The most dramatic and yet under-reported trend in the last 30 years of American economic history is the shift in the distribution of wealth from labor to capital. This is often described as "the rich are getting richer" but that cliché does not accurately describe the change in our economic order.
Workers at all levels of the economy are forced to put in more time for less money. This is as true for young lawyers and middle managers as it is for assembly line workers. No one has a three-martini lunch anymore. Assistant art directors, who used to do some the grunt work in advertising agencies, hardly exist today. Now the senior art director has to do his own cutting and pasting.
Downsizing means those of us who still have jobs have to also do the work of the newly unemployed, without getting their pay. That money goes straight to the corporate bottom line. Economists like to call it productivity gains. Median wages in the United States have stagnated for over a generation while the stock market has risen from 700 to 11,500.
The victories of the New Deal have for the most part disappeared. Who among us works a 40-hour week? The poor, if they can find them, work two jobs if not three. Those of us in the professions or management often don't get home until after our children go to sleep.
It used to be, a generation ago, that one wage earner could satisfy the needs of a family. Now both husband and wife work to maintain a middle class lifestyle.
It used to be, a generation ago, that workers had an unwritten lifetime contract with their employers. They gave the company their youth and the company supported them in their old age. Now, with the expansion of freelance labor, corporations have no obligation to most of those who work for them.
It used to be, a generation ago, that TV talk show hosts would joke about how much money their plumber was making. Now they joke about Paris Hilton, who shows that in this culture, four generations of wealth is not enough to give one class.
Why is Paris Hilton, an undereducated (albeit attractive) 24 year old worth $30 million dollars? The lowering, and eventual elimination of estate taxes is one reason. The massive tax cuts for the wealthy is another. Perhaps the principal reason, though, is that maids, and bellhops, and dishwashers at her family's hotels are paid less now in real terms than they were in 1973. The money that would have gone into their pockets now goes into the stockholders' and thus into hers.
When a company announces a plant closing or the downsizing of workers, its stock price goes up. Wall Street analysts understand that lowering labor costs (a euphemism for firing people or paying them less) means more profit for the corporation.
The boom in the stock market from 1982 to 2001 was not principally because of new technologies or new paradigms. It is because wages have stagnated allowing corporate profits to rise.
To understand the world we live in now, we have to look at the `70's. Unlike today, the `70's were a very bad time for the holders of wealth. Inflation was in double digits. The stock market was stagnating. Real interest rates were negative. If you put money in the bank, in real terms, a year later you had less than when you started.
Workers, however, didn't have it so bad. They got annual raises, matching or beating inflation. In larger firms, their health insurance was paid and they were guaranteed pensions when they retired. Labor activism meant that strikes were common. Back then, hard to believe now, labor unions won more strikes than they lost. Workers were confident, back in the `70's.
Paul Volker, perhaps the most brilliant Federal Reserve chairman of the 20th century, broke inflation by breaking worker confidence. In the early `80's he engineered two back-to-back recessions that put such fear into working Americans that they were just happy to have a job and weren't going to demand more pay.
Ronald Reagan, by crushing the Air Traffic Controllers union, showed even skilled workers they were not indispensable. After all, if the country could function with newly trained air traffic controllers, than what possible job security could truck drivers and steel workers and news cameramen have?
It has been over 20 years since Volker's recessions. Since then, all statistics tell us that the economy has expanded dramatically. Why then haven't wages risen?
Wages, like all economic goods, are determined by supply and demand. When there are fewer workers, their wages rise. After the Black Death in 14th century Europe, wages for laborers increased dramatically. With a quarter of the population dead, the supply of labor decreased and so the bargaining power of the common man improved.
The goal for corporations today is to keep their labor pool large and insecure, thus keeping wages down, thus keeping profits up.
Globalization is the answer. Call centers aren't moving from Omaha to Mumbai because corporations want to help the struggling Indian economy. No it is because wages in India are lower. Workers in the developed world can't demand higher pay if they know their bosses can outsource their jobs to the third world.
Likewise, if immigrants to the developed world weren't willing to take the worst jobs for low pay, then those jobs would have to pay more, which would have a rippling effect throughout our economy. The minimum wage in real terms is almost 40% less than it was in 1973.
Stripped to its essentials, globalization is the creation of larger, less localized markets for labor. If you want to shoot a movie about New York but you don't want to pay union scale, you can shoot in Toronto. The effect, of course, is that in the aggregate, movie technicians make less money. The search for lower labor costs is the engine of globalization.
