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Wednesday, October 26, 2016

By focusing on supply, economists and policymakers have lost sight of the fact that driving down wages destroys demand.

For a few decades now, American economic policy has focused on keeping inflation low, assuming that the natural rate of unemployment is fairly high. In general, that has led to stagnating wages. Family income today is at 1990s levels. Adjusted for inflation, hourly wages are at levels they last reached in the 1960s. The wage share has been falling.

Some economists claim inequality is the bigger issue due to runaway income at the top. My own view is that a better way to understand America’s dilemma to focus on stagnation for the broad middle and bottom. As I note in my latest piece for the New York Review of Books, the incomes at the top, which account for most of the inequality, are made in finance — much of which is a game Wall Street plays with itself. For this brief piece, I will put that issue aside.

It is time to talk about the importance of high wages to sustainable growth in America and Europe — indeed, in most countries around the world. The precarious circumstances in the eurozone today are widely understood, as was the U.S. financial crisis, as a problem of fiscal and financial discipline. In fact, I’d argue they were mostly a product of economic models based on low wages that were not sustainable. Both Germany and China had models that depended on low wages.

I’d also argue that the U.S. had a low wage policy to fight inflation, which had become public enemy number one in the minds of even the most sophisticated economists since the 1970s. These economists persistently over-estimated the so-called natural rate of unemployment, which gave the Federal Reserve justification to keep rates up to suppress inflation. In practical fact, the Fed under Alan Greenspan was mostly appeasing bond markets, which Greenspan watched very closely as the signal of inflationary expectations.

We can now focus our attention on wage deficiency. You might be surprised to think Europe or even American financial distress is a wage problem, not a financial discipline problem. But it is time to think this through clearly. We are told too often that disciplined Germany must bail out undisciplined Greece, that America is angry at China’s currency manipulation and China at America’s profligate government deficits. We might almost believe this is the heart of the matter.

But at the center of the issue are low wage shares and inequality. And one reason the world’s policymakers, technocrats, and economists don’t think about it clearly enough is that they focus too much on “supply” as the principal source of economic growth — of machinery, ideas, technology, resources, and human capital quality labor. They focus far too little on “demand” as a source of economic growth.

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  • fairlysharon

    wow – excellent reasoning! Even I, not an economist,understands this. How does one go about getting Congress to see this reality?

  • tfsoccer

    Exactly! How about politicians better educating the largely ignorant public about the need for balancing greed through limits on wage inequity within businesses. If all business followed this limitation, similar to pro sports teams having controlled pay ceilings, the wealth would be better shared among all, stimulating higher but still competitive demand and higher wages for all. If only everyone knew the advantages of ‘competitive’ socialism over pure capitolism. Freedom is good to a point: the one where the greedy and powerful exploit the powerless.

  • Keni

    This is a well thought out thesis, but it’s flawed. The long term answer is Never more Government hiring/employees. The Government does not contribute to the economy – it Takes from the economy. If the US Gov hires 25K new employees at $40K plus a benefit load of 30% ($12k)that requires either a) more tax revenue, or b) more debt borrowing. The only way the Government can pay anyone is to take from the private sector of borrow more money. America can not afford either scenario. And although many argue that these new Government employees pay taxes, that amount is no where near the expense it cost to employ them.

    Increasing wages is a better option, but increase wages come at the expense of raising product costs. Wages are paid out of margin dollars, and the only way to get increased margin dollars to cover the increased wages, is higher product costs. It becomes a bit of a Catch-22 proposal.

    Family wages buy less because fuel and food have skyrocketed. But the US government does not factor those two items into the inflation rate – which is crazy. Fuel and food are the two largest consumers of income – both directly and indirectly.

    The US can work out of it’s problems by putting more people back to work. We don’t need new taxes, we need more taxpayers. Start by ending the ridiculous strategy of unending unemployment. My god, what are we at now? 3 years of living off of unemployment? Stop this madness. When living off the Gov is unending, why get a job and pay taxes? Secondly, Welfare should not pay more than working 40 hrs on Minimum wage. Under no circumstances. and you should Not get a welfare raise because you are having another child. Working people don’t get raises because they have another kid.

    And before you jump all over me as a Neo-Con, I’m not. I’m sick of the status quo of people taking and taking from the Government. America is not a hand out. America is the land of opportunity. You can be anything you want here. If you don’t like your life – make different choices; you’ve improve your life.

