Wage-labor and capital—pandemic edition

It’s clear, at least to many of us, that if the United States had a larger, stronger union movement things would be much better right now. There would be fewer cases and deaths from the novel coronavirus pandemic, since workers would be better paid and have more workplace protections. There would be fewer layoffs, since workers would have been able to bargain for a different way of handling the commercial shutdown. And there would be more equality between black and white workers, especially at the lower end of the wage scale.

But, in fact, the American union movement has been declining for decades now, especially in the private sector. Just since 1983, the overall unionization rate has fallen by almost half, from 20.1 percent to 10.3 percent. That’s mostly because the percentage of private-sector workers in unions has decreased dramatically, from 16.8 percent to 6.2 percent. And even public-sector unions have been weakened, declining from a high of 38.7 percent in 1994 to 33.6 percent last year.

The situation is so dire that even Harvard economist Larry Summers (along with his coauthor Anna Stansbury) has had to recognize that the “broad-based decline in worker power” is primarily responsible for “inequality, low pay and poor work conditions” in the United States.*

Summers is, of course, the extreme mainstream economist who has ignited controversy on many occasions over the years. The latest is when he was identified as one as one of Joe Biden’s economic advisers back in April. Is this an example, then, of a shift in the economic common sense I suggested might be occurring in the midst of the pandemic? Or is it just a case of belatedly identifying the positive role played by labor unions now that they’re weak and ineffective and it’s safe for to do so?

I’m not in a position to answer those questions. What I do know is that the theoretical framework that informs Summers’s work has mostly prevented him and the vast majority of other mainstream economists from seeing and analyzing issues of power, struggle, and class exploitation that haunt like dangerous specters this particular piece of research.

Let’s start with the story told by Summers and Stansbury. Their basic argument is that a “broad-based decline in worker power”—and not globalization, technological change, or rising monopoly power—is the best explanation for the increase in corporate profitability and the decline in the labor share of national income over the past forty years.

Worker power—arising from unionization or the threat of union organizing, firms being run partly in the interests of workers as stakeholders, and/or from efficiency wage effects—enables workers to increase their pay above the level that would prevail in the absence of such bargaining power.

So far, so good. American workers and labor unions have been under assault for decades now, and their ability to bargain over wages and working conditions has in fact been eroded. The result has been a dramatic redistribution of income from labor to capital.

Clearly, as readers can see in the chart above, using official statistics, the labor share of national income fell precipitously, by almost 10 percent, from 1983 to 2020.**

Not surprisingly, again using official statistics, the profit rate has risen over time. The trendline (the black line in the chart above), across the ups and downs of business cycles, has a clear upward trajectory.***

Over the course of the last four decades is that, as workers and labor unions have been decimated, corporations have been able to pump out more surplus from their workers, thereby lowering the wage share and increasing the profit rate.

But that’s not how things look in the Summers-Stansbury world. In their view, worker power only gives workers an ability to receive a share of the rents generated by companies operating in imperfectly competitive product markets. So, theirs is still a story that relies on exceptions to perfect competition, the baseline model in the world of mainstream economic theory.

And that’s why, while their analysis seems at first glance to be pro-worker and pro-union, and therefore amenable to the concerns of dogmatic centrists, Summers and Stansbury hedge their bets by references to “countervailing power,” the risk of increasing unemployment, and “interferences with pure markets” that “may not enhance efficiency” if measures are taken to enhance worker power.

Still, within the severe constraints imposed by mainstream economic theory, moments of insight do in fact emerge. Summers and Stansbury do admit that the wage-profit conflict that is at the center of their story does explain the grotesque levels of inequality that have come to characterize U.S. capitalism in recent decades—since “some of the lost labor rents for the majority of workers may have been redistributed to high-earning executives (as well as capital owners).” Therefore, in their view, “the decline in labor rents could account for a large fraction of the increase in the income share of the top 1% over recent decades.”

The real test of their approach would be what happens to workers’ wages and capitalists’ profits in the absence of imperfect competition. According to Summers and Stansbury, workers would receive the full value of their marginal productivity, and there would be no need for labor unions. In other words, no power, no struggle, and no class exploitation.

That’s certainly not what the world of capitalism looks like outside the confines of mainstream economic extremism. It’s always been an economic and social landscape of unequal power, intense struggle, and ongoing class exploitation.

The only difference in recent decades is that capital has become much stronger and labor weaker, at least in part because of the theories and policies produced and disseminated by mainstream economists like Summers and Stansbury. Now, as they stand at the gates of hell, it may just be too late for their extreme views and the economic and social system they have so long celebrated.

