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Monday, September 04, 2006

The Stagnation Tax [or How Labor is Depreciated -ed] - Stirling Newberry

The New York Times wants to argue the glass is half full, but then admits at the bottom that it is very full for the top 5%, and bone dry for everyone else. The reality is that virtually all Americans are paying the stagnation tax - an economy where productivity across most of the economy is basically flat. The average looks fine, but then, on average everyone gets up from the poker table with the same amount of money they started with.

Economists like to talk about "the inflation tax" - where governments allow inflation, and reap the benefits because they are net borrowers. We are now seeing that the same game can be played in reverse, that Republican government is allowing wage stagnation, and reaping the benefits from it.

The stagnation tax is what you pay when your paycheck doesn't go up, but your expenses do. Even if inflation is low, it doesn't matter if you don't have what economists call "pricing power". Pricing power is the ability to charge more for what you do.

Continued...to "Read More" click link below

CONTINUED:

Over the last 30 years American industry has become more "productive." Now there is a common sense idea of what productivity means, and there is the economic sense. They have some relationship to each other, but productivity is the bikini of economics - as Eisenhower said, what it reveals is interesting, what it conceals is vital. Productivity in economics is real GDP per worker hour. Take GDP, divide by the paid hours worked, and that is the productivity of the economy. There are several metaphysical concepts hidden in this concept, the most important one being that one can really measure inflation and one can really say that price increases after inflation represent happiness. So it isn't really clear that what economists call productivity is productivity. A better description would be "profitability" - increase represents how much money is on the table between those who work, those who supply capital, and those wh charge rent. Productivity increases - however you slice them, are the pot that the card game of politics is about.

Over the last 30 years, American workers have gotten virtually none of the pot - cleaned out by profit and rent over and over again. Not only did profit get its share of productivity gains, it got labor's share as well. This is one reason why many Americans lurched into playing the stock market in the 1990s and the housing market in the 00s - because wages weren't the way to go.

I posted this table before, but I am going to do so again. It lists the nominal median wage for hourly employees in the US, then what that nominal number is in inflation adjusted terms based on the CPI-W, and then what it would be if wages had gone up with productivity:

Nominal Wage Inflation Constant
1975 $4.61 $18.32 $32.68
1976 $4.89 $17.36 $30.25
1977 $5.25 $17.46 $29.50
1978 $5.65 $17.86 $29.72
1979 $6.13 $18.17 $29.89
1980 $6.56 $17.81 $29.37
1981 $7.18 $17.09 $28.22
1982 $7.71 $16.42 $26.79
1983 $8.05 $15.86 $26.15
1984 $8.37 $15.92 $25.15
1985 $8.60 $15.78 $24.45
1986 $8.84 $15.70 $23.95
1987 $9.01 $15.43 $22.86
1988 $9.28 $15.73 $23.20
1989 $9.64 $15.70 $22.78
1990 $10.00 $15.59 $22.46
1991 $10.36 $15.35 $21.73
1992 $10.63 $14.94 $20.83
1993 $10.92 $14.97 $20.08
1994 $11.19 $14.87 $19.86
1995 $11.47 $14.90 $19.69
1996 $11.84 $14.95 $19.65
1997 $12.27 $15.08 $19.32
1998 $12.77 $15.24 $19.23
1999 $13.25 $15.59 $19.14
2000 $13.73 $15.90 $18.98
2001 $14.28 $16.07 $18.68
2002 $14.74 $16.00 $18.16
2003 $15.19 $16.34 $17.82
2004 $15.48 $16.23 $17.08
2005 $15.88 $16.36 $16.72

Let's go over this. The median wage in 20005 was $15.88, not even keeping up with inflation. There are some who argue that inflation is overstated, and some who argue it is understated, but the balance is that CPI is probably somewhere in the right area over time. As you can see the present wage is so close to the inflation adjusted wage in 1975 as to be insignificant. If anything, it is less.

However, that would be reasonable only if the economy of today were no different from the economy of 1975. The reality is that we can do more with the same amount of work, and the result is that wages should have gone up. In fact, the difference is now so large that most people don't even believe it if told - if 1975 wages had gone up with productivity, real wages would be twice what they are today. Let me repeat that: the median wage would be twice what it is today.

This would mean, among other things, that no one would worry about Social Security - there would be plenty of payroll taxes to pay for it. No one would worry about Medicare. People would be a great deal less surly about helping out the poor, if they weren't being treated like the poor in their paychecks. The absurdity of tax cutting comes into focus. Even if the present worker paid no taxes of any kind, he'd still be behind the constant wage worker who paid the same tax burden workers paid in 1975. And by the way, according to the CBO, the tax burden on the median worker hasn't changed in the last 30 years in any significant way - a couple of percent up, a couple of percent down, but basically flat.