  • calhar

    I agree with this annalyisis.It all comes down to supply and demand.The supply is available,but not the demand which generates business.Why,because of two reasons economics,and the fuzzy thinking of those at the top who beleive that people should be kept down and in poverty.Today the sluggish economy is driven only by the haves by what they want to spend.{I believe President Reagen called it the trickle down theory}.These same people are responsible for all welfare programs,because it helps them ease their concience to feel good by their so called charity?? This is all fact because in my 80 years I have been all through it from the depression to recessions and economic downturns in the economy of the country.Poiticans and the rich make strange bed fellows???????On the other hand people have got to know their limitations and be frugal.One can’t continualy live off of the bank.

  • terango.lf

    An alternative (to Public Financing) U.S. House of Representatives Finance Reform?

    A Constituency Based Finance Scheme

    L.F. Terango


    Can WV. State law (or any state) dictate the terms of campaign finance for their own U.S. House of Representative members? Can WV. force their own U.S. house representatives to only accept constituency monies from their own districts? Moreover, by doing so can we, the representative client, the simple citizen, actually be the lobbying influence foremost in our representatives mind. Perhaps, regaining the reins of power from wealthy out of state congressional interlopers; that most of the time has an agenda, running counter to our own interests. Then hopefully, the common American can reap the benefits of a more Jeffersonian form of representation.

    True U.S. congressional finance reform
    The U.S. Constitution states that the people may lobby their government for change and redress. So does limiting our representatives to only accept campaign funds from their constituency, really limit the “people” from lobbing their government? I believe the constitution says nothing of campaign money when any reference is made regarding to lobbying. Therefore, by default the Bill of Rights Tenth Amendment should allow States to regulate this shade of gray corrupting our “American Dream”; what was once a grand experiment of humanity, now gone horribly wrong.
    This and this alone, could defang the National Oligarchy. The diffuse number of votes would then be more valuable to those that live in the perspective districts. Our 1/435th congressional vote and our 2/100th senatorial vote(s) will truly wield some political power. It would then force all those lobbyists’ clients to come to our districts, to our communities, to open up shop to establish residency in some form or fashion and convince us the voters, that this is what I want my vote cast for. This would include any…any special interest group; banks, Wall Street, social interest groups, corporations, wealthy trusts of all kinds.
    Imagine the strength your small congressional vote would carry when they have to be physically in your district if they want to use money for (yours-or-theirs) influence upon your congressional representative or senator. The charity events, the community gifts such as parks, schools, other civic improvements, and maybe, just maybe corporations would actually be manipulated into opening business satellites in nowhere districts to be qualified to lobby our representative. Deny the powerful & wealthy lobbyists’ clients one stop shopping in Washington D.C. for working on a majority vote. Obviously, these clients would not invest in all 435 districts; however, they would have to lobby 220 or so districts to win legislation. The overlap in districts between these lobbying clients could go a long way to spread the wealth and influence around the country. Because they would be forbidden to contribute to campaigns in the central government setting, politics would have a chance to become local once again.
    Corruption will always be present in any money driven enterprise. However, when all contributions have to be personally presented within a representatives district, transparent-see will have a better chance to survive, because people would actually have a chance through proximity to “rub shoulders” with (and possibly confront) both the representative and campaign contributor. This would be especially so for the local oligarchic wealth, people would have a chance of knowing how these people are connected to affluence because they perhaps now know who they are.
    This system would still allow lobbyists, corporations and individuals to petition your representative or anyone else’s representative at the Capital in Washington D.C., thus allowing the people access to petition their national government as before. No one can deny these special interests access to anyone else’s representative or ours. It is just that lobbyists would have to sell their ideas and legislation, at the National level, and not be able to purchase, as they did before. Lobbyists could still wine/dine, luncheon, or have breakfast with representatives, it is just that they would have to contribute campaign monies physically in the representatives district and only if they qualified as a resident or business interest of said district.
    House Representatives would and should still “horse trade” votes with one another to form collations that would move legislation forward and I believe it would improve these congressional collations by house members, because it would probably lead to regional relationships vs. partisan relationships.
    This is the crux of my proposal…controlling the money locally used to influence and write law at the national level. But is this legal? I don’t know if it is for myself…cause I aint no constitutional scholar. The reason that I believe we can do this, is that all States exclusively conduct all elections; local or national. So, if we can do that, why can’t we control the occupational position we filled. Since we already have absolute control of the hiring at local levels, why can’t we have control of the representatives ethics and be able to fire them at any time the district uproar would dictate?
    If we could take that much control of our U.S. House Representative? Why not set the occupational policies that reflect what the majority of us are expected to comply with and have to endure? Let’s start with a 40 hr work week while in session. As our employee, it would not matter that congress is closed on Monday and Friday, our representative would be on the clock at his office working directly with his staff. If our representative worked IN THE CAPITOL BUILDING over 40 hours (verifiable by time a clock) then maybe we could let him have some comp time for long weekends at home. When Congress is not in session, then the representative would have to work 30 hours a week in his district office, being available to his constituents for lobbying and working with staff to craft legislation. We could also directly control our representatives’ ethics, with real penalties imposed through either public referendum or State laws that would be prosecutable in our state court system, not those corrupt, toothless, cronies, “Do Nothing” congressional and senatorial ethics committees.
    Furthermore, we could dictate how much the state and national political parties can contribute to our U.S. House of Representatives. Perhaps limiting political parties to only matching $0.50 to $1.00 of the locally contributed monies. We could also enact our own laws disclosing every penny given or used in all our elections. This would greatly reduce the obligation of our representatives to participate in fundraisers for the National Parties and Political Action Committees
    I think that a majority of Appalachians (or any regional citizen group) do not care if their representative look like a million dollars, this is not what we see when we look in the mirror. Other representatives might look like a million dollars, and that is ok if their district is full of millionaires, but not ours (we do have Jay Rockefeller, but he has been slumming it here for thirty years or more). One representative may look wealthy and the other look like a Hill Billy, but their vote has the same value; 1/435th or 1/100th of deciding an issue. So why do we allow BIG money to cheapen the value of our representative vote.
    Additionally, multi-national corporations, as with all corporations are legally individuals, endowed with all the rights of any citizen, and so they are entitled to representation and being able to lobby the government as we can. With district-controlled finances, the corporations would not be able to buy 10, 20, 40…218 congressional votes at one time. They too would be required to buy influence in the home districts of their legal residency and wielding the same 1/435th or 1/100th representative vote, the same as you or I. Bringing back the politically incorrect phrase “one man, one vote” could be said with a fair and equitable taste to be savored. Focusing that “free speech equals money” or “money equals free speech” argument into a whole another arena: the home district. Perhaps then, “We the People” would have a more level playing field and a greater voice in policies.

