Posts Tagged ‘wages’


I’m taking nominations for the best examples of dismal economic scientists.

While I wait for your suggestions, I’m going to offer two of my own nominations: Tyler Cowen and Paul Romer.

I am nominating Cowen because, in his argument that the economy probably needs a “reset,” he only focuses on lowering workers’ wages. First, he makes no mention of resetting corporate profits or the incomes of those at the very top, as if what they manage to capture were completely off limits. All the adjustment in the new, “grimmer future” will be born by those at the bottom. Second, he completely overlooks the mechanisms of his own economic theory: if lower rates of economic growth are the product of lower rates of growth of available workers (a key factor in the theory of secular stagnation), then the relative scarcity of workers should mean higher—not lower—wages. In other words, Cowen is determined to make sure all the costs of the new, slower-growing economy will be born by shifted onto those who can least afford it. For that reason, I nominate Cowen for the title of dismal economist.

I also want to nominate Romer, who continues to double down on his “mathiness” argument, by asserting (against all the work that has taken place in the philosophy of science in recent decades) that (a) there’s a single truth, (b) that truth can only be obtained via science, and (c) mathematical modeling is the singular method for making progress in science to obtain truth. There are so many things wrong with each of those assertions it’s hard to know where to begin. And I won’t, at least right now. Let me just say Romer deserves his nomination as one of the most dismal economists because of the extraordinary arrogance, pretentiousness, and ignorance of the following statements:

About math:. . .I’ve seen clear evidence that math can facilitate scientific progress toward the truth.

If you think that math is worthless or dangerous, I’m sure that there are people who will be happy to discuss this with you. I’m not interested. I’m busy.

About truth and science: My fundamental premise is that there is an objective notion of truth and that science can help us make progress toward truth.

If you do not accept this premise, I’m sure that there are people who would be happy to debate it with you. I’m not interested. I’m busy.

And please do not write to tell me that science is a social process or that the progress it makes toward the truth can be irregular. I know.

Me, I’m not too busy to discuss either the fundamental injustices of contemporary capitalism or the often-worthless and dangerous role mathematics, truth, and science have played and continue to play in the discipline of economics.

I’m also not too busy to post additional nominations for dismal economists.


Tyler Cowen has made a bit of a splash with his argument that, here in the United States, we’re probably in the midst of an economic “reset.”

What does Cowen mean? Essentially, his argument is that economic growth may continue at relatively low levels for the foreseeable future (in contrast to the higher rates of growth following on other postwar recessions), that low and stagnant wages will likely continue (his examples are lower salaries of adjunct faculty, two-tier wage systems in manufacturing, and lower wages for college graduates), and there’s probably not much government policy can do to avoid this “grimmer future.”

In this, Cowen is basically echoing the concerns expressed by others, in the form of the “new normal” (associated with, among others, PIMCO boss Mohamed El-Erian) and “secular stagnation” (which Larry Summers [pdf], among others, has been arguing).

My view, for what it’s worth, is Cowen is both right and wrong. He’s right in the sense that we have witnessed, and will likely continue to experience, a relatively slow recovery from the crash of 2007-08. That’s why I continue to refer to our current situation as a Second Great Depression. And, as we have seen, what recovery there has been during the past six years has mostly benefited those at the very top. The rest of the population has already been forced to “reset” their expectations in terms of stagnant wages and salaries.


But Cowen is also wrong, in the sense that he’s only focused on the last few years. His view is that recent rates of economic growth have been relatively low (by postwar standards), and that trend may continue into the future (thereby requiring those at the bottom to revise their expectations downward). What he misses is the fact that a fundamental “reset” of the U.S. economy has been taking place for much longer, since at least the mid-1970s. Since then, we’ve seen the profit share growing and the labor share declining—a long-term trend that has only been exacerbated since the crash of 2008-08.

Or, if you want a different sort of evidence, consider taking a look at George Packer’s magnificent book, The Unwinding: An Inner History of the New America. Using fascinating profiles of several Americans (and a dos Passos-like sprinkling of alarming headlines, news bites, song lyrics, and slogans), Packer offers an epic retelling of American history from 1978 to 2012—of a shrinking middle-class and an economy that has lost its ability to offer any significant hope for recovery for the majority of the population.

It’s that unwinding—which we’ve been living through for almost four decades now but which Cowen and others miss—that is going to require a fundamental “reset” of our economic system.


As Andrew Flowers reports,

If it seems like big business is getting bigger, it is. Over the last two decades, the largest U.S. companies have grown faster than the economy as a whole. And it’s the biggest of big businesses that are making up a larger and larger share of the growth.

