Levy and Temin: Inequality and Institutions in 20th Century America

Since I'm highlighting Vox EU today, here's one more from their site. This is Frank Levy and Peter Temin discussing the institutional factors behind recent changes in inequality such as the implementation of the "Washington Consensus" during the 1980s "adopted in the name of improving economic efficiency":

Inequality and institutions in 20th century America, by Frank Levy and Peter Temin, Vox EU: A central feature of post-World War II America was mass upward mobility: individuals seeing sharply rising incomes through much of their careers, and each generation living better than the last. It therefore is problematic that recent productivity gains have not significantly raised incomes for most American workers. In the quarter century between 1980 and 2005, business productivity increased by 71%. Over the same quarter century, median weekly earnings of full-time workers rose from $613 to $705, a gain of only 14% (figures in 2005 dollars), as our recent research shows.¹ Detailed analysis of these years shows that college-educated women are the only large labour-force group for whom median compensation grew in line with labour productivity.

Since productivity growth expands total income, slow income growth for the average worker implies faster income growth elsewhere in the distribution. In the US case, growth occurred at the very top.  Piketty and Saez estimated that the share of gross personal income claimed by the top 1% of tax-filing units – about 1.4m returns – rose from 8.2% in 1980 to 17.4% in 2005. Among tax returns that report positive wage and salary income, the share of wages and salaries claimed by the top 1% rose from 6.4% in 1980 to 11.6% in 2005.²

To place these developments in historical perspective, we construct the following ratio

The numerator of this ratio is the sum of median annual earnings of full-time workers and the value of estimated fringe benefits. The denominator is Non-Farm Business Productivity – the standard labour productivity measure - expressed as an annual dollar amount. We can think of this ratio as a bargaining power index, BPI for short, since it is the share of total output per worker that the average full-time worker captures in compensation.

Figure 1 displays this Bargaining Power Index from 1950-2005. For purposes of comparison, Figure 1 also displays the Piketty-Saez estimate of the 99.5th income percentile on federal tax returns – the median income of the top 1% of reported incomes – adjusted for fringe benefits and normalised by Non-Farm Business Productivity.

In the “Golden Age” of 1947-73, labour productivity and median family income each roughly doubled. The median compensation of full-time workers (the numerator of the BPI) and labour productivity (the denominator) grew at the same rate from 1950 to the late 1970s. Simultaneously, income equality increased as very high incomes (illustrated by the 99.5th percentile) grew more slowly than labour productivity.

In the 1970s stagflation, median compensation of full-time workers began to lag behind productivity growth, a trend that accelerated after 1980. In Figure 1, the lag is illustrated by the BPI declining from 0.6 in 1980 to 0.53 in 1990 and to 0.43 in 2005. This declining bargaining power of the average full-time worker is a useful way to describe why significant productivity growth since 1980 has translated into weak growth in earnings and compensation.

Many economists attribute the average worker’s declining bargaining power to skill-biased technical change – technology, augmented by globalisation, which heavily favours better-educated workers. In this explanation, the broad distribution of productivity-gains during the Golden Age is often assumed to be a free-market outcome that can be restored by creating a more educated workforce.

We argue instead that the Golden Age relied on market outcomes strongly moderated by institutional factors. Following the literature on economic growth that emphasises the role of institutions in economic outcomes, we argue that institutions and norms affect the distribution of economic rewards as well as their aggregate size. Our argument leads to an explanation of earnings levels and inequality in which skill-biased technical change, globalisation and related factors function within an institutional framework. In our interpretation, the recent impacts of technology and trade have been amplified by the collapse of these institutions, a collapse which arose because economic forces led to a shift in the political environment over the 1970s and 1980s. If our interpretation is correct, no rebalancing of the labour force can restore a more equal distribution of productivity gains without government intervention and changes in private sector behavior.

We do not challenge the existence of technology’s and trade’s effects on labour demand.³ Rather, we argue that technology and trade’s impacts are embedded in a larger institutional story. We argue that the current trend toward greater inequality in America is primarily the result of a change in economic policy that took place in the late 1970s and early 1980s. The stability in income equality where wages rose with national productivity for a generation after the Second World War was the result of policies that began in the Great Depression with the New Deal and were amplified by both public and private actions after the war. This stability was not the result of a natural economy; it was the result of policies designed to promote it. We have termed this set of policies the Treaty of Detroit, after the most famous labour–management agreement of the postwar years.

This agreement was replaced in the 1980s (and surrounding years) by another set of institutional arrangements which we call the Washinton Concensus.⁴ These new policies also originated in a time of economic distress, albeit nowhere near the distress of the 1930s. In a process similar to the experience of the Great Depression, policy-makers – unable to comprehend the macroeconomic causes of distress – instituted microeconomic changes in an attempt to ameliorate the macroeconomic problems. In both cases, the measures taken were only partially successful, and recovery came from diverse influences. The microeconomic changes, however, had durable impacts on the distribution of economic production.

