Talking About Money Article Club: "How This All Happened: The story about how America evolved from 1945 to 2018" by Morgan Housel
Understanding how things came to be in American economic history can greatly impact how you approach your work today.
While I read a lot of books for work, I also read a lot of articles. This one came across my email inbox recently and I spent days thinking about it. What a great reason to write a blog post!
“How This All Happened: The story of how America evolved from 1945 to 2018,” by Morgan Housel of The Collaborative Fund, is a long read (5,000 words) detailing the evolution of the American economy from post-World War II until the present day. While as a social worker I like to think that I have a fairly good grasp on what got us from there to here with regards to poverty and income insecurity, this article dropped some eye-opening nuggets of information from our nation’s recent history that I had never considered.
Let’s dive into the article and discuss three fascinating moments in our nation’s economic history:
1.The Birth of a Consumer Credit Nation in 1950 Was Highly Influenced by the Federal Government
“[There] was an explosion of consumer credit, enabled by the loosening of Depression-era regulations. The first credit card was introduced in 1950. Store credit, installment credit, personal loans, payday loans -- everything took off. And interest on all debt, including credit cards, was tax deductible at the time [emphasis added].”
Wait, what? ALL DEBT WAS TAX-DEDUCTIBLE? I did not know that.
Is it just me, it does it seem like consumer debt was the drug, and the federal government was the drug dealer? Then add into the mix that marginalized communities did not have the same income-generating opportunities to pay off said debt. Now you’ve got one slow-building credit-addiction epidemic, as we shall see.
I know that I am a product of my times in thinking that there are two types of debt: “good” debt (mortgages, student loans) and “bad” debt (car loans, personal loans, credit cards). It makes over-paying for homes and college seem reasonable in your mind (“It’s okay, it’s tax deductible! And anyway, my investment today is going to grow over time.”) while there is a certain amount of shame for having a car note that’s too high or for carrying an unreasonable amount of credit card debt.
How might the country be different today if the decision to make all consumer debt tax deductible wasn’t made back then? Chew on that for a minute…
2. The Rise of the Middle Class in the 1950’s Included Lots and Lots of People in the Middle
“The defining characteristic of economics in the 1950’s is that the country got rich by making the poor less poor.
Average wages doubled from 1940 to 1948, then doubled again by 1963.
And those gains focused on those who had been left behind for decades before. The gap between rich and poor narrowed by an extraordinary amount.
This was not a short-term trend. Real income for the bottom 20% of wage-earners grew by a nearly identical amount as the top 5% from 1950 to 1980 (emphasis added).”
“The leveling out of classes meant a leveling out of lifestyles. Normal people drove Chevys. Rich people drove Cadillacs. TV and radio equalized the entertainment and culture people enjoyed regardless of class. Mail-order catalogs equalized the clothes people wore and the goods they bought regardless of where they lived.”
“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.”
This part of the story resonates with me. I was a child in the 1970’s and we lived in a middle-class suburb on a street of identical 1950’s three-bedroom ranch homes with attached garages.
My father had two master’s degrees and went downtown each day on the public bus to work his professional job in an office building (he was an economist), returning home at 6:00 for dinner.
The other neighborhood fathers went to union jobs where they worked a shift and came home in the afternoon. The streets would be empty by 5:00 because that’s when all the other families in my neighborhood would eat dinner. Their fathers were hungry by then, as their days started earlier.
Other than the time that we ate dinner, from the outside our lives looked pretty much the same.
3. After 1980 The Economy Shifted and Then There Were Two Middle Classes: The Joneses, and You
“One of the biggest shifts of the last century happened when the economic winds began blowing in a different, uneven direction, but people’s expectations were still rooted in a post-war culture of equality. Not necessarily equality of income, although there was that. But equality in lifestyle and consumption expectations; the idea that someone earning a 50th percentile income shouldn’t live a life dramatically different than someone in the 80th or 90th percentile. And that someone in the 99th percentile lived a better life, but still a life that someone in the 50th percentile could comprehend [emphasis added].”
“…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.”
“A culture of equality and togetherness that came out of the 1950’s-1970’s 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.”
Oooohhhhh, I get it now!
You’d be surprised (or maybe you wouldn’t) how often I hear from my friends and relations some variation of the refrain, “I work hard. I deserve to have this.” My inner-voice response is normally something along the lines of, “do you, really?” But’s that’s just me.
But now I get it. For decades Americans were told that they were “middle class” and were promised that as long as they worked hard they could have a “middle class” lifestyle. And don’t worry, harmless consumer debt would fill in for what you could not purchase with cash, and there would always be plenty of jobs available to earn the income to pay off the debt.
And now here we are in this situation of growing poverty and income inequality. Because while there are jobs out there, they do not pay enough for you to keep up with the Joneses. And giving you access to consumer credit that you cannot realistically repay is not fair.
Honestly, I am not sure what we should do. Universal basic income? A resurgence of unions? Medicare for all?
I think that one aspect of what brings us together as Americans is that most of us self-identify as middle class. When I am in the tony suburbs of Boston I hear people with trust funds living in mortgage-free family homes identify themselves as “middle class.” When I am working in rural parts of the state in towns with no public transportation, few cell phone towers, and comprised of households making less than $30,000 a year, my clients tell me that they are “middle class.”
Who’s right? And is it my job to correct them if they are wrong? I don’t know.