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The Way to a Fair Deal

1.

Between 1973 and 1993, the standard of living for average Americans rose more slowly than in any previous twenty-year period since the Civil War. Although the economy grew, the benefits of this growth were largely enjoyed by the rich. Average wages and salaries grew because the earnings of those belonging to the highest income categories increased rapidly. But there was not a commensurate gain in median family income—the level at which half of American families earn more and half less, and probably the best overall measure of the standard of living. In fact, median family income rose only slightly over these years, and it did so largely because of the rapid increase in two-income households.

By contrast, in the preceding twenty years, starting in 1953, median family income doubled. Then, between 1973 and 1993, the average wage of non-management workers fell nearly 25 percent, from $615 a week in today’s dollars to only $479. Family incomes fell well behind rapidly rising health care costs, and an ever-higher proportion of Americans went without coverage.

Nor did the income of the typical family keep up with the rising costs of higher education, public transit, and drugs; and of course the situation of the poor was even worse. It is true that the federal government’s earned income tax credit, which largely absolved low-income workers from taxes and supplemented their wages, became more generous over these years. But the incomes of minorities stagnated, and the gap in income and education between black and white Americans remained wide. Since a small number of well-to-do Americans had much larger incomes and built and increased enormous fortunes, inequality reached the notorious levels attained in the Roaring Twenties.

Despite the strained conditions for most Americans, there was no broad progressive political reaction, as there had been during the Depression. On the contrary, the social programs and regulations of the New Deal and Lyndon Johnson’s Great Society were increasingly attacked, pared down, and eliminated. Government regulation of airlines, truckers, and communications became more permissive under Presidents Jimmy Carter and Ronald Reagan. The regulation of banks, brokers, and other financial services was relaxed under Bill Clinton. Laws protecting organized labor were weakened or poorly enforced. Besides cutting income taxes sharply and making them more regressive, Reagan reduced the proportion of people covered by unemployment insurance. Federal support of education fell as a percentage of Gross Domestic Product as well. Affirmative action programs were circumscribed by the courts, and Clinton limited the scope of federal welfare programs.1 The minimum wage was raised only a few times over these decades, and in purchasing power adjusted for inflation it is now the same as it was in the 1950s.

Some economists and policymakers have argued that reduced taxes, deregulation, weaker labor unions, and a lower minimum wage were just what was needed to revitalize the economy. The benefits of more rapid growth would, they argued, naturally accrue to all workers. Many voters seemed to believe them. Since 1969 there have been five Republican presidents and only two Democrats. And those two presidents, Carter and Clinton, “moved to the center” on economic as well as other issues.

But these policies largely failed to work as promised. Except for the second half of the 1990s, economic growth remained slow by historical standards and wages continued to stagnate. And for most families the boom of the late 1990s only partially compensated for the stagnating incomes of the preceding two decades. During the moderate economic expansion of the early 2000s under George Bush, family income fell for the first time since World War II.

The lack of a persistent liberal response has been confusing. Some economists argue that, contrary to what the evidence suggests, American workers must have been doing moderately well in these years.2 Exciting and often cheap new products, they claim, like VCRs, video games, and PCs, have compensated for lagging or even falling incomes. The Democratic Leadership Council, the centrist group of so-called New Democrats established in 1985, of which Clinton was a founding member, endorsed a version of this argument. The group began to portray the large-scale social programs created by Roosevelt, Kennedy, and Johnson as misguided, old-fashioned, and often irrelevant. Despite the growing number of people living in poverty, these New Democrats have advocated inexpensive social programs that encourage Americans to help themselves.

According to Benjamin Friedman, a Harvard economist, however, this counterintuitive political trend is by no means a surprise. In his new book, The Moral Consequences of Economic Growth, he argues that since the industrial revolution, progressive policies have usually been associated with rapid economic growth and rising incomes in all levels of society, and not with uneven growth or economic stagnation. Friedman is concerned with the moral as well as the material effects of economic trends. He argues that economic growth—if it is broad-based—can advance such fundamental moral aims as tolerance, democracy, and equality. The first progressive age, for example, took place during the long industrial boom of the first twenty years of the twentieth century. The nation imposed income taxes, battled the trusts, established female suffrage, and adopted regulations to protect workers. John F. Kennedy’s New Frontier and Johnson’s Great Society were direct outcomes, Friedman argues, of the rapid growth and rising standard of living of the 1950s and 1960s. During these periods, rising productivity, or the increase in goods and services produced per hour of work, was matched by wage gains for all income levels.

