Why So Much Inequality?

Answering Kennedy’s Call

Epi.org

There aren’t many economists that still debate the origins of our record income inequality, the worse in the developed world, and even in some of the developing world.

A loss of $10/hour in the typical worker’s compensation is the result of employers’ successful efforts to keep wage growth down over the past 40 years, according to a new paper by EPI distinguished fellow Larry Mishel and EPI director of research Josh Bivens.

Mishel and Bivens maintain that while productivity increased 69.6 percent from 1979-2018, employees’ compensation increased just 11.6 percent, per the EPI graph.

How did this happen? The obvious reasons are the growing strength of corporations and loss of labor union bargaining power that has allowed states to pass anti-labor laws and American corporations to ship many high-paying jobs overseas with little government regulation that would mitigate the job losses of domestic workers.

But it goes deeper. It goes back to the origins of the so-called economic sciences and the economic theories that politicians utilize to rationalize their policies.

They really derive from political economics, the original pseudo-science that attempted to understand human’s financial behavior, which is not that difficult to understand when we are talking about dollars and sense.

The owners of companies and the capital that controlled them wanted few regulations and lower taxes. So from 1980 onward Republican administrations and Big Business began to deregulation whole industries, and the labor lows and practices that guaranteed employees their fair share of the profits under what have been called Laissez Faire or free market economic theories.

Less government oversight and lower taxation, for instance, was based on the supposition that it encouraged greater growth, since corporations would create more jobs to produce more goods and services.

Industries have become more productive, but the increased profits were kept by the owners and chief executives of those companies rather than passed on to their employees; so much so that the gap has widened between employee’s hourly compensation and productivity that doesn’t guarantee the majority of service workers a livable wage.

That justified lower trade barriers in turn, so that consumers with their reduced incomes could afford the cheaper goods now made made overseas.

Even the Supreme Court got into the act by allowing public employees to avoid paying any fees if they so choose, even though receiving all the benefits of union membership—higher wages, pensions, worker safety, the list goes on and on.

The Supreme Court issued a sweeping ruling in 2018 that dramatically undermined unions for teachers, firefighters, police officers, and other public employees throughout the United States.

The case, Janus v. AFSCME, involved a challenge to the practice of public sector unions charging “agency fees” to employees who decline to join the union but who still benefit from the deals it bargains.

And twenty-eight states have ridden the free market banner that have “right to work” laws banning agency fees. Such laws create a free-rider problem: People don’t have to join unions or pay agency fees to get the unions’ benefits, so the unions lose members and political influence.

There is an ongoing dispute over how much of the economic pie should be going to workers vs. the owners of capital, but not the fact that it has happened. Our badly degraded infrastructure and a warming planet tell us that public works have been badly neglected that would prepare US for future catastrophes as well.

The ongoing political and economic debate is how to right the fact that most of the rewards of higher productivity have not increased the public good, but diminished it. Mishel and Bivens are helping us to see that labor must have a greater voice in that debate.

Harlan Green © 2021

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen 

ANSWERING the KENNEDYS CALL

In a new Economic Policy Institute report entitled The New Gilded Age, income inequality has risen in every state since the 1970s, and in most states it has continued to grow in the post–Great Recession era.

Why should we care? The most dire economic consequences of income inequality are recessions, including the Great Depression when inequality was as high as it is now. And since 1980, such inequality has resulted in 5 recessions, including the Great Recession.

Are there more on the horizon in this ninth year of this long-in-the-tooth recovery from the Great Recession? The Economic Policy Institute map shows the income disparities in the U.S. today. In Alaska the top 1 percent earns 12.7 times the 99 percent, whereas New York has the highest multiple, at 44.4 percent.

From 2009 to 2015, the incomes of the top 1 percent grew faster than the incomes of the bottom 99 percent in 43 states and the District of Columbia. The top 1 percent captured half or more of all income growth in nine states. In 2015, a family in the top 1 percent nationally received, on average, 26.3 times as much income as a family in the bottom 99 percent.