*The link in the text is to the column by Summers and Stansbury published in the Washington Post. That essay is based on their research paper, published in May by the National Bureau of Economic Research.

**We need to remember that the labor share as calculated by the Bureau of Labor Statistics includes incomes (such as the salaries of corporate executives) that should be excluded, since they represent distributions of corporate profits.

***I’ve calculated the profit as the sum of the net operating surpluses of the nonfinancial and domestic financial sectors divided by the net value added of the nonfinancial sector. The idea is that the profits of both sectors originate in the nonfinancial sector, a portion of which is distributed to and realized by financial enterprises. The trendline is a second-degree polynomial.

“Nothing will fundamentally change”

Three and a half weeks ago, Bernie Sanders became the last challenger to drop out of the race, thus clearing the way for Joe Biden to become the Democratic nominee on the November presidential ballot.

Since then, the novel coronavirus has engulfed the country (and, of course, the world), the U.S. economy has mostly come to a standstill, and tens of million American workers have joined the ranks of the unemployed, while “essential” workers are forced to commute to and labor in perilous conditions and jobless families have found it necessary to walk or take to their cars to wait in line by the thousands outside food banks.

Biden therefore has to find a way of presenting a progressive alternative to Trump by articulating some clear ideas, and perhaps eventually a detailed plan, to confront the most dramatic economic and social crises to face the United States since the first Great Depression.

Given the fact that Biden was the first choice of the conservative Democratic establishment, which breathed a sigh of relief when he and not Sanders (or, for that matter, Elizabeth Warren) became the presumptive nominee, he was quickly warned that he needed to pay attention to and incorporate ideas from progressive movements inside and outside the party.

Just hours after Sanders ended his campaign, seven groups made up of young left-wing activists—the Alliance for Youth Action, Justice Democrats, the March for Our Lives Action Fund, NextGen America, Student Action, the Sunrise Movement, and United We Dream Action—sent an open letter to Biden with a set of demands spanning policy and personnel to earn their support in the general election against Donald Trump.

Messaging around a “return to normalcy” does not and has not earned the support and trust of voters from our generation. For so many young people, going back to the way things were “before Trump” isn’t a motivating enough reason to cast a ballot in November. And now, the coronavirus pandemic has exposed not only the failure of Trump, but how decades of policymaking has failed to create a robust social safety net for the vast majority of Americans.

And then, a few weeks later, Bloomberg revealed that one of Biden’s economic advisers was none other than. . .Larry Summers.

As it turns out, Summers was the first name on the “Biden Do Not Reappoint” (or, alternatively, Do Not Resuscitate) list published last month by Robert Kuttner, who wrote that Summers in 2009 “not only lowballed the necessary economic stimulus and ended it prematurely, but he successfully fought for rescuing the biggest banks rather than taking them into temporary receivership.”

The response to Bloomberg’s scoop was quick and equally categorical. In a joint statement, two of the organizations that signed the open letter—Justice Democrats and the Sunrise Movement—announced they were launching a petition asking Biden to disavow Summers, whom the groups noted has a long history of advocating for harmful economic policies and a record of bigoted statements. And David Sirota, senior adviser and speechwriter on the Sanders campaign, tweeted that Biden “has chosen as his economic adviser the main Democratic proponent of the China PNTR deal and Wall Street deregulation. Apparently, Biden may really have meant it when he said ‘nothing will fundamentally change’.”

What is it about Summers that provokes such ire from progressive individuals and movements?

Perhaps the best place to begin is the piece that Michael Hirsh published in the National Journal back in 2013, when Barack Obama was considering Summers as the replacement for Federal Reserve Board Chairman Ben Bernanke. Hirsh noted that while “on paper, Summers is a superb candidate to succeed Bernanke in a post that the brilliant 58-year-old Harvard professor has pined for since his earliest days in Washington, he was “a very risky choice for chairman.”*

Why? Hirsh presented two main reasons: First, Summers often used his power and intellectual arrogance “to bully opponents into silence, even when they have been proved right.” Second, he had committed “a lot of errors in the past 20 years”—from his moves to deregulate Wall Street in the administration of Bill Clinton to the too-tepid response to the Second Great Depression under Obama—and “yet in no instance has Summers ever been known to publicly acknowledge a mistake.”**

Hirsh’s article played an important role—in addition to opposition from four Democrats on the Senate Banking Committee—in forcing Summers to withdraw his name from consideration for the post.***

