The Great Compression

8 Things About The Conscience of a Liberal #2
What I Learned from Paul Krugman's The Conscience of a Liberal

(O)rdinary workers and their families had good reason to feel that they were sharing in the nation's prosperity as never before. And on the other side, the rich were a lot less rich than they had been a generation earlier.

The longest period of economic prosperity ever experienced by this country began with "The Great Compression". For the first time in the history of our nation, the differences in income between the rich and everyone else had become compressed. More importantly, the standard of living between the rich and everyone else was leveled. There's no better way to put it than to say this, the American people were better off. How did this happen?

One way was through tax policy. During the New Deal, income taxes on the rich spiked. During the roaring 20s, the tax rate on the top income bracket ranged from 24% to 25%. At the start of the New Deal, the rate was raised to 63%. From 1940 to 1963, the top rate would vary from 81% to 94%. It was as high as 91% as late as 1963. For the record, these are among the most prosperous years this country has ever seen. More importantly, it was a shared prosperity. The income tax was not the only tax to see increases. Dramatic increases in the estate tax made it much harder to perpetuate wealth from one generation to the next. All in all, FDR used taxes a way to bring economic fairness to the nation.

Like the depression, the narrowing of income gaps was a defining event in American history, something that transformed the nature of our society and politics. Yet where the Great Depression lives on in our memory,the Great Compression has been largely forgotten. The achievement of a middle-class society, which once seemed an impossible dream, came to be taken for granted.

Of course, keeping the income of the rich down was one thing, but an increase in the real wages of the average American worker would do wonders for the standard of living as well. Why did the wages of the American blue-collar worker rise? That's easy. It was labor unions. Membership surged in the early years of the New Deal thanks to worker anger as well as the creation of the National Labor Relations Board (NLRB) by FDR. Here's the great thing about unions: not only do the average wages of their membership increase, other workers at non-union companies tend to get increases as well as management tries to keep unions out. The role of unions in the advancement of the American middle class cannot be understated.

So changes in tax policy and the rise of the labor union got us part of the way to our goal, but it would take the largest public works program in American history to finish that journey. That program was, of course, World War II. More accurately, it was our governments response to World War II, specifically the price controls and wage controls implemented. Now, the spending required to wage World War II was, naturally, inflationary. Additionally, there were work shortages that threatened to send wages skyrocketing. The government's wage controls were designed to keep wages down, but loopholes in the law allowed for easier wage increases to be given to those at the lower end of the income scale, effectively closing the gap even further.

In the aftermath of the Great Depression, the government interfered. Tax policy was changed. The government supported the labor movement. Wage controls were used. If there's anything to take away from the Great Compression, it's that direct government intervention can help ... it can work.

(T)he story of the Great Compression is a powerful antidote to fatalism, a demonstration that political reform can create a more equitable distribution of income - and, in the process, create a healthier climate for democracy.