How we got here
Note: This post is part of our League Symposium on inequality. You can read the introductory post for the Symposium here. To see a list of all posts in the Symposium so far, click here.
by B-psycho
By now you’ve probably seen the chart that Tod Kelly put up showing corporate profits headed for the moon amidst the continuing post-crash lull in the rest of the economy. Similar information is out there showing that over a time span of the past few decades productivity kept shooting up as usual while compensation stagnated, and CEO pay even far outpaced the profits that were supposed to be the reason for their pay. Meanwhile, unemployment remains high. It’s rather bad on several counts, we can see the numbers.
Usually what follows pointing out such are remarks about how this is the result of a free market allowed to run out of control, and the answer is carefully thought out government intervention. Well, I see the Ongoing Capitalist Crackup as something else entirely: the logical outcome of an economic structure intended to concentrate wealth. I’ll explain…
Time was, for labor the holding of the means of production were an open question. Relax, I’m not going Marx on you. I refer instead to syndicalist impulses within the organized labor movement, think “Wobbly”. Somewhere along the line — after an extended period of workers being arrested or murdered for their activities, a form of consensus arose involving business, labor & the state, by where labor organization was funneled into mainstream partisan politics & cut off from the kind of questions it had previously asked, in exchange for the New Deal-era safety net & job security for the ones who were working. This is the “devil’s bargain” I referred to when discussing this with CK Macleod.
At the time, and by some even now, this was seen as an unqualified success. That the working class came to treat their employers as subsets of the state (which they had a point about in another aspect, due to the extensive assistance that business obtained from the government) and were lulled into Consume-and-STFU? Minor detail I guess.
Of course, that which is given can also be taken away. See the spot on that EPI chart where productivity continues a 45 degree angle & compensation falls through a crack in the floor? That’s where the old agreement started to unravel. Continuing productivity gains no longer met with reward for job well done, and the costs of living went onward unfazed. Keep in mind as well that the housing market has been subsidized out the wazoo by government all this time, and credit later opened up. When most people can’t save, and what they make doesn’t keep pace with what they need (and on a macro level, what they’re expected to have to keep the whole thing rolling), debt is the only answer, and all that leverage needs to go somewhere…
When you look at a breakdown of the top 1% that the Occupy crowd keeps talking about, notice how much of it is people wrapped up in the commanding heights of finance? This is one major reason. The less that the average person has any hope of saving their own money, the more borrowing that takes place, the more that the gains in an economy are measured as interest and penalties rather than wages. The Federal Reserve and its symbiotic relationship with the largest of banks looms large as the other part of this: loose money for them does not necessarily mean loose money for you. This has been a particular thorn in my side for a reason.
From there, high finance started taking that debt they got because of us having to leverage ourselves to death and betting each other on it, leveraging themselves even harder, until finally the whole damn mess started to collapse…and here we are.
Despite this being a problem that built up over a long time akin to cancer, there’s the inevitable talk about quick fixes. It’s no surprise that people go for that kind of thing, and it’s in the self interest of the formal part of our ruling class to offer them. Yet, in my view unless we have a substantial increase in labor power sufficient to snap that crack in compensation back in place while also allowing the average person to actually save money and make centralized finance largely irrelevant, a breakup wave in banking including the Federal Reserve itself, and above all patience enough not to expect the same types that shuffled us into this situation in the first place to somehow care whether we get out, we’re screwed.
It took a long time to create this bubble-dependant rigged mess we call an economy. It’s going to take a lot to unravel it.
Note: I describe primarily the U.S. because it is what I know, though as a global focal point our structure and its failings are clearly contageous.
Of course, that which is given can also be taken away. See the spot on that EPI chart where productivity continues a 45 degree angle & compensation falls through a crack in the floor? That’s where the old agreement started to unravel.
I’d suggest it’s something a bit different, though not necessarily mutually exclusive.
The graph compares productivity to workers’ compensation. It excludes shareholders’ compensation. Who are big shareholders right now? The baby boomers and the funds that serve them.
Right now they’re still very numerous. They have the most shares of stock they’ll probably ever own. And they’re going into retirement — so they’re very, very concerned with maximizing their return on investment. They also have the votes to change how corporations do business, so it’s little surprise that workers are going to lose out. (Though I agree, they shouldn’t.)
This is also to say that the fight isn’t primarily between workers and CEOs. Pay all CEOs peanuts, and you’ll still have virtually the same problem.Report
I wouldn’t say it’s primarily workers vs CEOs either. The role finance plays actually puts them above executives in other businesses. As for ROI by retirees though, that we’ve gone through the spectacle of bonuses being handed out while companies tank suggests to me that corporate governance has the same accountability problem representative government in general has. If they’re winning regardless then those boomers must have some really good advisers.Report
For now. There’s going to be quite a downward bit of pressure on the stock market beginning any minute now once the boomers start cashing that stock out… and I don’t know that there will be enough purchasing pressure pointing upward to keep those portfolios boosted.
