Former Labor Secretary Robert Reich, writing in an article
published in the spring issue of “The American
Prospect”, had these observations concerning the growing maldistribution
of income in the United States. Author
of several books including “Work of
Nations”, “Aftershock” and “Beyond Outrage”, Reich has also produced and
narrated a film entitled “Inequality for
all” wherein he graphically walks us through the changes wrought on the
American economy transforming what he refers to as the ‘virtuous’ business
cycle into an emerging, and terrifying, ‘vicious’ cycle. The former Harvard economics professor and
current professor of Public Policy at the University of California, Berkley in
his own words:
“The Political Roots of Widening
Inequality”
Friday, May 1, 2015
For the past
quarter-century I’ve offered in articles, books, and lectures an explanation
for why average working people in advanced nations like the United States have
failed to gain ground and are under increasing economic stress: Put simply,
globalization and technological change have made most of us less competitive.
The tasks we used to do can now be done more cheaply by lower-paid workers
abroad or by computer-driven machines.
My
solution—and I’m hardly alone in suggesting this—has been an activist government
that raises taxes on the wealthy, invests the proceeds in excellent schools and
other means people need to become more productive, and redistributes to the
needy. These recommendations have been vigorously opposed by those who believe
the economy will function better for everyone if government is smaller and if
taxes and redistributions are curtailed.
While the
explanation I offered a quarter-century ago for what has happened is still
relevant—indeed, it has become the standard, widely accepted explanation—I’ve
come to believe it overlooks a critically important phenomenon: the increasing
concentration of political power in a corporate and financial elite that has
been able to influence the rules by which the economy runs. And the
governmental solutions I have propounded, while I believe them still useful,
are in some ways beside the point because they take insufficient account of the
government’s more basic role in setting the rules of the economic game.
Worse yet,
the ensuing debate over the merits of the “free market” versus an activist
government has diverted attention from how the market has come to be organized
differently from the way it was a half-century ago, why its current
organization is failing to deliver the widely shared prosperity it delivered
then, and what the basic rules of the market should be. It has allowed America
to cling to the meritocratic tautology that individuals are paid what they’re
“worth” in the market, without examining the legal and political institutions
that define the market. The tautology is easily confused for a moral claim that
people deserve what they are paid. Yet this claim has meaning only if the legal
and political institutions defining the market are morally justifiable.
II
Most
fundamentally, the standard explanation for what has happened ignores power. As
such, it lures the unsuspecting into thinking nothing can or should be done to
alter what people are paid because the market has decreed it.
The standard
explanation has allowed some to argue, for example, that the median wage of the
bottom 90 percent—which for the first 30 years after World War II rose in
tandem with productivity—has stagnated for the last 30 years, even as
productivity has continued to rise, because middle-income workers are worth
less than they were before new software technologies and globalization made
many of their old jobs redundant. They therefore have to settle for lower wages
and less security. If they want better jobs, they need more education and
better skills. So hath the market decreed.
Yet this
market view cannot be the whole story because it fails to account for much of
what we have experienced. For one thing, it doesn’t clarify why the
transformation occurred so suddenly. The divergence between productivity gains
and the median wage began in the late 1970s and early 1980s, and then took off.
Yet globalization and technological change did not suddenly arrive at America’s
doorstep in those years. What else began happening then?
Nor can the
standard explanation account for why other advanced economies facing similar
forces of globalization and technological change did not succumb to them as
readily as the United States. By 2011, the median income in Germany, for
example, was rising faster than it was in the United States, and Germany’s
richest 1 percent took home about 11 percent of total income, before taxes,
while America’s richest 1 percent took home more than 17 percent. Why have
globalization and technological change widened inequality in the United States
to a much greater degree?
Nor can the
standard explanation account for why the compensation packages of the top
executives of big companies soared from an average of 20 times that of the
typical worker 40 years ago to almost 300 times. Or why the denizens of Wall
Street, who in the 1950s and 1960s earned comparatively modest sums, are now
paid tens or hundreds of millions annually. Are they really “worth” that much
more now than they were worth then?
Finally and
perhaps most significantly, the market explanation cannot account for the
decline in wages of recent college graduates. If the market explanation were
accurate, college graduates would command higher wages in line with their
greater productivity. After all, a college education was supposed to boost
personal incomes and maintain American prosperity.
