‘X’ Marks The Spot Where Inequality Took Root: Dig Here

On August 5, 2017, Stan Sorscher writes on Economic Opportunity Institute:

In 2002, I heard an economist characterizing this figure as containing a valuable economic insight. He wasn’t sure what the insight was. I have my own answer.

The economist talked of the figure as a sort of treasure map, which would lead us to the insight. “X” marks the spot. Dig here.

The graphic below tells three stories.

First, we see two distinct historic periods since World War II. In the first period, workers shared the gains from productivity. In the later period, a generation of workers gained little, even as productivity continued to rise.

Figure 1: The X marks the spot where something happened.

Figure 1: The ‘X’ marks the spot where something happened in the mid-1970’s. (Click to embiggen)

The second message is the very abrupt transition from the post-war historic period to the current one. Something happened in the mid-70’s to de-couple wages from productivity gains.

The third message is that workers’ wages – accounting for inflation and all the lower prices from cheap imported goods – would be double what they are now, if workers still took their share of gains in productivity.

A second version of the figure is equally provocative.

Figure 2

Figure 2: Follow the money (or the lack of it).

This graphic shows the same distinct historic periods, and the same sharp break around 1975. Each colored line represents the growth in family income, relative to 1975, for different income percentiles. Pre-1975, families at all levels of income benefited proportionately. Post-1975, The top 5% did well, and we know the top 1% did very well. Gains from productivity were redistributed upward to the top income percentiles.

This de-coupling of wages from productivity has drawn a trillion dollars out of the labor share of GDP.

Economics does not explain what happened in the mid-70s.

It was not the oil shock. Not interest rates. Not the Fed, or monetary policy. Not robots, or the decline of the Soviet Union, or globalization, or the internet.

The sharp break in the mid-70’s marks a shift in our country’s values. Our moral, social, political and economic values changed in the mid-70’s.

Let’s go back before World War II to the Great Depression. Speculative unregulated policies ruined the economy. Capitalism was discredited. Powerful and wealthy elites feared the legitimate threat of Communism. The public demanded that government solve our problems.

The Depression and World War II defined that generation’s collective identity. Our national heroes were the millions of workers, soldiers, families and communities who sacrificed. We owed a national debt to those who had saved Democracy and restored prosperity. The New Deal policies reflected that national purpose, honoring a social safety net, increasing bargaining power for workers and bringing public interest into balance with corporate power.

In that period, the prevailing social contract said, “We all do better when we all do better.” My prosperity depends on your well-being. In that period of history, you were my co-worker, neighbor or customer. Opportunity and fairness drove the upward spiral (with some glaring exceptions). Work had dignity. Workers earned a share of the wealth they created. We built Detroit (for instance) by hard work and productivity.

Our popular media father-figures were Walter Cronkite, Chet Huntley, David Brinkley, and others, liberal and conservative, who were devoted to an America of opportunity and fair play.

The sudden change in the mid-70’s was not economic. First it was moral, then social, then political, ….. then economic.

In the mid-70’s, we traded in our post-World War II social contract for a new one, where “greed is good.” In the new moral narrative I can succeed at your expense. I will take a bigger piece of a smaller pie. Our new heroes are billionaires, hedge fund managers, and CEO’s.

In this narrative, they deserve more wealth so they can create more jobs, even as they lay off workers, close factories and invest new capital in low-wage countries. Their values and their interests come first in education, retirement security, and certainly in labor law.

We express these same distorted moral, social and political priorities in our trade policies. As bad as these priorities are for our domestic policies, they are worse if they define the way we manage globalization.

The key to the treasure buried in Figure 1 is power relationships. To understand what happened, ask, “Who has the power to take 93% of all new wealth and how did they get that power? The new moral and social values give legitimacy to policies that favor those at the top of our economy.

We give more bargaining power and influence to the wealthy, who already have plenty of both, while reducing bargaining power for workers. In this new narrative, workers and unions destroyed Detroit (for instance) by not lowering our living standards fast enough.

In the new moral view, anyone making “poor choices” is responsible for his or her own ruin. The unfortunate are seen as unworthy moochers and parasites. We disparage teachers, government workers, the long-term unemployed, and immigrants.

In this era, popular media figures are spiteful and divisive.

Our policies have made all workers feel contingent, at risk, and powerless. Millions of part-time workers must please their employer to get hours. Millions more in the gig economy work without benefits and have no job security at all. Recent college graduates carry so much debt that they cannot invest, take risk on a new career, or rock the boat. Millions of undocumented workers are completely powerless in the labor market, and subject to wage theft. They have negative power in the labor market!

We are creating a new American aristocracy, with less opportunity – less social mobility and weaker social cohesion than any other advanced country. We are falling behind in many measures of well-being.

The dysfunctions of our post-1970 moral, social, political and economic system make it incapable of dealing with climate change or inequality, arguably the two greatest challenges of our time. We are failing our children and the next generations.

X marks the spot. In this case, “X” is our choice of national values. We abandoned traditional American values that built a great and prosperous nation. Our power relationships are sour.

We can start rebuilding our social cohesion when we say all work has dignity. Workers earn a share of the wealth we create. We all do better, when we all do better. My prosperity depends on a prosperous community with opportunity and fairness.