There’s one hell of a supply/demand ratio adjustment coming.Report
I suspected that was part of the reason for the attempt at faux-private accounts on Social Security back when that came up: funneling in new investment to fill the coming gap.Report
For a while they did amazingly well. The 1980s, 1990s, and even the 2000s were all great decades to be in the stock market. Lately that’s changed, of course.Report
The 1920s were a great time to be in the stock market, too. It didn’t last.
That’s one reason the idea of replacing social security with 401(k) and other sorts of stock market-related schemes is such a horrible idea.Report
There is another route to preserving wealth, through annuities. A 401(k) is not a particularly awful scheme, though I’d change it substantially were it in my power.Report
Provided that someone makes enough in their lifetime to afford the annuities, and never has an emergency incident in their life requiring them to cash in the annuities early.Report
IFF this country was sincerely interested in solving the problems associated with maintaining the elderly and infirm, it would structure taxation so workers would save and invest, not spend and spend.
Singapore’s brutal and simple about this process. They’re serious about garnering investment capital. Sure wish we were.Report
Some objections to the chart:
-It’s comparing aggregate productivity—i.e., of the whole economy—with median cash compensation for a subset of workers, specifically private-sector production/non-supervisory workers. This isn’t nefarious, since it really isn’t possible to measure the productivity of individual workers due to synergies between different actors in the economy, but it is worth keeping in mind that the fact that these aren’t perfectly correlated isn’t proof of some great injustice.
-I’m pretty sure it’s median cash compensation, i.e., ignoring benefits, which have grown faster than wages. And no, it’s not paying more for the same quality of health care, it’s paying more for better health care.
Objections to your analysis:
Continuing productivity gains no longer met with reward for job well done, and the costs of living went onward unfazed.
First, productivity gains don’t necessarily mean that workers are doing a better job. It often just means that they’re working with better tools. The reason American workers are so much more productive than Chinese workers isn’t that Americans are just plain better—it’s that Americans have much more capital enhancing their productivity.
Second, that chart is inflation-adjusted. Costs of living have not risen faster than wages, as you imply.Report
The compensation chart is inflation-adjusted, but I didn’t intend to use it as a measure of divergence from cost of living, only where productivity split off. My suggestion is the additional gains went somewhere: where?
Besides, there’s things that are deliberately left out of the official measurement that result in understating inflation anyway.Report
Healthcare probably.Report
Besides, there’s things that are deliberately left out of the official measurement that result in understating inflation anyway.
Ehh, that’s debatable. Some economists say we overestimate inflation. Ultimately there’s a lot of subjectivity built into measuring it, because we have to pick which items should be counted and we have to decide if (and then how) to adjust for quality improvements and consumer substitution effects. It’s a bit simplistic to flatly state that inflation is either under or over estimated.Report
Besides, there’s things that are deliberately left out of the official measurement that result in understating inflation anyway.
You’re thinking of “core inflation.” They don’t do this with the CPI, which I’m pretty sure is what was used to adjust the wages in this chart.Report
Exactly what workers are included in the EPI chart? The discretion production/nonsupervisory works could represent only a relatively small share of the workforce. The numbers if it used median income wouldn’t look much better because the numbers I’ve seen indicate that median income growth has been significantly reduced as well.Report
My suggestion is the additional gains went somewhere: where?
Non-cash compensation and above-average workers, I think. And government transfers, of course. That’s the one real growth sector.
Besides, there’s things that are deliberately left out of the official measurement that result in understating inflation anyway.
On the other hand, hedonic adjustments probably don’t sufficiently capture increases in standard of living. All things considered, I strongly suspect that the median standard of living has risen considerably since the late ’70s, but I’m not old enough to say from personal experience.Report
I believe the consensus among economists is that this trend is due to technology and globalization and their effects on supply of lower skilled labor.
The consensus seems pretty overwhelming…
http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_0IAlhdDH2FoRDrmReport
I’m going to be a bit of a gadfly on this one. Look at that chart real carefully and note where exactly the knee of the compensation line occurs. Right about 1971. Question: What major, macro-economic, economy-wide, and permanent, change occurred then?
Answer: From Wikipedia: “On August 15, 1971, the United States unilaterally terminated convertibility of the dollar to gold. This brought the Bretton Woods system to an end and saw the dollar become fiat currency.[1] This action, referred to as the Nixon shock, created the situation in which the United States dollar became a reserve currency used by many states. At the same time, many fixed currencies (such as GBP, for example), also became free floating.”
