The Great Compression

In a recent newsletter, Paul Krugman referenced a 1991 economics paper in glowing terms. He said that he’s read many economics papers during his career, but very few that changed the way he sees the world.

This one, evidently, did.

Krugman began his discussion by reminiscing; as a Baby Boomer, he’d grown up at a time when extremes of wealth and poverty were far less pronounced than they are these days–a time when middle managers and better-paid blue-collar workers were more or less  financial equals. It was a time, as he reminds us, when  C.E.O.s of major companies were paid “around 20 times as much as the average worker, compared with more than 200 to 1 today.”

Although female and Black workers certainly weren’t equal, the extremes of wealth we see today–the enormous gap between the rich and the rest– were inconceivable, and the middle class was substantial. (I still remember a long-ago political science class that attributed national stability to the existence of a sizable middle-class, among other things.)

And we took it for granted. A more or less middle-class society, almost everyone assumed, was the state toward which an advanced economy naturally evolved.

Not so much, we learned as the boomers turned middle-aged. The future of inequality wasn’t what we expected it to be; America today has more or less returned to Gilded Age disparities in income and wealth.

The question, of course, is “why did this happen? Why isn’t the future of inequality what we expected?

The paper he was praising–“The Great Compression”– was written by Claudia Goldin and Robert Margo, and it showed that,  as Krugman put it,  America had gone to bed in 1939 in the Gilded Age and woke up in 1945 as the middle-class nation of his childhood, where wages were–as the paper labeled them–“compressed.”

Some of the reasons for that compression of wages are obvious:  World War II required a controlled economy. Wage increases were regulated– and the rules tended to be more generous to less well-paid workers. But those rules, and the economic controls, were lifted after the war.

Why didn’t things spring back to where they had been before once wage and price controls had been lifted?

One answer, as Krugman demonstrates, was the emergence of unions.

A strong union movement, it seems, was able to lock in the new wage norms created by the war for several decades after the war was over. And the rise of unions was clearly linked to politics: first the New Deal, then the war, created favorable environments for union organizing.

Another important element was public policy. Policy, as Krugman and many other economists can attest, can shape a fairer, flatter, more inclusive economy.

What does this tell us about the future of inequality? On one side, it’s encouraging: high inequality isn’t something unavoidable, the necessary consequence of implacable technological forces: political action can create a much less unequal society. On the other side, both the politics of the New Deal and, even more so, the policy environment of World War II, were pretty unique. Progressives are, in general, delighted with how activist the Biden administration is proving; but despite Republican cries of “socialism,” its actions are far more modest than what happened in the ’30s and ’40s.

The big question is how much of the Great Compression we can achieve through less dramatic policies, in a political environment where spending one percent of G.D.P. on infrastructure seems radical. No, I don’t know the answer.

Our ability to fashion public policies that reinvigorate and regrow that all-important, stabilizing middle class depends significantly on a widespread recognition of the economic reality that everyone does better when everyone does better.

Even the most creative entrepreneur cannot innovate and profit in the absence of a supportive physical and social infrastructure and enough people with the wherewithal to pay for his product.


  1. I remember a conversation with my Mother as a lad where I had expressed an interest in becoming a teacher when I grew up (a work still in process). She said the usual, “you can be whatever you want…BUT”, she also said: “You’ll never be paid more than a factory worker”. The implication was that in other fields I could earn a much higher income. The other was that factory workers were paid pretty well, considering that teaching was a respectable and solid middle class career choice – plus Summers off (likely the real attraction to me)!

    Fast forward 60 years to the present day and you’ll find that while teacher pay in Indiana hasn’t kept up with inflation since 2001, it is still much higher on average than most factory jobs, even more when you consider health, pension and time off benefits. So many of the calls to increase teacher pay have until very recently fallen on deaf ears of local school boards, especially those located in rural counties. Factory jobs generally pay between $13.50/hr and $18.00/hr and may include health benefits, but it will come with an unaffordable deductible and the premiums for family coverage are very high. The average salary for a teacher in Indiana is around $50,000 or $25/hr assuming they work the equivalent hours of a year-round job, which most do, and some more, and they generally have excellent benefits.

    Teachers were generally exempt from the economic forces and national economic policies that decimated working and middle-class wages for low-to-mid-skilled factory work. This is because their pay and benefits were derived from through collective bargaining with units of local government (usually school boards). Factory workers watched their ranks, real wages and benefits waste away as a result of globalization and technology (more the latter than the former).

    But Indiana state government’s 15+ year war on traditional public education and its effort to deprofessionalize teaching as a career is the result of national and state education policies – they didn’t just happen on their own. When President Biden recently said: “trickle-down economics has never worked” he could not have used better examples than factory workers and teachers.