Dig there.

‘X’ Marks the Spot Where Inequality Took Root: Dig Here

 

Why Radical Libertarians Are the New Communists

On June 21, 2017, Nick Hanauer and Eric Liu write on Evonomics:

Most people would consider radical libertarianism and communism polar opposites: The first glorifies personal freedom. The second would obliterate it. Yet the ideologies are simply mirror images. Both attempt to answer the same questions, and fail to do so in similar ways. Where communism was adopted, the result was misery, poverty and tyranny. If extremist libertarians ever translated their beliefs into policy, it would lead to the same kinds of catastrophe.

Let’s start with some definitions. By radical libertarianism, we mean the ideology that holds that individual liberty trumps all other values. By communism, we mean the ideology of extreme state domination of private and economic life.

Some of the radical libertarians are Ayn Rand fans who divide their fellow citizens into makers, in the mold of John Galt, and takers, in the mold of anyone not John Galt.

Some, such as the Koch brothers, are economic royalists who repackage trickle-down economics as “libertarian populism.” Some are followers of Texas Senator Ted Cruz, whose highest aspiration is to shut down government. Some resemble the anti-tax activist Grover Norquist, who has made a career out of trying to drown, stifle or strangle government.

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Yes, liberty is a core American value, and an overweening state can be unhealthy. And there are plenty of self-described libertarians who have adopted the label mainly because they support same-sex marriage or decry government surveillance. These social libertarians aren’t the problem. It is the nihilist anti-state libertarians of the Koch-Cruz-Norquist-Paul (Ron and Rand alike) school who should worry us.

Human Nature

Like communism, this philosophy is defective in its misreading of human nature, misunderstanding of how societies work and utter failure to adapt to changing circumstances. Radical libertarianism assumes that humans are wired only to be selfish, when in fact cooperation is the height of human evolution. It assumes that societies are efficient mechanisms requiring no rules or enforcers, when, in fact, they are fragile ecosystems prone to collapse and easily overwhelmed by free-riders. And it is fanatically rigid in its insistence on a single solution to every problem: Roll back the state!

Communism failed in three strikingly similar ways. It believed that humans should be willing cogs serving the proletariat. It assumed that societies could be run top-down like machines. And it, too, was fanatically rigid in its insistence on an all-encompassing ideology, leading to totalitarianism.

Radical libertarianism, if ever put into practice at the scale of something bigger than a tiny enclave, would also be a disaster.

We say the conditional “would” because radical libertarianism has a fatal flaw: It can’t be applied across a functioning society. What might radical libertarians do if they actually had power? A President Paul would rule by tantrum, shutting down the government in order to repeal laws already passed by Congress. A Secretary Norquist would eliminate the Internal Revenue Service and progressive taxation, so that the already wealthy could exponentially compound their advantage, as the programs that sustain a prosperous middle class are gutted. A Koch domestic policy would obliterate environmental standards for clean air and water, so that polluters could externalize all their costs onto other people.

Radical libertarians would be great at destroying. They would have little concept of creating or governing. It is in failed states such as Somalia that libertarianism finds its fullest actual expression.

Extreme Positions

Some libertarians will claim we are arguing against a straw man and that no serious adherent to their philosophy advocates the extreme positions we describe. The public record of extreme statements by the likes of Cruz, Norquist and the Pauls speaks for itself. Reasonable people debate how best to regulate or how government can most effectively do its work — not whether to regulate at all or whether government should even exist.

The alternative to this extremism is an evolving blend of freedom and cooperation. The relationship between social happiness and economic success can be plotted on a bell curve, and the sweet spot is away from the extremes of either pure liberty or pure communitarianism. That is where true citizenship and healthy capitalism are found.

True citizenship enables a society to thrive for precisely the reasons that communism and radical libertarianism cannot. It is based on a realistic conception of human nature that recognizes we must cooperate to be able compete at higher levels. True citizenship means changing policy to adapt to changes in circumstance. Sometimes government isn’t the answer. Other times it is.

If the U.S. is to continue to adapt and evolve, we have to see that freedom isn’t simply the removal of encumbrance, or the ability to ignore inconvenient rules or limitations. Freedom is responsibility. Communism failed because it kept citizens from taking responsibility for governing themselves. By preaching individualism above all else, so does radical libertarianism.

It is one thing to oppose intrusive government surveillance or the overreach of federal programs. It is another to call for the evisceration of government itself. Let’s put radical libertarianism into the dustbin of history, along with its cousin communism.

Why Radical Libertarians Are the New Communists

 

To My Fellow Plutocrats: You Can Cure Trumpism

On July 18, 2017, Nick Hanauer writes on Politico:

Since Election Day, I’ve been overwhelmed by anguished calls, emails and conversations from you, my wealthy friends, who, for the first time, are confronting the real possibility that our cozy utopian, urban, pluralistic lifestyles may be in peril. I share your fear. And with good reason.

Three years ago, in these pages, I warned you that the pitchforks were coming. I argued that 30 years of rising and accelerating inequality would inevitably lead to some sort of populist revolt that would disrupt the fantastic lives we elites enjoy. I cautioned that any society which allows itself to become radically and indefensibly unequal eventually faces either an uprising or a police state—or both.

