My previous column documented the fact that, since the mid-1970s, the gulf between the rich and the poor in this country has steadily widened — a phenomenon often called the Great Divergence. But my documentary source, the Rand Corporation study, does not seek to answer the question: “Why has that happened?” A temptingly simple answer might be: “The rich have been in charge.”
Admittedly, that’s not just a simple, but a simplistic, answer. It’s evident that not all rich people seek to perpetuate the income gulf, nor are the rich, in any obvious way, in charge of government policy or social and economic developments. Clearly, there are many factors that have produced the Great Divergence, and each is itself complex.
One way to get at those factors and their interactions is to contrast the three decades immediately following the end of World War II, with the ensuing decades.
The immediate post-war decades (the Truman-through-Johnson-presidencies), saw a spectacular recovery by the U.S. industrial economy. Unemployment was low, growth vigorous, and it was an era of striking increases in the wages of low-income Americans — increases that created a genuine middle-class. That period is sometimes called the Great Compression, precisely because of the relatively low percentage of national income that went to the top ten percent of earners.
One factor that caused the Great Compression was that labor unions were large, influential and regarded by the public as a necessary part of the economy’s machinery. Truman met with labor leaders in 1945 and promised them government support. He even coaxed the anti-union Chamber of Commerce to acknowledge that “Labor unions are woven into our economic pattern of American life, and collective bargaining is part of the democratic process.” Unions contributed to the narrowing of the rich-poor gap by achieving wage increases and other benefits from the industries that employed them.
Another factor was that the spirit of Roosevelt’s New Deal persisted. American society accepted — in fact welcomed — a continuation of high rates of taxation of the wealthy and an expanded government that believed it should provide assistance to average citizens and the poor. One might well call those decades the Keynesian era, for there was general agreement that Keynes’ economic theory was correct: that unfettered capitalism led to periodic catastrophes, and that the government’s job was to prevent those boom-and-bust swings, as well as to create programs like Social Security that benefited the average American. The rich business owners of that era, in light of this societal attitude, and a steady growth in consumer demand and their own profits, were willing to tolerate unions, welfare programs and relatively high taxes.
Beginning in the 1970s, however, the economy took a decided, downward turn. Growth slowed, productivity declined, and inflation increased. The condition was called, at the time, “stagflation,” i.e., rampant inflation with stagnant growth. Two oil crises, in ’73 and ’79, exacerbated the problems.
Unions sought to compensate for inflation by forcing higher wages, but the unions were weakening. In 1947, a Republican Congress had, over a Truman veto, passed the Taft-Hartley Act, which made unlawful several of the unions most effective strike tactics, and inhibited union growth by forbidding what were called “card checks” — which allowed a union to become the bargaining agent if enough workers filled out a card indicating their support for the union. Beginning in the late ’60s, companies discovered that they could get away with “union busting.” They could, with impunity, simply fire striking union members and hire non-union workers.
As time passed, the character of the U.S. economy changed. Cheap international shipping created more competition for American manufacturers, but also enabled them to move production to low-labor-cost countries, further weakening labor unions. Moreover, the transition to a “service” economy began, and the financial sector became a major source of wealth.
As part of the early response to the country’s economic problems in the 1970s, the idea was spread, with the enthusiastic endorsement of, the rich, that Keynes had been proven wrong, and that what was needed was a return to classical capitalism, where the market was allowed to operate freely and the government reduced its interference through regulation and progressive taxation. The consequence of that return, it was argued, would be increased wealth at all levels of society.
This view, called “supply-side” economics (and, derisively, “trickle-down” economics) became dominant in the early 1980s. Ronald Reagan adopted that view whole-heartedly. He dramatically reduced taxes on the rich, cut welfare programs, and accelerated the weakening of unions by suppressing the air traffic controllers’ strike in 1981. Subsequent Republican presidents — the two Bushes and Trump — bought into the same doctrine, and so did one Democrat, Bill Clinton.
The current version of supply-side economics is called “neo-liberalism.” It holds that free-market competition solves all economic problems; that the Great Divergence is a good thing, for it appropriately rewards the rich and incentivizes the poor; that progressive taxation on income, wealth and inheritance is morally and economically wrong; that government should not encumber enterprise with regulations and oversight; that labor unions are bad; that governmental aid to the poor should be minimized, and that many traditional government services should be privatized.
The rich have continued to inculcate this doctrine, and with increasing effectiveness, within the political sphere. They have done so by behind-the-scenes funding of allegedly “educational” think-tanks and foundations and purportedly “grassroots” organizations, and by spending vast amounts of “dark money” to fund conservative political candidates. The rich may not have been “in charge” all this time, but they have certainly been a significant factor in creating and sustaining the Great Divergence.
Perhaps, with the Biden presidency, another Great Compression will occur; perhaps neo-liberalism will be decisively rejected, not only because it is a mistaken economic theory — remember the Great Recession of 2008? — but because it’s a doctrine that sanctifies the insatiable greed of the rich, and accepts the exploitation of the poor. Let’s hope.
Leonard Hitchcock of Pocatello is an alumnus of the University of Iowa and did graduate work at Claremont Graduate University and the University of California, San Diego. He taught philosophy in California and Arizona for 15 years. In 1985, after earning a library degree, he was hired by Idaho State University. He retired from ISU’s Oboler Library in 2006.