Bottom Line: Liberals love the 1950s and 1960s when income inequality was far lower than it is today. But the economy of that era was dominated by large, complacent, bureaucratic corporations, employing few women, immigrants or blacks. Dynamic entrepreneurial activity was limited, in part because taxes were so high. It worked well for a while but could not handle the foreign competition that emerged in the 1970s. So the notion that raising taxes on affluent job creators will take us back to the good old days of the 1950s is a fantasy, like Red River Sam (read on).
Full Story
On August 9 we introduced the Marx Brothers (Paul, Joe and Rob). All three of these illustrious liberal economists bemoan the rise in inequality since 1980. To them the “good old days” were the 1950s and 1960s when America was a prosperous middle class society — when a factory worker could afford a new car and a suburban house; the incomes of all social classes were rising nicely; and the rich were kept in their place with punitive income taxes. The Marx Brothers would like to take us back to that simpler, more virtuous time, variously lauded as the “great compression,” “great prosperity,” and “good boom.”
But if we go beyond superficial inspection of income inequality data and take a close look at the corporate economy of the fifties and sixes, it becomes clear why it failed in the 1970s and had to be reformed in the 1980s. The old order was not sustainable and cannot be regained today by raising taxes.
Compressed
In the 1930s and 1940s American society was compressed by potent economic and political forces. With Wall Street blamed for the Great Depression, taxes on the rich were raised sharply in the 1940s to pay for World War II and kept high in the 1950s to curb capitalist excess. Wages were raised dramatically in the 1940s not only by acute labor shortages but also by directives of the FDR Administration to companies with government contracts. The Wagner Act (1935) and other legislation consolidated the power of labor unions. But Big Business fared well nonetheless, thriving on fat cost-plus contracts to manufacture the sinews of war. The Fortune 100 entered the 1950s with a vastly larger asset base than two decades earlier. With Japan and Europe shattered by war, foreign competition was negligible and companies expanded overseas, mainly in Europe.
Capitalism without Capitalists . . .
To Americans in the 1950s, “millionaires” were mainly historical curiosities they read about in books. Once upon a time America was an empty continent filling up with immigrants; shrewd capitalists used guile and graft to grab big chunks of the fast-growing economy. Sociologist C. Wright Mills highlighted “The opportunities to appropriate great fortunes out of the industrialization of America,” via “legal illegalities and the plainer illegalities.” Mills reminded readers “we must also bear in mind that the private industrial development of the United States has been much underwritten by outright gifts out of the people’s domain.”
This flawed historical narrative shaped Americans’ understanding of what was possible and proper in a private economy. In the first place, the pecuniary triumphs of the “robber barons” were deemed to be illegal and immoral; their brutal enterprise was not welcome in a more civilized post-war America. But, secondly, it was not repeatable anyhow because the American economy had already been built – the railroads constructed, the copper mines claimed, the timberland acquired, the oil wells dug. Building the Great Fortunes was a one-off event. Thirdly, in this telling of economic history there was no room for past or future business geniuses who build the proverbial “better mouse trap”; one did not get rich simply by creating a great product. It was all about manipulating money on Wall Street and votes on Capitol Hill. Thus Matthew Josephson’s influential history The Robber Barons (1934) is dominated by financiers and railroad building wheeler-dealers like JP Morgan, Jay Gould, Daniel Drew and Cornelius Vanderbilt – not makers of great consumer products such as refrigerated meat (Swift), canned pickles (Heinz), soap (Gamble), and cheap autos (Ford).
By the 1950s the business structure was believed to be pretty much “set,” with a handful of corporations controlling each industry. The corporate order was now a melding of rich owners of major firms (DuPont, Rockefeller, Ford, etc.), and the corporate executives who actually ran them. The owners were mostly “old money.” C. Wright Mills inspected the 95 richest families over time and found that the percentage that had originated in the upper class (and thus were not upwardly mobile) had climbed steadily; it was only 33% in 1900, 56% in 1925 and 68% in 1958. Rich families kept their heads down and their spending discrete; for the truly rich this was an era of “inconspicuous consumption.”
. . . or Competition
Crucially, in the 1950s these top companies had little to worry about, competitively speaking. Each industry was dominated by a handful of companies. Harvard economist John Kenneth Galbraith claimed that they made their own weather, and maybe their own climate. There was a “massive reduction of risk” in the corporate economy because:
- Companies protected themselves from changing consumer taste via advertising and a broad, diversified line of products.