  2. Dwight Eisenhower praised labor unions while being President. He said that the political party that tried to kill unions was stupid. Well, we see what he meant. The Republican party is clearly the stupid party.

    They love them some Donald Trump. Stupid.
    They love them some tax cuts for the moguls and oligarchs (Nod to Todd). Stupid.
    They love them some cutting of social initiatives. Very stupid.
    They love them some insurrectionists. Stupid, seditionist and, wait for it, really, really stupid.

    So, why would the stupid party embrace “trickle-down” economics? BECAUSE THE REPUBLICAN PARTY IS STUPID. Ever since Reagan, they have embraced stupidity in every facet of governing.

    That fact speaks volumes about who votes for Republicans and why they do it.

  3. Maybe, as Vernon writes, the cause of all of our problems in the country is that Republicans are just stupid. It might just be as simple as that. After all, half of the population really does have IQs under one hundred.

  4. Apparently, Krugman isn’t very open-minded after all if he’s pointing at a 90s economic book. He might want to use Thomas Piketty’s book, Capital in the 21st Century. He basically starts today’s problem of high inequality with the cause in the 80s – neoliberalism. He started the book in the states but finished it back in France so it wouldn’t be sabotaged.

    If an academic doesn’t trust his colleagues, why should the American people?

    A subject for another day.

    When our economy shifted from manufacturing to service, what did the job creators do? What did our politicians do?


    The minimum wage is 7.25. The state of Indiana pays social workers poverty wages. They’ve outsourced many of that work, and those employers pay poverty wages with high deductible health insurance plans. Teachers have unions. Cops have unions. They get paid comparable wages. So, the public servants all get paid higher wages than the public?

    In what society is this deemed appropriate?

    I could go on with one example after another, revealing the inequity of our so-called labor markets. Those failing our society are “job creators” and those who impact “public policy.”

    If labor truly functioned as a market, job creators would have adjusted wages a long time ago to offset these imbalances, but they didn’t. It’s either because the labor market isn’t really a functioning market or the job creators colluded to keep the cost of labor down.

    If they colluded with each other, why didn’t the government step in and regulate them? That is their role. If the job creators corrupted them, why didn’t the press do their job reporting that so the people (workers) could hold those officials accountable for getting screwed?

    The checks and balances don’t work as established. Based on my research, they never did because when the constitution was written, many oligarchs (job creators) were using free labor (slaves) in the south and cheap immigrant labor in the north.

    Someone, please tell me when workers had equal footing with the oligarchs and how many years in our democratic republic.

    In 1949, Einstein said our society was an oligarchy controlled by oligarchs. When did that change, and for how long?

  5. off subject,
    DocFilm. “manufacturing ingnorance.” 1300UTC.. on now, agnatology..

  6. I would love to see every CEO have to live for one month on the wages of the lowest paid worker in the company. This would need to be an annual event. If this happened, my guess is that wages in every company would rise each year, just before the boss got his turn at the lowest wage.

  7. War!

    You can go back to the robber barons, where basically they were the ones that ran the country.

    Then came Teddy Roosevelt with his three C’s, the Conservation of natural resources; Control of Corporations; Consumer protection! As they used to say, round man square deal!

    But it didn’t last long, and of course we had the great depression which really took many wealthy down along with the average worker. Although, when you are at the bottom already, you can’t really go too much further than the bottom.

    FDR used his executive branch powers to control wages and make deals (the new deal) with unions to get the productions done he needed for the war effort. The new deal programs kinda piggybacked on his cousins three C’s. The existing corporations and new corporations didn’t really appreciate the fact that workers were so deeply invested in their corporations because of the executive branch. But, there wasn’t much they could do about it.

    After the war, there started to be a whittling away at workers wages and corporate tax paying!

    So, as I mentioned in earlier comments, the only way out of this is not to extend your hand as a good old boy buddy, but as a supreme authority that will force you to walk the chalk line at the risk of your business. The beginning of the progressive age started with a Republican, Teddy Roosevelt. His cousin, Democrat, FDR was at the end of this massive control on corporations and worker protections, even a continuation of environmental programs.

    Of course these men, related as cousins, were imperfect men, their family lineage steered their direction in life. They did the best they could and the times they lived. Without either of these men, the face of the country would’ve been much different than it turned out to be, and, odds are for the worst.

    The point is, there has to be an executive once again that rises to the occasion, an executive to use the power of his branch to subdue the renegade forces demolishing society as was done earlier by these two cousins.