As regular readers know, I have had my own running battle with Summers and his economic views on this blog. For example, I challenged him on the idea that inequality is necessary consequence of entrepreneurship; that capitalism has no inherent flaws and the problems of unemployment, inequality, and so on “can be addressed with proper fiscal and monetary policies”; that Summers, unlike most academics, has been very well paid to play on behalf of those who have a big stake in what’s being debated inside and outside the academy; that his “belated, poorly thought-out, population-driven ‘discovery’ of the possibility of secular stagnation” received undeserved accolades from other mainstream economists; that the cure for secular stagnation does not reveal a flaw in capitalism but instead has an easy fix, an increase in government-financed infrastructure spending; and finally that workers’ compensation depends on productivity growth and therefore it’s not necessary—and perhaps even counter-productive—to shift attention from growth to solving the problem of inequality.

More recently, Summers joined fellow Harvard economist Gregory Mankiw in criticizing the kind of wealth taxes that were proposed by Sanders and Warren (as scored by Emmanuel Saez and Gabriel Zucman)—because, among other things, wealthy people can avail themselves of many ways to avoid such taxes (thus reducing the projected revenues) and because closing loopholes would “involve placing limits on the ability to be charitable or to establish trusts for the benefits of grandchildren.”****

The fact is, Summers continues to represent, from his perch at Harvard, both the theoretical blinders and bullying stance of mainstream economics as well as the rush to return to “business as usual” within the Democratic Party.

If Biden wants to signal to wealthy donors and large corporations and banks that, if he somehow manages to defeat Trump in November, “nothing will fundamentally change,” then he really can’t do better than to stick with Summers.

 

*Back in 2013, my own choice, for what it’s worth, was Federal Reserve Governor Sarah Raskin.

**As I wrote in 2009, those characteristics (which Cornel West described as “a braininess that lacks wisdom and vision” and “a smartness that lacks a sensitivity to the poor and the marginal”) are a good description of most mainstream economists I have come across over the years.

***Kuttner, in a more recent piece, wrote that “After Summers personally complained to David Bradley, then the publisher of Atlantic Media, which owned National Journal, Hirsh was advised to seek other work—he ended up moving to Politico and then to Foreign Policy, though no errors were ever found in the Summers piece and no correction was ever issued.”

****If readers want to follow the debate, here is a link to the rejoinder by Saez and Zucman (pdf) and a follow-up response by Summers and his coauthor Natasha Sarin.

Stiglitz vs. Summers

Mark Tansey, “Source of the Loue” (1988)

Two giants of mainstream economics—Joseph Stiglitz and Lawrence Summers—have been engaged in an acrimonious, titanic battle in recent weeks. The question is, what’s it all about? And, even more important, what’s at stake in this debate?

At first glance, the intense, even personal back-and-forth between Stiglitz and Summers seems a bit odd. Both economists are firmly in the liberal wing of mainstream economics and politics—as against, for example, Gene Epstein (an Austrian economist, who accuses Stiglitz of regularly siding with left-wing populists like Hugo Chávez) or John Taylor (a committed supply-sider, who has long been suspicious of “demand-side discretionary stimulus packages”). Both Stiglitz and Summers have pointed out the limitations of monetary policy, especially in the midst of deep economic recessions, and have favored relatively large fiscal-policy interventions, a hallmark of mainstream liberal economic policy.

One might be tempted to see it as merely a clash of outsized egos, which of course is not at all rare among mainstream economists. Their exaggerated sense of self-importance and intellectual arrogance are legion. Neither Stiglitz nor Summers has ever been accused of being a shrinking-violet when it comes to debates in the many academic and policy-related positions they’ve held.* And there’s certainly a degree of personal animus behind the current debate. Apparently, Summers [ht: bn] successfully lobbied in 2000 for Stiglitz’s removal from the World Bank, reportedly as a condition of the reappointment of Jim Wolfensohn as President of the World Bank. And, in 2013, Stiglitz came out strongly in favor of Janet Yellen, over Summers, for head of the Federal Reserve.**

That’s certainly part of the story. And the personal attacks and evident animosity from both sides have attracted a great deal attention of onlookers. But I think much more is at stake.