And here we are.

Our new president was swept into power through exactly the kind of populist anger I predicted. He was an historically terrible candidate, and his behavior and actions as President have confirmed my worst fears. There is a thuggish, violent undercurrent to everything he says, tweets and does. Even scarier, his supporters relentlessly attack our democratic norms and institutions. The free press (and reality itself) is under assault. But given the stunningly insufficient way in which Hillary Clinton spoke to the economic and status concerns of so many voters, it shouldn’t have surprised us that Trump won. People are hurting, and they lashed out—by voting for the guy who was lashing out too.

Don’t say I didn’t warn you. And don’t console yourself for a minute that in electing a fellow plutocrat, our side won. President Trump isn’t on any side but his own. And his strategy to make America great again by bringing back an old industrial economy that no longer exists is as substantive as his early morning tweets about Cable news hosts. After his trickle-down policies—like ripping away heath care from tens of millions of Americans so plutocrats like us can get giant tax cuts, or just enacting giant tax cuts for us, and calling it tax reform—inevitably exacerbate the already extreme inequality that helped sweep him into office, those pitchforks will be angrier than ever.

My own ideas about the effect of inequality on social instability align with the work of social scientist Peter Turchin. He and his collaborators use mathematical models to study the rise and fall of societies—an analysisthat postulates a new American civil war arriving as soon as 2021 (and in a highly-armed nation already suffering from an epidemic of gun violence, he doesn’t mean “civil war” metaphorically). For the first time in history, polls show that most Democrats and Republicans identify Americans from the opposing party as the biggest threat to our country. So yes—if you have a deep sense that something is very wrong with our nation, you are almost certainly correct.

Yet, I find myself in deep disagreement with almost everyone I talk to about Trump and Trumpism. I firmly believe that Trump, by himself, is not the problem. Indeed, the left’s maniacal focus on Trump confuses cause with effect. Yes, Trump is a manifestation of a serious civic sickness. But treating the symptom by removing Trump won’t cure the disease, even if it temporarily makes us feel better. No, to heal the body politic we must confront the disease itself.

The real threat to our republic is an alarming breakdown in social cohesion, and the cause of this breakdown is obvious: radical, rising economic inequality, and the anger and anxiety it engenders. The truth is that over the span of decades, American lawmakers (at the behest of economic elites like us!) have enacted policies that have depressed wages, stoked economic insecurity and exacerbated cultural angst and social dislocation. At the same time, a tiny minority of mostly urban elite (again, us!) have benefitted obscenely from our growing economic, political and legal power.

Our lives of ostentatious luxury might be forgiven if all boats were rising as fast as our 200-foot yachts. But they’re not. In fact, as we few continue to capture the benefits of almost all of our nation’s economic growth via a trillion dollar a year transfer of wealth from wages to profits, millions of American families are sinking out of the middle class. It is this winner-take-all economy, and the indefensible and obvious injustice it represents, that creates the justifiable anger that threatens our civility, our national cohesion and our democracy itself. A century ago, as communism and fascism threatened to overrun Europe, our nation struck a grand bargain: We plutocrats would continue to be tolerated—even celebrated—as long as broadly rising incomes meant that each new generation of Americans continued to do better than the last. But through the policies we championed in the corridors of power and through the longstanding social norms we violated in the corporate boardroom, we broke our end of that bargain. And now the pitchforks are coming for us, my friends, from both the right and the left.

I believe that we in the American political and economic elite face an extraordinarily inconvenient but undeniable truth: Our country will not get better until our fellow citizens feel better; and they will not feel better until they actually do better. And this is the hard part for many of you: The American people will not do better until they are actually paid more.

And they won’t be paid more until we change the way we manage our economy. This is the stark, simple fact at the heart of our ailing political system. Nothing is going to get better until we enact laws and standards that persuade or oblige every business to pay every worker a fair, dignified and livable wage. Everything else, from Trump on down, is a distraction or a lie.

***

Yet, when I make this case to my wealthy friends, even the progressive ones, the reaction is almost universal: You look down at your shoes, or start talking about “messaging” or “narrative”—or charter schools. When I urge you to focus your energy and resources on the kinds of direct action that can actually make a real difference to working people—like, for instance, a state or city minimum wage campaign—you roll your eyes, or prevaricate. You insist that the only way to fight Trumpism is to fight Trump. But you couldn’t be more wrong. The only effective way to fight Trumpism is to address its cause by ensuring that the middle and working class do better.

Trumpism poses a threat to all Americans, but to the superrich most of all—because we have the most to lose. Sure, estate tax repeal might at first sound like win, but permanently creating a class of entitled aristocrats out of our own kids isn’t likely to improve our democracy, Meantime, if you aren’t already planning to give away the bulk of your fortune, you’re kind of a selfish jerk. That’s why, as counterintuitive as it might sound, the single best way to advance our own interests is to put more energy and money into advancing the economic interests of others. For example: by fighting to pass a $15 an hour minimum wage.

$15? Crazy. I know.

“That’s impossible,” one retail executive told me, “you can’t pay people that much.”

