Streets of Gold

October 16, 2025

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Ran Abramitzky and Leah Boustan. Streets of Gold: America’s Untold Story of Immigrant Success. New York: Public Affairs, 2023.

As we witness the efforts of the Trump administration to carry out their mass deportation policy, this is a good time to review some of the basic facts about immigration. I found this book by economists Ran Abramitzky and Leah Boustan very helpful.

They wrote the book to expose some of the most common myths about immigration. They especially wanted to question the unflattering comparison of today’s immigrants to those of an earlier era. Many people seem to think that immigration was once a “rags-to-riches” story, but that more of today’s immigrants get stuck in poverty and put a strain on public resources. They fear that immigrants are failing to learn English and integrate into American culture, reducing job opportunities and wages for other workers, or even becoming a criminal underclass raising rates of violent crime. While some of that may be true in individual cases, most of the evidence does not support these generalizations.

The great strength of this book is that the authors have solid data on which to base their conclusions. They say that “we were able to compile what is the first set of truly big data about immigration.” They did this by getting permission to tap into Ancestry.com’s digitized database of census records. Linking family records from decade to decade and generation to generation enabled them to study both intragenerational and intergenerational economic mobility. (At least they could compare fathers and sons; women were harder to track because they so often changed their last names.)

The researchers supplemented this database with other sources of information, including Social Security and IRS records, interviews from the Ellis Island Oral History Project, and their own interviews and surveys of today’s immigrant families.

Two waves of immigrants

One of the biggest questions the researchers wanted to answer was whether the immigrant experience has changed very much over the past century. To find out, they compared the two biggest waves of immigration in US history—1880 to 1920 and 1980 to today.

Some differences between the two waves were apparent. The earlier wave featured large numbers of immigrants from Southern and Eastern European countries, such as Italy, Poland and Russia. That was before the restrictive immigration laws of the 1920s both reduced the number of legal immigrants and imposed quotas that favored Northern and Western Europe, the places from which earlier generations of Americans had come. After those restrictions were lifted in 1965, immigrant origins shifted to regions with large and growing populations, especially Latin America and Asia.

During the first of the two waves, legal entry was much easier, especially for unskilled laborers. Once the steamship made the ocean crossing faster and cheaper, poor immigrants arrived in large numbers. Although some returned to their native country voluntarily, less than two percent were barred from entry or deported. During the recent wave, legal entry has been more selective, with preference given to immigrants with skills or links to relatives already here. A special provision for refugees fleeing oppression was added in 1980, although it was slow to be implemented. With the demand for legal entry above the supply of legal slots, stopping illegal immigration has been difficult, especially because of the 1000-mile southern border we share with a relatively poor part of the world.

Another difference is that the initial earnings gap between immigrants and the US-born is larger now than it was in the earlier wave. That’s because the United States is now a very wealthy country and most immigrants come from distinctly poorer ones. As we’ll see though, that gap does not prove to be insurmountable once they get here.

The similarities between the waves are as important as the differences. In both cases, the impact of immigration on the percentage of foreign-born in the population has been about the same. It rose to about 14 percent in both eras. Add in the children of the foreign born, and then their children, and we have truly been a nation of immigrant families.

Also in both eras, the rapid increase in the foreign born provoked an anti-immigrant reaction. My impression is that the hostility was worse during the nativist movement of the 1920s, which inspired the most restrictive immigration laws in our history.

Despite the challenges, the immigrant story in both eras is largely one of success and assimilation. The progress was gradual rather than instantaneous, but “the American Dream is just as real for immigrants from Asia and Latin America now as it was for Immigrants from Italy and Russia one hundred years ago.”

Dispelling the myths

With regard to economic success, the immigrant story is neither one of rags to riches nor persistent poverty. On the average, the income gap between immigrant and non-immigrant families gets cut in half after twenty years.

Even more noteworthy is the success of the second generation. The children of immigrants have the advantage of being exposed to the domestic economy and culture from an earlier age.

[W]e find that the children of immigrants surpass their parents and move up the economic ladder both in the past and today. If this is the American Dream, then immigrants achieve it—big time.

The researchers focused on second-generation children who grew up with family incomes at the 25th percentile, the point that demarcates the lowest quarter of the distribution. These children were more likely to move up to the 50th percentile (the median income) than US-born children who started out at the same low level. The authors suggest a couple of reasons why immigrant children might surpass US-born children in upward mobility. First, when their families immigrated, they chose to move to cities with job opportunities, while equally poor non-immigrant families were often “rooted in place” in locations with depressed economies. Second, the immigrant children’s initial low incomes might be misleading, since their parents experienced language barriers and other adjustment difficulties that kept their abilities from being fully rewarded. Less disadvantaged by those problems, the children moved briskly ahead.

When children of immigrants are themselves undocumented, their job and income prospects are much more limited. But that applies to only 5% of the children of immigrants, since the vast majority are either citizens born in the US or members of families that entered legally (or received amnesty under the 1986 Immigration Reform and Control Act).

Fears that the more recent wave of immigrants are failing to learn English and integrate into US culture have proven to be mostly unfounded. The authors find that ethnic distinctiveness declines rapidly over time, as measured by such indicators as English fluency, residential desegregation, marriage across ethnic boundaries, and the kinds of names parents give their children. “In one generation’s time, we find that it becomes hard to tell apart the children of immigrants from the children of the US born. Both groups are simply American.”