The current debate began with the critique Stiglitz leveled at the notion of “secular stagnation,” which Summers has championed starting in 2013 as an explanation for the slow recovery of the U.S. economy after the crash of 2007-08. The worry among many mainstream economists has been that, given the severity and duration of the Second Great Depression, capitalism could no longer deliver the goods.*** In particular, Summers invoked the specter of persistently slow growth, which had originally been put forward in the midst of the first Great Depression by Alvin Hansen, created by demography: the decrease in the number of available workers, itself a result of the declines in the rate of population growth and the labor force participation rate. The worry is that, looking forward, there simply won’t be enough workers to sustain the rates of potential economic growth we saw in the years leading up to the most recent crisis of capitalism. In the meantime, Summers, in traditional Keynesian fashion, expressed his support for raising the level of aggregate demand, through public and private spending, even at low real interest rates (which, in his view, were incapable of fulfilling their traditional role of boosting spending).****

Stiglitz for his part has dismissed the idea of secular stagnation, as “an excuse for flawed economic policies” (especially the inadequate stimulus package proposed and enacted by the administration of Barack Obama), and put forward an alternative analysis for capitalism’s slow growth problem: its inability to manage structural transformations of the economy. According to Stiglitz, the shift from manufacturing-led growth to services-led growth characterized the U.S. economy in the years before the most recent crash, analogous to the manner in which the crisis in agriculture “led to a decrease in demand for urban goods and thus to an economy-wide downturn” in the lead-up to the depression of the 1930s. Thus, in his view, World War II brought about a structural transformation in the United States (“as the war effort moved large numbers of people from rural areas to urban centers and retrained them with the skills needed for a manufacturing economy”) but nothing similar was undertaken in the wake of the crash of 2007-08.

The Obama administration made a crucial mistake in 2009 in not pursuing a larger, longer, better-structured, and more flexible fiscal stimulus. Had it done so, the economy’s rebound would have been stronger, and there would have been no talk of secular stagnation.

These are the terms of the theoretical debate, then, between Stiglitz and Summers: a focus on sectoral shifts versus a worry about secular stagnation. The first concerns the way the private forces of American capitalism have been inept in handling structural transformations of the economy, while the second focuses on ways in which “the private economy may not find its way back to full employment following a sharp contraction.”

For my part, both stories have an important role to play in making sense of both economic depressions—the first as well as the second. The problem is, neither Stiglitz nor Summers has presented an analysis of how American capitalism created the conditions for either crash. Stiglitz does not explain how the crisis in agriculture in the 1920s or the move away from manufacturing in recent decades was created by tendencies within existing economic institutions. Similarly, Summers does not conduct an analysis of the changes in U.S. capitalism that, in addition to producing lower growth rates, led to the massive downturn beginning in 2007-08. Their respective approaches are characterized by exogenous event rather than the endogenous changes leading to instability one might look for in a capitalist economy.

Moreover, both Stiglitz and Summers presume that the appropriate stimulus project will fulfill the mainstream macroeconomic utopia characterized by levels of output and a price level that corresponds to full employment and price stability. There is nothing in either of their approaches that recognizes capitalism’s inherent instability or its tendency, even in recovery, of generating one-sided outcomes. For Stiglitz, “the challenge was—and remains—political, not economic: there is nothing that inherently prevents our economy from being run in a way that ensures full employment and shared prosperity.” Similarly, Summers emphasizes the way “fiscal policies and structural measures to support sustained and adequate aggregate demand” can overcome the problems posed by secular stagnation. In other words, both Stiglitz and Summers redirect attention from capitalism’s own tendencies toward instability and uneven recoveries and focus instead on the set of economic policies that in their view are able to create full employment and price stability.

Finally, while Stiglitz and Summers mention en passant the problem of growing inequality, neither takes the problem seriously, at least in terms of analyzing the conditions that led to the crash of 2007-08—or, for that matter, the lopsided nature of the recovery. There’s nothing in the debate (or in their other writings) about how rising inequality across decades, based on stagnant wages and record profits, served to dismantle government regulations on the financial sector (because those who received the profits had both the means and interest to do so) and to propel the tremendous growth (on both the demand and supply sides) of financial activities within the U.S. economy. Nor is there a discussion of how focusing on the recovery of banks, large corporations, and the incomes and wealth of a tiny group at the top was based on a deterioration of the economic and social conditions of everyone else—much less how a larger stimulus package would have produced a substantially different outcome.

The fact is, the debate between Stiglitz and Summers is based on a discussion of terms and a mode of analysis that are firmly inscribed within the liberal wing of mainstream economics. Focusing on the choice between one or the other merely to serves to block, brick by brick, the development of much more germane approaches to analyzing the conditions and consequences of the ways American capitalism has been characterized by fundamental instability and obscene levels of inequality—today as in the past.

