transformation needed the special circumstances of World War II.
Under ordinary circumstances the government in a market economy like the United States can, at most, influence wages; it doesn’t set them directly. But for almost four years in the 1940s important parts of the U.S. economy were more or less directly controlled by the government, as part of the war effort. And the government used its influence to produce a major equalization of income.
The National War Labor Board was actually created by Woodrow Wilson in 1918. Its mandate was to arbitrate disputes between labor and capital, in order to avoid strikes that might disrupt the war effort. In practice the board favored labor’s interests—protecting the right of workers to organize and bargain collectively, pushing for a living wage. Union membership almost doubled over a short period.
After World War I the war labor board was abolished, and the federal government returned to its traditional pro-employer stance. As already noted, labor soon found itself in retreat, and the wartime gains were rolled back.
But FDR reestablished the National War Labor Board little more than a month after Pearl Harbor, this time with more power. The war created huge inflationary pressures, leading to government price controls on many key commodities. These controls would have been unsustainable if the labor shortages created by the war’s demands led to huge wage increases, so wages in many key national industries were also placed under federal controls. Any increase in those wages had to be approved by the NWLB. In effect the government found itself not just arbitrating disputes but dictating wage rates to the private sector.
Not surprisingly, given the Roosevelt administration’s values, the rules established by the NWLB tended to raise the wages of low-paid workers more than those of highly paid employees. Following a directive by Roosevelt that substandard wages should be raised, employers were given the freedom to raise any wage to forty cents an hour (the equivalent of about five dollars an hour today) without approval, or to fifty cents an hour with approval from the local office of the NWLB. By contrast increases above that level had to be approved by Washington, so the system had an inherent tendency to raise wages for low-paid workers faster than for the highly paid. The NWLB also set pay brackets for each occupation, and employers were free to raise any worker’s wage to the bottom of the pay bracket for the worker’s occupation. Again this favored wage increases for the low paid, but not for those with higher wage rates. Finally the NWLB allowed increases that eliminated differences in wages across plants—again raising the wages of those who were paid least.
As Goldin and Margo say, “Most of the criteria for wage increases used by the NWLB served to compress wages across and within industries.” So during the brief period when the U.S. government was in a position to determine many workers’ wages more or less directly, it used that power to make America a more equal society.
And the amazing thing is that the changes stuck.
Suppose that Democrats in today’s Congress were to propose a rerun of the policies that produced the Great Compression: huge increases in taxes on the rich, support for a vast expansion of union power, a period of wage controls used to greatly narrow pay differentials, and so on. What would conventional wisdom say about the effects of such a program?
First, there would be general skepticism that these policies would have much effect on inequality, at least in the long run. Standard economic theory tells us that attempts to defy the law of supply and demand usually fail; even if the government were to use wartime powers to decree a more equal structure of wages, the old wage gaps would reassert themselves as soon as the controls were lifted.
Second, there would be widespread assertions—and not only from the hard right—that such radical equalizing policies would wreak destruction on the economy by destroying incentives. High taxes on profits would lead to a collapse of business investment; high taxes on high incomes would lead to a collapse of entrepreneurship and individual initiative; powerful unions would demand excessive wage increases, leading to mass unemployment, and prevent productivity increases. One way to summarize this is to say that the changes in U.S. policies during the Great Compression look like an extreme form of the policies that are widely blamed today for “Eurosclerosis,” the relatively low employment and (to a lesser extent) economic growth in many Western European economies.
Now, maybe these dire predictions would come true if we tried to replicate the Great Compression today. But the fact is that none of the bad consequences one might have expected from a drastic equalization of incomes actually materialized after World War II. On the contrary, the Great Compression succeeded in equalizing incomes for a long period—more than thirty years. And the era of equality was also a time of unprecedented prosperity, which we have never been able to recapture.
To get a sense of just how well things went after the Great Compression, let me suggest dividing postwar U.S. economic history into three eras: the postwar boom, from 1947 to 1973; the time of troubles, when oil crises and stagflation wracked the U.S. economy, from 1973 to 1980; and the modern era of reasonable growth with rising inequality, from 1980 until the present. (Why start in 1947? For two reasons: The Great Compression had been largely accomplished by then, and good data mostly start from that year.)
During the postwar boom the real income of the typical family roughly doubled, from about $22,000 in today’s prices to $44,000. That’s a growth rate of 2.7 percent per year. And incomes all through the income distribution grew at about the same rate, preserving the relatively equal distribution created by the Great Compression.
The time of troubles temporarily brought growth in median income to a halt. Growth resumed once inflation had been brought under control—but for the typical family even good times have never come close to matching the postwar boom. Since 1980 median family income has risen only about 0.7 percent a year. Even during the best of times—the Reagan-era “morning in America” expansion from 1982 to 1989, the Clinton-era boom from 1993 to 2000—family income grew more slowly than it did for a full generation after the Great Compression.
As always these are just numbers, providing at best an indication of what really happened in peoples’ lives. But is there any question that the postwar generation was a time when almost everyone in America felt that living standards were rising rapidly, a time in which ordinary working Americans felt that they were achieving a level of prosperity beyond their parents’ wildest dreams? And is there any question that the way we feel about the economy today is, at best, far more cautious—that most Americans today feel better off in some ways, but worse off in others, than they were a couple of decades ago?
Some people find the reality of how well the U.S. economy did in the wake of the Great Compression so disturbing, so contrary to their beliefs about the way the world works, that they’ve actually rewritten history to eliminate the postwar boom. Thus Larry Kudlow, who preaches his supply-side doctrine every weekday night on CNBC, tells us that thanks to Ronald Reagan’s tax cuts, “for the first time since the post–Civil War period (but for the brief Coolidge-Mellon period in the 1920s), the American economic system became the envy of the world.” I guess the prosperity reported by that
But it was no illusion; the boom was real. The Great Compression, far from destroying American prosperity, seems if anything to have invigorated the economy. If that tale runs counter to what textbook economics says should have happened, well, there’s something wrong with textbook economics. But that’s a subject for a later chapter.
For now let’s simply accept that during the thirties and forties liberals managed to achieve a remarkable reduction in income inequality, with almost entirely positive effects on the economy as a whole. The men and women behind that achievement offer today’s liberals an object lesson in the difference leadership can make.
But who were these men and women, and why were they in a position both to make such large changes in our society and to make those changes stick?
4 THE POLITICS OF THE WELFARE STATE
Almost every American of a certain age knows the photo: A grinning Harry Truman holds up an early edition of the