“A $15 minimum wage is a job-killer,” sputtered the CEO of a large restaurant chain.

“That will destroy the economy,” a manufacturing executive tut-tutted.

Bullshit. It simply isn’t true that reasonable wages, decent labor protections and higher taxes on the rich would destroy the economy. Such were the norms back in the 1950s and 1960s when America’s growth rates were much higher—and there’s no empirical evidence to suggest that we couldn’t support similar norms today. The truth is that when economic elites like us say “We can’t afford to adopt these higher standards,” what we really mean is, “We’d prefer not to.” We like to frame our claims as objective truths, like the so-called “law” of supply and demand, but what we’re really asserting is a moral preference. We are simply defending the status quo.

In my circles, few seem to want to confront the reality that our political environment won’t improve until the actual economic circumstances of our fellow Americans improve. We rich folks crave the variety and stimulation of progressive blue cities, yet we’re often not willing to fight for basic progressive policies like higher wages and the right to organize. We pound the table, ranting about diversity and inclusion without recognizing that the 43.7 percent of Americans earning less than $15 an hour, mostly white and rural, simply cannot afford to be included in our pricey, progressive, pluralistic enclaves. We smugly #resist when an airline beats a passenger bloody, but we do so from the safety and comfort of our own private planes, literally looking down on the shuttered factories and struggling small towns of middle America as we luxuriously jet from coast to coast.

Today in America, tens of millions of lower- and middle-class workers are routinely subject to poverty wagesunpaid overtimewage theftdehumanizing scheduling practices and the constant threat of automation or off-shoring. But the plight of these workers rarely comes up in conversations with my peers. Maybe the problem isn’t sexy enough. Maybe it seems too big. Maybe it requires the uncomfortable admission that some of our outsized profits are coming at their expense. But whatever the reason, we’ve let the problem grow too large to ignore.

Many of my peers prefer to hide behind the enduring myth that today’s crisis of economic inequality and insecurity is the result of forces unleashed by unstoppable trends in technology and globalization. “It’s not my fault I have so much while others have so little,” we comfort ourselves, “it’s the economy.” That is nonsense. There’s no intrinsic reason why the social and political changes delivered by technological advances and globalization have to massively concentrate wealth in the hands of the few. We simply exploited changing circumstances to take advantage of people with less power than us.

Over the last 40 years, corporate profits as a percentage of GDP have increased from about six percent to about 11 percent, while wages as a percentage of GDP have fallen by about the same amount. That represents about a trillion dollars a year that used to go to wages, but now goes to shareholders and executives. One trick we use to keep profits high and labor costs low is to refuse to schedule workers for the 30-plus hours a week they would need to qualify for benefits. Today, an astonishing 6.4 million involuntary part-time workers are denied the full-time work they seek in order to keep our profit margins high. You can call that “the market” or you can call that “stealing,” but from the point of view of a disgruntled worker it amounts to the same thing. How could they not be angry?

Another elite excuse for inequality is “education.” If everyone had a Harvard MBA, the argument goes, then we’d all be fine. Don’t get me wrong; the better educated our citizens, the better off we all will be. But someone is still going to need to clean the hotel rooms, flip the burgers, pour the coffee, assemble the cars, cut the hair, etc. But if that job doesn’t provide a decent and dignified life, then we have made little collective progress. And while it’s true that college graduates earn more on average than those without college degrees, wages for young college graduates have stagnated since 2000, with wages for young female graduates falling 6.8 percent. Churning out more college graduates can’t close the inequality gap if wages are stagnating or falling across the board.

***

In 2014, when I last checked in with you all, my home city of Seattle had just passed a $15 minimum wage ordinance. The derision thrown my way for supporting this initiative was predictable. Pundits from the Chamber of Commerce, Forbes and AEI went crazy. “Job killer” they screamed. When wages rise, they said, employment plummets. Seattle we were told, would slide into the ocean. Restaurant closures. Epic job losses. Poverty. Economic Armageddon!

Over the last three years we have implemented the policy in stages. Today, all large employers—those with more than 500 workers on their payroll—pay their workers $15 an hour (or $13.50 for those that provide medical benefits). Small employers pay between $11 and $13. Let me remind you that this minimum wage includes tipped workers, who now earn a remarkable 700 percent more than the federal tipped minimum of $2.13—as stark an experiment in whether higher wages kills jobs as has ever been attempted. So how is Seattle doing?

When the ordinance passed in June of 2014, Seattle’s unemployment rate already stood at a healthy 4.5 percent; in April 2017, it hit a record low of 2.6 percent (basically a labor shortage). Seattle is now the fastest growing big city in America. Our restaurant industry is booming, second only to San Francisco in the number of eateries per capita, with food service industry job growth far outpacing the nation. Restaurateurs who once warned against raising wages are now complaining about how hard it is to fill the positions they have. Around the corner from my office, the sandwich chain Jimmy Johns is paying drivers $20 an hour plus tips, well above the mandated minimum rate. Are there many factors at play? Of course. But our city has proven that raising wages does not automatically kill jobs. In fact, of the 10 largest counties in the nation, King County, Washington had the largest year over year job growth in 2016 (3.8 percent), and was the only one of the 10 counties to see over-the-year growth in wages (3.5 percent).

