as a communist country for the years 43-45."

If by "basically" you mean "not at all" then yes, you have a point.

It is certainly true that the US became a more statist society during the war. There was central planning for heavy industry, conscription, and rationing. There were higher taxes to pay for it. And yes, in the short run, it worked. This really shouldn't be surprising at all, because that is not a description of communism. Every country that has ever been involved in a major war has taken similar steps.

Also, what Gene O'Grady said.

Posted by LaFollette Progressive | September 23, 2007 11:34 AM

When Tyler Cowen talks about the "distribution of economic talent" he's talking about the people who inherited money and used it to make more in the "too big to fail" boom of 60 years of military-industrial spending.

Did Boeing make a lot of money building airlners? You bet they did- because the government built the airports, the air traffic control system, and the roads to serve all of this.

Did Reynolds and Alco make a lot of money in aluminum? Of course they did- using subsidized power from government dams.

In fact, if you look at how the government and the people have spent and built, the marvel in Cowen's "economic talent" is how they botched the job. The government built the roads, and Detroit went bankrupt- how can that happen?

With every sort of loan, grant, project and guarantee, the financial wizards have managed a great crash requiring a big bailout every ten years. Of course they're millionaires- I'd be a millionaire too if every one of my bad ideas had ended with a handout from the government.

Fortunately, we have a WW II sized crisis called Global Warming coming along to help us get our priorities straightened out. If we're smart enough.

Posted by serial catowner | September 23, 2007 12:37 PM

Incidentally, to get an idea of what kind of person Tyler Cowen is, check out the story by Charles Duhigg in the Business section of today's NYT. Duhigg reports on how the financial sharks Cowen admires so much have been making life worse for residents of nursing homes. And Duhigg's report is not anecdotal in nature.

Memo to Tyler- the only "economic talent" involved in stealing from people who are too weak to get out of bed is figuring out what could possibly be left to steal. It's not a "talent" that I want to have or encourage.

Posted by serial catowner | September 23, 2007 1:15 PM

Precisely what is the definition of "economic talent" if not the ability to thrive economically in whatever the given economy of the day happens to be? The ability to thrive economically in some sort of imaginary laissez fair system?

Posted by Anthony Damiani | September 23, 2007 4:44 PM

Economic talent should be read as talent in finance. The system has been skewed, rigged really, to make financial gains easy. Tax, legal and regulatory (or lack thereof) policies have favored financial innovation. Thus with favorable incentives it was understandable that outsized gains accrued to financial practitioners and talented and smart people were attracted to finance.

Now that trillions of dollars in modern financial products, mostly credit and credit derivative paper, are losing 'value' , sometimes all of it, should hardly be surprising. For the financial boom encouraged large amounts of silly to fraudulent activity and a general mis pricing of risk and ever lower standards of fiduciary responsibility. What Minski called Ponzi finance. In essence the financial system has become one giant experiment in moral hazard.

The dream is that the Fed and central banks will be able to fix all the problems. When all your talent is reduced to relying upon hope let me suggest that there is a problem.

Posted by rapier | September 23, 2007 5:38 PM

rapier,

What financial assets are you talking about? From what I have read, the P/E ratio of U.S. stocks is well within historical norms. Few experts seem to believe that stock prices are seriously inflated. Maybe you mean housing. I think we were in a housing bubble during the 5-10 years prior to 2006, and we're now in a correction, which will probably last a few more years.

Posted by Mixner | September 23, 2007 5:56 PM

In fact, if you look at how the government and the people have spent and built, the marvel in Cowen's "economic talent" is how they botched the job. The government built the roads, and Detroit went bankrupt- how can that happen?

Er, because their foreign competitors (you know, evil, capitalist, profit-driven companies like Toyota and Hyundai and Mercedes) have been making better products at lower prices than Detroit. I'm not sure what you think this has to do with the fact that the government built the roads. (Or, at least, that the government funded the roads. They were mostly built by more of those evil, capitalist, profit-driven private corporations you seem to hate so.)

