During the Great Recession, there was a significant shift in public discourse surrounding the economy. Throughout much of the country’s history, Americans held the belief that the future would bring greater prosperity for themselves and future generations. Despite occasional economic crises, progress was generally seen at every level of society. However, the 2008 financial crisis shattered these assumptions and sparked a newfound interest in economists studying inequality. Suddenly, predictions of economic decline dominated the conversation, and the once-optimistic America began to fear a future of diminishing prosperity for most people.
The Great Disappointment rested on three key arguments. The first, championed by economist David Autor, claimed that the wages of most Americans were stagnating, reversing the historical trend of doubling every generation. In the 1980s, wage growth for the majority of the population began to plateau, leaving poorer Americans without hope for real improvements in their living standards.
The second argument focused on the impact of globalization on income distribution worldwide. Branko Milanović’s “elephant curve” illustrated that the poorest individuals experienced minimal income growth, while the middle percentiles thrived due to globalization. However, those in the upper-middle class bracket, including industrial workers in rich countries like the United States, faced stagnant incomes. This mixed blessing of globalization raised concerns, particularly for the bottom half of wage earners in developed economies.
The final argument delved into the nature and causes of inequality. While much of the population struggled to maintain their prosperity, the wealth and income of the richest Americans continued to rise rapidly. Economist Thomas Piketty argued in his book “Capital in the Twenty-First Century” that this trend was likely to persist, and only drastic events like war or radical political change could curb increasing inequality.
The Great Disappointment has had a lasting impact on how many Americans perceive the current and future state of the economy. However, recent shifts in the global economy, including the pandemic and rising inflation, have begun to challenge the intellectual foundations of this theory. The reasons behind economic pessimism are becoming less convincing than before, raising the question of whether it’s time to reassess the core beliefs of the Great Disappointment.
Prominent labor economist David Autor, who has extensively studied the stagnation of American workers’ incomes, now presents a more optimistic perspective. Autor notes that due to the post-pandemic labor shortage, low-wage workers find themselves in a better bargaining position. This unexpected shift in economic fortunes has led to disproportionate wage growth at the bottom of the income distribution, reducing wage inequality and benefiting workers under 40 without a college degree. The bottom quarter of American workers has experienced a significant increase in income, reversing previous trends of decline.
Branko Milanović, known for the “elephant curve,” has also started to question the assumptions that once underpinned his work. Upon updating the curve with data from an additional decade, Milanović found a more optimistic trend. Incomes of the poorest individuals rose rapidly, followed by those in the middle of the income distribution, while the wealthiest experienced sluggish growth. Contrary to conventional wisdom, global economic conditions were improving for nearly everyone, with the most needy reaping the greatest rewards.
Even Thomas Piketty’s pessimistic analysis, which supported the Great Disappointment, has faced criticism from other economists. Some argue that Piketty misunderstood the reasons behind the higher returns on capital compared to labor in industrialized countries post-World War II. They claim that the outsized returns were mainly driven by skyrocketing house prices in major cities due to political factors like restrictive building codes. The primary beneficiaries were not billionaires and large corporations, but rather the upper-middle-class professionals who owned the bulk of housing stock in these cities.
Economists continue to debate the validity of these criticisms, but Piketty himself has adopted a more optimistic outlook regarding the long-term structure of inequality. As the landscape of the global economy evolves, it becomes crucial to reevaluate and challenge the core assumptions of the Great Disappointment.
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