By the same token, perhaps it’s time to start worrying about the downwardly rigid prices of increasingly large corporations (and the upwardly rigid wages they pay to their employees), instead of the downwardly rigid wages that have been so much the focus in recent years.


Here’s another chart from the AFL-CIO Executive Pay Watch, which illustrates the fact that, over the long term (between 1962 and 2013), productivity has increased by 388.2 percent while real hourly compensation for workers has risen only 107.4 percent. During the same period, U.S. Walmart stores expanded from zero to 4,625.

The “Walmart model,” which has so enriched the Walton family, has three important dimensions: First, Walmart pays low wages in its own stores. Second, Walmart’s competitive contracting keeps wages low for the workers who produce the goods sold in Walmart stores. And third, the fact that the consumer goods in Walmart stores are sold at relatively low prices means that U.S. employers can pay less, even as productivity has risen, to purchase workers’ ability to work throughout the U.S. economy.

In other words, the enormous growth of Walmart stores has boosted profits not only for Walmart itself (by capturing a large portion of the surplus from the workers who produce the goods that are then sold in Walmart stores by poorly paid Walmart workers), but also the profits of all the corporations across the economy whose workers are forced to have the freedom to sell their ability to work and then use their wages to purchase goods in Walmart stores.

That has kept wages low and profits high—for Walmart and for many other large corporations—since Walmart first burst on the scene four decades ago.


And there’s a fourth dimension to the growth of the Walmart model: to the extent that the growth of Walmart stores has come at the expense of other, smaller retailers, the workers who were laid off have been forced to look for jobs elsewhere, thus putting further downward pressure on all workers’ wages—thereby boosting profits of Walmart and of many other corporations.

IN-Russell IN-S&P

According to the AFL-CIO Corporate Pay Watch, in the state of Indiana, the 2014 CEO to average worker’s pay ratio was 101:1 (for corporations in the Russell 3000) and 306:1 (for corporations in the S&P 500).

In the nation as a whole, the ratio (for corporations in the S&P 500) was 373:1, which surpassed the ratio for 2013 (331:1)—both of which were much, much higher than the ratio in 1980 (42:1).

The average CEO compensation of Russell 3000 companies in 2014 was $5,504,432. As it turns out, the industry with the highest CEO pay was Tobacco Products ($13,061,671), followed by Railroad Transportation ($12,526,083), Petroleum Refining ($12,502,981), Communications ($10,769,054), and Hotels ($10,058,029).

As for the Security and Commodity Brokers, Dealers, Exchanges, and Services industry (where financial institutions like Goldman Sachs are located), the average CEO pay was “only” $8,102,970—ranging from $105,295 (for Joe Mansueto of Morningstar) to $88,518,411 (for Mario J. Gabelli of Gamco Investors, Inc.).

Clearly, a large portion of the surplus workers create ends up in the pockets (and portfolios) of the CEOs of the nation’s largest corporations.


In 2012, Indiana became the twenty-third state to adopt a so-called Right to Work law. Now, in another blow to unions, it has eliminated its Common Construction Wage system.

A Republican-backed measure that will repeal Indiana’s law setting wages for state and local government construction projects has been approved by Gov. Mike Pence. Mr. Pence, a Republican, signed the legislation Wednesday and said it would allow the free market to determine pay rather than government boards. Supporters estimate that the change will reduce project costs by as much as 20 percent by allowing more contractors to pay wages below union scale. Opponents dispute such savings will occur and say it will open the door for low-paying out-of-state contractors. The repeal takes effect in July.


The headline, “Labor vs. Capital,” is not mine; it’s the Wall Street Journal’s. And the argument is,

For decades, labor’s share of American national income has shrunk while the share that goes to profits has expanded.

There are now tantalizing signs that labor may finally be gaining ground on capital.

Workers in the first quarter of the year recorded their biggest annual gain in pay since 2008, evidence that a steady decline in unemployment is finally having an effect on paychecks.


That’s because, according to latest numbers from the Bureau of Labor Statistics [pdf], the wage and salary portion of the employment cost index increased by 0.7 percent during the first quarter of 2015 and 2.6 percent for the 12-month period ending March 2015 (as one can see in the chart above), which was higher than the 1.6-percent increase in March 2014.


But we have to remember that workers’ share of income has been declining for decades, which means that a big chunk of the growth that has occurred during that period has gone to profits, shareholders, and a tiny group at the top of the distribution of income.

It’s going to take much more than a 2.6-percentage annual rise in the wage and salary component of the employment cost index—even if sustained for many years—for workers to really gain ground on capital.