In his book Wealth and Democracy (2002), Kevin Phillips came up with a useful way of thinking about the changing patterns of wealth inequality in the US. He looked at the net wealth of the nation’s median household and compared it with the size of the largest fortune in the US. The ratio of the two figures provided a rough measure of wealth inequality, and that’s what he tracked, touching down every decade or so from the turn of the 19th century all the way to the present. In doing so, he found a striking pattern.
We found repeated back-and-forth swings in demographic, economic, social, and political structures
From 1800 to the 1920s, inequality increased more than a hundredfold. Then came the reversal: from the 1920s to 1980, it shrank back to levels not seen since the mid-19th century. Over that time, the top fortunes hardly grew (from one to two billion dollars; a decline in real terms). Yet the wealth of a typical family increased by a multiple of 40. From 1980 to the present, the wealth gap has been on another steep, if erratic, rise. Commentators have called the period from 1920s to 1970s the ‘great compression’.
That's what I recall from my avid study of the Guinness Book of World Records around 1969: the records for wealthiest man and highest income were really boring. The wealthiest man was, I think I recall, oilman J. Paul Getty, but if you adjust for inflation, the old time capitalists like Rockefeller in roughly 1900 or Ford in 1925 were richer. Nobody seemed to be really richer in 1969 than in 1929. Similarly, the highest annual income was something like the chairman of G.M. making a million dollars per year. Boring.
The past 30 years are known as the ‘great divergence’. Bring the 19th century into the picture, however, and one sees not isolated movements so much as a rhythm. In other words, when looked at over a long period, the development of wealth inequality in the US appears to be cyclical. And if it’s cyclical, we can predict what happens next.
An obvious objection presents itself at this point. Does observing just one and a half cycles really show that there is a regular pattern in the dynamics of inequality? No, by itself it doesn’t. But this is where looking at other historical societies becomes interesting. In our book Secular Cycles (2009), Sergey Nefedov and I applied the Phillips approach to England, France and Russia throughout both the medieval and early modern periods, and also to ancient Rome. All of these societies (and others for which information was patchier) went through recurring ‘secular’ cycles, which is to say, very long ones. Over periods of two to three centuries, we found repeated back-and-forth swings in demographic, economic, social, and political structures. And the cycles of inequality were an integral part of the overall motion. ...
So it looks like the pattern that we see in the US is real. Ours is, of course, a very different society from ancient Rome or medieval England. It is cut off from them by the Industrial Revolution and by innumerable advances in technology since then. Even so, a historically based model might shed light on what has been happening in the US over the past three decades.
First, we need to think about jobs. Unless other forces intervene, an overabundance of labour will tend to drive down its price, which naturally means that workers and their families have less to live on. One of the most important forces affecting the labour supply in the US has been immigration, and it turns out that immigration, as measured by the proportion of the population who were born abroad, has changed in a cyclical manner just like inequality. In fact, the periods of high immigration coincided with the periods of stagnating wages. The Great Compression, meanwhile, unfolded under a low-immigration regime. This tallies with work by the Harvard economist George Borjas, who argues that immigration plays an important role in depressing wages, especially for those unskilled workers who compete most directly with new arrivals.
Immigration is only one part of a complex story. Another reason why the labour supply in the US went up in the 19th century is, not to put too fine a point on it, sex. The native-born population was growing at what were, at the time, unprecedented rates: a 2.9 per cent growth per year in the 1800s, only gradually declining after that. By 1850 there was no available farmland in Eastern Seaboard states. Many from that ‘population surplus’ moved west, but others ended up in eastern cities where, of course, they competed for jobs with new immigrants.
This connection between the oversupply of labour and plummeting living standards for the poor is one of the more robust generalisations in history.
... The tug of war between the top and typical incomes doesn’t have to be a zero-sum game, but in practice it often is.
This is well said. It's common to see people who have taken Economics 101 inform you that things don't have to be a zero-sum game, which is true. But in practice, they often are.
... Naturally, the conditions affecting the labour supply were different in the second half of the 20th century in the US. An important new element was globalisation, which allows corporations to move jobs to poorer countries (with that ‘giant sucking sound’, as Ross Perot put it during his 1992 presidential campaign). But none of this alters the fact that an oversupply of labour tends to depress wages for the poorer section of the population. ...
Falling wages isn’t the only reason why labour oversupply leads to inequality. As the slice of the economic pie going to employees diminishes, the share going to employers goes up. Periods of rapid growth for top fortunes are commonly associated with stagnating incomes for the majority. Equally, when worker incomes grew in the Great Compression, top fortunes actually declined in real terms. ...
It is relatively easy to understand the periods when the wealthy bent the agenda to suit their interests (though of course, not all rich people care exclusively about their own wealth). How, though, can we account for the much more broadly inclusive policies of the Great Compression era? And what caused the reversal that ended the Gilded Age and ushered in the Great Compression? Or the second switch, which took place around 1980?
History provides another clue. Unequal societies generally turn a corner once they have passed through a long spell of political instability. Governing elites tire of incessant violence and disorder. They realise that they need to suppress their internal rivalries, and switch to a more co-operative way of governing, if they are to have any hope of preserving the social order. We see this shift in the social mood repeatedly throughout history — towards the end of the Roman civil wars (first century BC), following the English Wars of the Roses (1455-85), and after the Fronde (1648-53), the final great outbreak of violence that had been convulsing France since the Wars of Religion began in the late 16th century.