Finally, the connection between immigration and crime has been greatly exaggerated, especially to scare voters into supporting a policy of mass deportation. In general, the researchers find that “immigrants are less likely to be arrested or incarcerated today relative to the US born.” The opposite impression is created by selectively publicizing incidents of immigrant violence, especially gang violence, although the US-born population has its criminal gangs too.

The most thorough study of immigrant crimes rates was based on Texas data. It found that:

…undocumented immigrants were half as likely as the US born to be arrested for violent crimes. For property crimes and drug violations, the gaps between undocumented immigrants and the US born were even larger. (The rates of criminal behavior for legal immigrants were substantially closer to, but still below, the rates for the US born.) Similar patterns have been documented for the country as a whole, albeit with less complete data.

One reason why immigrant crime rates tend to be low is that immigrants in general—and the undocumented in particular—take pains to avoid getting in trouble because of their great fear of deportation.

In my next post, I will tackle the contentious issue of how immigrants impact the US economy and affect the economic prospects of other Americans.

Continued

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Power and Progress (part 2)

August 24, 2025

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In general, over the last millennium, technological advances have raised living standards. But this broad generalization obscures important historical variations. At least two conditions must be met if new technologies are to contribute to widespread prosperity. First, they must sustain labor demand by augmenting and not just replacing human labor. And second, high labor demand must generate high wages. According to Acemoglu and Johnson’s Power and Progress, directing new technologies toward these ends is a social choice, and the distribution of social power affects how that choice is made.

Even when couched in appeals to the common good, new technologies do not benefit everybody automatically. Often, it is those whose vision dominates the trajectory of innovation who benefit most.

An important implication of this argument is that the path to prosperity leads through democratization as well as through technological innovation. The middle part of the book supports their argument with many historical examples.

“Cultivating Misery”

The history of agriculture reveals that a positive relationship between technology and prosperity is mostly a modern urban phenomenon. For much of history, people who have worked the land have received little benefit from their own increased productivity. In Medieval Europe, the problem was not a low demand for labor, but the power of landowners over workers. England after the Norman conquest “was a dark age for English peasants because the Norman feudal system ensured that higher productivity would accrue to the nobility and the religious elite.” Farming methods gradually improved, but a coercive social system enabled the elites to claim the surplus product, while keeping the peasants at a subsistence level.

Beginning in the fourteenth century, this social order was disrupted by the high mortality rates of the Black Death. For a time, the demand for labor exceeded the supply, putting the surviving workers in a stronger bargaining position.

By the eighteenth century, agricultural laborers faced a new threat. The expansion of commercial agriculture led landowners to reorganize their holdings, throwing out peasants who worked the land for their own subsistence and replacing them with fewer workers producing commodities for the growing market. In the name of progress, “It was acceptable to strip the poor and uneducated from their customary rights and common lands because the new arrangements would allow the deployment of modern technology, hence improving efficiency and producing more food.”

Through much of history, therefore, agricultural systems have “cultivated misery.” When masses of farmworkers were in demand, they were usually dominated by more powerful landowners. When technology improved productivity, they were either worked harder so that others could profit, or else thrown off the land.

Acemoglu and Johnson worry that if the latest technologies replace too many workers and empower the few rather than the many, “our future begins to look disconcertingly like our agricultural past.”

Industrialization

The shrinking demand for farm labor would not have been an obstacle to prosperity if good jobs awaited the displaced peasants in the manufacturing sector. But in the early days of manufacturing, the factory system offered an alternative form of misery.

The Industrial Revolution was preceded by what the authors call a “middling sort of revolution.” By the mid-eighteenth century, a rising class of innovators, inventors and entrepreneurs were starting to reshape the economy. Innovations like the steam engine and the spinning frame appeared at this time. Just as important was a social transformation that weakened the power of the landed aristocrats and modestly expanded democracy.

As the rising entrepreneurs reorganized production and applied new technologies, productivity rose rapidly, especially in the textile industry. But the authors’ theory explains why this “progress” did not initially improve living conditions for the workers. The first reason was low labor demand. Because early industrialization emphasized the mechanization of existing tasks, notably spinning and weaving, the factory system created new jobs by destroying old ones.

The second reason was the power imbalance between entrepreneurs building capital and impoverished workers desperate for work. As the rising middle class expanded their wealth and political influence, their vision of progress increasingly dominated public discussion. The “industrial entrepreneurs’ choices of technology, organization, growth strategy, and wage policies enriched themselves while denying their workers the benefits of productivity increases—until the workers themselves had enough political and social power to change things.”

The result was that early factory workers—despite their high productivity—were made to work very long hours under dismal working conditions for very low wages. They were also crowded into urban factory districts plagued by coal-dust pollution, poor sanitation, unclean water, and related diseases.

As the rising middle class gained wealth and political power, their vision of progress dominated public discourse. Obsessed with how industrialization created new wealth—for them—they had little sympathy for those who earned too little to share in the benefits of their own productivity.

Conditions improved in the second half of the nineteenth century. New technologies like railroads and the telegraph created more jobs than they destroyed. Workers began organizing to exert countervailing power against employers. Social critics and reformers scandalized by social conditions began to challenge the dominant vision of progress. Governments took a few steps to improve public health and other urban conditions. With labor demand and labor power rising along with productivity, real wages could increase.