So what, you say. The dishwasher makes less; Paris Hilton makes more, the gaffer in New York is out of work, the grip in Toronto has a job. As long as the pie is growing who cares about its distribution? The problem, as John Maynard Keynes taught us, is when workers earn less money, they can no longer afford to buy the all of products they make and this imbalance plunges the economy into recession. This lack of demand, after all, was the fundamental cause of the great depression. We may well be approaching that moment. Only American consumers' (and government's) blind willingness to take on ever more debt is keeping the world economy going.
One of the most pernicious economic myths of our time is the trickle down theory. This excuses giving money to the rich in the hope that it will somehow get to the lower levels of the society. Economic growth actually works more in a trickle up fashion. Let us remember the golden days of the American economy in the Post War era.
Americans who had been poor, dirt poor during the Great Depression found good paying jobs. They used their wages to buy homes, cars, refrigerators, powerboats. They bought them mostly from American corporations, stimulating their bottom line, making them profitable, allowing them to hire more workers and pay them well, creating a boom that lasted thirty years.
This virtuous cycle was broken for a variety of reasons but mostly because European and Japanese corporations started making better and cheaper products than the American behemoths. American wages, more and more were not spent on American products.
Our corporate leaders could have lowered prices or improved quality but they didn't. They took the easy way out and concentrated on cutting costs. Our government could have constructed an industrial policy that protected our productive capabilities but they didn't and now the United States has an annual trade deficit of $700 billion dollars, almost 7% of GNP.
Protectionism is laughed at by our economic experts. Tell that to the man on the ten dollar bill. If Alexander Hamilton had not erected tariff barriers at the time of the birth of the nation, the United States would have probably remained a supplier of raw materials to a more developed Europe.
We are taught that the theory of comparative advantage proves that free trade benefits everyone. Portugal should make wine while Britain should make manufactured goods, David Ricardo told us. Tell that to Portuguese manufacturers.
Tell that to the Japanese. They built their export-based economy by protecting their markets at home. Tell that to the Argentines. In the nineties, their government accepted neo-liberal Washington consensus. They opened their economy, they bought the free trade mantra and their economy was eviscerated. More economies were built behind tariff walls than ever were through free trade.
I am not arguing for thoughtless protectionism. Despite our massive and growing trade deficit, many Americans (including myself) profit greatly from free trade. The "beggar thy neighbor" tariff policies of the 1930's certainly made the Great Depression even worse. But I am arguing against the blind worship of free trade. We all learned in Econ 101 that free trade benefits everyone, even if it is not reciprocated. More accurately, it benefits all consumers. Free trade certainly wasn't good for Portuguese manufacturers in the 19th century nor for workers in Detroit today.
Society is more than just an agglomeration of consumers. In the 1790's Americans would have been able to buy manufactured goods for less if Alexander Hamilton had not erected tariff barriers. But few would argue that the United States would be better off today without the tariffs that allowed our infant industries to flourish.
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Who wins from globalization, from immigration and job outsourcing? Certainly software engineers in Bangalore win, as do Mexican peasants who earn more as dishwashers in Chicago than they do plowing their fields. We as consumers win, buying clothes made by Chinese prison labor for much less than we would were they made in union factories in the United States.
Who loses? The workers in the developed nations lose and that, I would submit, is the entire point. It isn't just that the textile worker in Tennessee or the software designer in Northern California or the telemarketer in Nebraska have lost their jobs, it is that their insecurity now pervades the entire job market, keeping all our wages lower.
Globalization in some form is inevitable. The world, for irreversible technological reasons, is shrinking. That does not mean that nothing can be done to control its deleterious effects. Increasing the minimum wage back to what it was in real terms in 1973 (and enforcing it) would take the cost of unskilled immigration away from the working poor and put it onto consumers, whom can more readily afford it. Putting barriers to repatriation of capital would make Wall Street financial fads less arduous to developing countries. Legislation protecting workers who want to unionize would shift a greater share of national wealth back to labor and away from capital.
Despite our almost religious faith in the free market, government policies do matter and, in a democracy, they should be made with the interests of the average citizen in mind. Globalization as it is sold to us today mostly serves the interests of the corporations and the financial elite. It does not serve the interests of the average worker or of the middle class.
A last thought. In 300AD, did a Roman economist prove the benefits of importing barbarians to serve in the legions? After all, the Goths had a comparative advantage at that sort of thing.