Posted by Kevin Villani on April 17th, 2017 (All posts by Kevin Villani)
For centuries leading up to the Bicentennial in 1976 the American Dream of perpetually rising living standards has been paid for with wages that rose faster than prices. During the post WW II era worker productivity – as measured by output per hour – has continued to rise at a constant rate. Wages rose in lockstep with increasing productivity until the mid 1970s, but have since stagnated, rising only 15% as much (11% as compared to 75%) through 2016, as reported by the think tank EPI. The view from the left is that the wealthy owners and managers of capital have expropriated 85% of the fruits of labor, implicitly reflecting the decline of unionization of the private labor force from about one in three workers in the 1950s to one in twenty today. Their policy proposals reflect this perception of exploitation.
Politicians promote “Social Justice” through protection and redistribution
Even Karl Marx never expected capitalists to be this successful at exploiting workers, exceeding even that of 19th century robber barons and pre-Civil War southern plantation owners who at least provided their slaves basic sustenance. Politicians have responded with labor protections and income subsidies.
For example, the Obama Administration strongly supported (and was generously supported by) public sector unions. It also supported the expansion of private sector unionization through such policies as card check and Davis Bacon “prevailing,” i.e., union, wages for construction. It also supported “living wage” laws and raised the federal minimum wage, with states following and in some cases leading. In addition, restrictive state certification rules have increased five-fold since the 1950s.
Politicians also responded by supporting a rising standard of living with welfare state income redistribution policies. Obama-Care made health insurance universal and the percentage of the population receiving food stamps rose by 32%. In addition, those receiving disability payments rose about 50% during the last decade, despite the decline in risky manufacturing jobs.
These labor and subsidy policies all have roots in the response to the Depression of 1929/30, before it became “Great.” FDR – following Hoover – supported private – but strongly opposed public – sector unionization and a high wage policy, successfully keeping wages 40% above their market clearing rate according to a 2009 article. Social Security was introduced by FDR’s Labor Department and food stamps by his Agriculture Department (food perishables were purchased by the government to keep farm prices inflated and taken off the market, then distributed to the poor to save storage costs).
Globalization isn’t to blame
From a longer term historical perspective the rise in real wages in the U.S over a quarter century following WW II is an outlier. The long term secular trends of prices and wages and their relationship over the last eight centuries depends on many factors. Devastating plagues and wars give real wages a secular boost. Prosperity gives rise to a baby boom that ultimately drive wages down. Progressive eugenics policies drive them up. Changes in the available supply of food and energy are subject to natural supply shocks that transmit price inflation across national boundaries. The effect of global competition for food and energy on domestic prices – hence real wages – isn’t new.
Domestic policies to maintain real wages above productivity raises consumer prices, improving living standards for the few at the expense of the many. Global labor competition in contrast improves domestic labor productivity and living standards.
Discrimination isn’t a likely cause
While discrimination against women is often alleged, between 1979 and 2013 total median wage and benefit income rose 56% for women compared to only 3% for men. A college degree further widens the gap, and female high school graduates are 20% more likely to go to college than males. This has created a large pool of working age males no longer breadwinners who have dropped out of the labor force (the labor force participation rate for working age men 25-54 has been steadily declining from almost 95% in 1975 to about 88% currently).
The dominance of high paid black athletes in college and professional football and basketball and Hispanic athletes in baseball undermines the case for widespread racial discrimination.
Did worker productivity really rise seven times faster than wages?
Historically first generation Americans worked harder to achieve the American Dream, saving and investing in the education of their children who could then work smarter rather than harder. My first generation grandfather who rode a newspaper delivery truck in NYC put my Dad through Fordham as a commuter. His three baby boomer sons all received advanced degrees.
Still, the 11% increase in real wages – closer to 15% including non-wage compensation – over the last four decades would rank as one of the most successful eras of the last millennium. The EPI calculation of productivity gains of 6.6 times that (purportedly more conservative than the Federal Bureau of Labor Statistic (BLS) calculation) is unprecedented. It is hard to explain how business could chronically exploit labor by so much in a free country where the number of workers trying to enter has consistently been greater than those who want to leave.
The allegation of exploitation raises two big questions. First, since it’s obvious that the millennium generation doesn’t work twice as hard as the baby boom generation, does it have almost twice the workplace smarts as implied by this analysis? Second, who are the contemporary plantation owners and robber barons extorting these huge economic rents?
My mother’s words “you are not as smart as you think you are” still ring true
Since the 1970s some states like California have largely taken over funding and control from municipalities, and the federal government expanded its role in primary and secondary education with the creation of the Cabinet level Department of Education at the tail end of the Carter Administration. The US spends more per student on primary and secondary education than any of the industrialized OECD countries , but the quality of U.S. primary and secondary education, particularly urban, has been declining and falling behind the international competition, ranking among the worst.