In the United States, conditions were generally better than in Europe because land was more abundant but labor was more scarce. That combination put workers, especially skilled workers, in a position to command a higher wage.

Rising real wages in Western Europe and America did not stop the rich from getting richer even faster, so that economic inequality increased during the Gilded Age. It also increased globally. At a time when the fruits of technological progress were starting to benefit more Europeans and Americans, colonialism impeded that process in many other places. The large flow of manufactured textiles from Britain to colonial India destroyed indigenous textile jobs, retarded industrialization, and confined a greater proportion of Indian labor to rural occupations.

A formula for prosperity

The time and place best characterized by a “productivity bandwagon” was the mid-twentieth century in Western Europe and the United States, especially the three decades after World War II. It had all the elements of an economically successful application of technology: Sustained growth in productivity; high labor demand in expanding occupations, and institutional structures supporting a more egalitarian distribution of power.

In the twentieth century, the proportion of the workforce needed in agriculture dropped sharply, but that was offset by a rising demand for labor in manufacturing and services. This was due to a better balance between labor replacement and labor augmentation. “The reduction in labor requirements driven by automation was offset, sometimes more than one for one, with other aspects of technology that created opportunities for workers.” Large-scale manufacturing needed not only blue-collar workers to run the assembly lines, but engineers to create them, technicians to repair them, and white-collar workers for managerial, clerical and sales jobs.

Operating the machinery of modern manufacturing required some skill, but the skills were not too hard to learn. Union contracts stipulated that employers would train their union employees. Rapid expansion of formal education provided qualifications for higher-level jobs.

Public policy supported broad-based prosperity in several ways: protecting the right of workers to organize and bargain collectively, spending tax dollars on public works and income support, and regulating business to place limits on corporate power.

The results were spectacular. Real wage growth averaged almost 3 percent per year for both more educated and less educated workers. The income distribution became more egalitarian, with labor’s share of national income rising and the share of the richest 1% falling.

Acemoglu and Johnson emphasize how exceptional the link between technology and prosperity was during this period:

In the long sweep of history, the decades that followed the end of World War II are unique. There has never been, as far as anyone knows, another epoch of such rapid and shared prosperity.

Even as they celebrate the accomplishments of the twentieth century, the authors are careful to acknowledge those who were left behind. Black Americans and immigrants were excluded from many of these gains. As individual earners, women were too, although they benefited indirectly as wives and daughters of upwardly-mobile men.

Despite these failures, we can understand why so many of the people who lived in that era—including many economists—came to accept the “productivity bandwagon” as a normal and natural phenomenon. That may have left them unprepared to appreciate the challenges of our new technological era. That is the issue for the last four chapters of the book.

Continued

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Power and Progress

August 21, 2025

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Daron Acemoglu and Simon Johnson. Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity. New York: Hachette Book Group, 2024.

Daron Acemoglu and Simon Johnson won the 2024 Nobel Prize in Economics for their research on how political and economic institutions shape national prosperity. In this book, they tackle the relationship between technological innovation and prosperity.

No one doubts that new technologies have the potential to boost productivity and raise living standards. How and when they actually accomplish this is a more difficult question.

In the introduction and first three chapters, the authors lay out their general theory of technology and progress, considering the role of variations in labor demand, wages, and social power. The next four chapters discuss how these variations have played out in various historical situations, ranging from the failure of innovation to benefit farmworkers and early manufacturing workers before the late nineteenth century, to the more widespread prosperity of the mid-twentieth century. Armed with insights from economic theory and history, the authors then address the more recent revolution in digital technology. Readers who follow the argument all the way through should come away with a better understanding of our current technological age and its discontents. I know I did.

The productivity bandwagon

The conventional wisdom in economics, as well as a lot of public discussion, is that technological advances raise productivity, and higher productivity raises living standards. The authors cite Gregory Mankiw’s popular undergraduate textbook, which says that “almost all variation in living standards is attributable to differences in countries’ productivity.”

But the productivity gains from new technologies can only raise living standards if they improve real wages. What about labor-saving technologies that lower the demand for labor, causing unemployment and lower wages? Mankiw acknowledges the problem, but minimizes it by claiming that “most technological progress is instead labor-augmenting.” Most workers find some way to work with new technologies, and their increased productivity enables them to command a higher wage.

Acemoglu and Johnson call this optimistic view the “productivity bandwagon.” They argue to the contrary:

There is nothing in the past thousand years of history to suggest the presence of an automatic mechanism that ensures gains for ordinary working people when technology improves… New techniques can generate shared prosperity or relentless inequality, depending on how they are used and where new innovative effort is directed.

Rather than accept a broad generalization about technology and prosperity, the authors want to study historical variations and identify the key variables involved. The stories that people tell themselves about technology—including the ones economists tell—can both reflect and affect the historical variations. Writing in the Great Depression, John Maynard Keynes coined the term “technological unemployment.” He could imagine “the means of economising the use of labour outrunning the pace at which we can find new uses for labor.” More recently, robotics and artificial intelligence are raising that possibility again, but the productivity bandwagon remains a popular narrative.  Economic elites who profit from the application of new technologies are especially fond of it.