 

*Stiglitz is a recipient of the John Bates Clark Medal (1979) and the Nobel Prize in Economics (2001). He served as the Chair of Bill Clinton’s Council of Economic Advisers (1995-1997) and Chief Economist at the World Bank (1997-2000). He is currently a professor of economics at Columbia University (since 2001). Summers is former Vice President of Development Economics and Chief Economist of the World Bank (1991–93), senior U.S. Treasury Department official throughout Clinton’s administration (ultimately Treasury Secretary, 1999–2001), and former director of the National Economic Council for President Obama (2009–2010). He is a former president of Harvard University (2001–2006), where he is currently a professor and director of the Mossavar-Rahmani Center for Business and Government at Harvard’s Kennedy School of Government.

**My choice, for what it’s worth, was Federal Reserve Governor Sarah Raskin.

***As I explained in 2016, contemporary capitalism has a slow-growth problem—”because growth is both a premise and promise of a particularly capitalist way of organizing our economic activities.”

****An archive of Summers’s various blog posts on secular stagnation can be found here.

Desperately seeking a link between wages and productivity

Everyone, it seems, now agrees that there’s a fundamental problem concerning wages and productivity in the United States: since the 1970s, productivity growth has far outpaced the growth in workers’ wages.*

Even Larry Summers—who, along with his coauthor Anna Stansbury, presented an analysis of the relationship between pay and productivity last Thursday at a conference on the “Policy Implications of Sustained Low Productivity Growth” sponsored by the Peterson Institute for International Economics.

Thus, Summers and Stansbury (pdf) concur with the emerging consensus,

After growing in tandem for nearly 30 years after the second world war, since 1973 an increasing gap has opened between the compensation of the average American worker and her/his average labor productivity.

The fact that the relationship between wages and productivity has been severed in recent decades presents a fundamental problem, both for U.S. capitalism and for mainstream economic theory. It calls into question the presumption of “just deserts” within U.S. economic institutions as well as within the theory of distribution created and disseminated by mainstream economists.

It means, in short, that much of what American workers are produced is not being distributed to them, but instead is being captured to their employers and wealthy individuals at the top, and that mainstream economic theory operates to obscure this growing problem.

It should therefore come as no surprise that Summers and Stansbury, while admitting the growing wage-productivity gap, will do whatever they can to save both current economic institutions and mainstream economic theory.

First, Summers and Stansbury conjure up a conceptual distinction between a “delinkage view,” according to which increases in productivity growth no long systematically translate into additional growth in workers’ compensation, and a “linkage view,” such that productivity growth does not translate into pay, but only because “other factors have been putting downward pressure on workers’ compensation even as productivity growth has been acting to lift it.” The latter—linkage—view maintains mainstream economists’ theory that wages correspond to workers’ productivity and that, in terms of the economy system, increasing productivity will raise workers’ wages.

Second, Summers and Stansbury compare changes in labor productivity and various time-dependent and lagged measures of the typical worker’s compensation—average compensation, median compensation, and the compensation of production and nonsupervisory workers—and find that, while compensation consistently grows more slowly than productivity since the 1970s, the series (both of them in log form) move largely together.

Their conclusion, not surprisingly, is that there is considerable evidence supporting the “linkage” view, according to which productivity growth is translated into increases in workers’ compensation and hence improving living standards throughout the postwar period. Thus, in their view, it’s not necessary—and perhaps even counter-productive—to shift attention from growth to solving the problem of inequality.

But Summers and Stansbury are still unable to dismiss the existence of an increasing wedge between productivity and compensation, which has two components: mean and median labor compensation have diverged and, at the same time, there’s been a falling labor share in the United States.

That’s where they stumble. They look for, but can’t find, a link between productivity and those two measures of growing inequality. There simply isn’t one.

What there is is a growing gap between productivity and compensation in recent decades, which has result in both a falling labor share and higher growth of labor compensation at the top. That is, more surplus is being extracted from workers and some of that surplus is in turn distributed to those at the top (e.g., industrial CEOs and financial executives).

Moreover, one can argue, in a manner not even envisioned by Summers and Stansbury, that the increasing gap between productivity and workers’ compensation is at least in part responsible for the productivity slowdown. Changes in the U.S. economy that emphasize capturing an increasing share of the surplus from around the world have translated into slower productivity growth in the United States.

The only conclusion, contra Summers and Stansbury, is that even if productivity growth accelerates, there is no evidence that suggests “the likely impact will be increased pay growth for the typical worker.”

More likely, at least for the foreseeable future, is the increasing inequality and the (relative) immiseration of American workers. Those are the problems neither existing economic institutions nor mainstream economic theory are prepared to acknowledge or solve.