That was a huge change, both in the way money operates domestically and internationally. Both commodity-backed and fiat currencies are valid monetary systems, but–and this is crucial–the ideal way you manage those two types of systems are different.
A lot of people get wound up about the idea of a government (or central bank) printing new money. OMG!!! Crazy inflation! Wheelbarrows of Deutschmarks to buy a loaf of bread! Zimbabwe trillion dollar bills! Well, sure… if you get stupid. But bad stuff happens whenever you do stupid things. So what?
The reality is that money is just an instrumentality to lubricate trade. It has no intrinsic value. While you or I may be richer individually for holding a quantity of dollars, the net worth of the U.S. isn’t affected a whit, one way or the other, by the numerical quantity of dollars in circulation. But our ability to efficiently affect trade in a monetary economy is affected by the quantity of dollars in circulation. The ideal would be to create just enough new dollars every year to keep the value of dollars (relative to what??) constant–neither inflation nor deflation. That’s tricky both to measure and simply to define in the first place. So it’s better to bias the money creation process slightly toward inflation, since deflation demonstrably leads to money hoarding and slows economic activity.
It should be uncontroversial that a larger economy needs more currency, ceteris paribus. The pertinent question is how should that new money be created and pumped into the system? Culturally, it seems we’ve decided that the government should NOT be that vehicle. Rather, we’ve (or someone anyway) has decided that role should go to the banking sector. So now we have approximately 95% of our money supply having been created by the banking sector through loans. That means 95% of all the money in circulation is “earning” interest for some financial corporation.
So the size and influence of the financial sector has just monotonically grown larger over the last four decades. But that’s largely been at the expense of the real economy. The financial sector doesn’t produce anything of real value. It provides an essential service, but in the larger scheme of things it should be viewed as a fixed overhead cost to be minimized. Rather, it seems to have become the tail wagging the dog.Report
Question: What major, macro-economic, economy-wide, and permanent, change occurred then?
One factor may have been feminism, more specifically the mass entry of women into the workforce. The labor force participation rate rose from 59% around 1965 to to a peak of 67% in 2000. Worker compensation is in part a function of the capital-to-labor ratio, and it’s likely that the increase in the denominator of that ratio resulted in suppression of wage growth.Report
Sure, but that doesn’t explain the sharp bend right at 1971. Precisely at 1971. It doesn’t just sorta meander from one long trend-line to a different trend-line through a broad curve. It’s a sharp knee between two flat segments.
Some basic structural change occurred and stuck (or it would be a kind of S- or Z- bend thing). I just find it too much of a coincidence not to seriously consider it.Report
Here’s the thing though…if this were the case, we should see massive productivity dips in the regions where we had substantial monetary crunches and financial sector drops. We don’t, really. The productivity boom is actually inexorable. S&L crisis, Stagflation, even the Lehman shock and dot com bubbles don’t seem to have impacted it at all. (Or conversely times of quantitative easing and currency movement should show increases, which they don’t seem to…)Report
In a way though it makes sense that productivity would be relatively untouched by financial shocks: how do you measure productivity of finance alone? Either it’s doing its textbook part in facilitation of other sectors (meaning it’d show up with those already) or it isn’t.Report
Trying to measure tiny fluctuations works well in almost zero systems.
Trying to measure your weight? Measure daily, at the same time each day. Take your weekly average weight and watch your trends.
Do NOT obsess over thinking you gained 4 pounds overnight because on wednesday you measured yourself coming out of the bathroom and thursday you measured yourself going in before making your “deposit.”
Financial systems are similar. Weekly data, monthly data, yearly data… great for tea-leaf readers, lousy for analyzing real trends. Give me the yearly data over at least a decade, preferably 5 decades or longer, and then let’s talk.Report
Problem one: you need a higher resolution image because you’re reading it wrong.
I see a slight bend in 1971, a downbend in both lines in 1972, a slight uptick in the productivity line with a “reduced downward motion” tick in compensation in 1973, linear parallel motion through 1978… and THEN it goes off the rails.
What happened in 1978? Well the beginning of the “1979” energy crisis for starters. So the compensation change even then may not be related, totally.
But then we hit 1980. Massive, reagan-era deregulation frenzy. Past 1980, the line never recovers.Report
I agree that that the Carter/Reagan deregulation (let’s be accurate, not ideological) era may account for much of this.
