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                The Effect of Broad Economic Forces on U.S. Workers 

                                                                                                                     

 In the forty years between 1973 and 2013, the average real hourly wage paid to workers dropped in real terms from $22.41 to $20.67. 1 Explanations of this decrease include blaming the “other”: immigrants, other countries and the swamp in Washington. The following argues that broad economic forces in combination with circumstance have resulted in pressures on many U.S. workers. Because the causes are varied, the solutions are as well. The following begins with the broad economic forces.

Deindustrialization

Although a free market conservative will correctly argue that market incentives are the main cause of short- term economic growth, the historical data also shows that broad economic forces such as trade and industrialization are the major determinants of that growth over long periods of time. Larger system forces will determine the specific entrepreneurial incentives that appear. Since the 19th century, world-wide economic growth has been exponential, due to industrialization. A breakdown of growth data in the following table, however, shows the economies with the highest GDP per capita annual growth vary. Real GDP/capita growth measures the potential for the twenty countries studied to improve their general welfares – rather than simply to grow. 2

                                                                 Table I

                            Countries with the Fastest Annual Real GDP Growth Per Capita

    Years

1820-1870

 1870-1913

 1913-1950

1950-1973

1973-2001

Belgium

      1.44

 

 

 

 

United States

 

       1.82

 

 

 

Sweden

 

 

       2.12

 

 

Japan

 

 

 

      8.06

 

China

 

 

 

 

      5.32

 

United States

      1.34

        1.82

        1.61

       2.45

      1.86

Source: OECD Publishing; “The World Economy, Historical Statistics;” 2001; Table 8b; p. 263. This is a link to that source.

Belgium was the first country in Europe to undergo an industrial revolution. Although the United Kingdom invented the industrialization described by Adam Smith in the 18th century, in the periods shown above, U.S. potential wellbeing growth was greater in all periods except the last, likely due to its large continental resource base. In the years 1913-1950, the European powers spent their time fighting each other. In the years 1950-1973, Japan industrialized. And in most of the years 1973-2001, China industrialized by reforming its economy. Export economies (including Germany) can achieve the highest growth in potential welfare. 3

The above table allows us to reach several conclusions: Early industrialization migrates to and then departs from countries with the lowest initial wages and best situations. In the past, the potential wellbeing growth of the U.S economy has been steady rather than rapid; but the present combination of demography and automation does not auger well for its rapid future growth. The appropriate structure of the economy in the earlier stages of industrialization was hierarchical, whether capitalist by Dickens' Mr. Scrooge or by crude Communist collectives. Both systems accumulated resources for industrial development, as Isaiah Berlin noted, replacing the static inequalities of the countryside with the dynamic inequalities of the industrial world. Both industrial systems were designed to enable semiskilled workers to produce volume - cars sold by the pound in the U.S., but in colors other than black, and cast iron bathtubs produced by the pound in the former Soviet Union. 

In 1991, the Soviet Union collapsed; its centrally planned heavy industries unable to generate innovation. In “Social Theory and Postcommunism,” British sociologist William Outhwaite writes, “The implosion of Soviet communism marked the failure of state socialist civilization…Underlying this was a structural problem that the reforms of the 1980s had attempted to address, namely that the centrally planned system was incapable of generating domestic innovation or the volume of exports required to sustain the required level of imports of technology…the system collapsed largely as a result of unintended consequences of reform…” 4

Janesville, Wisconsin (pop. 63,000) is 4953 miles away from Moscow, Russia. Yet, it is dealing with some of the same industrial issues. In “Janesville: An American Story,” Amy Goldstein recounts and details what happened when a G.M., heading towards bankruptcy, closed its oldest plant. The consequences are harrowing:

·       Since the founding of the GM plant in 1923, a job there enabled generations of workers to achieve the American Dream: a car, a secure job, education for the children and a secure retirement. In 2008, the company announced a curtailment of production that eventually turned into closure that affected as many as 9,000 jobs at the plant, its suppliers and other businesses. 5

·       Those workers lucky enough to be retained by G.M. became “GM gypsies,” driving hundreds of miles to a G.M. plant in Fort Wayne, Indiana that imported 900 workers from Janesville and twenty-four other consolidating GM facilities; commuting back to Janesville for the weekends.

