Bad Day

Labor Day has a curious history:

The Haymarket square massacre and subsequent show trials occurred in the U.S., and labor organizations throughout the world celebrated May Day in solidarity with their U.S. labor counterparts, who quickly moved to distance themselves from those movements that were aware of, and emphasized, class conflict. After the massacre of union members at the Pullman Strike, U.S. labor organizations began celebrating their own labor day, in September — almost the antipodal opposite of May Day

The U.S. has always been afraid of acknowledging  the underlying battle between labor and capital. A frank assessment would put this conflict front and center, and would attempt to mediate some form of grand bargain — something for which the U.S. is exceptionally skilled.  But we get the bargain in backrooms, while the publicly pretending that no bargain has been made, and no bargain is necessary. This creates a terrible schizophrenia and political dysfunction, and hobbles macro-economics to the point of irrelevancy.

Here is Roosevelt in 1936:

Tomorrow is Labor Day. Labor Day in this country has never been a class holiday. It has always been a national holiday. It has never had more significance as a national holiday than it has now. In other countries the relationship of employer and employee has more or less been accepted as a class relationship not readily to be broken through. In this country we insist, as an essential of the Ameri- can way of life, that the employer-employee relationship should be one between free men and equals. We refuse to regard those who work with hand or brain as different from or inferior to those who live from their property. We insist that labor is entitled to as much respect as property. But our workers with hand and brain deserve more than respect for their labor. They deserve practical protection in the opportunity to use their labor at a return adequate to support them at a decent and constantly rising standard of living, and to accumulate a margin of security against the inevitable vicissitudes of life.

Note how Roosevelt, arguing in favor of extending labor protections, nevertheless felt constrained to frame his argument within the confines of the  “America has no class distinctions” shibboleth:

“It is those short-sighted ones, not labor, who threaten this country with that class dissension which in other countries has led to dictatorship and the establishment of fear and hatred as the dominant emotions in human life.”

Roosevelt understood the fundamental point that labor requires income security, an increasing standard of living, and strong bargaining rights. Moreover, this does not happen “automatically” as a result of voluntary exchange. It’s quite a trick to argue for such a thing while denying the existence of a struggle between capital and labor.   Crucial information is missing. We can’t study the dynamics of labor and capital without acknowledging that these dynamics exist. We cannot make peace without acknowledging that a war is fought, and we cannot understand the mess we are in:

From the early 1930s through the late 1960s, the incomes of the masses and the rich grew more or less in tandem. Then, tragically, growth at the high end began seriously to lag the broader population. While the incomes of the bottom 90% (by the Piketty–Saez measure) fell by 2% from 1968 to 1978, those of the top 0.01% were down by 38%. This was clearly a social emergency.

..productivity growth began to sag, while total compensation (including fringe benefits) continued to grow. [...]

The whole state of affairs was clearly unsustainable. And so, as this newsletter has pointed out several times in analyzing the prehistory of our current crisis, the American elite mobilized [...] Paul Volcker took the helm at the Federal Reserve and created the deepest recession since the 1930s [...], scaring the hell out of the working class. And then Ronald Reagan moved into the White House, fired the air traffic controllers (declaring open season on organized labor), squeezing domestic spending, and cutting taxes on corporations and rich individuals. A massive upward transfer of income began.

[...]To sustain purchasing power, people turned to borrowing [...]

The basic argument can be seen in the data. The following image is taken from a BLS study on the productivity-compensation gap – something that no president or presidential candidate will mention.

Compensation was rising above productivity in the first half of the post-war era; after the Volcker intervention, productivity took off whereas compensation stagnated.  There is no plausible theory of wages being equal to the marginal revenue product of labor that can be consistent with this data. It was government policy that drove wages above productivity in the first period, and government policy drove them below productivity in the second period.

To put things into perspective, between 1980 and 2011, output per hour worked increased by a factor of 1.8, but median real earnings were unchanged (they actually declined somewhat) and median household income increased by a factor of 1.13.  The latter due to more women joining the labor force, bolstering total household income.

Women in labor force vs. hours worked/total size of labor force

Consumer expectations of median income growth (taken from the University of Michigan surveys), census bureau measurements of median income growth, and BLS measurements of median wages all show the stagnation, even as real GDP continued to grow.

But if consumers were aware of this income stagnation, why did they continue to purchase output at the current prices?