By contrast, according to Friedman, during times of uneven prosperity the American government has typically cut taxes, reduced social programs, and restricted immigration. As examples he cites the “populist era” between 1880 and 1895, when real per capita income stagnated and racism and anti-immigrant sentiment were prevalent; and the two decades between 1973 and 1993—from Nixon to Reagan—which he calls the “backlash era.” Friedman also identifies the 1920s, a period of expansion for many businesses, as a time of economic stress for average Americans; the resentments and anger of the time helped give rise to racist movements such as the Ku Klux Klan.

Many of Friedman’s arguments are persuasive. He shows that those who claim there were few economic strains for most Americans between the early 1970s and mid-1990s are wrong. Stagnating incomes resulted in economic frustration and deprivation. The lack of rapid growth and the inequitable distribution of what gains there were, he suggests, also undermined the promise of economic progress from one generation to the next. As a result, he argues, Americans became increasingly hostile to immigration and skeptical about affirmative action, and the government began to roll back some of the progressive social legislation of earlier eras, including placing punitive limits on welfare.

But what are we to make of the progressive political programs passed during the Great Depression of the 1930s? Friedman argues that widespread desperation made these programs possible. The New Deal is an exception, he suggests, and does not undermine a general connection between economic growth and progressive changes in society. When growth in family incomes is strong, more people are willing to support efforts to expand individual rights, restrain prejudice, allow immigration, and open opportunity to larger numbers through public education. They support these efforts because they are aware of new possibilities for themselves. When there is a lack of growth, Americans are more concerned about their own economic security and seek to limit government attempts to redistribute wealth and opportunities to others and often seek reductions in taxes.

The history of the Depression raises serious questions about Friedman’s broader argument. More than any other presidency in American history, that of Franklin Roosevelt gave shape to progressive government in the United States. New Deal programs such as Social Security, unemployment insurance, and the minimum wage changed the relationship between government and society, and their legacy lasted well beyond the Depression. Far from being an exception, as Friedman argues, the New Deal might instead be interpreted as the reference point for progressive movements for the remainder of the twentieth century.

Nevertheless, the weight of the evidence, I believe, supports his case. In general, growth in America has usually benefited most levels of society. When it does so, it fosters democratic values and progressive policies. If economic growth falters, or is more narrowly confined to particular groups in society, these values are endangered. In this regard, Friedman argues, the experience of the past thirty years poses a threat:

Broad-based economic growth in America was not a myth. Nor is it true that the growth Americans enjoyed in the early postwar decades was merely an aberration to which we nonetheless became accustomed. The pace of increase in living standards in those years was little more than what the nation had experienced on average during the previous century and a half. It is instead our own era, dating from the early 1970s, that stands out as exceptional. A rising standard of living for the great majority of our citizens has in fact been the American norm, and it is we, today, who are failing to achieve it.

2.

Economic historians disagree about precisely when and how the industrial revolution got underway, but it is clear that in Great Britain in the late 1700s and early 1800s, the economy began to grow consistently for the first time. That is, Gross Domestic Product per capita—the nation’s total income divided by each man, woman, and child—increased significantly over the years. Economic recessions reduced this income from time to time, but the economy always recovered and the nation’s income per capita invariably reached higher levels. For Europe, consistent growth was new, and helped to overcome the Malthusian fear that a lack of resources would make it impossible to provide for a growing population.

The European view that progress was inevitable was not just a matter of the industrial revolution. As Friedman writes, it was also an intrinsic value of the Enlightenment that was reinforced by remarkable advances in science. But the increasing prosperity created by the industrial revolution gave additional support to the idea of continual progress, and Americans have tended to be much more optimistic than Europeans.

