Will the Baby Bust Reduce Inequality? (Part 2)

A Short History of Inequality

A simple history of inequality in the United States runs as follows.The early colonies were highly unequal, as settlers tried to reproduce the rigid social hierarchies of Europe. They failed, inequality gradually fell, and then it took a big hit with the Revolution.  The main reason we call it a revolution, rather than just a war for independence, was that it dealt a body blow to aristocracy. Before 1776, ‘democrat’ was a term of contempt, but by 1801 it was a badge of honor.  In most states, white men without property could actually vote, something unheard of in Europe.

Inequality kept falling until the late 19th century, when the enormous industrial wealth of the “Gilded Age” flowed to entrepreneurs and investors Meanwhile Jim Crow subordination reversed gains in the South.  Rising productivity led to yawning gaps until the Great Depression of the 1930s, which hurt everyone but reduced many large fortunes.  It also provoked the New Deal of Social Security and strong labor unions.  

World War II added social solidarity and high taxes, followed by an egalitarian golden age of prosperous manufacturing to sell to the rebuilding global economy.  Men with only a high school degree could raise affluent middle-class families.  Strong governments and unions acted as counter-vailing forces, preventing corporations from channeling profits to executives.  Declining bigotry, including racism and sexism, helped reduce inequality as well.

We know what happened next. Starting in the 1970s, renewed foreign competition reversed many of these trends.  Over-structured governments and companies couldn’t compete.  Deregulation and downsizing freed up society and the economy to revive growth, but to the detriment of workers who didn’t increase their education in tandem with expanding technology.  Inequality has risen steadily and is now back to 1920s levels.

This brief sketch leaves out a major factor: demographics.  Inequality in early America fell mainly because of the widespread availability of land.  Would-be aristocrats, at least in the North, couldn’t keep workers on their plantations, because those supposed peons could move west and set up their own farms.Southern planters had greater success, but only because their rich soil yielded such valuable crops that they embraced the terrible practice of slavery.  And in increasingly democratic America, slavery couldn’t last long.

Inequality returned in the late 19th century largely because of two major developments: most western lands were stolen or bought up, discouraging further migration; and a flood of European immigrants led to a plentiful supply of labor for the first time in American history.

Why then did equality rise after 1930?  The federal government sharply limited immigration after 1924, just as the birth rate was falling.  The net result was a shortage of workers just as American companies were booming.  Strong unions and other government programs certainly helped, but demographics set the foundation.

Those trends reversed in the 1960s.  We reopened the gates to mass immigration, and the postwar baby boom moved into adulthood.  By the 1970s, the overall labor force was much bigger than before, perfect timing for companies that needed to shift their priorities from workers to investors and executives.

It seems we are now entering a new phase of demographic tightening, where workers regain bargaining power.  The birth rate has been falling steadily since the late 1980s, while immigration has slowed since the 2010s.  Even European and Asian countries that have discouraged immigration are now so desperate as to welcome newcomers.

If many developing countries become “failed states” due to environmental and other pressures, we may see a flood of desperate immigrants in affluent countries that overwhelm restrictions. But even in that scenario, the labor supply is likely to fall.  Overall, baby boomers are retiring with fewer young people to take their place.  The pandemic has apparently rubbed off the glow of corporate employment for at least some workers – and more people working independently will only speed up this process of demographic destiny.  If these trends continue, even with rising automation, inequality should come under pressure as it did in previous eras of demographic tightening.