It’s Labor Day which I will celebrate by not working. I think it’s the disparity of wealth in this country that’s killing us at the moment. You can be poor but happy, but that’s tougher when there is a wealth class appropriating a significantly disproportionate part of the value of the nation’s production. I’m not an economist and won’t pretend to be one, but I don’t think it’s “envy” (a major bugaboo in these conversations) that makes such happiness tougher. I think perhaps it erodes the sense that if you work hard and play by the rules, you’ll get a fair shake. I know I look around and see that folks made piles of money moving around paper associated with real estate and walked away from the bust without losing their shirts. It’s hard to escape the notion that working is for chumps.
From my simple high school economics education, I have come to the conclusion that risk, innovation, and labor are the things that our economy should be rewarding. If you aren’t adding value through one of those things, you probably shouldn’t have any money. That probably doesn’t help us find the leak in our economy though; find places where value is being diverted inefficiently. Anyone can probably point to some level of risk, innovation, and/or labor they put forth in almost any given business undertaking. The question becomes whether those levels are being compensated adequately. My sense is that minor levels of risk are being over-compensated and major levels of labor are being under-compensated. Innovation is a crapshoot.
I am willing to be convinced that my notions of how labor should be compensated are skewed. I have come to the conclusion that some of our social conventions are skewed by a tendency to view the post-war 50s as a yardstick instead of an aberration. It occurs to me that I have to consider the possibility that the same is true of economics. The postwar boom where unions were strong and workers were well compensated for manufacturing had a lot to do with the fact that the rest of the world was a smoking ruin while our factories were up and running. The rise of production elsewhere means that an equilibrium is settling in among the workers of the world. (Idle thought: I wonder if this means equilibrium will settle in among the world’s capital?)
But, at the same time the equilibrium has been settling in among the working classes, our national tax structure has shifted in a way that is decidedly beneficial to the very wealthy. Over the past 30 years, productivity has been increasing; wages have been largely stagnant; and taxes on the wealthy have decreased sharply. The rich have gotten a lot richer over this time period. It’s hard for me to escape the conclusion that our economy has a bit of a leak where the very rich are concerned. I think they could be convinced to put forth similar levels of risk, innovation, and labor for less compensation. The excess is probably an inefficiency in our economy.
I’ve noticed an interesting thing when it comes to discussions about compensation of ordinary workers versus compensation of the wealth class. The focus seems to be more often on the proper workings of an efficient economy when it’s worker compensation being discussed. When it’s the compensation of the very wealthy, it seems like individual rights are more likely to come up . . . along the lines of: “Who cares if we could structure the economy to extract the same value from these individuals for less; it would be morally wrong to do so.”
Anyway, here’s hoping for a pleasant labor day for all. And, the best pro-labor song I know, from the Dropkick Murphys:
I don’t know if it’s that minor levels of risk are being overcompensated, real innovation under-compensated. I’m more inclined to say that huge, unproductive paper-shuffling risks are being bailed out as too big to fail.
I tend to think that real risk is compensated, or not, by the market – unless it’s so outlandish a risk that government intervenes somehow. I briefly felt sorry for the folks who presciently “shorted” the crap that was going on and who then got their smart bets boogered up by the bailouts. But, really, were they doing anything more productive than Goldman Sachs was doing?
I read the theory recently that we turned to “finance” as an industry in its own right (rather than part of the infrastructure of real industry) partly to create (the illusion of) prosperity after we shipped so much manufacturing overseas. That strikes me as very plausible – and scary. How do we reverse that and get back to real wealth creation – even if the wealth we create is modest?
There’s a book called “Wealth & Democracy” that, as I recall, has a pretty good discussion of countries that have historically converted from more productive enterprises to finance, to the eventual detriment of the country. England and the Netherlands were primary examples, I believe.
Depends on what you call risk and innovation. I know someone who risked going to jail in order to make a ton of money. Well, he did go to jail, but came out with a different ton of money. Did that experience change his behavior? Oh no, he’s still doing the risky cheaty stuff, and still making money doing it. I guess he made risk a career. Of course, he only has one or two friends left, not including his kids who sort of have to still interact with him, since they are his Swiss bank.
I don’t think that the statistics bear your views out.
You may recall that I did a world famous “study” of census bureau data on household income. My finding was that you could statistically explain household income if you looked at hours worked, educational achievement, and the number of people working in the household.
So maybe this doesn’t explain George Soros or Fortune 500 type money, but it does cover about 99% of households. The idea that there are people out there who are not working for their fortunes is not borne out by the data.
So… if inequality is increasing, but it is doing so because of “The Bell Curve” type factors (smart, educated people marrying smart, educated people and vice versa), I don’t know if we should care, or if there is anything that can be done about it if we did.
Doug- England was crushed under the weight of its’ empire and endless wars, much like the USA is today. But, it also paid its labor much more highly than other upstart nations, like the USA, that would pay a fraction to its’ labor.
History is repeating itself. You can make the value judgment that labor should be highly compensated, (insert ponies & fairy dust wisecrack here) but in the real world, you find the result is Kokomo, Anderson, and Elkhart, and upstart China makes things we used to.
Us making things that England used to and China making things we used to might be closely tied to the shift from manufacturing to finance as the primary profit center in England and the U.S. respectively.
I think profit is more closely aligned with leverage than it is with creation of value. The ability to create value is one form of leverage, but it’s not the only one or even the best rewarded one.
Since the post about the world famous Buzzcutt study was dated 2008, I presume the census data was from 2000 or estimates based on the 2000 census. It would be interesting to see if the correlation is still as strong with 2010 data.
Doug, leverage is simply a multiplier. It magnifies your wealth in good times, maginifies your losses in bad times. Generally, we want to reduce large swings of the economy (the “boom or bust” cycle), right? If so, this means that the current tax code, which gives incentives for loans (student loans, housing up to $1 million) is bad policy for the average taxpayer. Personally, I believe the housing crisis would not have been even close to this severe if homeowners received incentives to invest in their homes, rather than corporate stocks.
I agree with you that the 1950’s might have been an aberration. However, while wages have stagnated, the average quality of life has certainly increased significantly. Are wages or the average “quality of life” the more important statistic to use to determine if wages are adequate?
I also wonder what will happen in ten years when many of the baby-boomers will have retired (hopefully?) Will there be higher demand and a smaller supply of labor, therefore raising wages?
(Also, Mike Kole +1)