Economic failure by design?

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Even before the start of the Great Recession, the growth of the U.S. economy was leaving American wage-earners behind.

Lack of productivity is not the problem.   U.S. productivity is increasing at a slower rate than before the mid-1970s, but it is increasing.  The “education premium” is not the problem.  A higher percentage of Americans than ever before have college degrees, and even the income of college graduates lags the growth of the U.S. economy.   Automation is not the problem.  U.S. manufacturing output, not just employment, is an ever-smaller part of the U.S. gross domestic product.  Globalization is not the whole story.  Some advanced countries, including Germany, maintain a favorable balance of trade.

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The problem, according to Josh Bivens, an economist for the pro-labor Economic Policy Institute in Washington, D.C., is that U.S. economic gains are being concentrated more and more in a smaller and smaller part of the U.S. population.  About half the national income flows to the upper 10 percent, half of the upper 10 percent’s income flows to the upper 1 percent, and half the upper 1 percent’s share goes to the upper 1/10th of 1 percent.

Bivens outlined all this in his new book, Failure by Design: The Story Behind America’s Broken Economy.  He said the upward redistribution of income is not the result of impersonal economic trends, but of deliberate decisions made in Washington.  They are:

Josh Bivens, an economist for the pro-labor Economic Policy Institute in Washington, D.C., wrote in his new book that the main reasons for this are:

  • the erosion of the purchasing power of the minimum wage,
  • a decline in the power of organized labor,
  • an increase in the share of the U.S. economy exposed to global competition,
  • a dismantling of regulations that governed the financial sector, and
  • monetary and fiscal policies that make low unemployment secondary to low inflation.

All this is true, I think.  There is more to be said about each of these points.

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Orthodox economists say it is axiomatic that a rise in the minimum wage will cause unemployment, because an increase in the price of anything reduces the demand.  I agree that it is theoretically possible to raise the minimum wage to a level in which employers could not afford to hire workers for certain jobs.  There is no evidence that actual increases in the U.S. minimum wage have ever increased unemployment significantly.

The decline in labor union membership is the result of anti-union campaigns by employers.  Labor law puts union governance under the federal regulation, and restricts union activity.  Corporate law does not put any corresponding limits on corporate governance, nor effectively restrict anti-union activity.  Half the people in a recent Pew poll said they would join a labor union if they could.  But anybody who tries to organize a union risks losing his or her job and becoming unemployed for life.  Without this threat, I believe that private-sector unions would be a strong as public-sector unions.

Orthodox economists say it is axiomatic that free trade benefits everyone.  Under the law of comparative advantage, every nation would specialize in the economic activity it does best and, in theory, produce greater wealth than if it tried to be self-sufficient.  The extreme form of this theory, advocated by the late Milton Friedman, is that a nation should declare unilateral free trade, even if other nations subsidize their industries or restrict imports.  According to this theory, cheap imports amount to a free gift.

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I agree that, in principle, exchange of goods and services among people in different countries is mutually beneficial, and that no country can be self-sufficient or should try to be.  And I agree that high tariffs hurt consumers.  The problem with the “free gift” theory of importing subsidized goods is that physical capital and human capital are not so easily reconstituted as financial capital.  Once a nation’s people cease making a certain product or providing a certain service, it is hard to get back the capability to do it again.

No nation engages in completely free trade.  Otherwise the so-called free trade treaties would not be hundreds of pages thick.  The U.S. government subsidizes and promotes American agri-business and armaments industries, defends the intellectual property rights of software, entertainment and drug companies and uses its influence to make sure banks are repaid every cent they lend to foreigners.  It is only U.S. manufacturing industries, almost alone in all the world, that are open to the winds of unrestricted competition.

The weight of the U.S. economy has shifted from the goods-producing to the financial sector sector.  This is a result of a continuing policy of the U.S. government to allow free rein to engage in financial speculation, and to bail out big financial institutions from their mistakes.  The financial sector generates more profits than the goods-producing sector, and more members of the top 1 percent of income earners.  But because the financial sector finds speculation more profitable than providing capital to the goods-producing sector, American economic growth has stalled.

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The final factor is the Federal Reserve Board, which is a hybrid agency accountable to both the banking industry and the U.S. government.  Historically bankers have always given the fight against inflation priority over the fight against unemployment, because they want loans to be paid back 100 cents on the dollar.  Of course bankers would prefer, all other things being equal, to see job growth, and nobody wants to see inflation run hog-wild, but if there is a choice between inflating the currency 1 percent and raising the unemployment rate 1 percent, bankers will choose the latter.

The Economic Policy Institute brought out a report on The State of Working America every two years from 1988-89 to 2008-09.  When I reported on business, I relied on its detailed and reliable information.  Although the pro-labor EPI is not impartial, I always found that their assertions were supported by facst and did not go beyond the facts.

Instead of bringing out a 2010-2011 edition, the EPI decided to post the information on its web site and instead publish Bivens’ small summary volume. Although brief, Failure by Design contains all the information necessary to understand the state of working America.  It is an excellent and readable description of the recent history of the U.S. economy and how the Great Recession hit a working population that was doing none-too-well to begin with.

Click on The State of Working America for the full background information and charts on the EPI web site.

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