To be sure,
young people with college degrees have continued to do better than people
without them. In 2013, Americans with four-year college degrees earned 98
percent more per hour on average than people without a college degree. That was
a bigger advantage than the 89 percent premium that college graduates earned
relative to non-graduates five years before, and the 64 percent advantage they
held in the early 1980s.
But since
2000, the real average hourly wages of young college graduates have dropped.
The entry-level wages of female college graduates have dropped by more than 8
percent, and male graduates by more than 6.5 percent. To state it another way,
while a college education has become a prerequisite for joining the middle
class, it is no longer a sure means for gaining ground once admitted to it.
That’s largely because the middle class’s share of the total economic pie
continues to shrink, while the share going to the top continues to grow.
III
A deeper
understanding of what has happened to American incomes over the last 25 years
requires an examination of changes in the organization of the market. These
changes stem from a dramatic increase in the political power of large
corporations and Wall Street to change the rules of the market in ways that
have enhanced their profitability, while reducing the share of economic gains
going to the majority of Americans.
This
transformation has amounted to a redistribution upward, but not as
“redistribution” is normally defined. The government did not tax the middle
class and poor and transfer a portion of their incomes to the rich. The
government undertook the upward redistribution by altering the rules of the
game.
Intellectual
property rights—patents, trademarks, and copyrights—have been enlarged and
extended, for example. This has created windfalls for pharmaceuticals, high
tech, biotechnology, and many entertainment companies, which now preserve their
monopolies longer than ever. It has also meant high prices for average
consumers, including the highest pharmaceutical costs of any advanced nation.
At the same
time, antitrust laws have been relaxed for corporations with significant market
power. This has meant large profits for Monsanto, which sets the prices for
most of the nation’s seed corn; for a handful of companies with significant
market power over network portals and platforms (Amazon, Facebook, and Google);
for cable companies facing little or no broadband competition (Comcast, Time
Warner, AT&T, Verizon); and for the largest Wall Street banks, among
others. And as with intellectual property rights, this market power has
simultaneously raised prices and reduced services available to average
Americans. (Americans have the most expensive and slowest broadband of any
industrialized nation, for example.)
Financial
laws and regulations instituted in the wake of the Great Crash of 1929 and the
consequential Great Depression have been abandoned—restrictions on interstate
banking, on the intermingling of investment and commercial banking, and on
banks becoming publicly held corporations, for example—thereby allowing the
largest Wall Street banks to acquire unprecedented influence over the economy.
The growth of the financial sector, in turn, spawned junk-bond financing,
unfriendly takeovers, private equity and “activist” investing, and the notion
that corporations exist solely to maximize shareholder value.
Bankruptcy
laws have been loosened for large corporations—notably airlines and automobile
manufacturers—allowing them to abrogate labor contracts, threaten closures
unless they receive wage concessions, and leave workers and communities
stranded. Notably, bankruptcy has not been extended to homeowners who are
burdened by mortgage debt and owe more on their homes than the homes are worth,
or to graduates laden with student debt. Meanwhile, the largest banks and auto
manufacturers were bailed out in the downturn of 2008–2009. The result has been
to shift the risks of economic failure onto the backs of average working people
and taxpayers.
Contract laws
have been altered to require mandatory arbitration before private judges
selected by big corporations. Securities laws have been relaxed to allow
insider trading of confidential information. CEOs have used stock buybacks to
boost share prices when they cash in their own stock options. Tax laws have
created loopholes for the partners of hedge funds and private-equity funds, special
favors for the oil and gas industry, lower marginal income-tax rates on the
highest incomes, and reduced estate taxes on great wealth.
All these
instances represent distributions upward—toward big corporations and financial
firms, and their executives and shareholders—and away from average working
people.
IV
Meanwhile,
corporate executives and Wall Street managers and traders have done everything
possible to prevent the wages of most workers from rising in tandem with
productivity gains, in order that more of the gains go instead toward corporate
profits. Higher corporate profits have meant higher returns for shareholders
and, directly and indirectly, for the executives and bankers themselves.
Workers
worried about keeping their jobs have been compelled to accept this
transformation without fully understanding its political roots. For example,
some of their economic insecurity has been the direct consequence of trade
agreements that have encouraged American companies to outsource jobs abroad.
Since all nations’ markets reflect political decisions about how they are
organized, so-called “free trade” agreements entail complex negotiations about
how different market systems are to be integrated. The most important aspects
of such negotiations concern intellectual property, financial assets, and
labor. The first two of these interests have gained stronger protection in such
agreements, at the insistence of big U.S. corporations and Wall Street. The latter—the
interests of average working Americans in protecting the value of their
labor—have gained less protection, because the voices of working people have
been muted.