Put simply, it is fear of revolution that restores equality. And my analysis of US history in a forthcoming book suggests that this is precisely what happened in the US around 1920. ...
Reforms that ensured an equitable distribution of the fruits of economic growth turned out to be a highly effective counter to the lure of Bolshevism.
These were the years of extreme insecurity. There were race riots (the ‘Red Summer of 1919’), worker insurrections, and an Italian anarchist terrorist campaign aimed directly at the elites. The worst incident in US labour history was the West Virginia Mine War of 1920—21, culminating in the Battle of Blair Mountain. Although it started as a workers’ dispute, the Mine War eventually turned into the largest armed insurrection that the US has ever seen, the Civil War excepted. Between 10,000 and 15,000 miners armed with rifles battled against thousands of strikebreakers and sheriff deputies. ... Add to all this the rise of the Soviet Union and the wave of socialist revolutions that swept Europe after the First World War, triggering the Red Scare of 1921, and you get a sense of the atmosphere. Quantitative data indicate that this period was the most violent in US history, second only to the Civil War. It was much, much worse than the 1960s.
That's generally been my impression: that the U.S. underwent a nervous breakdown during the second Wilson Administration, and then recovered under the underrated Harding.
The US, in short, was in a revolutionary situation, and many among the political and business elites realised it. They began to push through a remarkable series of reforms.
Wilson's reforms and foreign adventuring contributed to the scary years of 1917-1921. But over many decades, there's a general continuity of direction in the first half of the 20th Century in how WASP elites settled old differences amongst themselves in order to create the modern but stable country that won the Big One, went to the Moon, and prevailed in the Cold War.
In 1921 and 1924, Congress passed legislation that effectively shut down immigration into the US. Although much of the motivation behind these laws was to exclude ‘dangerous aliens’ such as Italian anarchists and Eastern European socialists, the broader effect was to reduce the labour surplus. Worker wages grew rapidly.
The subject of immigration had been studied by responsible leaders in a depth that's unimaginable today. Congress set up United States Immigration Commission in 1907, for example. After four years of work, it issued the 41-volume Dillingham report. Today, the notion of writing 41 volumes on the impact of immigration sounds horrifying. Didn't they know back then you aren't supposed to know anything about immigration other than that diversity is our strength?
Here's the kind of man who was involved in the Immigration Commission: Senator Henry Cabot Lodge (R-MA). Wikipedia explains:
He was cousin to the American polymath Charles Peirce. In 1872, [Lodge] graduated from Harvard College... In 1874, he graduated from Harvard Law School ... After traveling through Europe, Lodge returned to Harvard, and in 1876, became the first student of Harvard University to graduate with a Ph.D. in Political Science. His teacher and mentor during his graduate studies was Henry Adams; Lodge would maintain a lifelong friendship with Adams. Lodge wrote his dissertation on the ancient Germanic origins of Anglo-Saxon government.
Uh, uh, obviously an uneducated ignoramus nativist!
Back to Turchin:
At around the same time, federal income tax came in and the rate at which top incomes were taxed began to increase. Somewhat later, provoked by the Great Depression, other laws legalised collective bargaining through unions, introduced a minimum wage, and established Social Security.
The US elites entered into an unwritten compact with the working classes. This implicit contract included the promise that the fruits of economic growth would be distributed more equitably among both workers and owners. In return, the fundamentals of the political-economic system would not be challenged (no revolution). The deal allowed the lower and upper classes to co-operate in solving the challenges facing the American Republic — overcoming the Great Depression, winning the Second World War, and countering the Soviet threat during the Cold War.
It almost goes without saying that there was a racist and xenophobic underside to all this. The co-operating group was mainly native-born white Protestants.
For example, women's suffrage was a pro-WASP ploy. WASP women were much more liberated than immigrant women, so giving women more power gave WASPs more power. (Prohibition was tied into women's suffrage. WASP feminists hated men drinking, so if they were going to get the vote, politicians had better pass Prohibition to mollify them.)
African-Americans, Jews, Catholics and foreigners were excluded or heavily discriminated against. Nevertheless, while making such ‘categorical inequalities’ worse, the compact led to a dramatic reduction in overall economic inequality. ...
It is no coincidence that the life of Communism (from the October Revolution in Russia in 1917 to the fall of the Berlin Wall in 1989) coincides almost perfectly with the Great Compression era. The Red Scares of, firstly, 1919—21 and then 1947—57 suggest that US elites took the Soviet threat quite seriously. More generally, the Soviet Union, especially in its early years, aggressively promoted an ideology that was highly threatening to the political-economic system favoured by the US elites. Reforms that ensured an equitable distribution of the fruits of economic growth turned out to be a highly effective counter to the lure of Bolshevism.
Nevertheless, when Communism collapsed, its significance was seriously misread. It’s true that the Soviet economy could not compete with a system based on free markets plus policies and norms that promoted equity. Yet the fall of the Soviet Union was interpreted as a vindication of free markets, period. The triumphalist, heady atmosphere of the 1990s was highly conducive to the spread of Ayn Randism and other individualist ideologies. The unwritten social contract that had emerged during the New Deal and braved the challenges of the Second World War had faded from memory.
It was not just individualist ideologies that flourished after the collapse of a credible military rival to the U.S., but also, famously, "globalist" ideologies, which are anti-nationalist and thus anti-patriotic and thus pro-elite and pro-inequality.