How can this be? Because that is how capitalism works. Because when workers earn more money, businesses have more customers and hire more workers. Because a thriving middle class is the source and cause of growth in capitalist economies. Because when restaurants pay restaurant workers enough so that even they can afford to eat in restaurants, it’s great for restaurants!

But old economic prejudices die hard. A new working paper from researchers at the University of Washington recently generated gloating headlines from conservative news outlets eager to confirm their “job killer” mantra, whatever the self-evident reality is on the ground. The UW researchers analyzed payroll data at single-location employers—mostly small businesses held to the slower implementation schedule ($10.50 to $12.00 in 2016)—concluding that low-wage workers are actually worse off than workers in a hypothetical “Synthetic Seattle” where the minimum wage was never increased. But it’s hard to take these findings seriously. The UW researchers report a 30-percent decline in low-wage employment for every 10 percent increase in the minimum wage—a finding 10 times higher than the average reported in 942 published studies. It’s an extreme outlier that raises serious questions about the limitations of the UW team’s data and methodology.

For example, by studying only single location employers, the UW study excludes 48 percent of Seattle’s low-wage workers, while introducing an unavoidable bias into the results: When a worker moves from a single location employer to a multiple location employer (where the minimum wage was up to 24-percent higher in 2016), the study counts that as a low-wage job loss. When a successful single-location employer expands to a second location, the study counts all of its current workers as low-wage job losses. When a low-wage worker sees her wages climb over $19, the study counts that as a low-wage job loss. When a low-wage employee moves to contract or gig economy work (Uber alone estimates it has 10,000 driversin the Seattle area), the study counts that as a low-wage job loss.

These findings are also totally at odds with a recent report from economists at the University of California at Berkeley who are studying the impact of the minimum wage on restaurants—the industry with the largest number of low-wage jobs. The Berkeley researchers found that wages increased at rates “in line with the lion’s share of results in previous credible minimum wage studies,” without affecting food service employment. Wages went up, jobs did not go down. In short, the researchers conclude: “the policy achieved its goal.”

Given the obvious limitations of the UW study and the contradictory results from the economists at Berkeley, it is too soon to reach a firm conclusion on the theoretical impact of Seattle’s minimum wage. On the other hand, in practice, in real life here on planet earth, Seattle’s economy is kicking ass.

***

President Trump promises to restore the middle class to its former glory by bringing back old industrial-era jobs—as if slashing environmental regulations could somehow make coal competitive again with plummeting solar prices, let alone our fracking-induced glut of cheap natural gas. This is magical thinking. Manufacturing as a percentage of the overall economy, and of jobs, has been declining globally for decades. This trend will not reverse. Trump cannot restore the middle class with empty promises to bring manufacturing jobs back from the dead.

No, the only realistic near term way to insure Americans do better is to make existing jobs into good jobs by requiring they be paid adequately. There is no earthly reason why an entry-level job at low-wage employers like Walmart or McDonalds could not pay $15 or even $20 per hour with full benefits, the way an old factory job used to. There is nothing “unskilled” about a barista or a home health care worker, and no economic principle that prevents these workers from earning a living wage. The only difference between today’s service workers and yesterday’s manufacturing workers is that most service workers have no union, and thus have no power. People have never been paid what they are worth, despite what the trickle-downer’s will tell you. They are paid what they negotiate. And working people have lost their ability to negotiate decent wages.

Union jobs that used to pay people middle-class wages and that delivered the job security and benefits that enabled a dignified, stable and secure life have been eliminated and replaced with minimum-wage jobs. Low-wage employers tell us that this is all they can afford. That, too, is a lie. When Starbucks and Walmart and McDonalds say they cannot provide their workers with middle class wages and benefits like General Motors and IBM used to, they really mean they’d prefer not to do so. Why? Because if wages are low, profits and bonuses are high.

I want to underscore that I do not think it reasonable for any company, even the size of Walmart, to be expected to unilaterally raise the wages of their workers to double the national minimum wage. In a viciously competitive market, such an action is unrealistic. What is unforgivable (and in a sense, inexplicable) is the failure of Walmart’s leaders to lead the charge to level the playing field by raising the federal minimum wage, so that every company is required to pay their workers fairly. After all, who would get the biggest share of these extra consumer dollars? Our nation’s largest retailer: Walmart.

To be clear: raising wages simply does not kill jobs. Raising wages will no more kill jobs than eliminating slavery killed jobs, or giving women the right to vote killed democracy (both of which arguments were made at the time). In fact, the opposite is true. Despite what our good friends at the Chamber of Commerce and the National Restaurant Association (the other NRA) may tell you. If raising wages really killed jobs, the empirical evidence would be abundant. We’ve raised the federal minimum wage 22 times since 1938, and unless the economy was already in or heading into recession, employment always increased. And if you look further into the data by sector, the results are even more dramatic. The more effected the industry sector by the increase, the better it did. The lowest wage sectors had better employment effects than higher wage sectors.

