Posts Tagged ‘wages’

margulies

Special mention

4855  Bennett editorial cartoon

americans-are-drowning-in-debt-22-91eamericans-are-drowning-in-debt-23-b50

americans-are-drowning-in-debt-24-756

americans-are-drowning-in-debt-25-131americans-are-drowning-in-debt-26-7cf

americans-are-drowning-in-debt-27-514

americans-are-drowning-in-debt-28-966americans-are-drowning-in-debt-29-871

productivity-wages

Mainstream economists continue to insist that workers benefit from economic growth, because wages rise with productivity.

Here’s the argument as explained by Donald J. Boudreaux and Liya Palagashvili:

Firms cannot afford a misalignment of their workers’ pay and productivity increases—the employees will move to other firms eager to hire these now more productive workers. Higher economy-wide productivity, after all, means that workers add more to the bottom lines of employers throughout the economy. To secure the services of these more-productive workers, firms bid up worker pay. This competition for labor services is what links pay to productivity.

Except, of course, the link between wages and productivity has been severed for decades now, going back to the late-1970s. Since then, as the folks at the Economic Policy Institute have shown, productivity has increased by 70.3 percent but average worker’s wages have risen by only 11.1 percent.

So, no, there is no necessary or automatic link between productivity and wages within the U.S. economy. There may have been such a relationship after World War II, during the so-called Golden Age of American capitalism, but not in recent decades.*

A natural question that arises is just where did the excess productivity—the extra surplus U.S. employers appropriated from their workers—go? A significant proportion, as I showed last year, went to higher corporate profits. Another large portion went to those at the very top of the wage distribution.

appendix

As is clear in the chart above, the top 1 percent of earners saw cumulative gains in annual wages of 157.3 percent between 1979 and 2017—far in excess of economy-wide productivity growth and nearly four times faster than average wage growth (40.1 percent). Over the same period, top 0.1 percent earnings grew 343.2 percent, with the latest spike reflecting the sharp increase in executive compensation.

In other words, corporate executives—on both Main Street and Wall Street—have been able to share in the extra booty captured from American workers, who were forced to have the freedom to sell their ability to work for wages that have barely increased in recent decades.

That combination of stagnant wages for most workers and the ability of those at the top to capture a large portion of the extra surplus is therefore at the root of increasing inequality in the United States.

 

*Even then, as I explained back in 2017:

The fact is, the supposed Golden Age of American capitalism was based on a set of institutions that allowed the boards of directors of large corporations to appropriate a growing surplus and to distribute it as they wished. At first, during the immediate postwar period, that meant growing incomes for those in the bottom 90 percent. But, even then, the mechanisms for distributing income remained in the hands of a very small group at the top. And they had both the interest and the means to stop the growth of wages, get even more surplus (from U.S. workers and, increasingly, workers around the globe), and distribute a greater share of that surplus to a tiny group at the very top of the distribution of income.

babis.jpg

Special mention

600_219836

12-21-18.jpg

Special mention

600_219645  Alone

Tom Toles Editorial Cartoon - tt_c_c160330.tif

No matter how we measure it, most Americans are falling further and further behind the tiny group at the top.

fredgraph  fredgraph (1)

That’s not at all surprising. Whether we compare the growing gap between average wages and Gross Domestic Product per capita (as in the chart on the left) or real median household income and real Gross Domestic Product per capita (as in the chart on the right), it’s clear the average American has been losing out. A growing proportion of what workers produce hasn’t been going to them but to the richest households for decades now.

That does not mean, contra Robert Samuelson, that “the incomes of most Americans have stagnated for decades.” That’s a canard. No one makes that argument.

No, the real issue is that American workers have been producing more and more but getting only a tiny share of that increase. As I explained last year,

That’s what mainstream economists can’t or won’t understand: that workers may be worse off even as their wages and incomes rise. That problem flies in the face of every attempt to celebrate the existing order by claiming “just deserts.”

It’s what is known as relative immiseration. And it simply can’t be disputed by the alternative statistics invoked by Samuelson or Stephen J. Rose (pdf).