- Research and development protected companies from new technology.
- The companies’ large size gave them pricing power and therefore a measure of control over earnings. Price competition had been replaced by “administered pricing.”
- This control over financial results gave companies easy access to the capital markets, which smaller firms lacked. So competition from below was limited.
- Firms’ large size and bureaucratic structure reduced the risk associated with changes in leadership.
Entrepreneurial Void
While Big Businesses became ever bigger and more secure, small businesses were expected to stay small in the 1950s, in part because taxes were so high. Sociologist William Whyte wrote, “The great majority of small business firms cannot be placed on any continuum with the corporation. For one thing, they are rarely engaged in primary industry; for the most part they are the laundries, the insurance agencies, the restaurants, the drugstores, the bottling plants, the lumber yards, the automobile dealers. They . . .do not create new money within their area.” C. Wright Mills agreed: “the misleading term ‘entrepreneur’ does not have the same meaning when applied to small businessmen as it does when applied to those men who have come to possess the great American fortunes.” He noted that by the mid 20th century “it has become increasingly difficult to earn and to keep enough money so as to accumulate your way to the top.” A key reason for this lack of upward mobility was, of course, confiscatory tax rates for Americans who made too much money.
Red River Sam and the Millionaire
A 1961 episode of the TV show “Leave It to Beaver,” illustrates Americans’ belief that fortune-making was a thing of the past. Beaver Cleaver, a wholesome middle-class suburban fifth grader, finds his father (Ward) fretting in the den over the monthly bills he had to pay. Ward grimaces when Beaver asks him if he will ever have a million dollars; later Ward complains to his wife June, “He wanted to know when I would become a millionaire.”
Upstairs in the bedroom they share, big brother Wally explains to Beaver that these days you become a millionaire by finding oil, which is why all the millionaires are in Texas. But the next day Beaver takes the money he had planned to spend on a novel about the cowboy Red River Sam and buys his father a book on how to get rich. When presented with the book, a flustered Ward assures Beaver he will put it in “an honored place in my library” but it ends up amidst the cookie crumbs in a drawer in the kitchen. After discovering the discarded book a sulking Beaver hides in a tree, but eventually he and his father make up; Ward buys his son Red River Sam in Montana. In 1960s suburbia millionaires, like cowboys, were fantasy figures.
The Cult of the Business Bureaucracy
In the 1950s the modern corporation was considered to be a novel, almost post-capitalist institution. Stockholders were pushed to the background. Explained a sociology textbook, “All are employees, not owners. Their places in the system depend upon the rules of bureaucratic entry and promotion; business is coming more and more to assume the shape of the government civil service.” C. Wright Mills agreed that “During the last three decades…the distinction between the political and the economic man has been diminishing.” The modern manager “has the political job of keeping all his constituents reasonably happy.” In this new institution, the key to success was not generating profits but getting promoted, which, Mills claimed, had little to do with merit and everything to do with pleasing your boss: “Only if the criteria of the top positions were meritorious, and only if they were self-applied, as in a purely entrepreneurial manner, could we smuggle merit into the statistics.”
Whether meritorious or not, the modern corporate executive intrigued Americans. Fortune ran a long article detailing their manners and mores — their hobbies, houses, daily routine, and even their family life. Gender roles were appallingly well-defined. Don Mitchell, the president of Sylvania Electric Products, explained that his social life was limited, and while he found stimulation from business his wife “probably finds the life boring. Her job is to bring up the children and keep my health reasonably good.” In one of the most influential novels of the 1950s, Sloan Wilson described the early career of The Man in the Grey Flannel Suit – a Connecticut commuter, Tom Rath, who goes to work for the CEO of a giant media company headquartered in Rockefeller Center. Tellingly, Tom’s first assignment has nothing to do with profits. He spends weeks perfecting a speech promoting research on mental health, which his boss delivers to a convention of doctors.