Variations in labor demand

Acemoglu and Johnson maintain that technological advances may or may not increase the demand for labor, depending on whether they are labor-augmenting or just labor-saving.

A classic example of technology that augmented labor, increased labor demand, and raised wages is the electrified assembly line introduced by Henry Ford. It not only raised the productivity of the existing autoworkers; it also enabled auto manufacturers to employ additional workers productively. (Economists call that variable the “marginal productivity of labor.”) By producing more cars at lower cost, car companies created a mass market for what had been a luxury item. In addition, they created additional jobs in related industries, such as auto repair, highway construction and tourism.

The effects of today’s robotics on automobile manufacturing may be very different. Carmakers can make just as many cars with less human labor, so labor productivity goes up. But demand for additional labor may go down, if factories are already turning out as many cars as their market can absorb. The marginal productivity of labor then falls, and the connection between technology and prosperity is weakened.

That is not to say that automation is always bad news for workers. That depends on the balance of labor-saving and labor-augmentation:

For most of the twentieth century, new technologies sometimes replaced people with machines in existing tasks but also boosted worker effectiveness in some other tasks while also creating many new tasks. This combination led to higher wages, increased employment, and shared prosperity.

The problem then is not just automation but excessive automation, especially if it is not really very productive in the fullest sense of the word. In economics “total factor productivity” refers to the relationship between economic output and all inputs, including capital as well as labor. Replacing workers with machines has costs as well as benefits, since machines cost money too, and displaced humans might have contributed something that machines cannot. The authors use the term “so-so automation” to refer to replacement of workers without much productivity gain. In that case, the classic gains of the earlier automobile boom—lower costs, expanded markets, rising labor demand, and widespread prosperity—do not occur.

Variations in wages

Even if new technologies are labor-enhancing, higher wages do not necessarily follow. They have not followed in societies where workers have been coerced to work without pay, or forbidden to leave their employer in search of better pay. The cotton gin enhanced the productivity of cotton workers in the Old South and expanded the areas where cotton could be profitably cultivated. But “the greater demand for labor, under conditions of coercion, translated not into higher wages but into harsher treatment, so that the last ounce of effort could be squeezed out of the slaves.”

In modern, free-market labor systems, wages are freer to rise along with labor demand. However, “wages are often negotiated rather than being simply determined by impersonal market forces.” A dominant employer may set wages for a multitude of workers, while the workers are too disorganized to bargain from strength. It was only in 1871 in Britain and 1935 in the United States that workers gained the legal right to organize and bargain collectively. Opponents of organized labor have continued to find ways of discouraging labor unions to this day. The share of national income going to labor rather than capital was highest when unions were strongest, in the 1950s.

Variations in power

Acemoglu and Johnson argue that the effects of technology depend on “economic, social, and political choices,” and that “choice in this context is fundamentally about power.”

What societies do with new technologies depends on whose vision of the future prevails. The most powerful segments of society have more say than others, although they can be contested by countervailing forces, especially in democratic societies where masses of workers vote. Although plenty of evidence points to the self-serving behavior of elites, they must at least appear to be promoting the common good for their views to be persuasive.

The technological choices a society makes can serve either to reinforce the power of elites or empower larger numbers of workers. This is especially true of general technologies with many applications. In the twentieth century, the benefits of electricity helped power a more egalitarian, broadly middle-class society. We cannot yet say the same about the digital technologies of the present century. The authors apply their theory, buttressed by historical evidence, to explain why.

Recall the subtitle of the book: “Our Thousand-Year Struggle Over Technology and Prosperity.” Making technology work for all of us has always been a struggle, and one that is related to the struggle for true democracy. Looking at it that way is more realistic and enlightening than seeing only a “productivity bandwagon” rolling smoothly toward mass prosperity.

Continued

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The Fourth Turning Is Here

January 24, 2024

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Neil Howe. The Fourth Turning Is Here: What the Seasons of History Tell Us about How and When This Crisis Will End. New York: Simon & Schuster, 2023.

Ever since I read Generations (1991) by Neil Howe and William Strauss three decades ago, I have been fascinated by their cyclical theory of history. Strauss died in 2007, but Howe is still going strong. His latest book, The Fourth Turning Is Here, further refines the theory and applies it to more recent events.

I think this interpretation of history provides a lot of insight into where America is now and where it is likely to go. The future cannot be known with any precision, but the cyclical patterns identified by Howe and Strauss give us some useful clues. At least they alert us to possible futures that we may want to embrace or avoid.

In this post, I’ll lay out the theory, and then in later posts apply it to the current social situation, which Howe regards as a once-in-a-lifetime social crisis. As we will see, the Millennial Generation will have a lot to say about how the crisis is resolved, although all living generations have some role to play.

Personal and historical cycles

This theory asserts a relationship between phases of the human lifecycle and phases of historical cycles that also last about the length of a lifespan, about 80 to 100 years. Howe refers to these historical cycles with the Latin word “saeculum,” which the Romans applied both to long lifetimes and long periods of history. In Howe’s interpretation, we are in the final phase of the “Millennial Saeculum” that began at the end of World War II. The previous “Great Power Saeculum” extended from the end of the Civil War to 1945.