In the United States, the country’s founding coincided with the beginning of the industrial revolution; economic growth, although cyclical, was the rule rather than the exception from the outset. Although Friedman does not give much attention to the economic history of early America, a closer analysis could have strengthened his case. Even in Revolutionary times, the records of personal health and average heights strongly suggest that the average American enjoyed a standard of living superior to that of the average citizen of the Old World. The availability of land accounted for much of this advantage, and it probably gave Americans a faith in economic self-sufficiency and future economic security that strengthened their demands for democracy. Wages were also already significantly higher than in the Old World. In fact, average American wages fell below those of Western Europe only during the past thirty years.

Most of Friedman’s account is devoted to the post–Civil War period. Partly stimulated by Civil War production, large-scale industrialization got underway in the 1870s. Between 1873 and 1880, American production grew by as much as 50 percent. According to Friedman, it is likely that the incomes of typical Americans also rose significantly in that decade. As Friedman points out, in those years state and local governments spent liberally on public education, states provided more relief for the poor than ever before, and the federal government adopted a pension system for Civil War veterans and widows—“America’s first large-scale effort to address poverty at the federal level.” In 1875, Congress even passed a civil rights bill that prohibited discrimination in public places.

By the 1880s, however, the economy was growing fitfully, and a prolonged recession began in 1893. As a result, 18 percent of the working-age population were unemployed and per capita income fell below levels reached a decade earlier. According to Friedman, the incomes of a large proportion of the population fell by 1895 to the levels first reached in 1880. Widespread frustration, especially among farmers, gave rise to a populist movement that combined elements of anti-Semitism, anti-Catholicism, and racism. The populists were obsessed with getting rid of the gold standard, which some viewed as a sustained conspiracy by Jewish bankers on the East Coast to keep money tight and farm prices down. As increasing numbers of poor immigrants, including many Catholics and Jews, arrived from Europe, the populists sought to clamp down on immigration. In addition to these primary concerns, however, populist leaders like William Jennings Bryan also supported such progressive measures as an income tax, the popular election of US senators, and women’s suffrage; but these proposals were not enacted by Congress.

At the time, business interests came under growing criticism, partly as a result of violence against the labor movement, such as the attacks on union organizers in Carnegie Steel’s Homestead mine in 1892, and again during the workers’ strike in 1894 at the Pullman car company. Books that were skeptical of commercial culture, such as Edward Bellamy’s Looking Backward, began to replace romantic business fantasies such as the Horatio Alger stories that had been popular in earlier decades. Nevertheless, the prevailing political ideas of the 1890s favored big business rather than workers’ rights. As Friedman observes, social Darwinism gained wide currency during this period, supported by such academics as the Yale professor William Graham Sumner. Government social policies were increasingly seen as a violation of the laws of the survival of the fittest in a period in which opportunity was relatively scarce.

In the late 1890s, America’s economic difficulties were abruptly reversed. During the next twenty years, the pace of industrialization accelerated, with the rapid spread of mass production and steel furnaces, oil pipelines, retail chains, bigger, faster railroads, and the telegraph. Real per capita income rose nearly 2.5 percent a year between 1896 and the end of World War I. The unemployment rate remained close to a remarkably low 4 percent. Discounting for the cost of living, Friedman writes, “the average annual wage of an American manufacturing worker rose from $550 to almost $900.”

Thus, as Friedman points out, the progressive age began amid prosperity, led by two presidents committed to strong government, Teddy Roosevelt and Woodrow Wilson. Unlike populism, which sought to return America to an agricultural economy, progressivism did not oppose the growth of business. Even leading progressives such as Robert LaFollette, senator from Wisconsin, believed economic growth could improve society and sought only to limit the social costs of industrialization. Progressives wanted to make cities livable through mass transit, new roads, public education, and large-scale changes in public health programs. They sponsored anti-trust laws, worker protection, and state welfare programs for widows and children. They also helped to make the case for such populist ideas as the income tax, female suffrage, and the direct election of US senators, all of which required, and eventually got, constitutional amendments. At the same time, Friedman argues, progressives were far more tolerant of immigration than the previous generation, although the Wilson administration’s hysterical attempts to suppress pacifists and leftists during and after World War I resulted in a setback for civil rights.