*Actually, the argument is about productivity and compensation, not wages. In fact, Summers and Stansbury assert that “the definition of ‘compensation’ should incorporate both wages and non-wage benefits such as health insurance.” Their view is that, since the share of compensation provided in non-wage benefits significantly rose over the postwar period, comparing productivity against wages alone exaggerates the divergence between pay and productivity. An alternative approach distinguishes what employers have to pay to workers, wages (the value of labor power, in the Marxian tradition), from what employers have to pay to others, such as health insurance companies, in the form of non-wage benefits (which, again in the Marxian tradition, is a distribution of surplus-value).

Hammer time

Millions of workers have been displaced by robots. Or, if they have managed to keep their jobs, they’re being deskilled and transformed into appendages of automated machines. We also know that millions more workers and their jobs are threatened by much-anticipated future waves of robotics and other forms of automation.

But mainstream economists don’t want us to touch those robots. Just ask Larry Summers.

Summers is particularly incensed by Bill Gates’s suggestion that we begin taxing robots. So, he trots out all the usual arguments, hoping that at least one of them will stick. It’s hard to distinguish between robots and other forms of automation. Robots and other forms of automation produce better goods and services. And, of course, automation enhances productivity and leads to more wealth. So, we shouldn’t do anything to shrink the size of the economic pie.

This last point has long been standard in international trade theory. Indeed, it is common to point out that opening a country up to international trade is just like giving it access to a technology for transforming one good into another. The argument, then, is that since one surely would not regard such a technical change as bad, neither is trade, and so protectionism is bad. Mr Gates’ robot tax risks essentially being protectionism against progress.

Progress, indeed.

What mainstream economists like Summers fail to understand is that not touching the robots—or, for that matter, international trade—means keeping things just as they are. It means keeping the decisions about jobs, just like the patterns of international trade, in the hands of a small group of employers. They’re the ones who, under current circumstances, appropriate the surplus and decide where and how jobs will be created—and, of course, where they will be destroyed. Which, as I explained last year, is exactly how international trade takes place.

And because employers, now and as Summers would like to see the world, are the ones who are allowed to retain a monopoly over jobs and trade, they also decide how the economic pie is distributed and redistributed. Tinkering around the edges—with the usual liberal shibboleths about the need for “education and retraining”—doesn’t fundamentally alter the fact that workers remain subject to decisions about technology and trade in which they have no say. Workers are thus forced to have the freedom to adjust, with more or less government assistance, to decisions taken by their employers.

And to sit back and admire, but not touch, the growth in productivity.*

 

*And that’s pretty much what Brad DeLong also recommends in making, for the umpteenth time, the argument that today, the world’s population is, on average, many times richer than it was during the long preceding age—because both average wealth and consumer choice have increased. Delong, like Summers, doesn’t want us to touch the “innovations that have fundamentally transformed human civilization.”

Capitalism’s growth problem

Contemporary capitalism has a big problem. And no one seems to be able to refute it.

The problem, as Robert J. Gordon sees it, is that economic growth is slowing down, it has been for decades, and there’s no prospect for a resumption of fast economic growth in the foreseeable future. After fifty (from 1920 to 1970) years of relatively fast growth, and a single decade (the 1950s) of spectacular growth, the prospects for continued growth seem to have dimmed after 1970.

In the century after the end of the Civil War, life in the United States changed beyond recognition. There was a revolution—an economic, rather than a political one—which freed people from an unremitting daily grind of manual labour and household drudgery and a life of darkness, isolation and early death. By the 1970s, many manual, outdoor jobs had been replaced by work in air-conditioned environments, housework was increasingly performed by machines, darkness was replaced by electric light, and isolation was replaced not only by travel, but also by colour television, which brought the world into the living room. Most importantly, a newborn infant could expect to live not to the age of 45, but to 72. This economic revolution was unique—and unrepeatable, because so many of its achievements could happen only once. . .

Since 1970, economic growth has been dazzling and disappointing. This apparent paradox is resolved when we recognise that recent advances have mostly occurred in a narrow sphere of activity having to do with entertainment, communications and the collection and processing of information. For the rest of what humans care about—food, clothing, shelter, transportation, health and working conditions both inside and outside the home—progress has slowed since 1970, both qualitatively and quantitatively.

From what I have read, Gordon appears to privilege technical innovation over other factors (such as dispossessing noncapitalist producers and creating a large class of wage-laborers, concentrating them in factories and cities, and so on). He also seems to argue that the fruits of past economic growth were evenly distributed and that the drudgery of work itself has been eliminated.

Still, the idea that rapid economic growth took place during a relatively short period of time dispels one of the central myths of capitalism, much as the discovery that relative equality in the distribution of wealth and constant factor shares characterized an exceptional phase of capitalism.