Ancient writers like Ibn Khaldun and modern historians like Arnold Toynbee both described repetitive patterns over such long periods. Toynbee “found the span of time between the start of one ‘general war’ and the start of the next to have averaged ninety-five years with a ‘surprising degree of coincidence’ across the millennia.”

But why should such cycles exist at all, especially in modern societies more preoccupied with linear progress? Why isn’t modern history just a story of continuous progress in technology, productivity, material prosperity, and so forth? The general answer is that change is rarely that continuous. “Our collective social life, as with so many rhythmic systems in nature, requires seasons of sudden change and radical uncertainty in order for us to thrive over time.” Periods of relative social stability are interrupted by social crises that require rapid institutional innovation and reform. After such a crisis, people try to conserve the new order until pressures for change build up again. That means that each generation is not just progressively different from the one before—better educated and more productive, for example—but each is situated differently in relation to major social events.

[I]magine that the society is suddenly hit by a Great Event (what sociologist Karl Mannheim called a “crystallizing moment”), some emergency, perhaps a war, so consequential that it transforms all of society’s members yet transforms them differently according to their phase-of-life responses.

For children, this response might be an awestruck respect for adults (and the desire to stay out of their way); for young adults, taking up arms and risking death to meet the enemy; for midlifers, organizing the troops and mobilizing society for maximum effort; for elders, setting strategy and clarifying the larger purpose.

Each generation is forever shaped by whatever is going on in society when they are growing up. Each generation also shapes later events by bringing their early experiences with them into later phases of the lifecycle. The interaction between historical change and personal change creates repetitive cycles, as explained below.

The four turnings

Each saeculum includes four “turnings,” which are analogous to the seasons of spring, summer, fall and winter. Each has a “characteristic social mood…reflecting a new shift in how people feel about themselves and behave toward each other.” Each turning lasts for about a quarter of the human life span. Howe divides the life span into the phases of youth, rising adulthood, midlife and elderhood. With each turning, each generation advances to the next phase of life. Each generation is shaped—especially as children—by the turnings it experiences, but each has its opportunity to shape events and moods as it ages. The interplay of turnings and generations creates four recurring types of generations, each with its own distinctive role in each of the four turnings. I’ll describe the turnings first, and then the generations.

The First Turning, analogous to spring, is a High. Howe describes it as “an upbeat era of strengthening institutions and weakening individualism, when a new civil order implants and an old values regime decays.” This comes after the previous fourth turning, when society had to confront and surmount a serious social crisis. The most recent example of a High is the postwar period that followed the crisis period of the Great Depression and World War II. The High of the previous saeculum was the “Gilded Age” after the Civil War.

The Second Turning, analogous to summer, is an Awakening. This is “a passionate era of spiritual upheaval, when the civic order comes under attack from a new values regime.” The most recent example is the “Consciousness Revolution” of the 1960s and 70s—Howe dates it from 1964 to 1984. The Awakening of the previous saeculum was the one that historians call the “Third Great Awakening” (1886-1908), associated with both religious fundamentalism and the the more progressive Social Gospel movement. These spiritual or cultural revolutions occur regularly, but they catch most people by surprise. Why disturb the relative peace and prosperity of a High? A key reason is the appearance of a new generation, which has no memory of the previous crisis, no mandate to build more order, and greater freedom to explore an inner world of meaning, self expression and higher purpose.

The Third Turning, analogous to fall, is an Unraveling. This is “a downcast era of strengthening individualism and weakening institutions, when the old civil order decays and the new values regime implants.” The Awakening era has generated enough new ideas and ideals to threaten existing institutions, without yet producing a consensus on institutional reform. The most recent example is the “Culture Wars” period (1984-2008). The Unraveling of the previous saeculum was the “World War I and Prohibition” era, when “opinions polarized around no-compromise cultural issues like alcohol, drugs, sex, immigration, and family life.”

The Fourth Turning, analogous to winter, is a Crisis, “a decisive era of secular upheaval, when the values regime propels the replacement of the old civil order with a new one.” Obvious examples include the American Revolution, the Civil War, and the Depression/World War II era (1929-1946). The last of those gave us bigger government, with its permanent military establishment and social welfare policies. Now The Fourth Turning Is Here. Howe dates the most recent Crisis from the Great Recession of 2008, and he expects it to end sometime in the 2030s. The economy has recovered, for now, but we still face extreme inequality, debt-fueled spending, shrinking world trade, political gridlock, climate change, and rising threats to democracy at home and abroad. But like previous long cycles, it may just be the winter before the spring. “If the current Fourth Turning ends well, America will be able to enjoy its next golden age, or at least an era that will feel like a golden age to those who build it.”

The four generational archetypes

In this theory of cycles, both generations and turnings are approximately the same length as a quarter of the life cycle. The exact dating of generations and turnings depends on finding a good fit between the two. “The leading edge of every generation…emerges from infancy and becomes aware of the world just as society is entering one of these eras.” Then it enters “rising adulthood” just before the following era. The Boomers started being born just before the end of World War II and entered adulthood just in time to help create the “Consciousness Revolution” of 1964-1984. Howe gets the best fit by dating their births from 1943, rather than using the more traditional 1946, the year when birth rates spiked.