·       Some of those who found jobs elsewhere replaced $28/hour GM jobs with those earning $12/hour. 6

·       Retraining programs at the local Blackhawk community college were not successful because there are no large local industries to be also involved. As Ms. Goldstein writes, “Retraining did not translate into greater success at finding a job. Among those who went back to school, the proportion who ended up with steady work (31.1%) was smaller than among the laid-off workers who did not (48.0%). Worse still, more of those who retrained were not earning any money at all.” 7

·       Where was Washington? Frankly, MIA. Janesville’s congressman likely truly tried to save the plant. 8 But he also believes in, “…‘the American Idea,’ a catchphrase he has devised lately that fuses his fiscal conservatism with a newer identity he is carving out as author of a Republican approach poverty. The America Idea is…(a) new way of expressing his belief that people who need help in their lives should look, not to government as the New Deal…encouraged, but to generosity and sources within their own communities.”

However, as the author points out, “…the need is so great the charity on which Janesville still provides itself so strained that HealthNet (a clinic offering free medical care) has to cut back the number of new patients it can take each Wednesday…(and) ECHO (the food pantry) has people lining up two hours before the doors open…” 9

 At the core of this is the operation of the competitive capitalist system. A 1/25/14 NYT article notes that in 2012 the average U.S. auto worker earned $45.34/hour including benefits. Article data also indicates, in the developing world, the average auto worker earned $11.34.

 

Increasing Concentration of Political Power

Free markets enable the flow of capital and therefore the export of factories and jobs. In “Saving Capitalism,” U.C. Berkeley professor, Robert Reich, discusses the political institutions enabling these markets and how markets, made up of human beings, are biased in favor of those holding the most power. Free markets require:

·       Private property. Government defines its scope and duration (as with drugs and patents) and its use (as with pollution).

·       Market power. Government defines the scope of its access, immunity from competition and the degree to which it is subject to anti-trust rules. Lobbyists seek to preserve the market power of their companies by influencing how government defines, “what is best for the public.”

·       Contracts. The legal system determines what is exchangeable and enforceable.

·       Bankruptcy. The laws determine who can declare it and then define the claims of all parties.

·       Enforcement mechanisms. These protect property and contracts. Legislatures and administrators determine what to enforce or not. Only large companies can pay litigators to contest the actions of government.

Source: Reich

There is often complaint about the visible downward distribution of wealth from the rich to the poor in the form of transfer payments and taxes. However, Professor Reich notes, in recent years, there has been a large and invisible upward redistribution of wealth by the operation of the market system from ordinary Americans to CEOs, Wall Street and shareholders (in the name of shareholder rather than stakeholder interests). 10

A former labor secretary in the Clinton Administration, Professor Reich knows in detail how Washington works. However, in a dematerializing, demonetizing and democratizing economy, the other 90% of Americans no longer have sufficient economic power to cause reform. He therefore calls for the restoration of countervailing power by popular mobilization; if necessary, the formation of a new political party in case one or both existing political parties are unable to respond, giving “…90 percent of Americans who have been losing ground their own political voice.” 11 If you think this is far-fetched, that has already happened in France with the election of Emmanuel Macron as president. It will be fascinating to see how this turns out.

Circumstances

Are people totally responsible for their fates? Using data between 1968-2011, Rank and Hirschi (2015), of Washington University and Cornell respectively published, “The Likelihood of Experiencing Relative Poverty over the Life Course.” This study found that for people between 25-60 years of age, 61.8% of households will experience a year below the 20th percentile of income ($25,500 in 2011). The variables predicting the occurrence of poverty (at the .001 statistical level) are: young age, race, sex, disability, not married and 12 years or less of education. Of the six independent variables only two are under the control of respondents. This means that poverty in the U.S. is mainly circumstantial rather than willful, as the Janesville book relates. This study also found a great deal of fluidity at both the top and the bottom of the income distributions. But the previous analyses show that the latter will increasingly predominate, as the past years likely provided better job opportunities than the future.