Today, the top 1 percent has garnered 24 percent of national income once again, as happened in 1928 just prior to the Great Depression, and which today is $1.3m. The 99 percent rest of us have an average annual income of $50,000 per year. And now we have to worry that the current geopolitical uncertainties—a Trump trade war, breaking up of western treaties (TPP, NAFTA, NATO), global warming that is causing mass migrations, the threats of more terrorism, or ongoing regional military conflicts—could plunge us into another recession or worse.

There is a way out of this mess, other than another recession or war. We could shift the balance of power to those that want to rebalance the income equation by rescinding those tax cuts that only benefit the 1 percent longer term.

Or, we could shift more spending away from the military’s $600B budget that just increases the likelihood of war to badly needed infrastructure improvements, boosting educational opportunities of the disenfranchised blue collar workers, or more R&D to create the next generation of innovators and entrepreneurs.

There are countless ways we can use those revenues, in other words, that would benefit 99 percent of Americans, instead of the 1 percent.

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

The Need For More Productive Investment

Consumers’ financial health has substantially improved in 2015, according to the Fed’s 2015 Q4 Flow of Funds report, plus, their real wages are finally rising because of lower inflation.  And since consumer income drives aggregate demand—the overall demand for goods and services, and so Gross Domestic Product —it directly impacts economic growth.

This dearth of aggregate demand has happened at the same time as diminished corporate investment in more productive capacity, according to a recent Bank of America report.  “Since the Great Recession, US business investment has grown at an average annual rate of 4.9 percent, compared with the 8.1 percent average for the corresponding period of all post-war recoveries. This shortfall is a much larger than the 1.8pp shortfall for household consumption, and the 2.0 pp for residential investment.”

Graph:  zerohedge.com

Why?  The Great Recession occurred in 2008, and businesses and financial markets have been slow to recover.  But a recent Economic Policy Institute report highlights a more serious reason for slower growth—wage inequality.

“The rise in wage inequality over the last three-and-a-half decades largely stems from intentional policy choices that have eroded ordinary workers’ leverage to secure higher pay (Bivens et al. 2014), said the EPI author Elise Gould. “These policy choices—made on behalf of those with the most economic power—include allowing the minimum wage to stagnate, eroding workers’ rights to bargain collectively, and (the Fed) prioritizing low inflation over low unemployment. Policies such as these have resulted in hourly pay for the vast majority of American workers stagnating despite growing economy-wide productivity, with economic gains highly concentrated at the top.”

And because wages and salaries of most Americans haven’t increased more than 2.2 percent since 2000, economic growth has also been stuck in the 2 percent range.  This creates ever larger budget deficits, needless to say, and so endangers social security,  Medicare, crimps investments that would increase productivity and boost our standard of living, and is the reason for our crumbling infrastructure of roads, bridges, resulting in even more productivity losses, for starters.

So raising the minimum wage floor is a start.  In fact, states that have already raised the minimum wage have boosted wages of the bottom 10^th percentile—as much as 5.2 percent for women in states where it was legislated, vs. states with no minimum wage increase.

Graph: EPI

That makes it even more important for companies and governments to invest more in capital expenditures, i.e., the best way to spend the profits made from higher productivity.  But it is hardly surprising that businesses lack confidence in any sustained upswing in demand that would justify taking the risks associated with large increases in investment, concludes the BofA report. For many listed companies, returning surplus cash to shareholders through dividends or share buybacks has seemed a safer strategy.

It is the old chicken and the egg puzzle.  Which comes first, investing to expand business, or waiting for household incomes to increase enough to encourage businesses to use their cash for productive growth rather than stock buybacks that benefit the few?

We really do know how to boost aggregate demand.  We have to create more jobs to fix our public infrastructure that hasn’t been upgraded in 75 years, build and upgrade our schools to educate a growing population, and spend more for the research and development of new, productivity-enhancing inventions. 