The exact numbers concerning the distribution of income in the United States depend, of course, on a whole host of assumptions and methodological choices, mostly involving what counts as “income.” The more categories that are included in income—starting with the traditional series (wages and salaries, dividends, interest, and rent) before and after taxes, and then including payments from government programs (such as Social Security, unemployment insurance, Temporary Assistance for Needy Families, and the earned-income tax credit), and going so far as to add employer contributions for health insurance and 401(k) retirement accounts, the employer share of the Federal Insurance Contributions Act, government noncash benefits (e.g., the Supplemental Nutrition Assistance Program, Medicare, Medicaid, and housing vouchers), housing services (homeowners paying rent to themselves) and government services (e.g., defense, education, legal system, and administration)—the less measured inequality turns out to be.

table2

In fact, as Rose demonstrates, most of the available studies show growing inequality in the United States, with a high and rising share of income captured by the top 1 percent.** The only real outlier is by Auten and Splinter, who merely demonstrate that it is possible for mainstream economists to make growing inequality virtually disappear with enough “massaging” of the underlying numbers.***

In the end, Samuelson himself is forced to admit,

None of this means we should stop debating inequality. Who gets what, and why, are inevitable subjects for examination in a rich democratic society. By contrast with many advanced societies, income and wealth are indisputably more concentrated in the United States.

And the problem of growing inequality is only going to get worse as we move forward, especially with ongoing automation. As David Autor explains,

employment is growing steadily, and its growth in terms of number of jobs has not been discernibly dented by technological progress. But the sum of wage payments to workers is growing more slowly than economic value-added, so labor’s share of the pie of net earnings is falling. This doesn’t mean that wages are falling. It means that they are not growing in lock step with value-added.

That’s exactly right. Workers’ wages and middle-class incomes may continue to rise in absolute terms but their relative standing with respect to the tiny group at the top—those who are in the position of capturing the surplus—will likely worsen.

Measure by measure, the economic and social landscape is being fractured and American workers are being left behind.

 

*So that I avoid the problem I encountered when I presented my “Merchant of Venice” paper, this post is not about Shakespeare’s play.

**The main studies include Emmanuel Saez and Thomas Piketty (pdf), Piketty, Saez and Gabriel Zucman (pdf), Gerald Auten and David Splinter (pdf), and the Congressional Budget Office. As I showed in 2016, even Rose, for all the faults in his own study, found

an enormous increase in inequality between 1979 and 2014: combined, the share of income going to the rich and upper middle-class more than doubled, from 30 to 63.1 percent, while the amount of income going to everyone else—middle-class, lower middle-class, and poor—fell precipitously, to less than 40 percent.

***Auten and Splinter arrive at such a misleading result through two statistical maneuvers: allocating underreported income (primarily business income) according to IRS audit data and retirement income. Thus, they conclude, “Our results suggest an alternative narrative about top income shares: changes in the top one percent income shares over the last half century are likely to have been relatively modest.”

T2D

Mainstream economists continue to discuss the two great crises of capitalism during the past century just like the pillars of society performed in the brothel—a “house of infinite mirrors and theaters”—in Jean Genet’s The Balcony.* The order they represent is indeed threatened by an uprising in the streets, and the only question is: can they reestablish the illusion of control?

The latest version of the absurdist economic play opens with Brad DeLong, who dons the costume of the liberal mainstream economist and argues that, while the Great Depression of the 1930s was far deeper than the Great Recession (what I have long referred to as the Second Great Depression), the recovery from the crash of 2007-08 was so mishandled that it casts a shadow over the U.S. economy in a way the first Great Depression did not.

now we are haunted by our Great Recession in a sense that our predecessors were not haunted by the Great Depression. Looking forward, it appears that we will be haunted for who knows how long. No unbiased observer projects anything other than slow growth, much slower than the years during and after World War II. Nobody is forecasting that the haunting will cease — that the shadow left from the Great Recession will lift.