  • mytwocents

    I am not sure you have the right perspective. What you say is true about low wages in that there is a gap in disposable income for a family earning less than a sustainable income. You must also consider that high wages is what leads to pricing people out of the market.

    While I am not an expert in economics or finance, I do like to think of things as what is “reasonable” (aside of what that might be for the rich and famous). Is it “reasonable” to pay $10 for a loaf of bread? The answer is relative; today the answer is “no” but that could be a “reasonable” price in 10 years. Therein lays the danger! In the 1960’s a loaf of bread was only 25 cents, today it is “reasonable” to pay $2.50, and in 20 years it might be $25.

    At what point does “reasonable” become absurd? At what point does it become “reasonable” to pay an assembler in the auto industry $100 an hour to install a wiper blade? At what point does it become “reasonable” to pay a baker’s assistance $75 an hour to pour dough into a baking pan for a loaf of bread? The answer is that the “reasonable” price of a car or a loaf of bread is determined by what the consumer can afford to pay with a “reasonable” income.

    There is room for a lot of discussion in between all of this, but another “reasonable” factor is the “reasonable” life of the product, which is certainly different between a car and a loaf of bread. Could it be that we should also focus on quality and sustainability; within reason of course?

  • aspurgeo

    Can’t agree more the only problem is you have to have the jobs available that demand higher wages. If you just increase wages you will soon put the price of a burger out of sight which in its self is a source of inflation because you are paying in the price of the service the price of the wage which increases prices all around thus making product unaffordable. People have to have the skilled jobs that demand better wages a burger flipper doesn’t cut it or let’s say a career a Costco! In addition to having better paying jobs people must become fiscally responsible as of now Americans have over spent we are out of credit and so is our government we are all going to have to suffer together to get through this. There are multiple aspects to this that need to be addressed our government can’t cure this they helped create this credit and wage crisis. We need small business who want to make a product that people want and need then have employees who want to share in the venture and take the risk and sale to ourselves.

  • mescal bean

    The world economy is complex and some degree of simplification is an inevitable part of any analysis. But the author of this article has not addressed two major factors which intrinsically impact labor cost and unemployment levels: the advancement and widespread use of automation, and the growth of population, especially of “low skill” employees. Studies have pegged the maximum economically sustainable population for the US at 200 million people. My view is that no matter what you do with tax structure or minimum wage rate, the US is destined to have high unemployment, surplus low skill workers, and the resultant downward pressure on working class wages.