And that’s a problem: the premise and promise of capitalism are that it “delivers the goods.” It did, for a while, and now it seems it can’t—which has mainstream commentators worried.

They’re worried that capitalism can no longer guarantee fast economic growth. And they’re worried, try as they might, that they can’t refute Gordon’s analysis. Not Paul Krugman or Larry Summers or, for that matter, Tyler Cowen.

All three applaud Gordon’s historical analysis. And all three desperately want to argue he’s wrong looking forward. But they can’t.

The best they can come up with is the idea that the future is uncertain. Thus, as Cowen writes, “many past advances came as complete surprises.”

Although the advents of automobiles, spaceships, and robots were widely anticipated, few foretold the arrival of x-rays, radio, lasers, superconductors, nuclear energy, quantum mechanics, or transistors. No one knows what the transistor of the future will be, but we should be careful not to infer too much from our own limited imaginations.

Indeed. We certainly don’t know what lies ahead. But, since the 1970s, we’ve witnessed growing inequality in the distribution of income and wealth, which resulted in and in turn was exacerbated by the most severe economic crisis since the 1930s. Capitalism’s legitimacy, based on “just deserts” and economic stability, was already being called into question. Decades of slow economic growth and the real possibility that that trend might continue for the foreseeable future mean that capitalism (not to mention those who spend their time celebrating capitalism’s successes and failing to imagine alternatives) has an even bigger problem.

With friends like these. . .

Last night in the annual McBride Lecture (a series sponsored by the University of Notre Dame Higgins Labor Studies Program that honors the fourth international president of the United Steel Workers, Lloyd McBride, who was president from 1977 to 1983), Tom Geoghegan argued that the tide may finally be turning as more and more people (including leading mainstream economists such as Larry Summers) express their support for labor unions.

Here’s what I was able to find from Summers:

What about the role of more traditional unionization and collective bargaining?

I think that one has to maintain a sense of balance. Unions are right in some employment contexts. Unions do not add value in other employment contexts.

What I think is important is the principle enshrined in U.S. law that workers should have the right to collectively bargain if that is what they desire. I am concerned that in recent times that right has eroded because employers have been permitted to retaliate against those who seek to organize workers with impunity.

At the same time, I would be the first to recognize that in a world where American businesses are competing very vigorously with foreign competitors, in a world where domestic competition has increased substantially, prudent union leaders will need to recognize that they need to cooperate with management to craft employment arrangements that better serve workers, but also serve the objectives of competitiveness and economic efficiency.

I think there’s substantial scope for thinking about new compacts between firms and workers in the mutual interest of both.

Just sayin’. . .

Class wars

Is 2015 going to be the year of class?

It certainly seems so, to judge by the widening gap between the wage and profit shares (the wage share in blue on the right scale of the chart above, the profit share in red on the left scale) and the worries recently expressed by politicians, economists, and journalists.

There is, of course, Mitt Romney on income inequality and the “scourge of poverty” (because Republicans have nowhere else to go, having been boxed in by Barack Obama on most other issues, but they’re going to have a hard time going against their pro-business agenda, especially with Romney as the standard-bearer).

And Obama himself, who apparently is going to propose closing the multibillion-dollar tax loopholes used by the wealthiest Americans, imposing a fee on big financial firms, and then using the revenue to benefit the middle-class (but he’s unlikely to get much bipartisan support in Congress for any kind of serious moves on those issues).

Plus we have the spectacle of Larry Summers (together with Shadow Chancellor of the Exchequer Ed Balls) openly expressing his concern for the future of democracy if capitalism cannot deliver broad-based prosperity, which may give rise to “political alienation, a loss of social trust, and increasing conflict across the lines of race, class, and ethnicity.”

But, as Mike Whitney [ht: ja] reminds us, the problem of class war is not a recent phenomenon: the most recent chapter started in the mid-1970s, when “everything started going down the plughole.” Once wages became detached from productivity,

the rich progressively got richer. They used their wealth to reduce taxes on capital, roll back critical regulations, break up the unions, install their own lapdog politicians, push through trade agreements that pitted US workers against low-paid labor in the developing world, and induce their shady Central Bank buddies to keep interest rates locked below the rate of inflation so they could cream hefty profits off gigantic asset bubbles. Now, 40 years later, they own the whole shooting match, lock, stock and barrel. And it’s all because management decided to take the lion’s share of productivity gains which threw the whole system off-kilter undermining the basic pillars of democratic government.

That’s where we stand today, in the midst of a class war. And, as everyone now acknowledges, only one side—a tiny minority at the top—is winning.