These are really the functions of governments, when businesses lack confidence to do anything but buy back their own shares.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

It’s Time For the 30-hour Week

Popular Economics Weekly

Don’t look now, but we should soon have the 30-hour work week as the standard, instead of the 40-hour work week last enshrined during FDR’s New Deal. Why, when Americans now work more hours than any other developed country?

There are a number of good reasons, and they have little to do with the ACA, or Obamacare, which has decreed that 30 hours per week is considered to be full time employment for large businesses that are required to offer insurance coverage to their employees.

But it has a lot to do with the labor slack in our job market that Fed Chair Yellen has been talking so much about, and the declining health and welfare of American workers. Thanks to the tech revolution and huge productivity gains of those past 30 years, fewer workers are needed to do the same amount of work in the digital world. So if fewer workers are needed to do the same work, then why are more employees working overtime?

Maybe because no one in America has thought through the consequences. What would it mean to share the workload with more people? The Germans certainly have done something about it. Rather than fire employees when times were tough in Germany’s last recession, firms hit hardest by the reduction in demand reduced their employees’ working hours to spread the pain.

And, the four-day workweek is nearly standard in the Netherlands, especially among working moms, according to a CNN Money article. Overall, the entire workforce averages around 29 hours a week -- the lowest of any industrialized nation, according to the OECD.

Some 86 percent of employed mothers worked 34 hours or less each week last year, according to Dutch government statistics, as reported by CNN. Among fathers, about 12 percent also worked a shortened workweek. Denmark is close behind with a 33 hour average work week and five weeks of paid vacation.

“Dutch laws promote a work-life balance and protect part-time workers,” said the report. All workers there are entitled to fully paid vacation days, maternity and paternity leave. A law passed in 2000 also gives workers the right to reduce their hours to a part-time schedule, while keeping their job, hourly pay, health care and pro-rated benefits.

Whereas in a U.S., a Gallup survey last summer found that the average for full-time employees was actually 47 hours—or 46 if you isolate those workers with just one job. Either way, that's almost the equivalent of an extra business day on top of the usual five-day workweek. And it’s affecting our health and longevity.

Of the more than 1,200 adults surveyed by Gallup, 21 percent said they worked 50 to 59 hours while 18 percent said they worked 60 or more. Another 11 percent estimated 41 to 49 hours. It is an insanity that American workers have become such workaholics at the expense of their health, their families, and their own sanity.

The Centers for Disease Control and Prevention cites studies that found "a pattern of deteriorating performance on psycho physiological tests as well as injuries while working long hours."

It also cited four studies that found "that the 9th to 12th hours of work were associated with feelings of decreased alertness and increased fatigue, lower cognitive function, [and] declines in vigilance on task measures."

Wouldn’t this be the least painless way for workers to catch up to the incomes of their bosses that now earn on average 303 times their average employees’ income, according to a recent EPI study? Where have most of the productivity profits since the late 1970s gone, as illustrated by the BLS graph? To those executives and their stockholders, as this graph illustrates.

It’s no longer a secret that America is the most over-worked country in the developed world, according to the Center For American Progress, a progressive think tank. It is the only developed country with no mandated vacation, sick leave or parental work leave allowances, which even many third world countries like Afghanistan and Ethiopia have.

In fact, it is already beginning to happen among high tech firms that allow flex hours and even work at home. A 4-day -- or compressed -- workweek is offered as an option to at least some employees at 43 percent of companies, according to the Society for Human Resource Management. But only 10 percent of those companies make it available to all or most of their employees.

And there are roughly two dozen local union contracts that include a compressed workweek option for public-service employees working in municipalities, universities and institutions such as prisons, according to the American Federation of State, County and Municipal Employees.