The economic boom of the 1920s produced fabulous personal wealth, record stock market highs, and new mass-produced products that factory workers could afford, including automobiles, victrolas, washing machines, refrigerators, radios, and the Hollywood “talkies.” But it was a decade of uneven economic progress. Friedman observes that although the wages of workers in new manufacturing industries such as automobiles rose rapidly, and the fortunes of the financiers soared, farmers and miners did relatively poorly. This contributed, Friedman says, to red-baiting, anti-immigrant prejudice, and racism. The Ku Klux Klan, largely made up of rural Americans who felt left out of the rising prosperity, flourished in these years, perhaps recruiting four to five million members. And membership was by no means limited only to Southern states.

Washington took hardly any action to control the Klan. Congress, for example, failed to pass any anti-lynching laws in a period in which lynching was on the rise again. States in the South, meanwhile, adopted new Jim Crow laws that segregated blacks, and Washington did not interfere. Instead, federal tax rates were cut sharply and some welfare programs were left without funding. A minimum wage law for women was declared unconstitutional by the courts. As Friedman ironically puts it, “The chief way in which the government did rush to citizens’ relief in the 1920s was to restrict immigration.” In such an atmosphere, the presidential candidacy of the Catholic governor of New York, Al Smith, was not likely to succeed; he was overwhelmingly defeated by Herbert Hoover, in an outpouring of anti-Catholic bigotry.

The year 1929 proved the high point of the boom economy. Following the stock market crash that year and ensuing financial crises, the country slid into a deep recession. In 1932, 37 percent of the nonfarming population was out of work, the highest proportion in US industrial history. With new programs adopted under Franklin Roosevelt, the economy began to recover, only to collapse again in 1937, when the unemployment rate reached 20 percent. In 1938, real per capita income was lower than it was twenty years earlier. The country was rescued by the need to produce supplies for World War II; in 1940 income per capita again reached its 1929 level.

A huge cross section of society supported Roosevelt’s social experiments. He set up programs to supply public service jobs, to refinance mortgages, and to support farm and urban income. At one point, seven million workers were on the federal payrolls. There were new regulations for banks and the stock markets. In the years after 1935, when the Social Security system was created, Congress also passed major legislation to protect labor unions.

Acknowledging that the Roosevelt years do not fit his thesis linking growth and moral progress, Friedman cites the Harvard economist Alexander Gerschenkron for support. “Historical hypotheses are not…universal propositions,” wrote Gerschenkron. “They cannot be falsified by a single exception.” But political, cultural, and social ideas often develop on their own, independent of economic conditions, and both political leaders and the general public may be drawn to them or turn against them for a variety of reasons. Friedman’s analysis does not convincingly take account of the complicated evolution of ideas. Some of the failed projects of the nineteenth-century populists, for example, such as an income tax and female suffrage, were eventually accepted during the progressive age. Thanks to the efforts of reformers such as Elizabeth Cady Stanton and Susan B. Anthony, the campaign for women’s suffrage started in the nineteenth century and would likely have succeeded in the twentieth even in poor economic circumstances. Following World War I, a reaction against Wilsonian notions of sacrifice for ideals may well have also weakened the push for social progress. During those years, however, progressive ideas such as the rights of labor and federal policies to protect farmers were still discussed and advocated in academic, union, and intellectual circles; this helped to create the shared understandings that were drawn on to shape New Deal legislation during the Depression. Rather than arising as discrete responses to prevailing economic conditions, such ideas often develop more slowly, and are inflected by broader intellectual and political currents.

Friedman also finds support for his views in the economic history of Britain, France, and Germany. But in each case, periods that bear out his thesis must be weighed against significant exceptions. In England, for example, the repeal in the 1840s of the Corn Laws, which restricted imports, was a positive measure made possible by strong economic growth. Similar periods of growth, in Friedman’s view, facilitated the adoption of female suffrage at the end of World War I and the many social reforms, including national health insurance, adopted after World War II. Yet the progressive social policies of Prime Minister Herbert Henry Asquith in the early 1900s, including the introduction of social security and unemployment insurance, were undertaken in times of economic stagnation.