All in the family

My better half has insisted for years that I not be too hard on Paul Krugman. The enemy of my enemy. Popular Front. And all that. . .

But enough is enough.

I simply can’t let Krugman [ht: br] get away with writing off a large part of contemporary economic discourse (not to mention of the history of economic thought) and with his declaration that Larry Summers has “laid down what amounts to a very radical manifesto” (not to mention the fact that I was forced to waste the better part of a quarter of an hour this morning listening to Summers’s talk in honor of Stanley Fischer at the IMF Economic Forum, during which he announces that he’s finally discovered the possibility that the current level of economic stagnation may persist for some time).

Krugman may want to curse Summers out of professional jealousy. Me, I want to curse the lot of them—not only the MIT family but mainstream economists generally—for their utter cluelessness when it comes to making sense of (and maybe, eventually, actually doing something about) the current crises of capitalism.

So, what is he up to? Basically, Krugman showers Summers in lavish praise for his belated, warmed-over, and barely intelligible argument that attains what little virtue it has about the economic challenges we face right now by vaguely resembling the most rudimentary aspects of what people who read and build on the ideas of Marx, Kalecki, Minsky, and others have been saying and writing for years. The once-and-former-failed candidate for head of the Federal Reserve begins with the usual mainstream conceit that they successfully solved the global financial crash of 2008 and that current economic events bear no resemblance to the First Great Depression. But then reality sinks in: since in their models the real interest-rate consistent with full employment is currently negative (and therefore traditional monetary policy doesn’t amount to much more than pushing on a string), we may be in for a rough ride (with high output gaps and persistent unemployment) for some unknown period of time. And, finally, an admission that the conditions for this “secular stagnation” may actually have characterized the years of bubble and bust leading up to the crisis of 2007-08.

That’s where Krugman chimes in, basking in the glow of his praise for Summers, expressing for the umpteenth time the confidence that his simple Keynesian model of the liquidity trap and zero lower bound has been vindicated. The problem is, Summers can’t even give Alvin Hansen, the first American economist to explicate and domesticate Keynes’s ideas, and the one who first came up with the idea of secular stagnation based on the Bastard Keynesian IS-LM model, his due (although Krugman does at least mention Hansen and provide a link). I guess it’s simply too much to expect they actually recognize, read, and learn from other traditions within economics, concerning such varied topics as the role of the Industrial Reserve Army in setting wages, political business cycles, financial fragility, and much more.

And things only go down from there. Because the best Summers and Krugman can do by way of attempting to explain the possibility of secular stagnation is not to analyze the problems embedded in and created by existing economic institutions but, instead, to invoke that traditional deus ex machina, demography.

Now look forward. The Census projects that the population aged 18 to 64 will grow at an annual rate of only 0.2 percent between 2015 and 2025. Unless labor force participation not only stops declining but starts rising rapidly again, this means a slower-growth economy, and thanks to the accelerator effect, lower investment demand.

You would think that a decent economist, not even a particularly left-wing one, might be able to imagine the possibility that a labor shortage might cause higher real wages, which might have myriad other effects, many of them really, really good—not only for people who continue to be forced to have the freedom to sell their ability to work but also for their families, their neighbors, and for lots of other participants in the economy. But, apparently, stagnant wages (never mind supply-and-demand) are just as “natural” as Wicksell’s natural interest rate.

And then, finally, this gem:

The point is that it’s not hard to think of reasons why the liquidity trap could be a lot more persistent than anyone currently wants to admit.

No, it’s not hard to think of many such reasons. But when the question is asked in the particular way Krugman poses it—in terms of natural rates of this and that, of interest-rates, population, wages, innovation, and so on—the only answers that need be admitted into the discussion come from other members of the close-knit family (and thus from Summers, Paul Samuelson, and Robert Gordon). All of the other interesting work that has been conducted in the history of economic thought and by contemporary economists concerning in-built crisis tendencies, long-wave failures of growth, endogenous technical innovation, financial speculation, and so on is simply excluded from the discussion.

It is no wonder, then, that mainstream economists—even the best of them—are so painfully inarticulate and hamstrung when it comes to making sense of the current economic malaise.

I’ll admit, it wouldn’t be so bad if it was just a matter of professional jealousy and their not being able to analyze what is going on except through the workings of a small number of familiar assumptions and models. They talk as if it’s only their academic reputations that are on the line. But we can’t forget there are millions and millions of people, young and old, in the United States and around the world, whose lives hang in the balance—well-intentioned and hard-working people who are being made to pay the costs of economists like Krugman attempting to keep things all in the family.

Cartoon of the day

Special mention