To make his case that we are living in a second Gilded Age, Kurz must study variations in market power and public policy over the course of American history. He believes that this comparative approach yields a much greater understanding of the recent era than just studying it in isolation from the past.
Data and methods
Historical research in economics is always challenging, since data for earlier eras are less complete, less reliable, and organized differently from modern data. Kurz needs to integrate two different data series, one from 1889 to 1929 for the private, nonfarm, nonresidential economy, and the other from 1925 to 2017 for the private corporate sector. The second series is more directly relevant, since the corporate sector is where most of the market power lies. Fortunately, the two series overlap for the years 1925 to 1929, and the differences between their estimates of key variables in those years provide a guide to adjusting the first series to make it comparable to the second.
Kurz wants to discern the rises and falls in market power, as influenced by technological developments and shifts in public policy. To do that, he needs to calculate the shares of corporate income going to labor, capital, and profit. Recall from the previous post that he defines capital to include only investments in tangible assets. Income beyond the cost of labor and capital is profit, and profit is an indicator of market power. Kurz’s method is to calculate the labor and capital shares from the data, and then use the residual—what’s left over—as an estimate of the profit share.
The most complicated part of the analysis is the calculation of capital share. The interest rate on corporate bonds is only the starting point for calculating the return on capital. Kurz needs to consider the risk premiums—additional returns—investors get for investing in different classes of capital assets, such as real estate and equipment. The rate he calculates for any given year is a composite rate representing a diversified portfolio of capital investments.
To discern trends, Kurz needs to filter out short-term fluctuations that confuse or distort the data. He makes some adjustments to the numbers and does some mathematical curve-smoothing to tease out the long-term trends.
The first Gilded Age
The first data series includes data for the 1890s, the culminating decade of the Gilded Age. In the first year of the series, 1889, the estimated labor share was 71.3%, and the estimated capital share was 27.5%. Since the residual is only 1.2%, that suggests that almost all corporate income above the cost of labor was going to compensate investors in tangible capital assets. By 1901, the situation had changed. Labor share had fallen dramatically to 50.8%. Did the capital share rise accordingly? No. It also fell, from 27.5% to 15.5%. The large residual, 33.7%, is income that neither wages nor capital costs can account for. Kunz considers it the profit due to market power, especially pricing power.
In 1892, J. P. Morgan financed the merger of the Edison General Electric Company and Thomson-Houston Company to create General Electric. GE’s 1896 patent-sharing agreement with Westinghouse “gave the two firms monopoly power over all U.S. electricity generation and transmission equipment… [T]he relative share of profits in GE’s income rose sharply, to the extraordinary level of 42 percent, in 1901.” Control over what Kunz calls a “General Purpose Technology” (GPT) drove market power and profit.
Since the economy was growing, the declining labor share did not necessarily mean an absolute decline in living standards. But it did mean that someone else was getting rich while the workers lagged behind. According to Kurz’s theory, the rising market power of the owners and managers of capital allowed them to keep prices high and maximize revenue without maximizing output. It also slowed economic growth, weakened the demand for labor and capital, retarded the diffusion of innovations throughout the economy, slowed the improvement in living standards, and allowed the wealthy to dominate politics.
Government policy in those years did not stand in the way. “Market power rose rapidly and was further augmented by a wave of mergers and acquisitions, and, equally important, no active policy or regulatory institutions existed to constrain this rising trend.”
The combination of technology-driven market power and passive public policy is what created the first Gilded Age. It is also what would create a second Gilded Age in the late twentieth century. But first came an era of policy reform.
The age of reform and egalitarianism (1901-1984)
Beginning in 1901, the downward trend in labor’s share of corporate income started to reverse. Labor share rose from 50.8 percent in 1901 to 59.9 percent in 1953, before drifting down to 55.2 percent in 1984. Kurz attributes this change to a more progressive policy regime that put limits on market power and profits, but strengthened the position of workers.
[Theodore] Roosevelt and his reformist allies had a vision of a substantially more active regulatory state. They created long-lasting institutions such as the Food and Drug Administration (1906), the Federal Trade Commission (1914), the Federal Reserve (1913), and the Clayton Antitrust Act (1914) that reinforced the Sherman Antitrust Act by restricting mergers, and settled the constitutionality of the federal income tax (1913). Progressive policy also supported the rising power of labor unions, in contrast with previous administrations that intervened to help in breaking strikes. Although innovations in electricity and combustion engines continued to give rise to new firms with market power, the effect of the stricter regulatory regime was stronger. The share of profits declined, and labor’s share rose.
New Deal legislation in the 1930s added more business regulation, formally recognized the right of labor to organize, and raised taxes on corporations and the wealthy. The top bracket of personal income was taxed at 70% or higher from 1936 to 1986. Union membership reached its peak in the mid-1950s with one third of all workers unionized. “A more egalitarian society emerged from the New Deal era, leading to the 1936-1973 Golden Age of the American experiment.” This was marked by high rates of economic growth and broad participation in the benefits. [But not universal participation—the movement to extend civil and economic rights across racial lines did not come until late in this era.]
The new technologies that dominated the twentieth century—electricity and the combustion engine—made workers more productive without requiring high levels of skill or education. Unionized blue-collar workers now earned enough to join the growing middle class.