The Four Turnings shape the character of four generational archetypes, which in turn shape subsequent turnings. The Hero type is born during an Unraveling, and then enters adulthood during a Crisis. The Hero generation we know best is the G.I. Generation (born 1901-1924), which has become known as the “Greatest Generation.” “We remember Heroes best for their collective coming-of-age triumphs…and for their worldly achievements as elders.” Being born in an Unraveling has the advantage that parents often go out of their way to protect their children from the cultural storms that are raging, which encourages the new generation to be cooperative and respectful. Once the Unraveling and Crisis have past, Heroes preside over the reformed institutional order they have helped build. The G.I. Generation presided literally, providing the string of seven U.S. presidents that held office from 1961-1992. Now Howe classifies the Millennial Generation (born 1982 to 2005—the latter date is a little uncertain) as a new Hero type, although it remains to be seen if they will live up to their advance billing.

The Artist type is born during a Crisis, and then enters adulthood during the following High. The Artist generation we know best is the Silent Generation (born 1925-1942). “We remember Artists best for their quiet years of rising adulthood…and their midlife years of flexible, consensus-building leadership.” Protected to the point of suffocation during the Crisis, they grow up cautiously conforming to the expectations of the institution-building older generation. In midlife the Silent have been sandwiched between more powerful G.I.s and more passionate Boomers, making them somewhat indecisive and conciliatory. Howe expects the children being born into the current Crisis—he calls them Homelanders—to be similar. Skipped over for the presidency for many years, the Silent finally got their one president, Joe Biden (born 1942).

The Prophet type is born during a High, and then enters adulthood during an Awakening. The Prophet generation we know all too well is the Boom Generation (born 1943-1960). “We remember Prophets best for their coming-of-age passion…and their principled stewardship as elders.” Prophets experience easygoing, indulgent parenting and develop high standards of personal fulfillment. They are very critical of flaws in social institutions, such as poverty, racism, sexism and environmental degradation. They tend to become the midlife moralists and culture warriors of the Unraveling era, but they can also provide inspiration for the next Hero generation. According to Howe’s dating, Boomers have produced three presidents—Bill Clinton, George W. Bush, and Donald Trump.

The Nomad type is born during an Awakening, and then enters adulthood during an Unraveling.  That includes Generation X (born 1961-1981). “We remember Nomads best for their rising-adult years of hell-raising.” Why hell-raising? Because the cultural upheaval of an Awakening is probably the worst time to be parented. During the Consciousness Revolution, parents were distracted by their new opportunities for self-fulfillment, and the sudden revolution in sexual and gender norms led to a surge in divorce. Generation X tended to become rootless and rather alienated from social institutions, contributing to the Unraveling that began in the 1980s. In a Crisis, however, they may become pragmatic leaders doing whatever needs to be done to survive, such as leading troops in battle. Barack Obama (born 1961) is Generation X by Howe’s dating, although a Boomer by more conventional dating.

Generational configurations and endowments

Each of the four turnings has its own distinctive generational configuration. During an Awakening like the Consciousness Revolution, Heroes are entering elderhood, Artists are entering midlife, Prophets are entering adulthood, and Nomads are being born. This is a formula for generational conflict, as elders who are committed to the existing order confront young Prophets who are raising new moral issues and demanding more personal freedom. This was the situation when Hero presidents Johnson and Nixon ordered up the Vietnam War and young Prophets responded with moral indignation. During a Crisis, the generational types are reversed, with Prophets entering elderhood, Nomads entering midlife, Heroes entering adulthood, and Artists being born. When the elder Prophet Franklin Roosevelt told the country what it needed to do, young Heroes signed up for service, whether in the WPA, Civilian Conservation Corps, or military service.

Finally, each generation has its own endowment of qualities that it brings to society. For Heroes, they lie in the area of “community, affluence, and technology”; for Artists, “pluralism, expertise, and due process”; for Prophets, “vision, values, and religion”; and for Nomads, “liberty, survival, and honor.” As each older generation dies off, a new generation growing up under similar circumstances can compensate by providing a similar endowment. In our time, the loss of the G.I Generation has created a vacuum in institutional organization and leadership that the Millennial Generation should be able to fill. As the current Crisis unfolds, the result may be a sudden shift away from individualism and culture wars and toward teamwork and social cooperation. Howe says that “every generation usually turns out to be just what society needs when it first appears and makes its mark.” And since the turnings occur within a long cycle that is about the length of a lifetime, each turning is a once-in-a-lifetime experience—and opportunity—for every living generation.

Continued

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Ages of American Capitalism (part 5)

July 13, 2021

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Continuing with the last of Jonathan Levy’s four ages, the “Age of Chaos,” I turn now to the present century and the period including the Great Recession of 2007-2009, the worst economic crisis since the Great Depression. Someday, Americans may look back and see it as the start of a new era in economy and government. So far, however, Levy observes mostly continuity since 2009, and not the new “democratic politics of capital” he would like to see. More on that later.

The “Great Moderation”

In 2004, Ben Bernanke, a governor of the Federal Reserve who would later become its Chair, used this term to describe the economic stability he believed had been achieved. (If this sounds familiar, I recently described Binyamin Appelbaum’s take on the “Great Moderation” in my third post about The Economists’ Hour.) At the time Bernanke was speaking, there had been only 16 months of recession in the previous 21 years. He credited this achievement especially to sound monetary policy, tight enough to control inflation but flexible enough to alleviate recessions by lowering interest rates as needed. Bernanke’s views expressed the capitalist confidence of the time—not only in the stability of the currency, but in the continued growth of economic demand and corporate profits.

