A first step towards a positive resolution of the American crisis?

The vision
I have described myself as a New Dealer in that I would like to see restoration of an American economy that works for the bottom 90%, like we had during the New Deal Order (1940-80). This amounts to a MAGA for the Left in direct contrast to that of the Right led by Donald Trump. I summarize it in four points:

1. Entry level wages should be living wages, as they were of old

2. Restore the economic (and marriage) prospects of working-class boys.

3. Restore a system of public institutions to house and oversee those unable to manage life on their own

4. A measure other than money is needed to “score” elite achievements

The problem to be addressed
I focus in this post on the first two of these points. They are a response to the decline in the economic status for ordinary people (bottom 90%) relative to the elite (top 10%). The idea that working people are worse off under post-1980 neoliberalism is something I have written a great deal about. Some scholars like Nathan Cofnas argue there has been no decline in the economic status of working people. He illustrates his point by noting that a wide range of consumer goods are much cheaper than they were fifty years ago, meaning the working-class person is better off today. This analysis misses that most consumption today is not consumer goods as it was in the 1950’s and 1960’s. Rather it is prices for things like housing that have risen at a faster rate than wages since the 1980’s. The cost of education has risen faster than income making it impossible for a middle class kid to put themselves through school without help from their parents or taking our loans. I was able to do this without difficulty in the late 1970’s, whereas my niece, attending the same school, was unable to do this forty years later, despite much more strenuous efforts. As for health care, its cost has risen faster than the other two.

More important is that Cofnas’s argument is based on income after transfer payments, whereas all of my analyzes are based on income before taxes and transfers. According to Cofnas, consumption is what matters. In my view there is an important difference between earned income and income from government benefits. It is a matter of respect, particularly for young men. Traditionally, men served in a provider role; their suitability as a potential husband was based, in part, on their ability to contribute materially to the future household. A crude measure of this ability applicable to young men of mediocre intellect would be unskilled, or entry-level wages relative to standard of living, as proxied by per capita GDP. Figure 1 presents a long-term trend in unskilled wage adjusted to today’s dollars using per capita GDP.

Figure 1. Trend in unskilled/entry-level wage adjusted for rising living standards (proxied by per capita GDP)

This chart shows the wage level over time relative to the society of the time. The graph suggests that unskilled workers have gotten poorer over the last two centuries. This is not true. An unskilled American worker in the 1890’s earned 125% more than his 1820’s counterpart. But the surrounding society had also gotten richer—and to a greater extent, so that relative to societal wealth his position has fallen by 35%. Turn of the century Progressives were scandalized by the low estate of the American industrial worker (relative to what they felt was acceptable), The reason for this was early 19^th century America was a largely undeveloped country, everyone was poor, aside from a small class of elites. Most labor was unskilled, and so this wage was a reasonable approximation for the average living standard. By the end of the 19th century, the US had industrialized so that those who earned unskilled wages were now significantly relatively poorer than they had been seven decades earlier. I performed this analysis for Vietnamese factory workers today and got a value of about $60K, almost twice the level of the American unskilled worker. Yet the American workers earn more than 10 times more money and enjoy a much higher absolute standard of living. But because Vietnam is so much poorer than America, the Vietnamese worker enjoys a higher economic status than his American counterpart despite his poverty.

I believe this loss of economic status, rather than a decline in consumption is at the core of the economic discontent fueling the current populist moment. Loss of economic status translates into loss of social status and working-class people feeling disrespected by professionals. In the 2020 election Democratic primary candidate Andrew Yang floating the idea of a universal basic income (UBI) as a potential solution to the increasing precarity of American lives. I found his proposal horrifying, as it sought to further uncouple income from earnings, creating a world in which more and more people would owe their living standards to government charity. What would that do to the status of American workers? I saw the prospects for an even more ugly populism than that presented by Donald Trump—a dark path we should not trod.

What should we do?
I see a possible solution in the restoration of the New Deal Order under which I grew up. By this I do not mean bringing back the industry of the 1950’s and 1960’s. If we did that we would become like Vietnam. After all the workers of the 1950’s and 1960’s lived in a much poorer, less developed society. If you got cancer, it was a death sentence. Ditto for a heart attack in most cases. Houses were much smaller and there was no home air conditioning, unless you were rich. Life was much more austere.

I would not want to return to those living standards, and I am sure most Americans would agree. But at the time I thought nothing of this, one cannot miss what doesn’t (yet) exist. What could be felt was a relatively equality of people of various classes (at lease compared to the era before the New Deal, which was still within living memory in those days). For example, in my neighborhood I played with kids whose father’s occupations ranged from truck driver, social worker, or electronics factory technician to a paving company owner, college professor, or corporate executive. This would not the be case today.