And yet, whereas only one worker in four had any post high school education when wages kept up with productivity, about two thirds of current high school graduates are going to college. Public institutions have expanded rapidly, largely at the expense of private universities. The weakest failed, while the strongest, e.g., the Ivy League schools, now get more revenue from tax than tuition dollars. But the rise in the average grade from C to A apparently doesn’t translate into workplace smarts.
Un-or-under-employment of college grads, i.e., those working in jobs that don’t require a college education, still hovers around fifty percent. College grads move up faster than those with high school degrees, most likely reflecting their age and maturity as well as ambition rather than the education they received, worsening the prospects of those with a high school diploma or less. Whether they recoup their lost productivity of their college years and the public subsidies received to keep the classrooms filled isn’t clear, but they clearly aren’t worth twice as much in the job market as their baby boom high school predecessors.
Crony capitalism always favors the political elite
Liberal Joseph Stiglitz and libertarian David Stockman both conclude that the biggest cause of rising income inequality between private sector workers and the “one percenters” is crony capitalism. This isn’t new. Two new TV shows, Frontier (Netflix) featuring the Hudson Bay Trading Company and Taboo (FX) featuring the East India Trading Company remind viewers that the Americans were revolting against a corrupt crony capitalist British Empire.
America’s early comparative advantage lay in the freedom of individual workers to exploit their own comparative advantage. Labor was often in short supply in the rapidly expanding United States of the 19th century, attracting Chinese immigrants in the west and Irish immigrants in the east, with recently liberated blacks migrating from the south, to build the private transcontinental railroad, which improved the average productivity of the rest of the American work force. But as the AMC TV show Hell on Wheels depicts, President Lincoln’s “public improvements” also turned Washington D.C. into a crony capitalist swamp.
Crony capitalists may lack the moral smugness of socialist soviet apparatchiks and the snootiness of the “rentier” class of landlords depicted in Versailles (Netflix) that exploited the peasants, but they mask their redistribution to the politically favored with liberal platitudes of paternalism. The political elite in the U.S. has been “democratized” to a much wider political base to include public employees and, as government has expanded both directly and by exercising regulatory control over what is still euphemistically called the private sector, major swaths of the economy.
The more heavily regulated and subsidized, the greater the rent seeking opportunities. Hence health care is ripe for the picking by trial lawyers, while the number of high paid college administrators increased ten times more than faculty in response to state and federal rules and regulations. Those not favored pay for this redistribution in the form of higher prices, premiums and taxes.
The Fatal Conceit
By EPI’s calculation, the minimum wage should have been raised to $18.42 in 2014 (almost $20 today) based on worker productivity. But EPI also reported that youth unemployment (16-24 year olds) is 50% for blacks, 36% for Hispanics and 33% for whites at the federal minimum wage of $7.25 set in 2009. Youth unemployment rates in France (25%), Italy (37%) and Greece (almost 50%) are comparable. Either millions of supposedly exploitative businesses worldwide are failing to exploit the “rents” that could be earned by hiring more youths at or above the minimum wage, or the aggregate “statistic” (derived from the Greek word for state) used as a proxy for worker productivity is nonsense.
EPI offers no direct evidence that a rise of 15% in real wages for “average hourly compensation of production/nonsupervisory workers in the private sector” is an inaccurate reflection of the increase in worker productivity, relying instead on the historical relationship of hourly wage rates to GDP, really total national spending.
But there is no evidence of excess returns to capital. During the Obama Administration business investment barely covered depreciation and new business start-ups plummeted. Even EPI only attributes 17% of the diversion to owners of capital from 1973-2014.
EPI attributes more than 50% of the divergence to rising income inequality, i.e., the rents going to managers and supervisors rather than workers or owners, labeling the alternative economic view that business hires and pays workers based on their individual productivity “doctrinaire.” They don’t explain why the owners of capital who have purportedly exploited workers for centuries now allow themselves to be exploited by managers, other than to suggest the decline of private sector unionization (EPI’s primary source of funds).
They attribute the rest of the “inequality” to consumer prices rising faster than producer prices. (So much for cheap Chinese goods!)
The policy choice
The New Deal was part socialist, part fascist. WW II may have ended the Great Depression, but the labor and spending policies of the New Deal helped make it “Great.” Progressives never recommended plagues, and they no longer support eugenics, but the rest of the agenda remains more of the same – big government paternalism, higher taxes on capital returns and spending – on which crony capitalism feeds. As this fails, they are again beating the drums of war.
Those left out of the work force by political wage determination- mostly the young but increasingly un-or-under-employed middle aged men – are the primary victims of the current opioid epidemic sweeping the U.S. Restrictive work rules and wage requirements are essential tools of crony capitalism
The Federal government that has since the New Deal paid farmers not to produce increasingly subsidizes workers not to work, with debt financed entitlements, i.e., disability payments and “free” college education, to maintain the expectation of rising living standards. This debt consumes the seed corn of real economic growth and represents the biggest threat to the future liberty and well being of the working class.
It’s time to liberalize labor markets and improve the incentives to work and save, putting Americans back to working productively.
Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, is a principal of University Financial Associates. He has held senior government positions, been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.