    There needs to be an accountability for those who committed treason and sedition, those who purposefully spread lies and conspiracies, and those who so willingly pit citizens of this country against each other, to garner personal power and influence.

    Will it happen? Well, we will have to see! The bloodletting is not done yet, as I mentioned in earlier comments couple of years ago, there will be blood, and everyone kind of blew that off. Well, there is going to be more, probably much more, and it will take very powerful individuals to subjugate those forces. And, in the long run, I’m sure people will not like the end result!

    Just like a supernova, burn bright and burn fast then explode! The question is, will that explosion be like a surgeon’s scalpel and amputate the rot? Or will it kill the host? The infection has been left to fester too long for their to be a fairly passive and even healing, what gets chopped off is going to change the face of not only this country but many others.

  8. The circumstances of our economic boom after WW 2 was unique. Europe and Japan were in ruins after the war. American factories and infrastructure were untouched.

    Eventually Europe, Japan and later Korea caught up with us. At some point the Mega-Corporations aided and abetted by American elected officials found off-shoring was very profitable. Third World countries with their lack of human rights, labor rights or strict environmental regulations were ideal for Steroid Capitalism.

    Factories could be off-shored and so could profits to a closet sized office some where, where taxes were low.

    It will be complicated to try to level the field so to speak. One step that is urgently needed is to have Universal Single Payer Health Care like Western Europe, Japan and others. Another step is to eliminate the tax loopholes that allow the 1% and the Mega-Corporations to pay little or no Federal or State Taxes.

  9. Professor Kennedy’s closing statement alludes to aggregate demand in the marketplace, which is practically non-existent during depressions and impaired in varying degrees during recessions and downturns. When demand goes south it matters not whether you are rich or poor, factory worker or CEO; you have a big problem. Economists talk of new plant, investment etc. When there is no or even impaired demand for your goods and services, there will be no new plant nor will investors flock to invest in an industry sans customers. The law of supply and demand works in investment availability as well as widget-world.

    The middle class which emerged from WW II and a hair-raising depression was the product of pent up demand from the war, the Marshall Plan for wartorn Europe, and a decent wage scale along with the union-favoring Wagner Act and FDR’s pro-labor stance. His New Deal ushered in the greatest boom we have ever seen, where wages and the Dow moved in tandem, all of which came to a grinding halt with Reagan. Results from his disastrous eight year reign include the trashing of unions (air controllers), giant tax cuts for the rich and corporate class, and an elevation of investment returns over labor returns.

    In my view, the potential to again unleash demand (and perhaps the halycon days of the New Deal) is to (politically since the capitalists will not do it) set a living wage as the minimum wage, which would provide the wherewithal to foster demand while the additional costs to the capitalists would be offset by enhanced demand and per unit efficiency in production. Overpayment of CEOs while underpaying corporate workers is a demand-killer pure and simple. If as a result of higher wages a corporation’s workforce buys 10,000 new cars, that would be a much greater boon to the economy than a CEO’s alimony payments and a new house in the Hamptons.
    My fellow contributors may wonder why I incessantly harp on wage inequality (as do Piketty and Stiglitz). It’s because I think this is the key to unlocking demand which in the aggregate is the measure of economic growth – the holy grail to which both economists and indeed all of us aspire. What are we waiting on? Permission from Wall Street? Let’s do it.

  10. ML,

    The Marshall plan really rebuilt the world after the war! The idea was to have these countries repay America for the rebuilding process, but, that never really happened completely. The United States forgave a lot of that debt! But, it did allow American corporations to gain footholds in countries across the ponds so to speak. This aided and abetted tax loopholes, and the seeds were planted for the decline of the middle class that sprung up through the war effort. Government giveth government taketh away! Unfortunately for those who put their thumb on the middle class, it made the workers more susceptible to conspiracies and the lies being told by those very politicians blaming everyone else but themselves, thereby causing even more divisiveness! After all, Dr. Frankenstein built his monster, and Frankenstein’s monster killed Dr. Frankenstein! Simplistic but fairly accurate!

  11. The pied pipers of the right, quite obviously, have convinced a significant number of the masses that unions (not to mention liberals…) are the spawn of Satan. They have tied their demagoguery very effectively to aspects of the American priestly (read economic elites) civil religion, namely empty notions of freedom and liberty. They have managed to convince the right wing mobilised masses that unions are unfree and trample on individual liberty just as they have convinced them that taxes and the government at large inhibit freedom and liberty. Quite a trick that I am sure Karl Marx would appreciate.

    The liberal form of the priestly civil religion with its version of freedom and liberty isn’t as emotive and hence as effective as the right wing civil religion. Playing on emotions, as we know (remember PT Barnum) is a highly effective strategy in mobilising the masses because it turns them into rageoholics.

