The Servant Economy

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Jeff Faux. The Servant Economy: Where America’s Elite Is Sending the Middle Class (Wiley, 2012).

This book is a rather grim assessment of recent economic trends. Faux is an economist and founder of the Economic Policy Institute. He believes that our economic problems go much deeper than the recent recession. We’ve been on the wrong track for about the last 30 years, as evidenced by stagnating real incomes, heavy reliance on debt, and increasing inequality. The economy has been losing good middle-class jobs, and replacing too many of them with low-wage service jobs. These developments were avoidable, and they may still be corrected, but we have come so far down the wrong road that finding a better path won’t be easy.

Faux is no fan of the “rising-tide” or “up-by-the-bootstrap” optimism that often pervades economic discussions. He agrees with Barbara Ehrenreich (Bright-Sided: How Positive Thinking Is Undermining America) that compulsory individual cheerfulness can discourage us from dealing with our social problems. He reports a recent poll showing that the number of Americans expecting to be well off in five years exceeds the number who are actually well off by a factor of three. Upward mobility through individual effort is our standard solution to any economic problem, despite studies showing that it is now less likely in the United States than in other advanced democracies (It’s most likely in Norway, Finland and Denmark). Nor does Faux place his faith in market mechanisms alone to generate favorable outcomes. He believes that we got to where we are through economic mismanagement, and going somewhere else will require some serious changes in policy.

In Chapter 2, Faux provides some historical background on the U.S. economy, calling attention to what made it so strong in the mid-20th century before the condition of the middle class started deteriorating. The country had started out with a number of advantages: a large, sparsely populated continent protected by two oceans from other powerful countries; some of the world’s most productive land; and the prospect of upward mobility through westward expansion. But after the frontier became largely closed late in the 19th century, the country experienced a “struggle for a new social contract between labor and capital that fit the urban experience.” Jefferson’s vision of a land of independent farmers was now obsolete. In the booming industrial cities, large-scale immigration, corporate concentration of power, and anti-union policies kept wages from rising as fast as worker productivity. Despite extreme inequality, standards of living did rise for most people as American manufacturing expanded, aided by high tariffs on imports and an aggressive foreign policy to gain access to foreign markets.

By the 1920s, the need for mass consumption to support mass-production manufacturing was clear. Advertising and buying on credit expanded in order to stimulate consumption. The experience of the Great Depression encouraged the Keynesian idea that high wages are actually good for business in a mass-consumption economy, and that government spending can stimulate the economy in times of low aggregate demand. Government began protecting the collective bargaining rights of workers and shoring up incomes with measures such as Social Security. It also practiced “military Keynesianism,” concentrating much of its spending on national defense, broadly defined to include initiatives like interstate highway construction, funding for science education, and space exploration. Innovations from jet engines to transistors and computers emerged from the collaboration between big business and big government. Foreign policy continued to promote business interests, as when the U.S. supported undemocratic regimes that provided easy access to their country’s markets and raw materials, most notably cheap Middle-Eastern oil.

In addition to Keynesian economics and permanently high levels of military spending, a third factor supported the U.S. economy during the postwar boom. That was the strong dollar, the foundation of the new international monetary system accepted by 44 nations at the 1944 Bretton Woods conference. The U.S. would redeem dollars held by foreign central banks at the fixed price of $35 per ounce of gold. “Dollars were now as good as gold, and the world had a source of credit to grow on.” In theory–and for a long time in fact–the dollar would hold its value even as the supply of dollars expanded, making it easier for Americans to buy assets in other countries cheaply.

These are the factors that Faux associates with the rapid expansion of the middle class after World War II. Between 1947 and 1973, real median household income more than doubled, rising an average of 3% per year. Workers with good manufacturing jobs joined the middle class, and the distribution of wealth and income became at least a little more egalitarian.

In my next post, I’ll discuss Faux’s account of what has gone wrong since the 1970s.

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