What Kurz calls “a sort of miracle” is that the labor share of income held up very well even during a period of rising market power, from 1932 to 1954. Kurz attributes this temporary rise to several factors: further technological advantages arising from the application of electricity and combustion engines, the destruction of smaller firms by the Great Depression, military profits and relaxed antitrust regulation during World War II, and a “massive transfer to private hands of technology that was developed in wartime with public funding.” But this time, labor was better protected by egalitarian public policies.
With labor’s share stabilized at a higher level, fluctuations in the profit share had to be balanced by fluctuations in the capital share in the opposite direction. When the profit share went up, the share of income attributable to capital investment went down. When profit share went down, which it did in the periods 1901-1932 and 1954-1984, the capital share went up. But looking at the entire era from 1901 to 1984, the profit share went down and both the labor and capital shares went up. That was the formula for twentieth-century mass prosperity.
The second Gilded Age
In the most recent period Kurz studied—1984 to 2017, the trends in corporate income reversed the egalitarian trends of the previous period. The labor share declined from 55.2 percent to 52.4 percent. The capital share declined from 29.1 percent to 15.7 percent. The residual, which Kurz takes as an indicator of market power and profit, increased from 15.7 percent to 31.9 percent. What is striking is how much the 2017 shares resemble the shares of 1901, at the culmination of the Gilded Age over a century ago.
How did this happen? Basically, for the same reasons it happened in the 1890s. A new technological revolution provided opportunities for corporations to achieve market power; and passive public policies allowed them to consolidate that power. While the earlier revolution had been based mainly on the General Purpose Technologies of electricity and the combustion engine, the new revolution was based on information technology.
Innovations in computer hardware in the 1960s produced a brief spike in market power and monopoly wealth (think IBM), but that did not last. The longer increase in market power began in the 1980s, with innovations in personal computers and software.
[A]ctual long-term recovery of monopoly wealth began in the early 1980s, when the new software innovation phase of IT went into high gear. IBM adopted Microsoft’s disk-operating system (DOS) as the PC operating system in 1981, and the military communication network (ARPANET) adopted in 1983 the protocol Transmission Control Protocol/Internet Protocol (TCP/IP) which expedited development of what we call today the internet.
Companies that owed their market power to the internet emerged after 1990, such as Amazon (1994), Netflix (1997) and Facebook (2004). Some older firms that were able to adapt to the IT age also gained market power. On the other hand, almost three thousand companies disappeared from the list of publicly traded firms between 1998 and 2016, most of them acquired by the larger firms.
Not only did the labor share of income decline, but the IT revolution had the effect of polarizing the labor force, increasing the income gap between workers of different skill levels. Workers with higher levels of education did relatively well, while less educated workers found their labor in less demand. They often had to settle for jobs in the rapidly growing, low-wage service sector. Workers with the skills to work with the smart machines thrived, while workers without those skills were more vulnerable to being replaced by them.
Just when new technologies were giving rise to greater market power, the “Reagan revolution” weakened the public policies that had limited corporate power and supported organized labor.
The [Reagan] administration…eliminated a wide range of business regulations and reinterpreted antitrust policy to allow a sharp rise in mergers and acquisitions, and hence in business concentration. Government-permitted mergers have led to the consolidation of important sectors such as airlines, banking, communication, chemicals, drugs, and high-tech.
The tax cuts of 1981 and 1986 lowered the tax rate on top-bracket income from 70 percent to 28 percent, just in time to allow the wealthiest stockholders to reap the benefits of the rising profits. One consequence was a sharp increase in the role of big money in politics.
Kurz maintains—and more and more economists agree with him—that the economic consequences of these policies were the opposite of what they were claimed to be:
One of the repeated arguments of those who supported the shift to a laissez-faire policy in the 1970s and 1980s was that the new policy would increase private incentives to work, invest, and innovate. They forecasted a substantial boom in investment and a higher growth rate of the economy. None of that materialized, and the implication of the theory presented here is exactly the opposite: such a change in policy would trigger a long period of adjustment marked by a decline in the rate of investment relative to potential trend and a lower growth rate of the economy relative to trend. This reasoning helps explain the decline of the rate of investment and economic growth from 1986 to 2020.
Our appreciation of the benefits of technology should not blind us to the disadvantages of allowing a small number of people to amass power and profit out of all proportion to their actual contribution to the general good.
Kurz also blames a lot of the social and political polarization of the country on these economic trends. Less educated workers who have been left behind by the IT revolution are among the most disillusioned by democratic government and the most vulnerable to manipulation by anti-democratic demagogues. [For those who argue that our social divisions are more racial than economic, I would stress the intersection of the two. Less educated white workers are most likely to compensate for their losses by clinging to their racial, religious or gender privileges.]
Like many writers before him, Kurz emphasizes the importance of a strong middle class to support democracy and seek compromise between the interests of rich and poor. The greater economic inequality, again reminiscent of the Gilded Age, makes it harder to agree on collective goals. Kurz would like to see a new round of economic democratization comparable to the Progressive/New Deal era, followed by an economic boom comparable to the postwar prosperity. I will turn to his specific proposals in the third and final post.
Beneath the Surface 