The self-serving claims that if wages go up, jobs go down, aren’t a description of reality. They are a negotiating strategy, a con job, an intimidation tactic masquerading as economic theory. Threatening people’s jobs when they ask for a raise is the oldest trick in the businessperson’s wage suppression handbook—it is simply an effective way for rich people like us to negotiate wages at scale. The Chamber of Commerce doesn’t say higher wages kills jobs because it is true; they say it because it works.

Once we’ve dismissed with trickle-down nonsense, the way forward becomes clear. I’ll save a detailed policy agenda for another forum, but there’s no getting around the trillion-dollar elephant in the room: the 5 percent of GDP that used to go to wages but now goes to executive pay and record corporate profits. This isn’t money we’re shipping overseas or feeding to robots or burying in holes. The most obvious way to address our crisis of growing inequality is to reverse the policies that undermined the older, more equitable norms. This means raising the minimum wage and the overtime threshold to their inflation-adjusted peaks, and indexing them to the appropriate economic metric. This means restricting the stock buybacks that have propped up executive pay through share price manipulation. This means rethinking our benefits systems and social safety nets to meet the needs of our modern economy. And this means substantially raising taxes on plutocrats like us who continue to capture the bulk of our nation’s economic gains. And yes, by all means let’s increase the Earned Income Tax Credit, even though it effectively socializes the cost of wages onto taxpayers. But keep in mind: the EITC currently costs $60 billion’ish per year. If we want to fill the trillion dollar per year hole in workers’ pockets, we’d need to raise it by about $940 billion per year. Good luck with that.

***

Many of us wealthy folks are laudably philanthropic; we feel like we are already doing our part to improve the lives of our fellow citizens. And this is true, to some extent. But if my thesis is correct—if the only cure for what truly threatens our democracy and our capitalist economy is to enact laws and standards that ensure that businesses pay people enough to lead secure, dignified lives—then some of our effort may be misdirected. Philanthropy is useful, but only about $100 billion per year is spent on helping disadvantaged folks. Raising the minimum wage to $15 would increase income for the bottom 60 percent of Americans by about $450 billion per year. No philanthropy comes close to the scale of that one policy.

Plenty of opportunities exist for wealthy folks to get involved in state based efforts like minimum wage campaigns, the fight to increase the overtime threshold upon which so many middle-class people depend, or the fight for portable, pro-rated and universal benefits. If just 10 percent of you, my fellow plutocrats, got behind these campaigns, the anger and resentment that nurtures Trumpism would quickly dissipate as standards were raised, people’s lives improved, and inequality diminished. When you’re filthy rich like us, donating a million bucks to a minimum wage campaign is chump change. I do it. So should you.

Many smug, wealthy, highly educated liberals like myself (and let’s be honest, like many of you who have been blowing up my phone since the election) have taken to soothing ourselves with the notion that Trump was elected by stupid, racist people. And to some degree, this may be true. But like it or not, in America, even stupid racists have an equal claim to the prosperity, dignity, status and happiness that we urban economic elites hold so dear. Also, they vote. So while we should never pander to their racism, we must face the fact that if our greed prevents them from having their fair shot at happiness, they will most certainly take it from us by force. Parenthetically, I want to make clear that I am not so naïve as to believe that prosperity eliminates racism. It does not. But, it is one hell of a distraction. People who are thriving and hopeful may still be filled with hate, but they don’t have nearly as much reason to act on it.

It is true that the American experiment has proven remarkably resilient, even through periods of wrenching political realignment. During the mid-1850s, one of our two major parties, the Whigs—representing issues including high tariffs and anti-Catholic nativism—collapsed and disappeared. Examine the political climate of that time and you’ll find some startling similarities with our own. Much of the North’s popular resistance to the inequality issue of that age, the expansion of slavery, had little to do with empathy for slaves; rather, the “free labor” movement was grounded in a deep sense of economic anxiety amongst the working poor who saw both slavery and immigration as a threat to their own jobs and wages. Sound familiar? Eventually we got ourselves back on track—but only after a long and bloody Civil War.

I don’t claim to have the all the answers on how to fix our economy, but I do guarantee that if we don’t raise wages and reverse inequality, the social cohesion that makes for a stable democracy and thriving economy is impossible. And that’s not an America where we plutocrats want to live. There are plenty of countries with yawning inequality where people like us and our children can’t go out in public without fear of being kidnapped for ransom. And then there’s Russia, where no amount of wealth can save you from the prisons or assassins of an all-powerful President Putin. So, if you are wealthy, and you rightly fear for the future of your country (not to mention your own personal safety), then I ask you to consider the possibility that the best way to defend your own interests is to improve the economic interests of others. Just do that. I think you’ll be surprised by how fast things get better. But you better act quick.

The pitchforks are coming, my friends, and whether they come in the angry hands of a desperate mob or the tiny hands of an angry dictator, they’re coming for us. You may not want to believe that your great fortune has come, at least in part, at the expense of others, but the American people believe it. And they’re righteously pissed. So, you have a choice: You can either act now to help close the vast economic divide that is tearing our republic apart—or you can follow Trump’s rhetorical lead and start building huge f*cking walls. The pitchforks are at the gate, and time is running short.

http://www.politico.com/magazine/story/2017/07/18/to-my-fellow-plutocrats-you-can-cure-trumpism-215347

 

Don’t Listen To The Rich: Inequality Is Bad For Everyone

Having only a few people with most of the wealth, motivates others. This theory is actually wrong according to research. Aakkosia sosialistien lapsille (1912)/FlickrCC BY-SA

On August 6, 2017, The Conversation published:

A world where a few people have most of the wealth motivates otherswho are poor to strive to earn more. And when they do, they’ll invest in businesses and other areas of the economy. That’s the argument for inequality. But it’s wrong.