What seems clear is that the US, which grew more rapidly than other nations for most of its history, came to depend on such growth to solve its social problems in ways other nations did not. In general, Western European nations, with their traditional networks of powerful labor unions and leftist parties, expect government to be directly involved in matters of social justice. These commitments to progressive policies sometimes draw on revolutionary traditions and are often anchored in the past. In America, these historical forces were not present in the same way. As a result, Friedman’s analysis suggests, social welfare arrangements in the United States, even during periods of broad prosperity, have depended on conditions of growth and have been less inclusive than those prevailing in Western Europe.

3.

Such issues are especially relevant to America now because a return to growth that would once again raise the standard of living for most workers is far from certain. Friedman argues that if we are instead entering a period of growth whose benefits are not widely shared, the nation’s moral values and particularly its acceptance of obligations toward the less well-off would be weakened as well. He makes a strong case that the progressive policies of the post–World War II period, from President Truman through President Nixon, were made possible by years of national prosperity, during which Social Security payments were increased, the GI bill, America’s largest program of government-financed higher education, was adopted, and the Marshall Plan invested in Europe the equivalent of half a trillion of today’s dollars. Under Kennedy and Johnson in the 1960s, Medicare and Medicaid were created, welfare for the poor was significantly expanded, and Congress passed far-reaching civil rights legislation. Under Nixon, Social Security benefits were indexed to inflation, and other welfare programs were expanded.

When the economic slowdown in the 1970s began, Friedman observes, few commentators understood the regressive influence of economic stagnation on popular attitudes. The conservative reaction that gathered strength with the Goldwater movement was often explained not as a symptom of economic frustration but as a consequence of shifting political ideologies and new culture wars over abortion, gay rights, and affirmative action. These mattered, and Friedman’s argument for the priority of economic factors would have been stronger had he addressed more directly the cultural and political causes of this shift. Apart from growing discord over abortion and gay rights, and the influence of highly organized and well-financed Christian right groups and conservative think tanks, Friedman might have devoted further analysis to the Southern resistance to Democratic measures supporting racial equality and to the shift of Southern voters from the Democratic to the Republican Party.

But his thesis is supported by the temporary return of prosperity in the late 1990s. Clinton’s election in 1992 was partly the result of the populist campaign run by businessman Ross Perot, who like his nineteenth-century predecessors promised to restrict trade. The recession and weak economic recovery of the early 1990s helped to explain Perot’s popularity, and he took a substantial portion of Republican support away from the incumbent, George H.W. Bush. In 1994, when the economy was still creating relatively few jobs, Newt Gingrich’s Republicans swept into office. Clinton moved his administration toward the political center and reduced welfare benefits. But by the late 1990s, as stagnation turned into a boom, the nation, Friedman argues, was more open to modest progressive programs. Even President Bush, in his 2000 campaign, ran on a program to strengthen the federal government’s investment in education. By contrast Bob Dole, Friedman points out, running in 1996, promised to eliminate the entire Education Department. Some of the larger public expenditures for social programs during the temporary return of prosperity under the Clinton administration in the late 1990s were for education and medical research, and for increasing the earned income tax credit for the working poor.

The economic performance of the past four years has again been troubling. The nation’s economy has grown, and productivity, the output per hour of work, has risen. But the economy has produced neither the number of jobs nor the rising wages such expansions once did. One likely reason for the poor performance is Bush’s fiscal policies, which were intended to stimulate the economy through tax cuts. These neither induced adequate demand nor bolstered confidence in the nation’s fiscal future, given that they also rapidly turned a situation of federal budget surpluses into record deficits. But other factors are also holding down wages. One is more intense global competition from nations with large numbers of well-trained and low-paid workers. Another may well be the weakening of the institutions and programs that protect people, such as an adequate minimum wage, strong unions, and an effective system of public education.

Friedman’s thesis that broad-based economic growth is a precondition of social progress forces us to ask a troubling question. What happens to America’s moral purpose if the living standard of average Americans fails to rise as it did in the past? Perhaps many Americans are naturally disposed to support national programs that will improve education, health, and productivity; but Friedman’s reading of history suggests this is hardly to be counted on. His analysis should be heeded. If American family incomes do not continue to grow, it may become increasingly difficult to mobilize broad support for a government committed to social equity and public investment.