Collectivist Capitalism
In The Organization Man William Whyte claimed that corporations promoted a collectivist “social ethic” in lieu of the individualistic protestant ethic of an earlier era. Executives have “taken a vow of organizational life” and are preoccupied with “group work” be it the work of the overall company or the “people at the conference table.” The traditional virtues of self reliance, thrift and competitive struggle were less necessary when the economy was booming. On college campuses, “the descent, every spring, of the corporate recruiters has now become a built-in feature of campus life” and the smarter grads had no problem getting several offers. Unlike college grads of the 1920s, who speculated in the stock market, they were not too worried about money; one recruiter claimed that in 300 interviews not one candidate brought up the issue of salary.
To make sure employees “fit in” to the corporate culture, personality tests were used; Sears Roebuck, for example, tried to screen out people who scored highly on aesthetics because “this is not a factor which makes for executive success.” The transition from college to company was undemanding; instead of venturing out into a “hostile world” new recruits were coddled in lengthy training programs (GE’s lasted two years). They would become bureaucrats in organizations that, increasingly, viewed themselves as national institutions rather than businesses – a status memorialized in the lavish corporate pavilions at the 1964 World’s Fair (see next post).
The collectivism of the corporation, Whyte believed, was reinforced by the new suburban housing developments springing up around the country. Here residents lived in nearly identical houses, went to the same parties, shared appliances such as lawn mowers, and watched the same TV shows. As incomes grew, consumer luxuries metamorphosed into necessities. Robert Reich recalls how his father was the first person in the neighborhood to buy a TV. “I remember neighbors crowding around it to watch Milton Berle in Texaco Star Theater. Within the decade, almost every family had its own TV.”
White Males Dominance
In the supposedly equalitarian wonderland of the 1950s so lauded by the Marx Brothers, virtually all the responsible corporate jobs were held by white males. The U.S. was still a deeply racist country; virtually no blacks were to be found in executive suites. Ditto white women; the labor force participation rate of married white women in 1950 was only 21%, versus 49% by 1980. Not until the late 1950s did women start to get full MBA degrees from Harvard Business School. A little-noticed reason for the rise in income inequality since the 1950s is the emergence of the two-career couples; many more women have high-paying jobs and are married to affluent males.
As for immigration, the door was shut to most foreigners in 1924, so very few bright young immigrants in their 20s and 30s were striving for success in the post-war corporate bureaucracy. In 1970 only 5% of Americans were foreign-born, versus 15% today. Here, too, social change has boosted income inequality. Although some immigrant are highly skilled, most have limited skills and low incomes; their absence from the U.S. labor force made the 1950s economy appear more equal to uncritical observers, such as the Marx Brothers, than today’s economy.
It Worked for a While . . .
An economy dominated by big, complacent, bureaucratic companies that were largely deprived of the skills of blacks, women, and immigrants might seem to be doomed to mediocrity or worse. But productivity growth was strong in the 1950s and 1960s. Why? A few ideas: After 20 years of depression and war, Americans were eager to get down to work, and there was strong pent-up demand for consumer goods such as autos and housing. And U.S. firms could commercialize technological innovations that had been developed in the 1930s and 1940s. (A good example is the computer, developed during the War at the University of Pennsylvania and elsewhere aim cannons accurately).
. . . But Not Forever
U.S. firms became vulnerable to foreign competition because there was little pressure to keep quality high and costs low. Companies could raise prices to meet the demands of unionized labor. Ford executive Lee Iacocca admitted, “In those days we could afford to be generous. Because we had a lock on the market, we could continually spend more money on labor and simply pass the additional cost along to the consumer in the form of price increases.” In the 1970s productivity slowed sharply, price increases led to cost-push inflation, and U.S. firms lost market share to foreign firms. Entrepreneurial activity—weak enough in the fifties and sixties—was stifled by rising capital gains tax rates (see our Sept. 27 post).
But the tax cuts, deregulation, and strict monetary policy of the 1980s Reagan revolution, so reviled by the Marx Brothers, eventually restored the vitality of the American economy. Wall Street funded hard-charging start-ups such as Apple, Genentech, Dell, and Microsoft which created millions of jobs. Private equity players financed by notorious junk bond king Michael Milken carved up dysfunctional conglomerates and pressured companies to cut costs and maximize shareholder value. So corporate America became more efficient and competitive; productivity growth accelerated in the 1980s and 1990s. (See our June 16 post.) The last thing the U.S. needs is a return to the high-tax bureaucratic capitalism of the 1950s. The world has change, and there is no going back.
