Nostalgianomics

I am a little late on this, but here is the latest from Brink Lindsey, another member of the Princeton Tower Club libertarian blogger set:

Yet the return to peacetime and prosperity did not result in a shift back toward the status quo ante. The more egalitarian income structure persisted for decades. For an explanation, Krugman leans heavily on a 2007 paper by the Massachusetts Institute of Technology economists Frank Levy and Peter Temin, who argue that postwar American history has been a tale of two widely divergent systems of political economy. First came the "Treaty of Detroit," characterized by heavy unionization of industry, steeply progressive taxation, and a high minimum wage. Under that system, median wages kept pace with the economy's overall productivity growth, and incomes at the lower end of the scale grew faster than those at the top. Beginning around 1980, though, the Treaty of Detroit gave way to the free market "Washington Consensus." Tax rates on high earners fell sharply, the real value of the minimum wage declined, and private-sector unionism collapsed. As a result, most workers' incomes failed to share in overall productivity gains while the highest earners had a field day...

Krugman sees the rise of inequality as a consequence of economic regress"”in particular, the abandonment of well-designed economic institutions and healthy social norms that promoted widely shared prosperity. Such an assessment leads to the conclusion that we ought to revive the institutions and norms of Paul Krugman's boyhood, in broad spirit if not in every detail.

There is good evidence that changes in economic policies and social norms have indeed contributed to a widening of the income distribution since the 1970s. But Krugman and other practitioners of nostalgianomics are presenting a highly selective account of what the relevant policies and norms were and how they changed.

The Treaty of Detroit was built on extensive cartelization of markets, limiting competition to favor producers over consumers. The restrictions on competition were buttressed by racial prejudice, sexual discrimination, and postwar conformism, which combined to limit the choices available to workers and potential workers alike. Those illiberal social norms were finally swept aside in the cultural tumults of the 1960s and '70s. And then, in the 1970s and '80s, restraints on competition were substantially reduced as well, to the applause of economists across the ideological spectrum. At least until now.

The "treaty of Detroit" model, if it ever even existed in the first place, is merely NRA-lite, an echo of the Mussolini-style corporate state FDR tried to create before the war.  Read the whole thing - Brink is, as usual, hard to excerpt.

One thing that is seldom mentioned in discussions of income inequality is the absolute wealth of the lower income brackets.  The evidence is pretty strong that the lowest income brackets in the US do at least as well as comparable brackets in Europe (especially after you correct for immigration), which have pursued the corporate state model Krugman longs for.  Our rich are richer, but our poor are about the same, and unemployment is systematically lower here.  So the problem is, what?  Just envy?

More on income distribution and mobility here.

  • DrTorch

    While you refer to many other related issues that may challenge Krugman's assertions, I will take a page from your book and simply say BS! to this

    "Under that system, median wages kept pace with the economy’s overall productivity growth, and incomes at the lower end of the scale grew faster than those at the top. Beginning around 1980, though, the Treaty of Detroit gave way to the free market “Washington Consensus.” Tax rates on high earners fell sharply, the real value of the minimum wage declined, and private-sector unionism collapsed. As a result, most workers’ incomes failed to share in overall productivity gains while the highest earners had a field day…"

    That's simply perposterous.
    Oh, I'm sure the original authors provide evidence to support their claims, but I have zero doubt these data can be dismissed w/ any sound analysis.

  • Esox Lucius

    Jealousy is an ugly human character flaw and an even uglier basis for a tax code. (Where did I hear that before.) Anyway, the thing I never understand is how income inequality is a thing that needs to be rectified. The first thing that would be necessary for me to want to take someone else's money is for someone to prove they got it by fraud or some other evil method. Usually when I get into this argument with the socialists they say that all wealth is gotten through fraud. Then I like to ask how Opra Winfry was fraudulent in accumulating her 1 billion dollar fortune. Its usually a lot easier to rage against the nameless faceless "Rich" than to put a name to them and ask how the fraud was committed. It's kinda fun to watch the "...does not compute..." wash over their eyes.

    On to my final thought. How do rich people, by becoming richer, MAKE poor people poorer? And if that can('t) be proven then do smart people make dumb people dumber? Do beautiful people make ugly people uglier? Do talented people make the untalented... You get the point. I fail to understand why we must correct income inequality when Tiger Woods is clearly better than me at Golf and nobody seems to be interested in either handy-capping him or sending me in for additional training.

  • ElamBend

    The 'treaty of detroit' was devastated when it was exposed to outside competition, namely import or foreign owned manufacturing. The whole adversarial negotiation system set up for Union contracts at the big manufactures created a byzantine system that made guaranteeing quality at a good price difficult. (not that management is off the hook, they just gave away the farm in a manner that left it for the next guy).

    I would also argue that purchasing power has gone up, even if wages have stagnated. Credit bubble burst aside, we are materially richer than 25 years ago, even at the bottom.

  • Dr. T

    "So the problem is, what? Just envy?"

    Primarily. Everyone believes he is underpaid. The high school dropout general carpenter believes that he should get $50 an hour. High school grad assembly line workers in Detroit believe they should get $70 an hour. Government clerical staff believe they should get $40 an hour. When they don't get what they believe they are worth, they are envious of those who make more money.

    When I worked at a VA hospital, I was astonished to hear comments from nurses and technologists who believed that they should be paid as much as me. I was a clinical pathologist with a BS in chemistry, an MD, a four-year residency, a two-year fellowship, and fifteen years of experience who was directing a laboratory with 60 employees. I made only twice as much a technologist (BS degree) and 1.5 times as much as a nurse (BS degree). Those gaps were considered too big. Apparently, some people believed that all "professionals" should get the same pay regardless of training, experience, difficulty of the job, and level of responsibility.

    This was my first personal encounter with people I call "levelers." They want to yank down the top earners so that no one is above them. (They claim to want to raise up those earning less than them, but I've never seen or heard of a plan to do so.) Unsurprisingly, the levelers have supporters within the Obama administration.

  • Bob Sykes

    The "Treaty of Detroit" excluded blacks, hispanics and Asians, all of whom were relegated to second class citizenship. Is Krugman proposing legal segregation, lack of voting rights, etc.?

  • sethstorm


    The “Treaty of Detroit” excluded blacks, hispanics and Asians, all of whom were relegated to second class citizenship<

    The "Washington Consenus" excluded US citizens of all races, all of whom are relegated to second class status in the workplace.

  • You were in Tower? I missed that along the way.