Morgan Housel distils the post war US economy into this lucid piece which brilliantly converges the discourse towards inequality. “But a central theme of this story is that expectations move slower than reality on the ground. That was true when people clung to 1950s expectations as the economy changed over the next 35 years. And even if a middle-class boom began today, expectations that the odds are stacked against everyone but those at the top may stick around.” However, whilst Morgan explains how such inequality came about, he leaves out the why for another debate.
1. August, 1945. World War II ends.
Morgan starts the article with US victory and end of World War II in 1945 and the big question being faced by US decision makers –“ What happens now”. Sixteen million Americans ( 11% of the population) who served in the war were freed-up with the war ending and the question in front of the Government was – What were they going to do next?, Where were they going to work?, Where were they going to live?
2. So we did something about it: Low interest rates and the intentional birth of the American consumer.
Fed kept the interest rate very low which resulted in borrowing to buy homes, cars, gadgets, and toys really cheap. “An era of encouraging thrift and saving to fund the war quickly turned into an era of actively promoting spending.”
3. Pent-up demand for stuff fed by a credit boom and a hidden 1930s productivity boom led to an economic boom.
“The answer to the question, “What are all these GIs going to do after the war?” was now obvious. They were going to buy stuff, with money earned from their jobs making new stuff, helped by cheap borrowed money to buy even more stuff.”
4. Gains are shared more equally than ever before.
“The defining characteristic of economics in the 1950s is that the country got rich by making the poor less poor….Average wages doubled from 1940 to 1948, then doubled again by 1963…. Real income for the bottom 20% of wage-earners grew by a nearly identical amount as the top 5% from 1950 to 1980…. The rich man smokes the same sort of cigarettes as the poor man, shaves with the same sort of razor, uses the same sort of telephone, vacuum cleaner, radio, and TV set, has the same sort of lighting and heating equipment in his house, and so on indefinitely….. This was important. People measure their well being against their peers. And for most of the 1945-1980 period, people had a lot of what looked like peers to compare themselves to. Many people – most people – lived lives that were either equal or at least fathomable to those around them.”
5. Debt rose tremendously. But so did incomes, so the impact wasn’t a big deal.
Sharp jump in household debt (5X from 1947 to 1957) did not have much impact due to strong income growth during the same period
6. Things start cracking.
“1973 was the first year where it became clear the economy was walking down a new path. The recession that began that year brought unemployment to the highest it had been since the 1930s. Inflation surged. But unlike the post-war spikes, it stayed high. Short-term interest rates hit 8% in 1973, up from 2.5% a decade earlier.”
7. The boom resumes, but it’s different than before.
The biggest difference between the economy of the 1945-1973 period and that of the 1982-2000 period was that the same amount of growth found its way into totally different pockets. Between 1993 and 2012, the top 1 percent saw their incomes grow 86.1 percent, while the bottom 99 percent saw just 6.6 percent growth. Joseph Stiglitz in 2011:While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone.
Why this happened is one of the nastiest debates in economics, topped only by the debate over what we should do about it. Lucky for this article neither matters.
All that matters is that sharp inequality became a force over the last 35 years, and it happened during a period where, culturally, Americans held onto two ideas rooted in the post-WW2 economy: That you should live a lifestyle similar to most other Americans, and that taking on debt to finance that lifestyle is acceptable.
8. The Big Stretch
The lifestyles of a small portion of legitimately rich Americans inflated the aspirations of the majority of Americans, whose incomes weren’t rising. And to fulfil their aspiration, Americans started to borrow heavily – from housing loan to car loan to personal loan.
“A culture of equality and Togetherness that came out of the 1950s-1970s innocently morphs into a Keeping Up With The Joneses effect.
Now you can see the problem.
Joe, an investment banker making $900,000 a year, buys a 4,000 square foot house with two Mercedes and sends three of his kids to Pepperdine. He can afford it.
Peter, a bank branch manager making $80,000 a year, sees Joe and feels a subconscious sense of entitlement to live a similar lifestyle, because Peter’s parents believed – and instilled in him – that Americans’ lifestyles weren’t that different even if they had different jobs. His parents were right during their era, because incomes fell into a tight distribution. But that was then. Peter lives in a different world. But his expectations haven’t changed much from his parents, even if the facts have.
So what does Peter do?
He takes out a huge mortgage. He has $45,000 of credit card debt. He leases two cars. His kids will graduate with heavy student loans. He can’t afford the stuff Joe can, but he’s pushed to stretch for the same lifestyle. It is a big stretch.
This would have seemed preposterous to someone in the 1930s. But we’ve spent a half-century since the end of the war fostering a cultural acceptance of household debt.”
9. Once a paradigm is in place it is very hard to turn it around.
“A lot of debt was shed after 2008. And then interest rates plunged. Household debt payments as a percentage of income are now at the lowest levels in 35 years.”
Morgan discusses the human psychology of expecting something which in reality is not possible – “It just matters that it did happen, and it caused the economy to shift away from people’s expectations that were set after the war: That there’s a broad middle class without systematic inequality, where your neighbours next door and a few miles down the road live a life that’s pretty similar to yours.
Part of the reason these expectations have stuck around for 35 years after they shifted away from reality is because they felt so good for so many people when they were valid. Something that good – or at least the impression that it was that good – isn’t easy to let go of.
10. The Tea Party, Occupy Wall Street, Brexit, and the rise of Donald Trump each represents a group shouting, “Stop the ride, I want off.” So people haven’t let go of it. They want it back.”
“The details of their shouting are different, but they’re all shouting – at least in part – because stuff isn’t working for them within the context of the post-war expectation that stuff should work roughly the same for roughly everyone…
You can scoff at linking the rise of Trump to income inequality alone. And you should. These things are always layers of complexity deep. But it’s a key part of what drives people to think, “I don’t live in the world I expected. That pisses me off. So screw this. And screw you! I’m going to fight for something totally different, because this – whatever it is – isn’t working.”
Take that mentality and raise it to the power of Facebook, Instagram, and cable news – where people are more keenly aware of how other people live than ever before. It’s gasoline on a flame. Benedict Evans says, “The more the Internet exposes people to new points of view, the angrier people get that different views exist.” That’s a big shift from the post-war economy where the range of economic opinions were smaller, both because the actual range of outcomes was lower and because it wasn’t as easy to see and learn what other people thought and how they lived.”
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