FDR and Labor: Earning Our Way Out of the Great Recession

In a recent editorial in the New York Times, former Labor Secretary, Robert Reich writes that this Labor Day promises to be one of the worst in decades. Organized labor, he notes, is down to a mere seven percent of the private work force; unemployment remains high; and the prospects for a further recovery of the economy remain uncertain at best. Professor Reich goes on to argue that this dismal state of affairs is unlikely to improve until we address the deep structural flaws in our economy; flaws that have made it impossible for the American consumer -- i.e. the middle class American worker -- to sustain the level of spending needed to keep our economy going.

He rightly blames this state of affairs on the steady decline in working wages that has occurred in the past three decades as US companies brought in new labor-saving technologies or shipped jobs to non-unionized low wage areas overseas. He also correctly points out that much of the economic growth that the US has experienced since the early 1990s -- growth that occurred in spite of the fall in wages -- was fueled by three basic phenomenon: the vast increase of women in the workforce; an increase in the number of hours people worked to make up for lower wages; and the massive use of consumer debt, fueled in part by the housing bubble.

In an eerie parallel to the 1920s, he observes that, thanks to this real decline in income, even a return to near full employment will not be enough on its own to get us out of this mess. Why? Because as it stands today the "vast middle class still wouldn't have enough money to buy what the economy is capable of producing." Nor, he says, should we look to the rich to stimulate demand, since the rich -- who now take in nearly 25% of the nation's total income as opposed to 9% in the late 1970s -- spend a much smaller portion of their incomes than the rest of us.

In other words, what we are now facing is what may best be described as a mal-distribution of wealth. This is remarkably similar to the economic conditions that existed in the "roaring twenties" when the US economy, thanks to an increase in consumer spending and growing speculation in the stock market (fueled in large part by the expansion of credit), underwent a period of significant economic expansion. Unlike today, wages in this period also went up, but not enough to sustain the capacity of the US economy to produce goods. Most workers, in fact, earned wages that kept them and their families just above the poverty line. As a result, when the crash came and the bubble burst, the earning capacity of the average American was simply not strong enough to lift the country out of its economic malaise.

The New Deal changed this, not, as is commonly held, by merely providing relief to the unemployed through unemployment insurance or work in the vast infrastructure projects of the WPA and other agencies, but by engaging in long-term structural reform; by granting the American worker what he or she needed most: better wages, hours and working conditions. The Roosevelt administration accomplished this through the unprecedented pieces of labor legislation passed during the New Deal: The National Labor Relations Act (or Wagner Act), passed in 1935, which established the Fair Labor Relations Board and guaranteed workers the right to engage in collective bargaining; and the Fair Labor Standards Act, which established a minimum wage and the maximum hours an employee could work, after which they would be entitled to overtime pay at one-and-a-half times their regularly hourly wage. Taken together, these two pieces of legislation vastly improved the lot of the American worker, and thanks to the rights granted in the former, led to an enormous expansion of union membership in the United States from a mere three million when FDR took office in 1933 to more than 14 million in 1945 (or roughly 30 percent of non-agricultural work force) . When one adds the other significant pieces of New Deal reform legislation to this -- banking and financial reform to make our financial sector more transparent and secure; Social Security to help the aged maintain a basic standard of living; the G.I. Bill, which significantly increased access to higher education -- what we end up with is a vastly expanded, better paid and much more secure middle class. A middle class that in the decades after World War Two had the earning capacity (not the borrowing capacity) to propel the US economy through the greatest period of economic expansion in history.

For FDR, then, the key to economic recovery lay not with providing the rich with ever-lower taxes, but in increasing the standard of living of the American worker through concrete measures that made it possible for him or her to earn a decent wage and take part in the American dream.

Instead of harping on and on about tax cuts and deficits (especially at a time when the US income tax rates are among the lowest in the industrialized world), perhaps it is time for our well-paid leaders in Washington to take a hard look at the plight of the American worker; to recognize this Labor Day that better wages and job security -- in short, a strong, well-paid middle class -- is not some sort of 21st-century luxury, but a necessity if we hope to earn our way out the Great Recession.

Cross-posted from New Deal 2.0.