So there is no good reason America, the richest country in the world, should remain an underdeveloped, overworked country anymore.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Economic Growth Still Too Slow

Popular Economics Weekly

Part of the debate over whether the Fed’s QE3 purchases of securities should end is based on economic growth.  I.e., why isn’t U.S. Gross Domestic Product growing faster than the average annual 2.2 percent rate? Actually, Q1 and Q2 2013 growth is even lower—1 and 1.7 percent, consecutively.

Part of the problem is that the unemployment rate is still 7.4 percent, of course, whereas the historical full employment rate is below 5 percent, which means at least another 2 million need to be employed.  Also current consumer spending seems to be maxed out, with household incomes rising less than inflation, as Fed Chairman Bernanke has been pointing out.  And so hopes are pinned on a housing recovery this year, which is still tentative.

For instance, existing-home sales finally reached its more normal 5 million unit annual rate the past 2 months, and new-home sales are some 500,000 annually, vs. 1.2 million at the height of the housing bubble. So the debate ought to be comparing current GDP growth to its full employment potential output.  In fact, the U.S. economy has lost more than $4 trillion in output from the Great Recession.

Graph:  EPI.org

The Congressional Budget Office recently released its updated Budget and Economic Outlook, which highlighted a key theme that recurs in many economic policy discussions: a rapid recovery is projected to begin relatively soon and to reliably deliver the economy back to full health in about four years. The problem is that this full recovery has generally been forecast to be four years away since the Great Recession began five years ago, says the Economic Policy Institute.

The output gap for 2012 was $995 billion, or roughly 5.9 percent of potential output. CBO’s latest economic forecast shows a rapid recovery starting in late 2013 and the full output gap now closing by 2017.   So it seems no one really has an idea when the economy can return to historical growth and employment.  That is a measure of just how ‘great’ was the Great Recession and its aftermath.

The latest economic data show a possibility of pickup in the fall, which is what the Fed’s deficit hawks are counting on to justify their call for an early end to QE3.  Specifically, both the Institute of Supply Management’s service and manufacturing surveys rose sharply in July.  The ISM's non-manufacturing report showed the largest surge that drove the composite index up a very substantial 3.8 points to 56.0 for the best reading since February. New orders, the key component in the report, rose nearly 7 points to 57.7 for its best reading since December. And overall business activity really took off, up more than 7-1/2 points to 60.4, also the best reading since December.

Graph: Econoday

            But from what level? It would have to remain above 50, which signals growth, for a considerable period before it is a reliable trend after last month’s dip to no growth in activity. Retail sales also remain healthy.  July’s numbers show an almost 6 percent annual growth rate, close to pre-recession levels.  Within the core, excluding more volatile auto and gasoline sales, gains were widespread with increases in food & beverage stores, health & personal care, clothing, sporting goods & hobbies & music, and general merchandise.  But furniture & furnishings, electronics & appliances, and building materials & garden equipment purchases.

So bottom line seems to be that economic conditions are still very uncertain; especially with the debt ceiling debate about to be repeated in the fall and many of the sequester spending cuts yet to take effect.  There should be no rush to end the Fed’s low interest rate program with such high unemployment levels and congressional gridlock that could even contribute to a further downgrade of federal debt.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

Repubs Platform—Reverse Robin Hoodism

The Financial FAQs

Reagan Budget Director David Stockman and even President Obama have called it the reverse the Robin Hood effect, or taking the meager wealth from the poorest to give to the wealthiest. Because the Tea Party has created the Republican election platform, their agenda has been laid bare, which is a blatant effort to suppress the wages and salaries of 80 percent of our workforce. This after more than 200 years of government working for both the advantaged and disadvantaged.

The Republican platform no longer even tries to hide what they want to do--make the poor and middle classes even poorer by shrinking the social safety net, as well as restrict or outright ban collective bargaining of both public and private sector employees.

It is unbelievable, but true. Their platform even includes removing all restrictions on assault rifles, with no limits on magazine sizes, and taking away a woman's freedom to choose her own health care options, including contraception.