Profits were growing rapidly in the 2000s; the bad news was that few of the economic benefits were reaching the average worker. Labor’s share of the national income was plummeting. Levy attributes that to another “credit-fueled and asset-priced” expansion, “which distributed, logically enough, more money to the property owners of assets, rather than to working people.”

Levy then provides a global perspective on this uneven expansion. Much of the world was experiencing an economic boom, but with some noteworthy imbalances. Manufacturing was booming in developing countries with historically low wages, led by China. Other developing economies prospered by meeting the increasing global demand for commodities like oil or iron. Countries of the new European monetary union were expanding their global financial services. The United States contributed a boom in housing and consumption heavily fueled by debt.

The relationship between the U.S. and China was pivotal. China’s communist leaders chose to save and invest much of the revenue from manufacturing exports. While holding down wages and consumption at home, they invested heavily in the United States, in effect financing the soaring U.S. trade deficit. (The federal budget also went from surplus to deficit as the George W. Bush administration cut taxes but increased military spending after 9/11)

The Federal Reserve had lowered interest rates as the economy slowed in 2000-2001. Now the combination of lower-cost loans in the U.S. and capital reinvested by the Chinese produced a “liquidity glut.” That fueled a speculative bubble in U.S. assets, especially housing. The moderation described by Bernanke gave way to a period of speculation and volatility, leading in a few years to financial breakdown.

Sources of profit

Levy does not claim that the American economy of the new millennium was based on speculation alone. Real businesses produced real goods and services and earned real revenue. Internet companies—so many of which had failed in the dot-com bust of 2000—were finding ways to become profitable. One way was to collect massive amounts of user data and sell it to marketers, as Google and Facebook did. Another was to gain a huge advantage over the competition by developing an especially powerful marketing platform, as Amazon did. Levy notes that such business concentrations challenge the thinking of the Law and Economics movement, which had weakened antitrust enforcement on “the assumption that short-term, rational profit maximization among firms would always increase competition to the benefit of all consumers.” One reason why labor’s share of national income declined was that big companies in highly consolidated industries had more power to set wages.

The benefits of the new economy were distributed unevenly, not only because of the growing power imbalance between business and labor, but because of the increasing premium placed on education and skills. The wage gap between college-educated and non-college-educated workers widened. Geographical disparities were also evident, as centers of technological innovation like Silicon Valley flourished, while old manufacturing cities and many rural areas declined. Unemployment remained stubbornly high in what was called a “jobless recovery,” since high-tech industries didn’t employ enough people to compensate for the decline in manufacturing employment. What job growth did occur was more in low-wage services.

A serious underlying problem was that the growth in profits was outrunning the growth in investment and productivity. Levy says that “productivity growth in general disappointed because few potentially productivity-enhancing innovations appeared.” Economic rewards flowed to the owners of intellectual capital (“Big Data”) and human capital (education), but not to enough workers. The investments that might have enhanced the productivity of ordinary workers were not, for the most part, forthcoming. But consumption could still grow if those with stagnant wages could compensate by assuming more debt. That’s where the liquidity glut came in, making it easier to extend debt to people at many income levels. That’s how the expansion of the 2000s turned into the great housing boom of 2003-2006.

U.S. housing prices shot up. Through a “wealth effect,” capital gains on leveraged property ownership could translate into new incomes for American homeowners. The housing stock thus became a new personal income flow. The age’s capitalism of asset price appreciation had found a new asset class to concentrate on, as many ordinary homeowners were given the chance to participate in the game of credit-fueled asset price appreciation. As in credit cycles before, it only worked so long as confidence was maintained, and prices kept going up. That was what the Great Moderation had come to depend on.

In booming cities, residential construction and home prices surged because of increased demand and short supply. But they could flourish in more depressed areas too because of riskier subprime mortgage loans (often with initially low but potentially very high rates). President Bush boasted about the “ownership society,” where ownership of a wealth-producing asset was open to all. The financial services industry constructed a $4 trillion pyramid of mortgage-backed securities on shaky ground. The securities became farther and farther removed from the real financial state of the borrowers and the affordability of the loans. Big banks created various classes of mortgage-backed securities, combined them in complicated ways until rating agencies underestimated their true risk, and even had them backed by insurance companies that also misjudged them.

Levy regards the economic expansion of the 2000s as a “wasted opportunity to make broad-based investments in economic life.” Too many dollars flowed into speculative real estate investments, based on the assumption that home prices would continue rising and workers with stagnant wages could make the payments on their subprime, adjustable mortgages. Meanwhile, “the alarm kept sounding that man-made climate change required long-term fixed investments in a new energy system to capture and reduce carbon emissions.” And climate change was not the only pressing national need being neglected.

The Great Recession

I have discussed the 2008 financial crisis and the associated recession many times, most recently in my summary of The Economists’ Hour, part 3. Levy’s interpretation is based on his understanding of the dynamics of capitalism, including the long-term, linear trend of technological advance and the shorter-term cycles of confidence and credit. The crash of 2008 marked the end of a particularly speculative credit cycle, when a liquidity glut suddenly gave way to a liquidity shortage.

