The thirty years that were never normal

The post-war decades created an extraordinary period of rising wages, affordable homes and economic security. Those conditions are gone. Politics must stop promising their return and start deciding how prosperity is shared in a slower-growth world.

Picture a working family in an Australian city in 1935. They rent. The father has been in and out of work for five years. Three years earlier, 29 per cent of trade union members had no job. There is no national unemployment benefit, only state relief. Food is the biggest item in the weekly budget. The parents were born into a country where one baby in 10 died before its first birthday. Materialism was not about buying the next iPhone but rather a fresh pair of socks.

Now picture their children in 1965. They own a house or are buying one. The husband has never been unemployed. Across his working life, the jobless rate has rarely risen above 3 per cent. One wage carries the mortgage. There is a car in the drive and the promise of a pension at the end of a working life. Their own children will finish school, and some will go to university.

Those children grew up assuming this was how the world worked. Work hard, buy a house, retire secure, watch your kids do better than you did.

They were wrong about one thing. It was not how the world worked. It was how the world worked for about 30 years, in a few dozen countries, once. For all of human history, this lifestyle was fantastical.

Most of our politics is now an argument about how to get back there. Almost nobody in public life will say out loud that the conditions that built it are gone. This truly was a unique period in human history.

For most of the history of the industrial West, the mass of people lived close to the edge. Not always destitute. But one illness, one layoff or one bad season away from it.

The numbers are plain. An Australian boy born in the first decade of last century could expect to live to 55, a girl to 59. American households in 1901 spent 42.5 per cent of their budget on food. Food, clothing and shelter together took almost 80 per cent. There was very little left for anything that might be called a choice.

In 1940, nearly half of American homes lacked complete plumbing. That means hot and cold piped water, a bath or shower and a flush toilet. This was the richest country on earth, on the eve of the boom.

In 1899, the researcher Seebohm Rowntree surveyed the English city of York and found about 28 per cent of its people in poverty. He went back in 1936. Eighteen per cent of those he surveyed were still poor. The causes matter more than the count. A third of the poor were in regular work, on wages too low to live on. More than a quarter were poor because the breadwinner had no job.

It would be wrong to say nothing improved before the war. Real wages rose. Families got smaller. By the harshest measures of destitution, poverty among British working households fell close to zero between 1904 and 1937.

But the gains were thin and easily reversed. The Depression proved it. Australia had lifted home ownership to 49 per cent by 1911. Thirty-six years later, after a depression and two wars, it stood at 53 per cent. A whole generation ran hard and stood still.

That is the baseline. Not a golden age that was interrupted. A long grind in which security was the privilege of a minority.

Between 1950 and 1973, income per person in Western Europe grew by 3.8 per cent a year. In the 37 years before that, it grew by 1 per cent. West Germany managed 5 per cent and France 4. Japan’s economy grew by about 8 per cent a year. Even the United States, already rich, managed 2.2 per cent per person.

The arithmetic is worth doing. At 3.8 per cent a year, living standards double in about 18 years. At 1 per cent, it takes 70. One generation got the improvement that used to take three.

Australia shared in all of it. From the end of the war to the mid-1970s, unemployment averaged about two per cent. Home ownership went from 53 per cent in 1947 to 71 per cent in 1966. By 1961, around 60 per cent of employees were union members.

Rowntree went back to York a third time in 1950, just four years before his death. He found 1.5 per cent in poverty. Low wages and unemployment had all but vanished as causes. What remained was old age and sickness. Later historians think he undercounted but nobody disputes the direction or trends.

Why? The gains were shared. In the United States the top 10 per cent took about 45 per cent of all income from the mid-1920s to 1940. After the war their share fell to about 33 per cent and stayed there until the late 1970s. For three decades the gains flowed down as well as up and possibly the best social balance we have ever achieved in history.

Why did it happen? Because a set of conditions lined up that had never lined up before. Europe and Japan were rebuilding from rubble, with American technology sitting ready to copy. Catch-up growth is the fastest growth there is. You only get it once.

Energy was cheap. Oil was cheap until 1973.

Populations were young. The boomers themselves became the bulge in the workforce. In 1975, there were 7.3 Australians of working age for every person over 65.

The great inventions of the previous 70 years were being rolled out to every household at once: electricity, the car, running water, antibiotics. The economist Robert Gordon’s point is that this can only be done once. You cannot electrify a house that already has power.

War and depression had flattened the fortunes at the top, as Thomas Piketty has shown, and left governments willing to tax, build and regulate. Strong unions bargained for the rest.

Critically, the West had the world’s factories almost to itself.

Not one of these was the natural state of a market economy. Together they produced the only period in history when a single ordinary wage could buy a house, raise a family and fund a retirement.

The boomers were born into it. They did not build it and they did not steal it. They arrived when the door was open. Plenty of them never got through it. But enough did to set the expectations of every generation since.

