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What Was Wrong with Our Economy Before the Crash of 2008?

If we want to fix what’s wrong with our economy, we can’t just return to the way things were before the Crash of 2008. We have to fix what was wrong before the Crash.

And what was that? In short, it was the failure of our low-wage economic strategy of the past 30 years, which crippled the growth engine of the U.S. economy.

The first step of the low-wage strategy was a sustained war against workers’ freedom to bargain collectively with employers, beginning in the late 1970s. The percentage of workers covered by a union contract fell from 27% in 1979 to 13.1% in 2011.

The second step of this strategy was the relocation of U.S. manufacturing production to countries with lower wages and environmental standards, from which goods would be shipped back to the United States. The new system of globalized low-wage production was made possible by pro-corporate trade deals and a “strong dollar” policy that gave a price advantage to imports over goods made in America. It resulted in perennial trade deficits since the 1980s, the loss of millions of good middle-class jobs that paid well and the hollowing out of the U.S. manufacturing sector.

The third step was Wall Street’s takeover of the real economy. Beginning in the 1980s, financial firms focused on making a quick buck by stripping assets from existing businesses, downsizing their workforces, cutting wages and outsourcing production. Between 1960 and 2008, the manufacturing sector’s share of the economy shrank by half, while the financial sector’s share of the economy doubled.

This economic strategy depressed wages in multiple ways. The war against unions undermined wages for union and nonunion workers alike. So did perennial trade deficits. The explosion of leveraged buyouts on Wall Street rewarded businesses for underpaying their workers and overpaying their executives. Other strategies to suppress wages included allowing the minimum wage to lose its value and the obsession with fighting inflation at the expense of full employment.

The end result of this strategy was that wages became delinked from productivity growth; nearly two-thirds of the income gains after 1979 were captured by the top 10%, and the concentration of income at the top reached levels not seen since the Great Depression.

This low-wage economic strategy crippled the growth engine of the U.S. economy. Rising economic inequality was harmful to the dynamism of the economy. Trade deficits acted as a chronic drain on U.S. economic strength. The new system of globalized production diverted productive investment from domestic manufacturing to overseas operations. And Wall Street firms increasingly failed to perform their core function of channeling savings to productive investment in the real economy, hindering economic growth and productivity.

Economic inequality also created the political conditions that made possible wasteful tax cuts for rich people, which did a lousy job of creating jobs but diverted resources away from economically productive public investment in education, clean energy and infrastructure.

The failure of this low-wage economic strategy was responsible for the unusual weakness of the U.S. economy before the Crash of 2008.  If we want to repair the growth engine of our economy, we will need a different economic strategy. 


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