 

The International Monetary System

Dani Rodrik is a developmental economist at Harvard. In “One Economics Many Recipes,” he describes the “Washington Consensus” that has guided developmental economics since the late 1980s. The partial consequences of this “free market” philosophy on the U.S. we have already described. Paradoxically, large swaths of the U.S. economy now require development.

The Washington Consensus (like Communism) was a literal recipe that developing countries were exhorted to follow. Its elements mainly included:

·       Fiscal discipline.

·       Deregulation

·       Competitive Exchange Rates

·       Trade liberalization

·       Openness to direct foreign investment

·       Privatization

Source: Rodrik

But, as he relates, a small Latin American country that tried this formula found, “The economy was scarcely growing, private investment remained depressed, and largely as a consequence, poverty and inequality were on the rise.” 12 In contrast, in fast-growing (and we note: export oriented) East Asia, the economic pattern is financial systems with restricted entry and directed lending, industrial policy and cartels, and close cooperation between industry and government. What growth requires is, “A semblance of property rights, sound money, fiscal solvency, market-oriented incentives…” 13 This is true for all economies – sound money and incentives.

But incentives vary by culture and so do the choices to be made. Even in economics, more complicated (and realistic) theory makes greater amounts of choice necessary. Take microeconomics, the theory of the firm. It’s simple and consistent. Markets resolve and balance the competing interests of producers and consumers on their own with the sole goal of efficiency. What about macroeconomics? In Keynesian macroeconomics, markets do not clear due to misinformation and price rigidities. Administrative action by the Fed is therefore necessary to achieve financial stability. In international economics, the situation is even more complicated. Markets are administered by multiple parties, and macro choices are necessary for poverty reduction and social stability. The Impossible Trinity includes one of the major policy choices that directly affects the U.S. economy.

The Impossible Trinity

The Impossible Trinity is the result of an economic theory that holds the appreciation or depreciation in the value of one country’s currency relative to another’s will be equal to the nominal interest rate differential between them. If the value of one currency is set according to another’s, arbitrage (buying and selling) will ensure that two country’s nominal interest rates will equalize. This implies that no country will be able to set interest rates independently and thus have a sovereign monetary policy. The implications of the full theory on central bank policy are as follows:

                                                            Free capital flow

                       Fixed exchange rate        Δ   Sovereign monetary policy

It is possible for central banks to pursue two policy objectives but not all three. Therefore, it would be ideal that capital flows be controlled to have an independent monetary policy and a fixed exchange rate that determines the degree of import competition to domestic producers. The Wikipedia notes that the combination of all three policies: fixed exchange rates, free capital flows and independent monetary policies have been known to cause financial crises in Mexico (1994), Asia (1997) and Argentina (2001).

Professor Rodrik writes that before the Washington Consensus, the postwar Bretton Woods agreements did indeed discourage capital flows. Between 1944 and 1973, the world financial system was stable. With capital flows discouraged, there could be no large-scale export of U.S. jobs. Bretton Woods made it possible for countries to maintain divergent paths of development, while removing some of the worst barriers. 14

Tariffs

Tariffs are the “T” word of economics. We have earlier discussed how a moderate general tariff might enhance the learning and spillovers that result from a prospering industrial economy. Professor Rodrik writes that developing countries have achieved their social and political goals by “unorthodox” policies, allowing trade protection and export subsidies. 15 Both spark local entrepreneurship.

Rather than impose a tall barrier between nations, he advocates a garden wall to enable them to adopt a variety of institutional designs appropriate to local conditions. In his words,” …there is no unique mapping between markets and the institutions that underpin them.” 16  The new opportunities that develop will depend on “local opportunities and constraints.” He would likely have useful views on what processes and policies might redevelop the U.S. economy, whose financial system is also central to world trade.

