The American economy: Buttigieg is wrong to say we can't go back

Democratic presidential candidate Pete Buttigieg, the mayor of South Bend, Ind., is wrong in an important way when he says we can't go back.

He's right in the sense that we can't go back to the same jobs and the same industries that built the middle class, the auto industry, for example. In the early and middle 1970s, before Japanese, European and South Korean imports gained traction and market share in the U.S., the auto industry and related components represented a huge chunk of the American economy. No more and never again. The long-shuttered and now repurposed Studebaker factory building in South Bend where Buttigieg announced his campaign for president is testimony to that.

But he's is wrong to say we can't return to some basic principles that built the middle class — the Treaty of Detroit, for example.

I'm guessing far more of those who are reading this article have heard of the Treaty of Versailles and can identify what it did than have heard of the Treaty of Detroit and can identify what it did. Yet from the standpoint of the growth and vitality of the middle class, perhaps no other agreement in U.S. history was more important.

The Treaty of Detroit was an agreement reached in 1950 between General Motors and Walter Reuther of the United Auto Workers. And what it did was two things: (1) It guaranteed UAW members an annual cost of living increase — or COLAs, as they came to be known, and (2) far more important, it guaranteed that UAW members would also share the economic benefits of increased productivity. As the pie increased, workers would get a bigger slice. In exchange, Reuther agreed to certain limits on strikes. But importantly, the concept affected not just UAW members — as a principle, it was applied elsewhere as well.

Historically, during the Golden Age of the American economy, workers generally shared the benefits of economic expansion. For example, from 1947 through 1973, nonfarm productivity grew at an annual rate of 2.8%. For roughly the same time period, real median wages grew from about $24,000 in 1950 to $38,000 in 1970, or at an average annual rate of 2.9%, or almost a direct 1-to-1 ratio with productivity.

But the linkage between productivity increases and pay increases was broken in the 1970s and early 1980s. As a result, real average hourly wages increased from $19.18 in 1964 to $20.67 in 2014, or an increase of only 7.7% over a half century, or about three cents per hour per year.

Had the linkage between hourly pay and productivity remained in place, and the increases in productivity been fully distributed throughout the workforce, real average hourly pay would have increased from $19.18 in 1964 to a staggering $82.28 a half-century later in 2014.

And how about the minimum wage? It was only $1.25 an hour in 1964, or $10.16 in 2019 inflation-adjusted dollars. Had it increased along with both productivity and inflation; it would have risen to an equally staggering $43.58 today (in 2019 dollars). Now, to be clear, I am not implying that the minimum wage should be that high, but rather that if it fully reflected the rise in productivity, it would be that high. And that $43-per-hour number certainly helps put the $15-per-hour target into perspective, doesn't it?

Yes, the economy has become far more productive, with real GDP more than quadrupling from $3.73 trillion in 1964 to $15.99 trillion in 2014 (both stated in 2009-chained dollars). The problem is that almost all of those gains went to a few at the top of the economic pyramid, and almost none of them went to those at the bottom.

You might say that rising tides lifted all yachts but sank all dinghies.

Had America held true to these principles, most certainly we would have created fewer multibillionaires like Jeff Bezos, Bill Gates, Warren Buffett and the Koch brothers.

But we wouldn't have 20% of our children living in poverty, and the middle class, rather than declining as a percentage of all workers, would have greatly increased in numbers and as a percentage of all households.

So, in this important sense, we can and must go back, to the good old days.

David Peterson, of Duluth, is an economist and author.