In trying to make sense of where we are at present, in our politics and in the national zeitgeist, it seems to me we need to look backwards for an understanding of cause. There is a question of how far back to go. For many liberals of my ilk, there is an intellectual shortcut that probably leads to some wrong conclusions - it all started with Reagan. In fact, some of what I will talk about preceded Reagan. But you need to start somewhere and for most of the time that Carter was President, I was a graduate student. I didn't have much income then and my dad did my taxes. So the awareness of the world, limited though it may be, that comes from having a regular job coincides for me with Reagan becoming President and that is where I will begin.
Today's kids won't remember the old AT&T and even us as adults may have dim recollections only - fueled more by macabre fascination with the film, The President's Analyst, than with any recollection of what phone service and pricing was like then, but I think it is the right place to start because of the economic theory that emerged around the break up of AT&T. This theory is encapsulated in the book by Baumol, Panzar, and Willig, Contestable Markets and the Theory of Industry Structure. I will give a very simplified version of that here.
In a complex regulated firm, which offers many products and services, one can consider optimal pricing by solving a particular social welfare problem - maximize consumer welfare given that the company breaks even. Now there is inherent tension in that solution because the company itself will want to do better than break even and price in such a way to achieve monopoly profits. So it has incentive to misrepresent its actual costs for that purpose. But, at the least, one can imagine what the social optimum looks like. It will frequently entail cross subsidies across product lines and from some groups of consumers to other consumers. One example of that, to make it concrete, is rural phone service. A market solution might provide none of that service whatsoever, as it is too costly to provide. The regulated solution is for those customers to be served and to pay rates like what urban customers pay. This is one argument for why we still have a postal service.
What happens to the regulated company when it becomes deregulated? It will face competition in some markets, where rivals may specialize there and not be as comprehensive in their offerings. Their cost structure will reflect that and that they are entering the market later. They will lack the advantages an incumbent has but be liberated from the incumbent's liabilities. As a general proposition, the preponderance of disadvantages and advantages taken in aggregate can go either way. But what is clear is that to compete effectively the incumbent company will have to reduce or totally eliminate the amount of cross subsidization. Certain services will become more expensive. Certain customers will pay more. It may be that some services are entirely eliminated because the market drys up at an unsubsidized break even price. Competition forces that.
Let's move on and consider the next important industry - automobiles. The Japanese invasion had started, greatly facilitated by OPEC. The American car manufactures didn't focus on low end vehicles nor did they focus on fuel efficiency. Their profit margins were much higher in the larger, more upscale vehicles. Further, if you read David Halberstam's The Reckoning, this point was brought home with great force, the management approach was quite different between the Japanese and American car manufacturers. Japanese companies were dominated by engineering thinking. The engineers were the bosses. American companies were dominated by MBA thinking. The bosses were MBAs. The different sort of leadership gives different imperatives for how the company should proceed. At the time it seemed the engineer led companies produced more innovative products, and would win the competition in the product market. This was true not just with with the car makers but also in electronics, where SONY was the clear market leader.
Still a different dimension was financial and can be encapsulated in the term - hostile takeover. As with much economics, there are different ways to consider the consequences of the behavior. The first is that it is efficiency enhancing - the company is being mismanaged at present and needs new leadership. I note that this view persists to this day and gives a raison d'etre for private equity firms. But I also want to note that it is quite different to consider such takeovers for large well known companies, on the one hand, and recent startups, on the other hand. For the latter, many companies have a structure that functions well initially but they get trapped because they don't know how to scale up. There are business decisions that need to be made to enable the company to reach scale.
For the large well established companies, the story is different. Frankly, if the company faces reasonably strong product market competition, that itself should promote efficiency in company operation. Then hostile takeover would seemingly not be necessary. If, however, the company is somewhat insulated from competition, for whatever reasons, then it may become sclerotic in its operations.
There is a different view of hostile takeovers, that they largely are predatory and represent the transfer of wealth - economic rents - from stakeholders in the company to those engaging in the acquisition. The image is of a corporate raider gutting the pension fund after having acquired the company via issuing junk bonds, and thereafter letting the company go to seed.