 

Dealing with Economic Problems

In politics as well as economics, there are, “first order principles.” 17 Americans, turning to the authoritarian but less than competent Donald Trump, have to honestly decide what kind of society and government they want. Back to ancient Greece: political society can be either oligarchic or democratic. Oligarchic societies are, by nature extractive, any economic outcome short of revolution is possible. Real democratic societies are more complicated. They aim at the ideal of justice, that involves the roughly equal distribution of “duties, honors and power.” 18

The appropriate social structure in the late stage of industrialization is participatory and democratic. The major assets of companies at this stage of capitalism are no longer plant and equipment, but the intangibles of goodwill and market position. United Technologies’ 2016 financial statement shows that net plant and equipment constitute only 10% of total assets. The major economic issue is therefore distribution in a consumer society so growth can be self-sustaining and not the concentration of excess resources at the top for unproductive speculation. The 21st century challenge is to achieve balanced and sustainable economies and the thriving middle classes necessary for thriving democracies.

The following discussion applies specifically to the U.S:

What sparks economic growth in Silicon Valley? In “Regional Advantage, Culture and Competition,” Professor AnnaLee Saxenian (1994) notes - Boston 128 tech firms are large and vertically integrated. They therefore missed the personal computer and Internet revolutions. Silicon Valley, on the other hand, contains a myriad of small and specialized companies, a supportive structure of social institutions and mutual assistance, and many potential entrepreneurs working as employees of other firms. This is an argument for pluralism.   

What will spark growth in the wages of the traditional economy? The good news is that the problem of low wages has many causes; piecemeal reforms are therefore both necessary and possible. The bad news is that the current Trump administration is set on reinforcing “free market” principles, and therefore oligopolies that do not increase employment.

At the Federal Level

·       Professor Reich discusses the five building blocks of the “free market” system: Private Property, Market Power, Contracts, Bankruptcy, and Enforcement. Improving, but not replacing, the Affordable Healthcare Act will begin to make health a public good, as it is in other developed countries, rather than a private purchase. Changing drug patent rules will decrease consumer subsidies to the industry. Implicit in these reforms is the idea that there must be some redistribution to make society work for all its citizens.

 

·       Imposing a low tariff on all imports will subsidize manufacturing improvements and training. It could be tuned to reduce the U.S. deficit appropriately. Establishing capital controls, as part of international monetary system reform, will discourage the further export of industrial jobs.

 

   Government will eventually have to address the impact of automation on jobs.

At the Local Level

Conservative economists, such as Hayek et al., note that the capitalist market system takes advantage of local knowledge; but as we have discussed above, all knowledge is not local because market complications require administration. While maintaining their autonomies, government and the private sector need to cooperate to improve growth, government providing the incentives for new activities. 19

·       Economic development ought to consider the existing and possible economic assets of each region – rather than simply throwing money at the problem by building large sports stadiums, convention halls or by fixating upon cultural issues.

Regions have different proximities to universities, large cities or natural resources. To cite two examples:

Pittsburgh, Pennsylvania (metro area pop. 2,360,000) is no longer smog-ridden. The University of Pittsburgh is a major medical center; Carnegie Mellon is a world leader in robotics. The area is home to 68 colleges and universities.

Temecula, California (pop. 100,000, near San Diego) is located along the gold-miner route, as the ‘49ers made their way up to Northern California. The region now hosts 2.7 million visitors per year who, the LA Times reports, spend $696 million, most of it on wine-related activities. There are 42 wineries; the master plan allows for substantially more. Wine drinkers say that the wine is, “improving.” 20 Bulldozers literally construct the vineyards out of the California hills.

 

·       The Importance of People (To note.)

Economies and markets are run by people. While maintaining their autonomies, government and the private sector need to cooperate to increase growth, to develop new opportunities. Far-sighted political leadership can create a consensus and supply a vision for the future. Professor Rodrik writes, “…countries suffer from market failures and institutional weaknesses that cannot all be removed in short order. There is an invitation to think of policy innovations that are explicitly second-best (i.e. practical)….We need to be imaginative, look for homegrown solutions, and be prepared to experiment.” 21 This is also the lesson of FDR’s New Deal.

Entrepreneurs assemble the resources to produce the goods and services people want or may want. In a Bloomberg radio interview, a venture capitalist was asked what percent of the population were entrepreneurs. He dodged the question, saying that there were many people abroad also. The interviewer pressed the question; he finally said that maybe only 1% of the U.S. population are entrepreneurs. Entrepreneurs who build large companies are very special people.