They are doing it in their time-tested way, playing the blame game again. As Rick Santorum said in his convention speech—“Almost half of Americans are on some form of government assistance,” implying that the poorest among US are too lazy to work. But most who receive government aid have retired on social security and Medicare, with very few on welfare, thanks to Clinton’s welfare reform that required welfare recipients to find work.

In fact, playing the blame game is their attempt to direct attention away from their own wholesale draining of the public coffers with tax breaks for the wealthiest that continue to increase the federal deficit, while income inequality is already at record levels. They would even make it worse under the Paul Ryan’s budget proposals by continuing to cut taxes, as well as social security, Medicare, education, and environmental protection programs.

Meanwhile defense spending would increase from some $500 trillion to over $900 trillion in 10 years by some estimates, if we follow Ryan’s prescription,  when we are the only super-power. This includes 9 super-carriers when no other country has even one.

What best confirms the Republican Party’s outright suppression of wages and salaries is the change in labor laws that have happened since at least 1980, when President Reagan disbanded the FAA Air Traffic Controllers Union, after only 4 days of negotiations.

In a just released report by the Center for Policy and Research, “Protecting Fundamental Labor Rights: Lessons from Canada for the United States,” begins with a comparison of the current state of organized labor in the United States and Canada.  It notes that, from the 1920s to about 1960, Canada and the United States had roughly the same unionization rates. But in 1960, the two began to diverge. As of 2011, the unionization rate in Canada stood at 29.7 percent, compared to less than half that in the U.S., at 11.8 percent.

While Canada and the U.S. both have elections as one route to forming unions, Canadian workers in several provinces also have the much faster option of card-check certification. Under card check, once a majority of employees signs cards in support of unionizing, an employer is required by law to recognize their union. . While the United States, however, workers must first file a petition showing support for unionizing and then vote to unionize in an election before an employer is required to recognize their union, unless an employer voluntarily recognizes a union.

And this can take months, during which companies are able to employ tactics to intimidate their workers. “During this time, U.S. employers usually engage in anti-union campaigns, often committing illegal acts – such as threatening to close the workplace or threatening to fire workers – to discourage them from voting to form a union,” said the report . “In fact, workers were illegally fired in about 30 percent of certification elections in 2007. Unfortunately, the legal response to such practices is slow and ineffective.”

Even more damning is the direct suppression of wages in the 23 right to work states  that say workers don’t even have to join a union, or outright banning collective bargaining of public workers, such as teachers, police and fireman, in Wisconsin, which other states are attempting to emulate.

For instance, A February 2011 Economic Policy Institute study found:

• Wages in right-to-work states are 3.2 percent lower than those in non-RTW states, after controlling for a full complement of individual demographic and socioeconomic variables as well as state macroeconomic indicators. Using the average wage in non-RTW states as the base ($22.11), the average full-time, full-year worker in an RTW state makes about $1,500 less annually than a similar worker in a non-RTW state.
• The rate of employer-sponsored health insurance (ESI) is 2.6 percentage points lower in RTW states compared with non-RTW states, after controlling for individual, job, and state-level characteristics. If workers in non-RTW states were to receive ESI at this lower rate, 2 million fewer workers nationally would be covered.
• The rate of employer-sponsored pensions is 4.8 percentage points lower in RTW states, using the full complement of control variables in [the study's] regression model. If workers in non-RTW states were to receive pensions at this lower rate, 3.8 million fewer workers nationally would have pensions.

The damage to economic growth is considerable when the 80 percent of Americans who are wage and salary earners have not been able to boost their incomes sufficiently to grow the economy. The facts are daunting. Income inequality has been growing since the 1970s—so much so that economic growth will continue to suffer, unless workers have sufficient bargaining power to begin to grow their incomes again.  But that can’t happen unless/until they recognize who is blocking their path to greater prosperity.

Harlan Green © 2012

What Has Caused Record Inequality (and Greater Recessions)?