First, women’s participation allowed total the income of the majority of households to increase somewhat, and second the majority was effectively selling portions of their assets to the top 1%. This was justified because they believed that their remaining assets were appreciating in value sufficiently to maintain their target wealth levels.

To be clear, we are talking about housing, as most households hold an insignificant portion of bonds or equities. As women’s participation began to level out in the early 1990s, mortgage equity withdrawals began to increase, peaking at around 9% of disposable household income. Consumer credit and auto credit also increased, but the dominant source of demand was equity withdrawal.

When the house bubble burst there was no additional source of demand left. In order to increase demand now, the government must either supply it via deficit spending, or real compensation needs to approximately double in order to restore the balance between pay and productivity.  The problem with only using deficit spending is that the underlying wage issues are not addressed — so there is no end to the deficit spending.

Without a class-based interpretation, you will be looking for what accident went wrong in 2008 that we can fix to get “back on track”. A sudden rush of regulatory uncertainty! A liquidity crisis! A shortage of safe bonds! But a class-based interpretation of this crisis is that we are at the end-game of a 30 year period of unsustainable wage deterioration, and the specific triggers of the financial crisis were not the underlying cause. The underlying cause was  a three decade period of market failure in which one imbalance was hidden by another and then another. If the former interpretation is correct, then the provisioning of liquidity or more safe bonds will allow employment to get back to normal. If the latter interpretation is correct, then these interventions wont work. Employment will continue to stagnate and output will continue to be constrained by the level of deficit spending stimulus.

Only a long period of grinding deflation, combined with nominal wage rigidity, or a short period of massive redistribution and substantially higher median wages will allow the economy to continue to grow at its historical rate. Note that we do not require a higher total wage bill, but higher median wages, and lower superstar wages.

We need a new grand bargain, but unfortunately we are not allowed to talk about this bargain, economists do not want to model class conflicts, and the politicians do not want to discuss 30 years of wage stagnation.

It is a silent labor day.

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12 responses to “Bad Day

  1. RSJ — Wonderful piece.

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  3. Very good analysis. At last we have a serious grasp of the issues – the share of Wages and Profits in GDP – almost Kaldorian or Pasinetti. The other issue you might want to address is Cartelization which has rigged market prices and ossified economic activity. It is almost a call for Trustbusters to return and break up the conglomerates financial and commercial.

  4. what a great article if only our politicians could get the message

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  6. Meanwhile Australia bumped its minimum wage this summer to, at today’s exchange rate, $16.33 an hour (A$15.51). Naturally their unemployment is a sky-high 5.3%. :o)

    OT but I figure anything involving taxing bank assets is up your alley.

    http://pragcap.com/consumers-would-feel-the-pain-if-the-fed-cuts-i-e-o-r/comment-page-1#comment-75342

    • Good for Australia!

      The pragcap article is insane. I don’t see how you can argue that IOR is not free money because banks also have other expenses. What kind of logic is that?

      Btw, Banks FDIC insurance payments are used to bail out other banks. The FDIC fund is currently negative, so banks are profiting from this insurance, on net, and of course if they were to purchase private insurance for deposits the rates would be much higher.

  7. Its funny that no one here looks to Australia as a model, even though their govt spending as a percentage of GDP is lower than here even with universal Medicare and a Social Security system rather astonishing in its breadth. I think their secret is a high minimum wage means they don’t have to waste govt spending on sustaining the working poor while the US labor market– with a min. wage that’s dropped a third in 40 years (even as labor productivity doubled) and wage subsidies in the form of tax credits, food stamps and housing vouchers– is basically a huge field trial to replicate the Speenhamland System. Mission accomplished!

    http://en.wikipedia.org/wiki/Social_Security_%28Australia%29

    http://www.thesocialcontract.com/artman2/publish/tsc_19_3/tsc_19_3_rubenstein_3.shtml

    As for the FDIC insurance premiums, am I wrong that it could be used to peg policy interest rate in the manner of the bank asset tax that you (and one trusts, all right thinking people) advocate?

    • Because it is easy to run surpluses and have good outcomes when you are in the midst of a massive property bubble. But I agree, in general we have much to learn from Australia.

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  9. I really like what you guys are usually up too. Such clever work and exposure!

    Keep up the fantastic works guys I’ve included you guys to my blogroll.

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