I employ a cultural take on economics. An economy is ultimately a cultural construct created by culturally adept primates. It is a productive system that can be analyzed as any other process. I identify two operating regimes, the SC and SP economy. SC and SP refer to the dominant business/economic cultures, stakeholder capitalism and shareholder primacy, respectively. Business culture transforms from one to the other through a process of cultural evolution. The key idea is what made the postwar economy so special was not singular external conditions (i.e. the US survived the war intact with the rest of the world flat on its back) but that the businessmen who ran the economy then expressed a different set of beliefs and behaviors (i.e. culture) than their modern counterparts. This more productive SC culture evolved in response to a set of tax and other economic policies different from that in which modern SP culture evolved. Thus, were we to restore SC-evolving conditions for a sufficient span of time, business culture would shift from the current SP back to SC. The resulting economy would then resemble the postwar economy in some ways (executive compensation and financial asset valuations will be lower), but not in others (what sorts of industries will be dominant). A return to SC culture does not mean a return to “smokestack America.” Like in the postwar era, entry level wages will be higher relative to GDPpc than they are today, but what sorts of jobs people do will be very different than what people did sixty years ago.

Shifting from SP to SC culture requires raising taxes on the rich, banning stock buybacks, and balancing the federal budget. Doing this is politically impossible today. Previously I outlined a scenario where this might be accomplished through a sped-up version of what happened over 1929-1945, when the original SC culture evolved. This brings us to the figure at the beginning of this article where I show the two “founders of the postwar American order”. One is obvious, Franklin Roosevelt, father of the New Deal and victor in the war against Fascism. The other is Herbert Hoover. One might think, what’s he doing there? Hoover played an important role by clearing out the old order (including torpedoing his party’s electoral prospects for a generation), allowing room for a new dispensation, doing this peacefully, and then abdicating when his party lost the 1932 election.

This is important because the 1932 transition from Hoover to Roosevelt represents the key step in the resolution of the last American secular cycle crisis. I have written about secular cycles and the present crisis era in particular. These things usually end in violence, but under Hoover it did not. Hoover left Roosevelt four gifts, a country in which immigration had been shut down in 1924, high tariffs enacted in 1930, high tax rates enacted in 1932 and most importantly, a financial system that had gone effectively bankrupt. This gave Roosevelt a relatively closed system¹ to work with in reflating the depressed economy, as well as a good start on the high tax rates needed to evolve SC culture.

Figure 2. Border crossed relative to population 1965-present

There can be no restoration of SC culture by a modern FDR without preparation by a modern Hoover figure. Trump’s recent “Liberation Day” has stirred hope that Donald Trump, though a greatly inferior man to Hoover, may be able to replicate most of what he accomplished. The 1924 immigration restriction was repealed in 1965, after which both legal and illegal immigration rose. Figure 2 shows a plot of border crossings along the southern US border since 1965. Recent data show the level of crossings has fallen to mid-1960’s levels suggesting that Trump has replicated the Republican immigration restrictions of a century ago.

Figure 3. Average tariffs over time

Figure 3 shows Trump’s recent tariff moves have returned tariff levels to around their pre-New Deal levels, so he has done this as well. Republicans will never raise taxes as Hoover did, which is why Republicans need to go. But there is one last task for the Trump administration before their historical role in the secular cycle is complete. They need to crash the economy. The reason for this is simple. The tax hikes needed to select for SC over SP culture will exert a negative economic effect. Economic effects operate in real time, while the effects of cultural evolution unfold slowly over 10-15 years. The immediate effect of tax hikes will be to slow the economy, perhaps even induce recession. The effect of banning stock backs would likely produce a bear market. Enacting either during good times will result in the responsible political party being driven from power and the policy reversed before it can have its positive evolutionary effect.

In a depressed economy, stimulus will be applied to lift the economy out of recession. Enacting tax increases and banning stock buybacks along with stimulus may dampen to effectiveness of the stimulus somewhat, but they will also counter the inflationary effects of the stimulus. Consider the large amount of stimulus employed during the pandemic. Had these been implemented along with tax increases and a stock buyback ban the subsequent stock market boom and inflation may have been avoided or at least lessened. These beneficial effects along with an absence of an immediate negative effect would make tax increases and banning stock buybacks much easier to enact than they would be during good times. We know this because this is how the SC-selecting economic policy under the New Deal Order was implemented.

Although there has been discussion of potential financial crisis stemming from the Trump trade policy, most of this has reflected recent turmoil in financial markets since President Trump’s announcement of tariffs on April 2. When I surveyed the S&P 500 market index on April 13, I saw it is up slightly over the past week, down 4% over the last month, down 8% over the last six months and basically flat over the past year. This does not strike me as particularly alarming. On one hand it is reminiscent of the year following the October 2007 market peak, which was followed by financial crisis. On the other it seems similar to 1994 or 1998, which were followed by stock market booms. I read reports of the dollar tanking, and yet when I look at the dollar index it looks unremarkable compared to historical swings in the dollar value. At this point I would say we are far from economic collapse, but Trump has only been president for three months, there are 45 more to go—plenty of time to get the job done.

1. Government deficit spending that flows overseas accomplishes less stimulus than if spent here and a massive influx of immigrants needing employment dilutes the impact of stimulus.