What Caused Labor to Lose Big in the 1970s?

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Matt Yglesias looks back at the labor changes we made in the 1980s and concludes that "several decades into this experiment, we're seeing much more of the 'profits surge' than the 'surging profits lead to an investment boom' dynamic. One explanation for this that's growing in popularity on the right is that the rise of more capital-friendly politics in the mid-1970s coincidentally occurred at the exact same time as a structural slowdown in the rate of technological progress, so while it seems like anti-labor politics has failed to deliver the goods, it's really all just a stroke of bad luck.

"And maybe that's right -- just because an unfalifiable [sic] proposition seems conveniently conducive to the interests of very rich people doesn't mean it's false. But it sure seems false to me.

"Now of course the policy world isn't binary. Just because something has failed doesn't mean the only way to fix things is to simply reverse the thing that failed. Possibly, the right remedy to this is to change labor law. Possibly, the right remedy is to change corporate governance. Possibly, the right remedy is to engineer a public sector investment boom. Maybe some of the sources of these profits need to be attacked directly. Maybe it's all of them. But however you slice it, the striking issue isn't simply the structural growth of profits in a low wage environment, it's that the business-friendly environment isn't bringing us the investment utopia we were promised."

I think that Matt is right that Reaganites overpromised; tax cuts and deregulation didn't deliver awild economic boom. On the other hand, I think he's wrong that it's unfalsifiable. For example, if there was some specific policy reason that productivity growth fell, such as a change in labor law, then we would expect to see that productivity fell in the U.S., but not elsewhere. That's not what we see. Here's what happened in all the big countries for which the OECD has statistics:

Source: OECD

I've punched up the U.S. to bright red so that you can see that we're not a special case; the rate of productivity growth falls for everyone in 1973, not just us. We took a somewhat bigger hit in the late 1970s than most, but it's hard to make that a story about union busting; it seems much more plausible to make it a story about oil: America's sprawling, high-energy economy. So while the "global slowdown in productivity" theory may be convenient, it also seems to be true.

Is there something that happened globally that could account for the rise in inequality, the increasing tendency for income to accrue to the top of the labor distribution? Before you answer, note two things: This increase has been happening at least since the early 1980s; and it has happened everywhere, not just in the U.S. So avoid the temptation to give answers like "tax policy" or "labor law," because while these things have changed all over the world, they have not changed evenly. Some labor markets, like those of the U.S. and Great Britain, liberalized early and deeply; others, like Germany, liberalized late; and some, like Greece, barely liberalized at all.

So what did happen in the 1970s that affected people all over the world? Trade liberalization might be one, but that too was lumpy -- some countries liberalized much later than others.

The only global policy I can think of that ended in the early 1970s was the collapse of the Bretton Woods system, the global monetary system that the allies had put into place after World War II. By the late 1960s the system -- in which the U.S. dollar was pegged to gold, and everything else was pegged to the dollar -- was clearly breaking down. U.S. gold stocks were being run down in an attempt to sustain the increasingly unsustainable peg. In 1971, Richard Nixon ended the dollar's convertibility into gold, and the world moved to a system of floating currencies.

But why would floating currencies cause inequality? Well, as that Palgrave briefing sheet says, "Once currencies were allowed to float, other controls on finance and capital movements became unsustainable." Capital flowed freely wherever it wanted. In the 1980s and 1990s, that gave us a series of financial crises in emerging markets, as the stupid money that had flowed into distant markets abruptly flowed out when it turned out that emerging markets were unpredictable.

Perhaps it also gave us declining wage rates in rich-world countries. You could argue that from the 1940s to the 1970s, capital was in some sense a captive of rich world governments, who restricted its flow and deployment. That depressed the rate of return on capital, transferring it to wages. Starting in the mid-1970s, however, capital had more freedom of movement -- and so in order to entice it to stay put, you needed to offer it a larger share of the pie.

This theory doesn't offer many attractive policy options for folks who would like to reverse the trend. If you think that labor law is the problem, then the obvious answer is to bring back the old labor laws. But we can't bring back Bretton Woods -- not only because no one would sign onto it, but because Bretton Woods was ultimately torn apart by its own internal contradictions. The currency peg was inherently unstable, as economist Robert Triffin pointed out in 1960. His observation, known as "Triffin's dilemma," was that in order to keep the system liquid, the U.S. needed to run persistent current account deficits. Doing so ultimately raised questions about the ability to maintain the gold peg, producing the attacks on the dollar and the runs on U.S. gold stocks that ultimately led to the collapse of the system.

Of course, one could rejoin that our inability to bring back Bretton Woods makes an even stronger argument for bringing back the old labor laws; if labor cannot win concessions in the marketplace, it will need to take them by force.

Yet even if we thought this was a good idea, could a resurgent labor movement really win concessions from mobile capital? You can think of unions in the 1950s as the only truck stop in the middle of an Arizona desert: they had quite a bit of bargaining power, because companies had little choice about doing business with them. Truck stops like that could make quite a bit of money, even serving very bad food. But post-Bretton Woods...well, it's like picking up that truck stop and moving it to the corner of 42nd & 5th Avenue. You can insist on your rights all you want, but it doesn't do you much good if all your customers desert for the guy down the street who will offer faster service at half the price.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net