It also had huge economic benefits in freeing up businesses to compete seriously with one another. Been able to afford an airline flight to visit friends/family, or go on vacation? Thank deregulation. Shipping costs in goods dramatically reduced? Thank deregulation. Enjoy that cell phone? Thank deregulation.Report
It’s also worth noting that despite certain, rather limited, deregulation in the Carter/Reagan era, the number of economic regulations in the U.S. has continued to grow at a significant rate, so that in many ways there is much more economic regulation now than then. The difference is that most of it is narrow and detailed, oriented toward very specific business activities, whereas back then it tended to be broad regulation of whole economic sectors that purposely constrained competition between companies within particular sectors.Report
Yeah, it’s more accurate to say the nature of regulation changed rather than wholesale de-reg.Report
It also had huge economic benefits in freeing up businesses to compete seriously with one another.
The initial deregulation bits? Maybe.
The ones since? Hah.
Been able to afford an airline flight? Sure, but the prices are going back up now as there are fewer and fewer airlines competing due to consolidation.
Been able to go on vacation? Not for 5 years, thanks. Hasn’t helped me one bit.
Shipping costs in goods dramatically reduced? Sure, though arguably we’re seeing some odd results there with the death of many retail stores in favor of constant online stores and shipping.
Enjoy that cell phone? Sure. Prices keep going up, and the number of possible carriers keeps shrinking at the same time.
Initial deregulations? Might have been good. 30+ years of politicians engaging in the economic deregulation wank-fest that followed? Most of that deregulation has been really, really bad.Report
Cell phone prices have gone up, but so has what they’re offering. If you want a deal analogous to what you could get in 1997, it actually hasn’t gone up very much at all*. But we want national coverage, a data plan, and so on. Consolidation has actually made that possible. I mean, I have no love for the big four, but if you want to talk about higher costs of living and the evils of consolidation, cell phone companies are actually a pretty bad place to point to.
* – Actually, prepaid has offered options that are even cheaper, if you’re a light user.Report
But why does US coverage and rates suck sooooo much more compared to other industrialized countries? I’m ashamed of discussing my ISP and cell phone services with my family, for example, because what I’m paying just seems wildly and outlandishly terrible in comparison to what they’re getting.Report
Lots of reasons, but consolidation isn’t one of them. If you want to argue that there are better ways, I am pretty sure I agree. Including ways with more government direction. But the way things were before the consolidation? That wasn’t a better way.Report
Very large, low population density. Covering 90% of the population of South Korea, Japan, the UK or Belgium can be done with far less infrastructure than 90% of the US.Report
See the spot on that EPI chart where productivity continues a 45 degree angle & compensation falls through a crack in the floor? That’s where the old agreement started to unravel.
An interesting essay, but what’s missing is an answer to why this happened.Report
Seriously consider my comment, James. Please? I value your opinion.Report
Rod,
I’m absolutely not a gold standard guy. But that said, yeah, the U.S. has not always been properly constrained in its money supply, IMO, and that may play a role. But I’m truthfully no expert on finance stuff, and I don’t know nearly enough to say exactly how much that’s an issue and how much other factors are an issue. I would toss in the U.S.’s big emphasis on home ownership and focus on increases in home prices as an indicator of economic vitality, which I think is foolish.Report
Really enjoyed this one. One of the big problems ahead is to disengage from the global $1 an hour labor cost. This can be done by bringing production of basic items to the neighborhood level and disengage in the practice of buying from corporations. Labor has to be made valuable again. The dollar will continue to become watered down as the game of thieves continues. Eventually bartering labor will become more valued than the dollar. A second era of cottage industry probably awaits.
The decouple out of traditional job markets has already begun. People are leaving the corporate job markets and aren’t returning.
A full on collapse may be worse than a horse and buggy scenario. There are very few horses now and to feed horses that perform daily workloads is currently cost prohibited. It typically takes 2 horses to pull a single 18″ turning plow. Anyone here fed a working horse lately?
It may be a walk where your going scenario.Report
Wouldn’t quite go that far with it, but I do see more localized production & a shift away from sprawl as long run helpful positions. Add in energy factors and its pretty much unavoidable, just a matter of whether adjustment is smooth or of the Kick, Scream, and Attempt to Repeal Reality variety.Report
I took another look at the EPI article from which the chart came, and it looks like they’re using different deflators to adjust productivity and wages for inflation, and that this accounts for a third of the gap in between 1973 and 2011. That is, the average prices of the things that consumers buy have risen more quickly than the average prices of the things that they produce at work. Which is to say, a third of the apparent gap is just a statistical artifact of the way they adjusted for inflation.Report
I should add that there’s nothing nefarious here. They’re fairly up-front about having used different deflators, and their reasons for doing so were sound. But I think it’s inappropriate to compare these trends when they’re not really commensurate.Report