We’ve embedded the slides from a presentation by economist Lance Taylor on the rise in inequality in the US and why it will be difficult to reverse. Taylor has done considerable work on the drivers of income inequality. He focuses, as some others have, on the way the implicit deal in the economy changed in the mid-1970s. Before, the benefits of productivity gains were split between workers and businesses. After that, they went increasingly to companies.
Several forces worked together to undercut labor. First was that the 1970 stagflation was widely attributed to the way worker formally and informally had their pay increased to reflect higher costs of living. This meant that inflation became self-reinforcing once it got going. Second was that the Keynesian economists (not to be confused with what Keynes actually wrote; American Keynesianism was neoclassical economics with Keynes treated as a special case; see ECONNED for details) who had devised the economic policies of the Kennedy and Johnson administrations were discredited for treating stagflation as theoretically impossible. That gave a big boost to the Chicago School of Economics, whose Milton Friedman had warned that the Johnson Administration needed to raise taxes to choke off inflationary tendencies (so too had Democratic party economist Walter Heller, but that didn’t seem to count). Third was that a far right wing effort, with John Birchers and the Koch Brothers as prominent members, coalesced to roll back New Deal reforms and move the values of the country to the right. Their campaign was codified in the 1971 Powell memo, written by Nixon Supreme Court justice Lewis Powell which set forth the vision for an open-ended campaign. Finally, an increasingly powerful faction in the Democratic party was unsympathetic to organized labor, seeing it as retrograde, and wanted the party to embrace young professionals and minorities as the wave of the future.
In an earlier analysis, Taylor debunked the idea that monopolies were the big culprit in the rise in inequality:
Output, employment, and income flows in the American economy fell apart over recent decades. Peter Temin of MIT and Servaas Storm of the Technical University of Delft point out that a “dual economy” emerged, signaled by divergence between “stagnant” and “dynamic” sectors in the structure of production, growing employment in stagnant industries, and rapidly rising inequality in the functional and size distributions of income. These imbalances affected the middle class and, much more strongly, poorer households at the bottom of the size distribution of income. Households in the top one percent and higher were insulated because they get most of their income from steadily rising profits, distributed to a significant extent through the financial system as bonuses, equity options, share buybacks, and capital gains….
In our new paper, Özlem Ömer and I break down 16 “industries” or producing sectors to look in more detail at these structural changes. Compared to the others, seven sectors—construction, education and health, other services, entertainment, accommodation and food, business services, and transportation and warehousing—have low levels of productivity. For all seven, it is easy to come up with examples of low-pay, dead-end jobs that they create.
Their growth rates of productivity and real wages lagged the rest. Their share of total employment rose from 47% in 1990 to 61% in 2016 while their share of wages went from 57% to 56% of the total. The big increase in employment relative to payments to labor demonstrates visible wage retardation. The real output share of the stagnant sectors fell from 48% to 41%. Despite their high employment and output, they generated only 30% of total profits at the beginning of the period and 23% at the end. Except for construction and transport, the shares of their own profits in output declined.
We estimate that households in the bottom 60% of the income distribution working in the stagnant zone have wage incomes 30% below those of their counterparts in dynamic sectors (though of course some high paying jobs exist in all sectors). Real wage growth between 1990 and 2016 in all sectors was less than two-thirds as fast as productivity growth.
Debate rages about whether the payment lag is due to business “monopoly” power pushing prices up against wages or suppression of wages resulting from labor’s failing bargaining power. Decreasing profit shares suggest that monopoly is not rampant in stagnating sectors. Among the dynamic sectors real estate rental and leasing accounts for a stable 30% of total profits. Property owners no doubt wield market power, but it does not appear to have strengthened over time. Manufacturing and information together account for a quarter of profits and wholesale and retail trade for another one-eighth. These large profits flow mostly to high income households, leading to rising income inequality as noted above.
Productivity increases may have gone along with monopoly power in parts of the dynamic sectors. Productivity growth did notaccelerate, however, suggesting that increased monopoly did not play a role. In the stagnant zone, higher employment for workers forced out of dynamic sectors provides a better explanation than monopoly for slow or negative productivity growth and the wage lag.
Taylor’s talk last week focused on the drivers of the rise in inequality, which came about via a rise in profit share of GDP, something we first noted in 2005 in a Conference Board Review article. That has enabled the top 1% to pull away from everyone else. Investment as a proportion of GDP has also dropped while consumption has increased.
The paper has more detail, but Taylor estimates it would take 40 years to reduce inequality to 1980 levels. He also warns that wealth concentration could increase from 40% held by the top 1% to 60%.
However, there have been other important levelers of the rich and poor. Wars and financial crises wipe out a lot of wealth. Perversely, disasters can help the surviving workers. An extreme case is that in the period after the Black Death, the reduction in the size of the population led to higher pay for laborers and craftsmen. And revolutions are designed to take from the rich or take out the rich.
But advocates of workers have failed to take up the task of determining what a reasonable level of profit is. We’ve mentioned before that in the early 2000s, Warren Buffett deemed a profit share of 6% to be unsustainably high. Yet for the past three years, the profit share has been nearly twice this high.
Oddly, the left and labor supporters have not engaged with the question of what a fair profit might be. Modern cultures have deeply internalized the idea that the result of market forces is somehow virtuous, when markets sit both in a legal system and in a set of societal norms that play a large role in what supply and demand looks like. For instance, most advanced economies make child labor illegal. Those rules, formal and informal, that we tend not to think about are some of the reasons that the idea that markets are “free” or virtuous or automagically self correcting is a bunch of hooey.
The dynamic of the labor movement has been for it to fight for standards like decent workplace hours and conditions, minimum wages, and later, for broader contracts that included seniority, pensions, grievances, and a host of other matters. Another way of thinking about the equation is to argue that a business is entitled to a fair level of profit and profits should not exceed that level at the expense of worker paid. But expecting businessmen to limit their incomes for the benefit of workers was a medieval idea, occasionally taken up by modern religious leaders like Pope Francis.
The closest response in economics was Classical economist’ antipathy for activities which were undeniably remunerative but bad for productive enterprise, such as usurious lending, which tended to go to wealthy gamblers. They also opposed rentierism and favored land taxes and opposed businessmen colluding to exploit workers and customers. In other words, the Classicals didn’t think profits were ever and always desirable, and thought some forms of profit-seeking needed to be restricted or prohibited.
The fact that CEOs are having to give lip service to the idea of more community-minded capitalism and billionaires are building panic rooms in case the revolution starts says they recognize some economic concessions might keep the rabble at bay. But with people like Jeff Bezos holding such powerful positions in Corporate America, I would not give self-reform much hope.00 A_Great_Deformation_inequlity