Our study of 21 OECD countries over more than a 100 years shows income inequality actually restricts people from earning more, educating themselves and becoming entrepreneurs. That flows on to businesses who in turn invest less in things like plant and equipment.

Inequality makes it harder for economies to benefit from innovation. However, if people have access to credit or the money to move up, it can offset this effect.

We measured the impact of this by looking at the number of patents for new inventions and then also looking at the Gini coefficient and the income share of the top 10%. The Gini coefficient is a measure of the distribution of income or wealth within a nation.

How inequality reduces innovation

From 1870 to 1977, inequality measured by the Gini coefficient fell by about 40%. During this time people actually got more innovative and productivity increased, incomes also increased.

But inequality has increased in recent decades and it’s having the opposite effect.


Author provided/The ConversationCC BY-ND

Inequality is preventing people with less income and wealth from reaching their potential in terms of education and invention. There’s also less entrepreneurship.

Inequality also means the market for new goods shrinks. One studyshows that if incomes are more equal among people, people who are less well off, buy more. Having this larger market for new products, incentivises companies to create new things to sell.

If wealth is concentrated among only a small group of people, it actually increases demand for imported luxuries and handmade products. In contrast to this, distributed incomes means more mass produced goods are manufactured.

What’s been driving inequality since the 1980s is changes to economies – countries trading more with each other and advances in technology. As this happens old products and industries fade while new ones take their place.

These changes have delivered significant net benefits to society. Reducing trade and innovation will only make everyone poorer.

The declining number of people in unions has also contributed to inequality, as workers lose collective bargaining power and some rights. At the same time, unions can adversely affect innovation within firms.

Unions discourage innovation when they resist the adoption of new technology in the workplace. Also if innovation creates profits for firms but some of these are taken up by higher wages (lobbied for by unions), these reduced profits provide less incentive for firms to innovate.

Where workers’ jobs are protected, for example with union membership, there’s often less resistance to innovation and technological change.


Author provided/The ConversationCC BY-ND

Giving people access to credit could change this

Most countries have much higher levels of inequality than the OECD average. This combination of high inequality and low financial development is a major obstacle to economic prosperity.

When financial markets work well, everyone gets access to the amount of credit they can afford and can invest as much as they need. We found that for a nation with a credit-to-GDP ratio of more than 108%, low income earners are less discouraged by not having a share of the wealth. There’s less of a dampening affect on innovation.

Unfortunately, most countries (including many in the OECD) are far from this threshold. In 2016, the credit-to-GDP ratio averaged 56% across all countries, and only 28% for the least developed. Until 2005, Australia was also below this threshold.

This means governments should look at providing more people with more access to credit, especially to the poor, to stimulate growth.

For financially developed nations like Australia, increased inequality actually has less of an effect on innovation and growth. So tackling inequality might not be as easy as increasing access to credit.

Spending and taxing are already historically high and growing inequality makes it harder to further raise taxes. Countries like Australia are not unequal societies in the sense of having significant barriers to people improving their income.

Australia is a relatively egalitarian nation. In 2016, the top 1% owned 22% of the wealth in Australia, compared to 42% in the USA, and 74% in Russia.

Governments in more developed nations can instead try to maintain a stable financial sector to improve growth or by training and education.

https://theconversation.com/dont-listen-to-the-rich-inequality-is-bad-for-everyone-81952

 

How “Shareholder Value” Is Killing Innovation

On July 31, 2017, William Laconic writes  on the blog of the Institute for New Economic Thinking:

The prevailing stock market ideology enriches value extractors, not value creators

Conventional wisdom holds that the primary function of the stock market is to raise cash that companies use to invest in productive capabilities. The conventional wisdom is wrong. Academic research on corporate finance shows that, compared with other sources of funds, stock markets in advanced countries have in fact been insignificant suppliers of capital to corporations. What, then, is their function? If we are to understand employment opportunity, income distribution, and productivity growth, we need an accurate analysis of the role of the stock market in the corporate economy.

The insignificance of the stock market as a source of real investment capital exposes as fallacious the fundamental assumptions of the prevailing ideology that, for the sake of economic efficiency, a business corporation should be run to “maximize shareholder value” (MSV). As a rule, public shareholders do not invest in a corporation’s productive capabilities; they simply buy shares outstanding on the market, hoping to extract value that they have played no role in helping to create. And in practice, MSV advocates modes of corporate resource allocation that undermine innovative enterprise and result in unstable employment, inequitable incomes, and sagging productivity.