    The US still has a prophetic civil religion but it is about as widespread as Quakerism, one of the major streams which fed into the American prophetic civil religion. Given the centrality of conformity in socialisation and what the masses are being socialised into it is likely never going to be widespread. It will always be the “religion” of some intellectuals and bohemians.

    By the way, I have been getting a bunch of right wing jacko “ads” on my Facebook page because, apparently, Facebook believes I am one of them. Facebook’s algorithims aren’t very good at understanding that words are multivocality and cultural. What have I found? I have found lies, damn lies, anger, rageoholism, the demonisation of any perspective that isn’t theirs. If this is a random sample the US is in deep shit. I have found a situation that parallels what happened in Weimar before the Nazi takehover. Fasten your seatbelts; it is likely to be a very bumpy ride.

  12. I remember as a very young child the feeling of optimism in my father’s generation with the rise of the middle class. There were so many homes built,and everyone loved getting a new car. Unions had the power to affect the profit margin of a corporation when they went on strike.

    If the middle class is going to return, we need not only government policies but changes in the organizational culture of corporations. Corporate America needs to invest more in its employees and less in its CEO’s and shareholders. We need corporations with executives that understand that when they poison the environment in which people live, they undermine the vitality of the economy. We need corporations whose values are based in good ethical principles i.e. the Golden Rule. We also need a public health infrastructure and an FDA that supports the health of its citizens and a health care industry that is rooted in collaboration,not competition.

    The other question for me is simply this. How do we increase the middle class while creating an economy that is sustainable because it addresses climate change and the need to conserve the earth’s resources? We won’t do it be creating an economy that is dependent upon consumer consumption of stuff. We won’t do it in an economy that marginalizes people of color,women, and other minorities.

    If the middle class returns, it will need to have an attitude of spend less and save more. Waste not, want not. We will need a middle class with a profound reverence for all sentient beings.

    Soon I will be planting butterfly weed to support the monarch butterflies. I am not waiting for the government or corporations to develop sustainable practices and policies.

  13. Of course, nothing in this complex world falls to simple explanation and understanding. There are many forces at work.

    Take the difference made by information automation of all kinds. Work that used to be divided into skilled and semiskilled has been rendered split between minimum wage and skilled; doing versus designing; the capability to accomplish tasks can be taught with minimum training and very moderate thinking and craft skills; designing both hardware and software can be learned by those with the capability, mindset and curiosity and time to but requires a wide range of education. Many people execute the work expecting to be paid “white-colored” wages though the skill demands have been rendered much simpler to do and almost full proof.

    Is this progress? It is from an automation perspective because it trades labor off for means of production. Workers get less now and owners get more share of the profit pie. Of course, like most complexity, it’s the transition that we are not big picture enough to carry off gracefully. We have obsoleted the education business because we didn’t see all of the implications soon enough to adjust for such profound changes to our culture in terms of how long in full careers education lasts nowadays. Education now lasts more or less for a decade while careers still last several. Life-long learning has become table stakes to economic survival.

    Can we, will we catch up with progress? Presumably, we can and will but not quickly enough to do it without a great deal of trauma and chaos and disruption that we observe in the workplace all of the time now.

  14. As long as Capitalist pay ‘our’ politicians’ campaign expenses, the rules will favor the Capitalists. Only a public campaign funding system can strip the Capitalists of such undue influence.

  15. Easy to talk about raising American wages: just ignore global economics. However, global economics won’t ignore you.
    Americans are spoiled rotten in terms of pay for work done. We’re entitled as hell about vacations, home size, transportation (the Ford F150 V8 best seller?) TV’s, clothes, boats, etc.
    We think we deserve it, but the world works cheaper than we do, and the manufacturing base has moved to more sensible climes where people actually expect to work at work, and live sensibly. China has more middle class people than we have people.
    Yes, greed exists at the top, but it goes a loooong way down.

  16. Amen Vernon. This all started with Reagan. That’s what we get when we turn actors (and Reality TV Personalities name Trump) into politicians. They just play the script they are being paid to perform and that is exactly what Ronnie did when the Christian fundamentalists teamed up to put Ronnie up to the task of getting Carter out. That’s when winning at any cost by any means became the Republican mantra. The Republican Party, aka the NAFP – New American Fascist Party.

  17. Wow… considering the bent of today’s neo-conservatism, I love this quote:

    “Our ability to fashion public policies that reinvigorate and regrow that all-important, stabilizing middle class depends significantly on a widespread recognition of the economic reality that everyone does better when everyone does better.”

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