why i miss communism

A remarkable chart made the rounds last week.  It shows that the evolution of American incomes over the course of the 20^th century happened in two very distinct phases.  The first phase, which lasted from 1940 to approximately 1973, saw the real incomes of the lower 90% of American wage earners increase steadily while the average income of the top 10% stayed put. Then, starting in 1983, the incomes of the top 10% take off while the rest of us hover.

Most of the attention is directed toward that dramatic 90-degree turn to the right in the ’80s because it seems to confirm the view that Ronald Reagan’s policies lowered taxes on the rich while suppressing wealth redistribution institutions like unions and welfare.  Sure.  I think it does too.  But actually I’m not all that interested in the right turn.  There’s nothing new about the rich getting richer.  Picketty’s work is only the most recent (and best documented) proof of the axiom.  There is plenty of evidence to suggest that we have simply returned to the historical norm.

Far, far more interesting is what happened in the middle of the century to explain the dramatic 90-degree left turn starting in the 1940s.

Up until that point, the chart shows that America’s economy evolved with both rich and not-as-rich moving together.  What is most remarkable about 1940s, then, is not that the lower-90% was getting richer (and yes, unions had a lot to do with that).  What needs explaining is the 30 year pause of the upper 10%.  Historically, that is pretty much unprecedented.  What explains it?

I’d like to offer the following hypothesis: these were the years when Soviet style communism was ascendant.  The Cold War was not only – or even primarily – a military conflict.  It was a political and ideological one.  The inherent flaws of centrally planned Soviet-block communism seem self-evident today.  But hindsight is 20-20.  At the time, it wasn’t so clear.  Western-style capitalism was evolving in this period and as it did so it reacted to what was, for all intents and purposes, a competing logic.  The upper tier of income earners accepted re-distributive policies because not doing so would expose themselves to further losses should western capitalism fail.  But as the flaws of the Soviet system became more and more obvious, it opened cognitive space for the Reagan revolution.  America could afford to allow the income distribution to shift back to the historical trend.

No one, certainly not me, would argue for reviving Stalinism.  But capitalism does need—indeed, it thrives on—competition.  In the middle of the 20^th century, it wasn’t just competition within capitalism (among companies or capitalist countries) that led to widespread prosperity.  Competition between capitalism and a true rival made capitalism itself work better.

Happy May Day.