Rising job
insecurity can also be traced to high levels of unemployment. Here, too, government
policies have played a significant role. The Great Recession, whose proximate
causes were the bursting of housing and debt bubbles brought on by the
deregulation of Wall Street, hurled millions of Americans out of work. Then,
starting in 2010, Congress opted for austerity because it was more interested
in reducing budget deficits than in stimulating the economy and reducing
unemployment. The resulting joblessness undermined the bargaining power of
average workers and translated into stagnant or declining wages.
Some
insecurity has been the result of shredded safety nets and disappearing labor
protections. Public policies that emerged during the New Deal and World War II
had placed most economic risks squarely on large corporations through strong
employment contracts, along with Social Security, workers’ compensation,
40-hour workweeks with time-and-a-half for overtime, and employer-provided
health benefits (wartime price controls encouraged such tax-free benefits as
substitutes for wage increases). But in the wake of the junk-bond and takeover
mania of the 1980s, economic risks were shifted to workers. Corporate
executives did whatever they could to reduce payrolls—outsource abroad, install
labor-replacing technologies, and utilize part-time and contract workers. A new
set of laws and regulations facilitated this transformation.
As a result,
economic insecurity became baked into employment. Full-time workers who had put
in decades with a company often found themselves without a job overnight—with
no severance pay, no help finding another job, and no health insurance. Even
before the crash of 2008, the Panel Study of Income Dynamics at the University
of Michigan found that over any given two-year stretch in the two preceding
decades, about half of all families experienced some decline in income.
Today, nearly
one out of every five working Americans is in a part-time job. Many are
consultants, freelancers, and independent contractors. Two-thirds are
living paycheck to paycheck. And employment benefits have shriveled. The
portion of workers with any pension connected to their job has fallen from just
over half in 1979 to under 35 percent today. In MetLife’s 2014 survey of
employees, 40 percent anticipated that their employers would reduce benefits
even further.
The prevailing
insecurity is also a consequence of the demise of labor unions. Fifty years
ago, when General Motors was the largest employer in America, the typical GM
worker earned $35 an hour in today’s dollars. By 2014, America’s largest
employer was Walmart, and the typical entry-level Walmart worker earned about
$9 an hour.
This does not
mean the typical GM employee a half-century ago was “worth” four times what the
typical Walmart employee in 2014 was worth. The GM worker was not better
educated or motivated than the Walmart worker. The real difference was that GM
workers a half-century ago had a strong union behind them that summoned the
collective bargaining power of all autoworkers to get a substantial share of
company revenues for its members. And because more than a third of workers
across America belonged to a labor union, the bargains those unions struck with
employers raised the wages and benefits of non-unionized workers as well.
Non-union firms knew they would be unionized if they did not come close to
matching the union contracts.
Today’s
Walmart workers do not have a union to negotiate a better deal. They are on
their own. And because less than 7 percent of today’s private-sector workers
are unionized, most employers across America do not have to match union
contracts. This puts unionized firms at a competitive disadvantage. Public
policies have enabled and encouraged this fundamental change. More states have
adopted so-called “right-to-work” laws. The National Labor Relations Board,
understaffed and overburdened, has barely enforced collective bargaining. When
workers have been harassed or fired for seeking to start a union, the board
rewards them back pay—a mere slap on the wrist of corporations that have
violated the law. The result has been a race to the bottom.
Given these
changes in the organization of the market, it is not surprising that corporate
profits have increased as a portion of the total economy, while wages have
declined. Those whose income derives directly or indirectly from profits—corporate
executives, Wall Street traders, and shareholders—have done exceedingly well.
Those dependent primarily on wages have not.
V
The
underlying problem, then, is not that most Americans are “worth” less in the
market than they had been, or that they have been living beyond their means.
Nor is it that they lack enough education to be sufficiently productive. The
more basic problem is that the market itself has become tilted ever more in the
direction of moneyed interests that have exerted disproportionate influence
over it, while average workers have steadily lost bargaining power—both
economic and political—to receive as large a portion of the economy’s gains as
they commanded in the first three decades after World War II. As a result,
their means have not kept up with what the economy could otherwise provide
them.
To attribute
this to the impersonal workings of the “free market” is to disregard the power
of large corporations and the financial sector, which have received a steadily
larger share of economic gains as a result of that power. As their gains have
continued to accumulate, so has their power to accumulate even more.