Posted by Mixner | September 23, 2007 6:03 PM

What financial assets? Simple. All manner of securitized debt. CDO's, MBS's. Also household debt and corporate debt. Then too all manner of the derivatives of them. The bubble is in debt itself, hardly just mortgage debt.

http://www.pimco.com/NR/rdonlyres/A0D85792-BC9A-430E-8AA2-1114B3E3FC2C/607/TotalCreditDebtChart.gif

Look at this chart.
http://static.seekingalpha.com/uploads/2007/9/10/asset_chart.gif

This is outstanding Asset Backed Commercial Paper. Seems to have dropped a bit. Wonder why? Because the 'assets', securitized debt instrument, are becoming worthless. The holders of a big part of this short term paper were told last month they couldn't get their money back.. Those holders are money market entities and hedge funds. Now nobody want's it, nobody want's to sell it. What about those holders who were stiffed last month and forced to roll it over. We will find out soon. Which is why I say if you have a Money Market account drop it if it isn't totally in Treasuries.

The collapse of this source of short term credit has necessitated banks becoming the lender of last resort. Borrowers of this money have lost their source of cash, think disappearing mortgage lenders. The lenders have put the money into other stuff, even stocks, which has boosted, stocks short term.

I won't go on except to note that the largest source of corporate profits for years has been financial. The Financial Standards Accounting Board just issued a new guideline saying that things like badly impared Mortgage Backed Securities can be held on the books at whatever the holder can think up. Marked to make believe is the new term. Thus the Wall Street giants who hold huge quantities of bad debt paper on the books are reporting record profits, again.

Posted by rapier | September 23, 2007 7:35 PM

Because the 'assets', securitized debt instrument, are becoming worthless.

This is nonsense. Yes, there's currently a significant problem with mortgage debt because of the housing market bubble. But even that is a serious problem for only a small minority of homeowners and lenders. There is no significant problem with other debt classes. There is no serious indication that stocks and other common securities are significantly overvalued. Average household net worth is at or close to its record high.

Posted by Mixner | September 23, 2007 8:38 PM

According to a genius posting above:

"Huge portions of these financial assets now are fictitious. Priced to make believe and are now carried on the books at full value on a wing and a prayer."

Mixner says this is nonsense, but really, if clever leftists think that the value of financial assets have disappeared, maybe they should just shut the f**k up about wealth distribution, since it has all supposedly disappeared

I recall a televison interview with one Dana Carvey, also a clever leftist economic thinker on tv telling the credulous interviewer that 4 Trillion of economic wealth had been "just stolen" after the dot-com collapse in the early 2000-2001 period.

I am glad Clinton hired people like Robert Rubin to be his economic advisors and hope Hillary will be equally pragmatic. When I hear the likes of "rapier" and the like,I half expect that a John Edwards or an Obamba administration will appoint Jeneane Garafolo to Secretary of Treasury.

As for those worthless bonds and mortgages, if someone here in The Atlantic land wants to make arrangements to sign theirs over to me, please post, and I'll take the worthless things off your hands real cheap.

Posted by Jozef | September 23, 2007 9:30 PM

Mixner says this is nonsense, but really, if clever leftists think that the value of financial assets have disappeared, maybe they should just shut the f**k up about wealth distribution, since it has all supposedly disappeared

Which is where this thread belongs, absent the silliness . The distribution has skewed upwards because of outsized gains in the financial sphere. If current credit market problems are a hiccup or the start of a significant deflation of financial assets is unknown. I just think the latter case is above the normal trivial chance. How either will effect distribution is hard to say. Right now I'd bet the rate of skewing will slow but not reverse. The entire political economy is designed to favor the inflation of financial assets and the deflation of income from work.

Posted by rapier | September 23, 2007 10:38 PM

"unlikely to be repeatable short of some comparably scaled world-historical calamity."

(Re?)read your Strauss and Howe. If their thesis in "Generations" is correct, one of those should be coming along any year now.

Posted by Knemon | September 23, 2007 11:33 PM