The most obvious manifestations of the corporate misbehavior that MSV incentivizes are the lavish, stock-based incomes of top corporate executives and the massive distributions of corporate cash to shareholders in the form of stock buybacks, coming on top of already-ample dividends. Indeed, with stock-based pay incentivizing senior executives to do stock buybacks—i.e., having a company repurchase its own shares to give manipulative boosts to its stock price—over the past three decades the stock market has had a negative cash function. On the whole, U.S. business corporations fund the stock market, not vice versa.

My INET paper, “The Functions of the Stock Market and the Fallacies of Shareholder Value,” provides an analysis of the evolving role of the stock market in the U.S. corporate economy over the past century. I ask how the changing functions of the stock market have influenced the processes of value creation (hence, the size of the economic pie), as well as the relation between value creation and value extraction (hence, the distribution of the economic pie). This essay is part of an ongoing projectaimed at making “The Theory of Innovative Enterprise” central to an economic analysis that comprehends institutions’ and organizations’ roles in supporting or undermining stable and equitable economic growth.

The Theory of Innovative Enterprise posits that three social conditions of innovative enterprise—strategic control, organizational integration, and financial commitment—determine whether a business can generate goods and services that are higher quality and lower cost than those previously available. The process of value creation enabled by innovative enterprise enhances the performance of both the company and the economy of which it is a part. Once armed with a theory of innovative enterprise, we can analyze the relation between those who contribute to the processes of value creation and those who reap incomes through value extraction. We can discern how “predatory value extractors,” who make little if any contribution to value creation, use their power to dominate the distribution of income.

In terms of the three social conditions of innovative enterprise: Strategic controlgives decision makers the power to allocate the firm’s resources to transform technologies and access new markets to generate higher-quality, lower-cost products; organizational integration creates incentives for people working together to engage in the collective learning that is the essence of the value-creation process; financial commitment secures funds to sustain the cumulative learning process, from the time when investments in productive capabilities are made until innovative products generate financial returns.

The functions of the stock market may support or undermine the social conditions of innovative enterprise. The functions of the stock market go well beyond “cash” to include four others, which can be summarized as “control,” “creation,” “combination,” and “compensation.” Historically, as the U.S. economy grew to become the world’s largest and most powerful, the key function of the stock market was control. Specifically, the stock market enabled the separation of managerial control over the allocation of corporate resources from the ownership of the shares in the company.

Yet, assuming that the key function of the stock market is cash, academic economists known as agency theorists see this separation of control from ownership as the “original sin” of American capitalism. They argue that the evils of managerial control can be overcome by incentivizing or, if necessary, compelling corporate managers as “agents” to maximize the value of the stock possessed by corporate shareholders as “principals.” The agency-theory mantra is that the key role of managers is to “disgorge” the “free” cash flow to shareholders in the forms of dividends and buybacks.

What is missing from the agency theory argument is a theory of how a firm creates value—that is, a theory of innovative enterprise. The functions of the stock market may support the types of strategic control, organizational integration, and financial commitment that can result in the generation of higher quality products at lower unit costs—the economic definition of innovation. It is possible, however, that the functions of the stock market may undermine the types of strategic control, organizational integration, and financial commitment that the innovation process requires.

Indeed, by following the prescriptions of agency theory—that senior executives should be incentivized by stock-based pay to “create value” for shareholders—corporate managers have undermined the conditions of innovative enterprise in U.S. corporations over the past three decades. Consider each of the three social conditions:

Strategic control: Senior executives who are willing to waste hundreds of millions or billions of dollars annually on buybacks to manipulate their companies’ stock prices can lose the capacity to determine what types of organizational and technological investments are required to remain innovative in their industries. Instead, the current structure of stock-based executive remuneration—as prescribed by agency theory—creates incentives for senior executives to allocate resources in ways that boost stock prices and increase their take-home pay. The stock buyback is a powerful tool at the disposal of corporate executives for manipulating the stock market for their personal gain.

Organizational integration: Collective and cumulative learning about the technologies, markets, and competitors relevant to a particular industry is the foundation for generating the higher-quality, lower-cost goods and services that result in productivity growth. What I call “collective and cumulative careers” are essential for organizational learning, especially in industries that are technologically and organizationally complex. Organizational learning depends on a “retain-and-reinvest” regime. In such an arrangement, senior executives make corporate resource-allocation decisions that, by retaining people and profits in the company, permit reinvestment in the productive capabilities that can generate competitive (high-quality, low-cost) products. Our research supports the hypothesis that, as part of a corporate resource-allocation regime that downsizes the U.S. labor force and distributes corporate cash to shareholders, stock buybacks are done at the expense of investments in collective and cumulative careers. For working people who are the real value creators, the “disgorged” cash flow is far from “free.”

Financial commitment: The cash flow that MSV calls “free” can deprive the business enterprise of the foundational finance for investment in innovative enterprise. Stock buybacks represent a depletion of internally-controlled finance that could be used to support investment in the company’s productive capabilities. Every once in a while, a major company that has done massive buybacks over a period of years hits a financial wall. At that point the billions of dollars it wasted on buybacks are not available to support the restructuring needed for it to become innovative once again. The process of predatory value extraction that destroys innovative enterprise is irreversible. It must be stopped before it starts.

https://www.ineteconomics.org/perspectives/blog/shareholder-value-is-killing-innovation