The GM plant in Janesville did not just happen. In 1897, a salesman called Joseph Craig became general manager of the Janesville Machine Company to produce gas-powered tractors. In 1918, he talked William C. Durant, founder of GM, into purchasing the company and building a new tractor plant. When the farm depression of 1921 hit, GM ceased tractor production. Craig then persuaded the company to renovate the factory to produce Chevrolets. 22

 

·       Change

The market system causes change, and that change does not always preserve communities. When an area’s population can no longer support local services, likely there will have to be a consolidation and restructuring, where the government can help.

 

Conclusion

In the 19th century Karl Marx wrote that the capitalist system would self-destruct by driving more and more people into poverty, replacing them with machines (capital). Rather than seeking piecemeal reforms by the difficult task of convincing others, Marx sought to effect change by developing a sweeping theory of class struggle which Lenin then spread in a post World War I world, fraught with economic and social collapse. As events developed, party members became but servants of totalitarian movements which aspired to total domination.

In The Wordly Philosophers (1953), the economist, Robert Heilbroner wrote, “The Marxist prediction of decay was founded on a conception of capitalism in which it was politically impossible for a government to set the system’s wrongs aright…The cure for capitalism’s failings would require that a government would have to rise above the interests of one class alone-and that was to assume that men could free themselves from the shackles of their immediate economic self-interest.” The New Deal reformed the capitalist system and expanded its freedoms (properly understood). The system thus retained popular support against the totalitarian societies of the 20th century because its goals were human flourishing and the broad distribution of  the benefits of economic growth. Now, in the 21st century the system again requires reform to deal with deindustrialization, the concentration of political power and the international economic system.

In an era of great change, we have been discussing the economy as part of the larger social system. Blaming economic ills on the machinations of “the other,” rather than on the operation of the market system is a misdiagnosis, and will fail to cure the problem. This will only fuel further anger and frustration. Government is therefore necessary to influence it. A recent PBS show on Victorian Era poverty ended with the quote, "If you give people hope, they'll work for it. Without hope, they fall into misery." Liberal democracy will not be able to withstand wide-spread despair. Making hope real is the positive art of politics.

 

Footnotes

__

What does "human flourishing" mean in the 21st century U.S., likely the most individualist society in history?

In a 7/21/17 NYT article, columnist David Brooks writes, "There are many different flavors of freedom....Freedom as capacity means supporting people so they have the ability to take advantage of life's opportunities." He writes that the Republican Party’s main problem is intellectual. "The freedom as detachment philosophy is a negative philosophy. It is about cutting back, not building....A party operating under this philosophy is not going to spawn creative thinkers who come up with positive new ideas for how to help people. It's not going to nurture policy entrepreneurs. It's not going to respect ideas, period ."

In his essay, "Two Concepts of Liberty," Isaiah Berlin wrote that there is negative liberty. "The liberty of some must depend on the restraint of others." This is the classic libertarian argument for minimal government. There is also a positive sense of liberty. The idea is that people have a predefined better self that should comply either to the logic of history or to nature; and it is up to the totalitarian state to force them to realize it. The latter was never in accord with social realities anywhere, particularly in the United States. *

In his article, Mr. Brooks discusses a third concept of liberty, "freedom as capacity," supporting people so they can create and grasp new opportunities. A concept like this could be a useful nucleus for government programs; although as a Republican, he might disagree about their scope. Coordinated and focused government programs could address the very fundamental issues of healthcare, jobs, technology and income.

 

*   Consider, as a first-order principle, the concept of liberty. To illustrate how the concept evolved in different societies: To all the ancient Greeks, liberty simply meant an absence of domination (by the Persians). To the Athenians, political equality preserved the social peace and the order of the universe, resulting in liberty. To the Romans, libertas was a civic right acquired under man-made law. In the Judeo-Christian tradition, the idea of liberty is free-will, the ability to choose between good and evil. In American politics, the New Deal expanded the idea of freedom to provide economic opportunities. The modern concept of freedom contains all these ideas, which is clear to us (considering the context of the problem to be solved). History is a resource to draw on; supplying examples to first-order principles, applicable to present challenges.

 

 

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