So let's review - after five Republican Presidents, three of them for two terms - the median worker has seen none of the improvements in productivity in the economy. After 27 years of "tax revolts", the median worker pays the same percentage of income in taxes as he did when it started.

That's a lost generation. John Edwards calls it "the war on work." Warren Buffet says "the rich have won the class wars." They are both right.

The Horizontal and the Vertical

If this were all there was to it, the solution would be to tax the rich and spend it on projects to help everyone else, or even just rebate it. Change the balance of negotiating power in corporate America, and that would be the end of it. Traditional redistributive leftism, as opposed to the redistributive rightism we've had - which has redistributed gains generated by the whole society upward.

However, Americans on a gut level get that this isn't the case. Liberal economists are fond of pointing out that, on aggregate, the economy did no better under Republican dominance than it did during the liberal era - by almost every measure, the "trend line" growth stayed the same. They are also fond of pointing out that the way that middle class families got ahead during the Republican period was sending the wife to work - latch key kids paid for the better home with missing parents.

But an economist knows that isn't the question, the question is "could liberal economics have done as well as the Republicans did over the last generation?" The answer to this is less clear, because there is only one term of liberal economic policy - not even that - in the last 35 years. The rest has been variations on conservative. Clinton didn't dramatically raise taxes on the rich, but instead distributed the costs of balancing the budget broadly over society - social security recipients paid some by lower cost of living adjustments, budget cuts continued, the defense budget stayed small, offshoring accelerated costing whole industries their jobs, and yes, there were some tax increases on the very rich. But it spread the pain very evenly.

The heart of the difference can be seen by comparing the real economy of 1945 to the real economy of 1975 and the real economy of 1975 to 2005. The gains in physical terms between 1945 and 1975 were enormous - from a nation of renters, to a nation of home owners, from a nation which did not own cars, to a nation that did, from a nation that barely finished high school, to one where almost everyone did, from propeller airplanes to international wide body jet service. From radio, to color television, from black and white to cinemascope, from outhouses to indoor plumbing. From depression poor and war time pent up demand, to the affluent society.

The real changes between 1975 and 2005 are not as visible, and not as great. The same 747s that became queens of the air in the early 1970's are just now being retired, to be replaced by jets that do the same things at roughly the same speed. The cars of 1975 have gotten CD players, anti-lock breaks, air bags and coffee holders. The air is cleaner. But one can see why there is no massive jump in real wages: because there has been no massive jump in the underlying physical culture.

Instead, we have gotten better at managing the economy of 1975, and better at distributing communications and the products of information - but this only increases efficiency by specialization, it does not create that Schumpterian creative destruction by which whole industries and types disappear. This is because the basic inputs are relatively much the same, and the basic idea of "what is happiness? what do people want?" is the same.

The bottom line can be seen in a measure that is similar to productivity, and that bottom line is in "energy density". Energy density takes GDP, and divides it by the energy required to produce that GDP - GDP per watt being the common one. Energy density improved by 100% between 1945 and 1975, and it did roughly the same between 1975 and 2005. The difference is that in the first period, America produced the energy it needed, and in the second period, it imported it. In the first period energy density of GDP improved because we improved the physical culture, and in the second period, it improved because we had a large asset bubble which created a great deal of productivity selling stocks and bonds.

In short for liberals to argue that they could have done better they need to tell where all the growth would not have happened - in the form of the asset bubble - would have come from. After all, if you are taxing the rich, the rich aren't going to be generating cheap GDP by having big IPOs and selling what the New Yorker called "9 Billion dollar puppies."

And it gets worse, the United States has, for 20 years, run persistent trade deficits with the outside world. In a liberal economic world those trade deficits would not be allowed to happen, because there wouldn't be inflated asset prices to sell to the rest of the world to get the money to buy goods. In short, for a liberal economist to argue that the last generation could have gone better, they would have to say what would have replaced the asset bubble as a way of generating energy cheap GDP that would replace both the GDP of buying and selling stock, and the "free" GDP of the trade deficits that run above otherwise sustainable levels.

That's a lot of GDP.

I've brought up these issues before, and regularly I've been told "well you don't have solutions". Actually there were solutions – and still are solutions. However, the require a different relationship between citizen and government. That, not the technical and economic factors, was what was decisive in the end. In the end Americans wanted to be consumers. And they were willing to pay a great deal to be consumers. This is an economic trade off – the hours that people have spent skiing and reading porn and watching television and mowing the lawn that they would otherwise have spent being involved in community and government, and feeling responsible for the consequences. However, the question is – is that free time worth $16 dollars an hour – because that is what the ordinary person is paying for it. Watching an hour of Law and Order or 24 might be amusing. But is it worth $16/hour. The answer for a long time, for the majority of Americans, was "yes".

Now it is becoming "no".