Popular Economics Weekly

Economists Lawrence Mishel and Heidi Shierholz of the labor think tank Economic Policy Institute (EPI) have been asking a question in their latest work that is at the root of our various economic crises, “Why did the richest 1 percent of Americans receive 56 percent of all the income growth between 1989 and 2007, before the recession began (compared with 16 percent going to the bottom 90 percent of households)? Why are corporate profits 22 percent above their pre-recession level while total corporate sector employees’ compensation (reflecting lower employment and meager pay increases) is 3 percent below pre-recession levels?”

The answers have become becoming blindingly obvious in the glare of the Great Recession. A concerted effort by business interests in general, and Republicans in particular, instigated a massive transfer of newly created wealth from wage earners to the owners of capital via various measures, including lowering upper income tax rates, restricting employees collective bargaining, rolling back regulations on financial institutions, and the like.

Such a wealth transfer has caused tremendous harm to our economy and society. The major casualty has been recurring recessions since the 1970s brought on in large part by mountains of debt. In fact, most of that debt was taken out by households with declining incomes who took advantage of increasingly available credit to borrow to make up for their income shortfall.

What created the wealth? Information age technologies, which massively increased worker productivity. Labor productivity has increased 254 percent since 1948. Hourly wages, however, increased just 113 percent. That can be seen in Figure A from the EPI, which presents both the cumulative growth in productivity per hour worked of the total economy (inclusive of the private sector, government, and nonprofit sector) since 1948 and the cumulative growth in inflation-adjusted hourly compensation for private-sector production/nonsupervisory workers (a group comprising over 80 percent of payroll employment).

Figure A: EPI

That transfer of wealth since the 1970s has been well documented in books such as, Jacob Hacker and Paul Pierson’s, “Winner Take-all Politics” that documents the massive lobbying effort by businesses to bring in business-friendly legislation and administrations resulting not only in the ownership of much of Congress, but an extremely conservative, corporate-friendly Supreme Court that in Citizen’s United now allows unlimited corporate donations to political campaigns, and so corporate control of 2 of the 3 branches of government for years to come.

The other side of that coin is blatant attempts by Republicans to suppress incomes by taking away collective bargaining rights of both private and public sector workers, such as happened in Wisconsin. The result is the almost disappearance of the middle class that has been the main driver of growth since WWII.

Big Business chose to raise their own incomes and that of their shareholders, but not their workers’ incomes, in other words. Yet Big Business was more than willing to lend consumers money via Wall Street and relaxed banking regulations, so much so that the personal savings rate dropped to almost zero during the Bush II administration, as the Calculated Risk graph clearly shows after peaking in 1980. Those consecutive recessions—6 since 1973—have been a tremendous drag on economic growth, in spite of the productivity increases.

Graph: Calculated Risk

According to the Federal Reserve’s Survey of Consumer Finances, the percentage of households holding revolving credit card debt rose from 16 percent in 1970 to 71 percent in 2004.

“Essentially, economic policy has not supported good jobs over the last 30 years or so,” said EPI. “Rather, the focus has been on policies that were thought to make consumers better off through lower prices: deregulation of industries, privatization of public services, the weakening of labor standards including the minimum wage, erosion of the social safety net, expanding globalization, and the move toward fewer and weaker unions. These policies have served to erode the bargaining power of most workers, widen wage inequality, and deplete access to good jobs. In the last 10 years even workers with a college degree have failed to see any real wage growth.”

All this has been part of an even larger trend, the maturing of our economy from industrial to a service-oriented economy dependent mostly on consumer demand, rather than capital investment as in the past. The result has been documented by Rutgers Economic Historian James Livingston. Though most economic activity over the past 100 years is generated by consumer spending, it hasn’t benefited most consumers.

This has to change. We can no longer tolerate such a diversion of wealth that has weakened our economic and social fabric so much that we have fallen behind the rest of the developed world in education, health care, ageing infrastructure, and even environmental protection.

Harlan Green © 2012