Friedman has his own analysis of the policies required to stimulate the kind of growth that is needed for social progress. He argues that the slow rate of business investment during the last twenty-five years has resulted from two related problems. Americans have been spending more and saving less, with a corresponding shift of resources from investment to current consumption. At the same time, he argues, the recent Bush tax cuts have reduced the nation’s savings further. The resulting large-scale government borrowing, he writes, has ironically “absorbed the lion’s share of what little Americans do save.” As a result, private savings that might otherwise finance capital investment in research and technology are instead being used to pay interest on the national debt.

In addition to advocating a higher savings rate, Friedman argues that more should be invested in education. Parents should be provided greater choice in the education of their children within and across public school districts. He does not favor the use of government vouchers that enable parents to send their children to private schools. Rather, he believes local school administrators must offer more choices, including varying academic programs, athletics, and extracurricular activities. This, he argues, will encourage constructive competition between schools. He also believes the government should invest more resources in kindergartens since many mothers are working and millions of small children are getting day care that is often perfunctory.

But such reforms, even if they gain enough support to be implemented, are not enough. The country faces growing health care and energy crises, an aging work force, and increasing competition from countries that do not have even America’s modest level of social protection. In a time of intense global integration of the economy and outsourcing of jobs, some protectionist measures may be sensible, at least while American industries make painful transitions.

There are strong arguments against such protection, but the implications of international economic trends need to be addressed in a way that will allow the country to resist reducing programs for education and medical care, among others, even further. What should be clear is the need for America to invest aggressively in energy independence, in a universal health care system, and in scientific research and industrial development, even if it requires higher budget deficits. The federal government should be developing a universal educational system for three-to-five-year-olds, and should no longer tolerate the existing flagrant inequities in the quality of elementary and secondary education across the country. Such public investment will help assure that the country achieves a rate of growth that, as Friedman plausibly argues, is essential for continued social and moral progress to occur.

Friedman also addresses the current debate about economic growth in poor and developing countries. He quotes the prominent development economist W. Arthur Lewis, who wrote half a century ago that “the case [for] economic growth is that it gives man greater control over his environment, and thereby increases his freedom.” To Lewis, economic growth is what mattered most.

Friedman agrees with Lewis’s point of view. He acknowledges the contribution of the philosopher and Nobel Prize–winning economist Amartya Sen, who has written that development is not guaranteed simply because a nation’s Gross Domestic Product increases. People need specific “capabilities” in order to lead full lives, Sen argues, and these often require direct investment in health care, education, and other social programs. Growth itself is often not sufficient. Friedman does not support Sen fully on this. He writes that

at the outset of the twenty-first century the record of experience is more supportive of the belief that economic development fosters the freedoms that are integral to such a broader conception of “development” than has been the case for a long time.

But Friedman’s argument is not convincing when he discusses poorer countries. Poverty has remained entrenched in these nations, despite many years of conventional development policies. Economic growth may remain the best antidote for deep poverty, but social expenditures on health and education are integral to comprehensive development. Government spending, if intelligently carried out, can often be beneficial for both social equity and growth.

Friedman recognizes that broad growth will not necessarily achieve social improvement without judicious government intervention, although he sometimes seems to assume, too readily, that such intervention will occur if an economy has satisfied the conditions necessary for sustained growth. Still, Friedman is able to show how important continued economic growth will be, for both the United States and the global economy. His book makes clear the moral consequences of economic growth in developed and developing nations. Without a coherent policy for sustaining growth, America could find its commitment to democracy and the rights of individuals increasingly weakened. Friedman urgently and convincingly describes a society that is failing in many respects but is strangely unable to understand why.



























  1. 1

    See Christopher Jencks’s article “What Happened to Welfare?” in the December 15, 2005, issue of The New York Review.

  2. 2

    See, in particular, W. Michael Cox and Richard Alm, Myths of Rich & Poor: Why We’re Better Off Than We Think (Basic Books, 1999); and Gregg Easterbrook, The Progress Paradox: How Life Gets Better While People Feel Worse (Random House, 2003).

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