It is well understood that companies adopted many defensive tactics to thwart the threat of hostile takeover. Some of these protected upper level management only. Others constituted changes in business as usual practice. Of particular interest is the abandonment of defined benefit pension plans, the norm going into the 1980s, and ultimately resulting in the rise of 401K plans. Another consequence was to reinforce a near term focus on quarterly profits. Companies that do poorly by that metric become acquisition targets. There was already a near-term bias in corporate decision making. The threat of acquisition only emphasized the point.
It is possible to make this list of factors very long. I will content myself with adding one more and then stop and try to tie them together. The 1980s marked the beginning of the retirements of those people who came of age in the Great Depression. (If you were 20 years old in 1935, you turned 65 in 1980.) This was the first generation to really experience increased life expectancy. Many of these people, at a minimum, became snowbirds, moving south during the winter. Some made the migration south permanently. Partly as lure, the likely candidate states for these older Americans - Florida, Texas, and Arizona in particular - embraced a low/no income tax approach.
This demographic change drove many other people southward - looking for jobs in industries that serviced these seniors. And that, in turn, created a multiplier effect where others moved southward as well. The no/low tax approach was for them too, as was the combating of unions via right-to-work legislation. One can readily connect these changes to the beginning of a real estate boom in the south and the emergence of the rust belt in the north.
* * * * *
It is arguable whether these changes were good or bad for consumers - whether innovation really did speed up or not as a consequence, whether the prices and quality of goods on the market were better, and if there were such gains whether they were modest or substantial. I don't think it arguable about the impact of these changes on wage earners. The consequence was pernicious. Of that there should be no doubt. And, given a sustained growth in per capita GDP, at least for the subsequent 20 years or so, capital income had to grow faster than GDP, as Piketty and Saez have so well explained.
An argument can be made that this consequence was inevitable. Manufacturing was going to decline regardless. We were destined to become a more service oriented economy. Some jobs would move offshore. Other jobs would be done by robots. Those things are the more important factors. What I've described above is of secondary or tertiary importance.
I want to acknowledge that argument, though I don't buy it. It is my belief that much of what happened was a consequence of the time and the attitude of government in not enforcing existing laws, antitrust for one, so mergers became more tolerated in the 1980s, as well as lax performance by the SEC, and parallel developments in the thrift industry which led to the S&L crisis. Likewise, the NLRA received much weaker enforcement, and as a result private sector union membership declined precipitously.
* * * * *
For unions to be effective, the industry itself needs the big players to have market power. An example today is retail, where Walmart has such market power as does Amazon. One might ask, could those companies continue to thrive if they were heavily unionized? How much of the higher wages and benefits would be paid by customers and how much would come from reduction in the return to capital?
Unionization is not a hot topic in the current presidential election. Really, I haven't heard it discussed at all except by the author of Only One Thing Can Save Us. It is tempting to riff on that title and describe the current attitude as There Is Nothing That Can Save Us - so let's vent instead. That could readily explain the support for Donald Trump.
For if the thought is that something might be done to save us, how does it make sense that so-called Reagan Democrats stayed in the Republican fold thereafter? It is very hard to explain this based on pocketbook issues.
If you are steeped in economic theory a la the Heckscher-Ohlin model, where the only difference between capital and labor is the letters that represent them (K for capital, L for labor) and if capital also is elastically supplied from the perspective of any one individual producer, it is a mystery why one factor's return should grow faster than the economy as a whole while the other factor's return grows slower. To make sense of this you either need a third input that is quite scarce but that commands a return (for example, entrepreneurial spirit) or you need to assert that the game is rigged. We are seeing a lot of the latter assertion.
But there is a problem with it when made in this blanket form. The game has always been rigged. In order to get AT&T the game had to be rigged. Regulation itself is a certain type of rigging of the game. The New Deal certainly was a rigging of the game. The gut reaction to hearing that the game is rigged is to opt instead for complete Laissez-Faire, or if you prefer, anarchy.
This leads me to my last point. Lack of trust in the U.S. government had grown for some time, first because of Vietnam then because of Watergate. But the 1980s brought out a different dimension. Government couldn't be trusted to enforce the laws and regulations on the books because those serving in government believed it to be the enemy. (As opposed to simply that a particular law or particular policy was bad.) Heretofore it was believed that government might rig the game in a way that benefited the many. In the 1980s that belief was shaken.
If government can't be used to rig the game in a way the many favor, there really is nothing that can save us. The 1980s started us down the path to that inevitable conclusion. There is no putting the genie back into the bottle.