If this sounds too neat, look at China.

In 1981, 88 per cent of Chinese people lived in extreme poverty on the World Bank’s measure. By 2015 it was 0.7 per cent. That is more than 850 million people. It is the largest creation of a middle class in human history, and it took a single generation.

The ingredients are familiar. A poor country with a young workforce. Technology ready to copy. People moving from farms to factories. A world willing to buy what they made. It was catch-up growth, on a scale and at a speed the West never managed.

The ending is familiar too. China’s workforce is now shrinking. Its property boom is over. Its young graduates are finding that the escalator their parents rode has slowed.

The lesson is not about China. It is that a mass middle class is manufactured by a specific set of conditions. When the conditions go, the easy growth goes with them. China’s boom is 40 years old and already ageing. Ours ended half a century ago. We are still campaigning as if it never did.

The economist Raj Chetty measured the American version. About 90 per cent of Americans born in 1940 went on to earn more than their parents had at the same age. For those born in the 1980s it is 50 per cent. A coin toss.

The Australian version is written in housing. From the 1950s to the early 1980s, a house in a capital city cost about three years of average earnings. It now costs more than eight. In September last year, servicing a new mortgage on the median home took 45 per cent of household income. (I am being kind.) In 1961, 60 per cent of households headed by someone aged 25 to 34 owned their home. By 2011 it was 47 per cent.

The rest of the settlement went the same way. Unemployment averaged 2 per cent for three decades, then about 7.5 per cent for the next three. The 7.3 workers for every older Australian are now 3.7. Treasury expects 2.6 by 2063. In the United States, the top 10 per cent were back to half of all income by 2006, a higher share than in 1928.

Here the argument needs care, because two different things are happening and politics blurs them together.

Some of the boom is gone for good. You cannot rebuild from a world war twice. You cannot roll out electricity and running water a second time. You cannot conjure seven workers for every retiree. Cheap energy and an empty field of competitors are not coming back. Growth of 4 per cent a year per person is not on offer in any rich country, under any government.

But some of what went was not lost. It was moved. Chetty’s team tested this. Faster growth alone would not restore the mobility of the generation born in the 1940s. Sharing today’s growth the way it was shared then would reverse more than two-thirds of the decline. Most of the fall came from who received the gains, not from how large they were.

So the honest account has two halves. The pie will grow slowly from here, and nobody can change that. How it is cut is still up to us. Almost nobody in politics offers that account. The business model of modern politics is restoration.

The established parties have spent 40 years selling the managed version. Every election they promise that home ownership will recover, that wages will outrun prices, that the next generation will do better than the last. They speak as if 1965 were a destination that better management could reach. Every term the numbers get a little worse and the delusion continues.

Voters notice and spot this delusion from a mile away. They may not know the statistics. They know their adult children are still in the spare room. They know the house they bought for three times their income now sells for eight. They know they did what their parents did and got less for it.

This is the slow realisation running underneath every election in the West. It does not arrive as an idea, a myth or a misinformed post online. It arrives as a feeling that someone has broken a promise. The gap between what was promised and what was lived is where trust in the major parties has gone to die.

The populists then sell the unmanaged version. The boom did not end, they say. It was stolen. By migrants, by elites, by Canberra, by globalisation. Remove the thieves and 1965 comes back. It’s of course a blatant lie but also a powerful message because it is half true. Something was moved. A share of the gains did shift from wages to assets and from the young to the already established. People are right to be angry about that.

Both sides of politics will win and lose contests in this world. One Nation can win seats. It can hold a balance of power, on a very good day. It may do more than that but winning is not the test. Delivering is.

There is no lever in Canberra that produces 3.8 per cent growth per person. There is no migration cut that makes a house cost three times a wage. A smaller intake does not bring back seven workers for every retiree. It moves the country towards two, faster. No tariff recreates a world in which the West had the factories to itself.

A party that rents its votes on the promise of restoration faces the same reckoning as the parties it displaced. It faces it sooner, because it promised more.

That is the wall. Not a scandal or a bad campaign. A slow, collective recognition, household by household, that what is being promised was never the normal state of affairs, and is not coming back by subtraction.

The awakening will not be comfortable. People who have lost a future they were promised do not thank whoever confirms that fact. Some will go looking for the next, louder version of the same promise. That cycle may run for a while yet.

But it does open the only politics that can work. One that stops promising 1965 and starts arguing about 2035. Who owns the housing. How work is taxed against wealth. Who pays for an older country. What a decent life looks like when growth is slow.

The post-war generation got rising living standards without the country ever having to choose who received them. Growth made the choice for us. That is what has gone. From here, a fair share has to be decided on purpose.

The 30 years after the war were not the West’s natural condition. They were its exception. Our politics will stay broken until someone is prepared to say so and force an electorate to accept the new world, that has more in common with 1930 than the last 40 years.