Basically, DeLong blames two groups—conservative mainstream economists and policymakers (“including the decision makers at the top in the Obama administration”)—for a recovery that was both too long and too slow. The first claims the monetary and fiscal policies that were adopted were wrongheaded from the start, and fought every attempt to sustain or expand them. The second group claims they prevented a second Great Depression and refuses to acknowledge the failure of the policies they devised and adopted.

The customer who dresses up as a representative of the conservative wing of mainstream economics, Robert Samuelson, expresses his sympathy with DeLong’s analysis but considers it be overstated. Samuelson’s view is that slow growth is not caused by the shadow cast by inadequate economic policies, but is the more or less inevitable result of two exogenous events: reduced growth of the labor force and slower growth in productivity.

The retirement of baby-boom workers would have occurred without the Great Recession. The slowdown in productivity growth — reflecting technology, management and worker skills — is not well understood, but may also be independent of the Great Recession.

This is exactly what is to be expected in the high-end economic brothel. It’s a debate confined to growth rates and the degree to which economic policies or exogenous factors should ultimately shoulder the blame of the crisis of legitimacy of the current economic order. Each, it seems, wants to play the fantasy of the Chief of Police in order to create the illusion of restoring order.**

What DeLong and Samuelson choose not to talk about are the fundamental differences between the response to the 1929 crash and the most recent crisis of capitalism. As is clear from the data in the chart at the top of the post, the balance of power was fundamentally altered as a result of the New Deals (the first and especially the second), which simply didn’t occur in recent years. After 1929, the wage share (the green line) remained relatively constant, even in the face of massive unemployment—and eventually, as a result of a whole series of other policies (from regulating the financial sector through jobs programs to unleashing a wave of labor-union organizing), the shares of national income going to the bottom 90 percent (the blue line) and the top 1 percent (the red line) moved in opposite directions. The current recovery has been quite different: a declining wage share (which, admittedly, continues a decades-long slide), the bottom 90 percent losing out and the top 1 percent resuming its rise.

And the reason? As I see it, what was happening outside the brothel, in the streets, explains the different responses to the two crashes. It was the Left—in the form of political parties (Socialist, Communist, and the left-wing of the Democratic Party), but also labor unions, councils of the unemployed, academics, and so on—that pushed the administration of Franklin Delano Roosevelt and Congress to adopt policies that moved beyond restoring economic growth to fundamentally restructure the U.S. economy (which, of course, continued during and after the war years).*** Nothing similar happened in the United States after 2008. As a result, the policies that were discussed and eventually adopted only meant a recovery for large corporations and wealthy households. Everyone else has been left to battle over the scraps—attempting to get by on low-paying jobs retirement incomes based on volatile stock markets, with underwater mortgages and rising student debt, and facing out-of-control healthcare costs.****

It should come as no surprise, then, that the elites who continue to play out their fantasies in the house of mirrors have lost the trust of ordinary people. Unfortunately, in the wake of the Second Great Depression, it’s clear that new masqueraders have been willing to don the costumes and continue the fantasy that the old order can be restored.

Only a fundamental rethink, which rejects all the illusions created within the economic bordello, will chart a path that is radically different from the recoveries that followed both great crises of capitalism of the past hundred years.

 

*I saw my first production of “O Balcão” at Sao Paulo’s Teatro Oficina in 1970, as a young exchange student during one of the most repressive years of the Brazilian dictatorship. Staging Genet’s play at that moment represented both a searing critique of the military regime and an extraordinary act of resistance to government censorship.

**Much the same can be said of a parallel debate, between Joseph Stiglitz and Lawrence Summers.

***Even then, we need to recognize how limited the recovery from the first Great Depression was. Amidst all the changes and new regulations, leaving control of the surplus in private hands left large corporations with the interest and means to circumvent and ultimately eliminate the New Deal regulations, thus creating the conditions for the Second Great Depression.

****As Evan Horowitz has shown, roughly 14 percent of workers have seen no raise over the past year (counting only those who have stayed in the same job). That means, with inflation, their real wages have fallen. Moreover, “when a large share of workers get passed over for raises, wage growth for all workers tends to remain slow in the year ahead.”