Under
these circumstances, education is no panacea. Reversing the scourge of widening
inequality requires reversing the upward distributions within the rules of the
market, and giving workers the bargaining leverage they need to get a larger
share of the gains from growth. Yet neither will be possible as long as large
corporations and Wall Street have the power to prevent such a restructuring.
And as they, and the executives and managers who run them, continue to collect
the lion’s share of the income and wealth generated by the economy, their
influence over the politicians, administrators, and judges who determine the
rules of the game may be expected to grow.
The answer to
this conundrum is not found in economics. It is found in politics. The changes
in the organization of the economy have been reinforcing and cumulative: As
more of the nation’s income flows to large corporations and Wall Street and to
those whose earnings and wealth derive directly from them, the greater is their
political influence over the rules of the market, which in turn enlarges their
share of total income.
The more
dependent politicians become on their financial favors, the greater is the
willingness of such politicians and their appointees to reorganize the market
to the benefit of these moneyed interests. The weaker unions and other
traditional sources of countervailing power become economically, the less able
they are to exert political influence over the rules of the market, which
causes the playing field to tilt even further against average workers and the
poor.
Ultimately,
the trend toward widening inequality in America, as elsewhere, can be reversed
only if the vast majority, whose incomes have stagnated and whose wealth has
failed to increase, join together to demand fundamental change. The most
important political competition over the next decades will not be between the
right and left, or between Republicans and Democrats. It will be between a
majority of Americans who have been losing ground, and economic elite that
refuses to recognize or respond to its growing distress.”
[This article
is from the spring issue of “The American Prospect.”] (1)
Two important points emerge from any study of economics. The first is that all wealth is socially
produced. One simply cannot create
wealth in a vacuum. As an example if
Bill Gates’ “Microsoft” corporation consisted of one employee—namely Bill himself—working
out of the back of his garage the chances are near certain that he would find
his business as being a part-time affair.
Certainly its net value would be measured perhaps in the thousands
rather than the billions of dollars. For
real wealth to accumulate requires an infrastructure from which one can draw a
skilled labor force and through which one can deliver goods and services. Foremost it requires a society to which one
can deliver the goods. Wealth,
accordingly, is recognition by that society of the value of the goods produced
or the services rendered and the entrepreneur is, accordingly, recognized and
rewarded with a economic and social medium called money. Money being nothing more than a medium of
social exchange, value for value. It can
be measured in gold (worthless to beings other than humans), oil (likewise) or
some other commodity as in a barter system or, in more advanced economies in
currency. The very term ‘currency’
implies a social medium by definition.
Economists ranging from Adam Smith to Karl Marx are in agreement on
these points; wealth is created by labor and distributed via social means.
The second point is the one the professor is here addressing and that
is that how this wealth gets distributed is determined by the rules of the ‘game’,
which, in turn, is determined by who writes the rules. As noted above for the last 40 years the
rules have been and are now being rewritten to favor wealth over work and to
reward the most well-to-do at the expense of the larger society. This is not happenstance it is intentional
and just as was done in the heyday of the ‘Gilded Age’ the laws are
increasingly bent to favor corporations who manage the wealth and punish the
workers who create the wealth.
It wasn’t always this way, as Professor Reich reminds us in several of
his publications. Previously, during era’s
of reform the country achieved a much more ‘balanced’ distribution of wealth so
that it was really true when John Kennedy reminded us that a “rising sea raises
all boats”. Today, paraphrasing Kennedy,
one would amend his observation to read “a rising sea raises all yachts”,
everything else is disappearing beneath the waves as the middle class goes
under.
It follows from this that the way we distribute wealth is a consequence
of Political Will; and as the Professor has pointed out the current
obscenity that confronts America today could not be possible without changing
the rules of the game, so it is clear that in order to restore the middle class
the people must rise, organize and through political action rewrite the laws
under which our economy will operate.
Until we organize politically and change the laws to enable workers to
unionize, tax wealth at a greater rate than work (since work produces wealth in
the first place), establish a strict regimen of economic and environmental
regulations we will continue the headlong process of hollowing out not only the
national economy but our very republic in the bargain; for a republic that does
not serve the greatest needs of the greatest number fails in one of its most
cherished goals. That is why in the
preamble to the Constitution our founding fathers charged this government with
the task of, among other things, to ‘promote the general welfare’. No republic worth the name can survive unless
it meets the needs of its people.
____________
1.
http://robertreich.org/post/117835755110