The answer to the problems of the distribution of wealth then are not in redistribution of wealth, but in resdistribution of work. What used to be called "the national effort."

The Wrong Wars

Conservative economists and gold bugs argue endlessly over the coming of the Great Depression. This is where they lost power. TARFU, FUBAR, SNAFU. Everything just went to hell. For a conservative to reimagine the world as it was in the late 19th century, he or she has to imagine how the conservative world could have dealt with the problems of 1925-1935, or more broadly with the problems of 1919-1939. It is important to realize that the conservative world that they are talking about really only established itself securely by 1870 and ran only until 1914. About 45 years.

Liberal economists are only just realizing that 1968-1980 represents the same period in liberal ecoomics. This is the period where a variety of forces that liberalism itself unleashed occured as a series of problems. While one can blame Nixon for a great deal of the trouble, the lurch to the right in the US was not enough - social democratic and liberal governments around the world could not deal with the baby boom coming of age, with the break up of colonial empires and the last gasping lurch of Stalinism. Failure is a team effort, and the team of the left failed to deal with high inflation in the 1970's.

In short, and it was a conservative economist by the name of Mundell who saw this, moment of the break up of Bretton Woods was the key failure. Certainly Nixon bungled the break up, but the break up itself was driven by the failure of LBJ to understand the economic realities of the late 1960's. He was busy fighting a war in Vietnam, even as the Middle East, where the world's oil supply was increasingly going to be from, was falling apart. The US could not deal with the 1967 crisis, because it was hip deep in the swamps of Vietnam. It was the wrong war, in the wrong place at the wrong time.

But LBJ and the liberal establishment went into Vietnam because of the political and social imperatives of that moment. LBJ could not not go into Vietnam. In fact, in 1968 the Democrats lost the presidency, because the Dixiecrats bolted for LBJ not fighting the war hard enough. People forget who was the Vice President on that Dixiecrat ticket - it was General Curtis LeMay.

This is why people look back to JFK - who, because his power base was not in the south, because he seemed ready to pull out of Vietnam before his assassination, because it seemed that he would have pursued a different economic course. But while JFK's assassination was momentus, it was not the moment of failure. Many look back at RFK's assassination - which has a strong argument, because it is likely that RFK could have beaten Nixon, where as Humphrey did not.

So that is where liberals must look, beginning from January 21st 1969, and show that different macro and micro solutions were possible to deal with the inflation of the 1970's. This challenge is not as high a hurdle as it appears. Many of the micro-problems are obvious, for example failure to engage in energy conservation sooner, failure to deal with the Middle East until it was too late, and failure to realize that capital was being overtaxed through out the 1970's. The macro- solutions are also out there, for example, looking at how to handle the collateral damage of an earlier "disinflation" strategy - which Nixon failed to pursue because he needed a better economy in his quest for a permanent Republican majority.

The answers to these questions become parallels to the answers in the present, first to secure the trust of the American people - to prove to people that the failures of the 1970's were a failures of people, and not failures of principle. But in the second part because the unsolved problems of the last generation need to be addressed. To tell people that you will deal with the festering swamp, means to tell them where, exactly, that swamp is.

The solution American chose was to pay the stagnation tax, leave their children alone and at risk to the world, and to pursue hobbies and the cult of small things while others ran the country. They wake up to find that the fees for that management were particularly high, and that it hasn't outperformed the marketplace - that they wake up today with declining wages, less access to health insurance, less and less affordable housing, less access to moving up the career ladder - and a political system that does not seem to be responding.

However if the beginning of the road is in 1969, the end of the road must be in Iraq. Iraq is the war that the reactionary system had to fight, it had no choice. What the reactionary system sold was "work hard and you can get a bigger and bigger house and a bigger and bigger car." Since these were two of the visible measures of growth in the old liberal economy, continuing them at the cost of all else was enough to swing enough voters in the south to swing the country from Democratically dominated to Republican dominated. They did not lose enough votes in the rural and suburban Northeast to lose the country.

There are reports circulating about the dire condition of Iraq. Their intent, within the current governing coalition, is to get more, not less, money for Iraq - they argue that in order to stabilize Iraq more money is needed, and that money will have to come from someplace. If not from weapon systems, then from medicare and domestic spending. But the picture they paint is accurate - the current Iraqi government does not exercise fiat over its own territory.

As with Vietnam, the war that the reactionary system had to fight - a fact realized by both Bushites and Clintonians - was also the war it had to lose, because there was no victory at the bottom of the darnk dank hole. The victory was elsewhere, because the future was elsewhere. It is with the rise of the micro-global power, and the rise of China, that the future is being shaped by. A decade of easy oil profits might have benefited a few handsomely, but the oil was going to be pumped regardless, and once gone, it was going to be just as gone.

The country wants answers, and hungers for ideas. There are ideas out there, but they are not going to come from the expected places.
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