The expansion of the 2000s came to depend heavily on the housing boom, which depended in turn on the extension of credit to home buyers whose low incomes limited their ability to repay the kinds of subprime, adjustable-rate mortgages they were getting. The risks were disguised by complex and overrated securities based on those mortgages. As long as buyers kept buying and confidence in rising home values remained high, the boom could continue. When housing prices peaked in 2006 and loan defaults increased, the bubble burst. Mortgage-backed securities suddenly lost value, and investment banks whose balance sheets were loaded with them could no longer raise cash either by selling them or borrowing against them. The collapse of Lehman Brothers in September 2008 triggered a massive contraction of credit.

Nervous, precautionary hoarding among the global owners of capital broke out on a massive scale. Capitalism regressed back to where it was during the Great Depression of the 1930s—mired in a liquidity trap. Across the board, spending of all kinds, whether for investment or for consumption, dropped off. Employment collapsed.

The “ownership society” celebrated by President Bush, in which Americans would prosper together by owning rapidly appreciating assets, had failed. “Due to collapsed housing prices, between 2007 and 2010 median wealth declined 44 percent—back, adjusted for inflation, to where it had been in 1969.” (That large a drop may sound hard to believe, but a family with a $300,000 home and a $250,000 mortgage has only $50,000 in equity, which drops by 44% if the house loses just $22,000 in market value. Many families have little net worth outside of their home.)

What was different in this financial panic was that the federal government quickly intervened to restore liquidity. The standard procedure of cutting interest rates to ease borrowing and expand the money supply was not enough. In addition, the Federal Reserve arranged and subsidized the buyout of investment bank Bear Stearns by JP Morgan. It made a large loan to AIG, the largest insurer of mortgage-backed securities. The Troubled Asset Relief Program (TARP) authorized the Treasury to buy “toxic assets” that companies could not otherwise sell. (Actually, Treasury injected the cash mainly by purchasing non-voting stock in the companies.) In 2009, the new Obama administration got Congress to pass the American Recovery and Reinvestment Act, which stimulated the economy with tax cuts, aid to states, infrastructure projects and government research programs. In 2010. the Federal Reserve adopted its policy of “quantitative easing,” buying up long-term Treasury and mortgage bonds in order to bring down long-term interest rates. (The higher the demand of lenders for bonds, the easier it is for borrowers to borrow at low rates.)

Although these measures alleviated the immediate crisis, economic recovery was slow. Little was done to prevent ten million homeowners from losing their homes to foreclosure. Nevertheless, a new conservative movement, the Tea Party, formed around the complaint that the Obama administration was doing too much to help “freeloaders” and not enough for “hardworking Americans.” Rather than rallying around Obama as earlier generations of Americans had rallied around Roosevelt, a substantial segment of the electorate still wanted less government, not more.

The limits of reform

On the other hand, Barack Obama was no Franklin Roosevelt either. He filled his administration with leaders associated with the moderate Clinton administration—economic thinkers who had trouble thinking beyond the restoration of financial stability. The Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) tightened regulation on the big banks and securities ratings agencies. But unlike Roosevelt, Obama didn’t have the benefit of many years of more sweeping proposals—in FDR’s case from the Populist and Progressive movements—and a public that was willing to try them. Even Obama’s rather moderate proposal for subsidized health insurance stirred up ferocious opposition.

Levy regards the Obama years as another lost opportunity. Because government could borrow money at near-zero interest rates, it was a great time to consider bigger public initiatives:

[M]any productive opportunities for spending cried out: to repair public infrastructure on dilapidated roads and bridges, to lay the foundations of a “green” energy grid, to invest in productivity-enhancing technology, or to support early childhood education to reverse the drastic effects of education gaps in the future labor market, to name some obvious candidates.

After Levy wrote those words, Joe Biden proposed such an ambitious agenda. But what Levy observed in the aftermath of the Great Recession was a “Great Repetition,” another expansion led more by asset speculation than by productive investment. This time it was an expansion of corporate debt that led the way.

Levy observes that each transition from one age of capitalism to another has required some form of state action. The victory of the Republican Party in 1860 and the Civil War ushered in the Age of Capital, as the nation transitioned from an agrarian economy based on land and slaves to a manufacturing economy based on steam-driven machinery. Then in 1932, the New Deal ushered in the Age of Control, as government tried to guide the economy with regulation, income supports, and fiscal or monetary policies to counter extremes of the business cycle. The “Reagan Revolution” of 1980 reacted against the reliance on government in the Age of Control and initiated the Age of Chaos.

A new age of capitalism—which Levy does not name and does not yet exist—would require more than an income politics focusing on the distribution of the benefits from capitalism. It requires a “democratic politics of capital,” giving citizens a voice in directing capitalist investments toward socially useful ends. Traditionally, government has directed investment primarily to wage war and maintain a military-industrial complex. Otherwise it has left major investment decisions to the private sphere and the owners of capital, who waste too much capital on short-term speculation. Now other urgent national needs may call for an expanded conception of public investment. Levy would probably like Biden’s concept of “human infrastructure.”

Readers who are not put off by the length of this book will find it historically informative and intellectually challenging. I highly recommend it.

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