The Mid-Century Social Compact
Post-war prosperity was built on explicit inclusion — its erosion explains today's political rage
Wolf identifies the post-war decades as a period when Western societies ran an unusual experiment: explicit commitment to full employment, strong trade unions, progressive taxation, and welfare state construction. Wealth inequality was low because the wars had destroyed and taxed away much of it. The social compact was the outcome — a broadly shared belief that the system delivered proportionate gains to those who contributed.
This compact was not accidental. It was built by policy: the Beveridge Plan in Britain, the New Deal legacy in the US, Christian Democratic and Social Democratic consensus in Europe. The result was several decades of widely shared growth — the fastest and broadest improvement in living standards in history. Wolf does not romanticise this period (it excluded many groups), but he treats it as the template against which current failure should be measured.
The compact began eroding in the 1970s: inflation shocks undermined confidence in full-employment policy; Reagan and Thatcher dismantled union power and deregulated markets; rapid deindustrialisation destroyed the organised working class that was one pillar of the compact; and financialisation rewarded capital over labour. By the 2000s, the compact had effectively ended — productivity gains went disproportionately to the top, leaving median earners with stagnant real wages for fifteen or more years.
- The post-war social compact was built by explicit policy, not by market forces — it required active construction and requires active maintenance.
- Widely shared growth is both an economic outcome and a political input: it sustains legitimacy for the system that produced it.
- Deindustrialisation did not just destroy jobs — it destroyed the organised working class that was the political counterweight to capital concentration.
- Fiscal adjustment choices are distributional choices: who bears the cost of consolidation shapes legitimacy as much as the size of the deficit.
- Once the compact breaks, legitimacy erosion is slow but cumulative — it takes a decade or more to manifest as electoral volatility, making it easy to miss in real time.
- Identify which groups were included in the compact and which have been excludedMap which segments of the population shared in productivity growth 1950–1980 versus who has been left behind since. In the UK and US, the clearest gap is between university-educated knowledge workers (gaining) and former industrial workers in deindustrialised regions (stagnant or declining for 40 years).Pro tipRegional analysis matters more than national averages — Northeast England and the US Rust Belt show the compact breakdown most starkly.
- Trace the institutional dismantlement sequenceDocument the sequence in which compact-sustaining institutions were weakened: union density, progressive marginal tax rates, industrial policy, welfare generosity. Each dismantlement feeds the next — lower union density means less countervailing power to resist the next round of deregulation.Pro tipWolf's key data point: university attendance has risen 20x since the early 1960s (from 2% to 40% of cohort), creating a large credentialed class that expects middle-class outcomes but faces stagnant real prospects — a distinctly new source of compact-breaking frustration.
- Audit the fiscal adjustment designWhen governments face deficit reduction pressure, the distributional design matters enormously. Wolf calculates that roughly 80% of UK austerity 2010–2015 came through spending cuts rather than tax rises, and within spending, local authority cuts fell hardest on the already-poorest regions. This is the proximate mechanism linking austerity to Brexit.Pro tipA 50/50 split between spending and revenue with protection for the lowest-income regions is Wolf's implicit alternative — more equitable and less delegitimising.WarningFraming deficit reduction as prudence while designing it to fall on the poorest is a political choice, not an economic necessity.
- Design compact-restoration policies that are politically viableWolf's preferred interventions: land value taxation (efficient and progressive), inheritance reform (close exemptions for the very wealthy), mandatory pension contribution increases (raise from 8% to 15% over a decade), housing investment financed by land value capture. Each is targeted at specific compact failures rather than generic redistribution.Pro tipLead with efficiency arguments alongside equity arguments — land value tax is less distorting than income tax, which makes the reform easier to defend on economic grounds alone.WarningUBI is a trap: at a meaningful level (5% of GDP), the money flows mostly to people who don't need it; at a lower level, it doesn't replace existing welfare. Wolf calls it 'a snare and a delusion.'
The Beveridge Plan (1942) institutionalised health, employment, and social care as universal rights. Combined with full-employment policy, progressive taxation, and strong union rights, it produced several decades of broadly shared growth. Wolf treats this as the compact's high-water mark.
Cameron and Osborne designed deficit reduction so approximately 80% came from spending cuts, hitting local authorities hardest. These cuts fell most severely on deindustrialised regions (Northeast England, Wales, parts of Scotland) that were already the poorest and most compact-excluded. Wolf directly cites this distributional choice as a proximate cause of the Brexit vote in those areas.
The 2008 crisis required state rescue of institutions that were the ideological champions of free markets. For ordinary citizens who had been told for 30 years that markets should be free of government intervention, this looked like the rules applying differently to the powerful.
Wolf traces this framework through his career in development economics and his 50+ years observing British economic policy. He was prescient about austerity — writing against it in real time in 2010 — and later traced the causal chain from Cameron-Osborne spending cuts (roughly 80% of fiscal adjustment through spending rather than tax) to local authority collapse in deindustrialised regions to Brexit votes in those same regions. The compact framework crystallised as the causal explanation for a chain he had observed unfold.