These microeconomic changes were not inevitable. Different labour-market institutions within Western Europe are compatible with similar rates of unemployment, and different labour-market institutions in Western Europe and America appear to be compatible with similar rates of economic growth. Rapidly rising incomes among the very rich appear in the U.S., England and Canada (largely in response to U.S. competition.) but do not appear in most continental European countries or Japan.

Globalisation clearly does not determine institutions. Some economists and commentators have asserted that globalisation has made more than one set of institutions not viable, yet the variety of institutions that are found in Western Europe shows only very limited signs of disappearing. Finally, economic shocks do not determine institutions. The Vietnam War and the oil shocks deranged the international economy, yet countries responded to these shocks in idiosyncratic ways. The contrast between the US and Japan in the 1970s is only one example of the great diversity.

Deregulation, floating exchange rates, international capital mobility, low minimum wages and taxes, and the destruction of labour unions, were not unique responses to the oil crisis or the productivity collapse. The effects of these policies have been amplified by skill-biased technical change and, in the extreme, winner-take-all markets. But the technology did not fully determine who received the rents produced any more than technology fully determined who got the rents from the great postwar expansion; African-Americans were largely excluded from the GI Bill and other public policies by a series of political and bureaucratic actions.

The elements of the Washinton Concensus were adopted in the name of improving economic efficiency. But there is growing recognition that the current free-market income distribution – the combination of large inequalities and stagnant wages for many workers – creates its own “soft” inefficiencies as people become disenchanted with existing economic arrangements.  People suffering from stagnant incomes —both here and in some similar countries—have begun to protest. Our analysis suggests that the trends in the distribution derive in part from the shift from one complex set of policies to another—from the Treaty of Detroit to the Washinton Concensus. There is no single determinant, whether education, minimum wage, capital or labour mobility, that determines the path of income distribution. Any specific measure therefore can alleviate the distress of some people, but it cannot change the overall distributional trends shown in our graphs.

The last six years of U.S. federal tax history have involved an inhospitable politics in which winners have used their political power to expand their winnings. But political sentiment does shift. Economic distress like that of the 1930s can induce such a shift. Even the smaller economic distress of the 1970s was enough to redirect American economic policy. Only time will tell if more economic distress is needed to change policy yet again.

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Footnotes

¹ Levy, Frank, and Peter Temin, “Inequality and Institutions in 20th Century America,” NBER Working Paper 13106, May 2007. [Return]

² See Thomas Piketty and Emmanuel Saez. 2003. “Income Inequality in the United States,” Quarterly Journal of Economics, and the updating of their figures to 2005 on Emmanuel Saez’ website. Their calculations are based on pre-tax market income (wages, partnership income, interest, dividends, rents, etc.), excluding transfer payments. A tax-filing unit represents a tax return (which may be single or joint). Piketty and Saez estimate the total number of tax-filing units that would occur if all U.S. households filed federal income taxes and figures like the “top 1% of tax-filing units” refer to the top 1% of that estimated number rather than the top 1% of those who actually file. [Return]

³ Card, David, and John E. DiNardo 2002. “Skill-Biased Technical Change and Rising Wage Inequality: Some Problems and Puzzles.” Journal of Labor Economics, 20 no 4 (October), pp. 733-783. [Return]

⁴ This term normally is used for LDCs, but the spirit of this concept applies well to the changing institutions within the United States. We use the term here to refer to the microeconomic policies of deregulation and privatisation of the consensus, not the macroeconomic policies of fiscal discipline and stable exchange rates.[Return]

Comments

[Bruce Webb]

Very interesting indeed.

I have a minor quibble:
"The elements of the Washinton Concensus were adopted in the name of improving economic efficiency".

The watchword within the "Consensus" may have been Efficiency, the public face was Equity: "Trickle Down" "Rising Tide Lifts All Boats". You can argue whether this was simple dishonesty, or an honest belief that the rewards of growth would be distributed equitably by the markets, the point being it didn't work as promised.

In a democracy the majority can be expected to act in its own interests, keeping the General Welfare and National Security in mind. And arguments against this policy or that policy because it is "Socialistic" are likely to be met with a shrug, if me and just about everyone I meet gains an advantage why should I worry about labeling.

To which the Right has two fundamental responses. One is the Hayekian appeal to Tyranny, the idea that any amount of government regulation leads to Totalitarianism. Well neither Truman or Eisenhower ended up being elected Dictator for Life, and the history of post-war Western Europe confirmed that democratic institutions could be maintained within fairly tightly regulated institutional systems.

So they fell back on Efficiency. "Regulations may not lead to dictatorship, but they are inherently inefficient." To which the response "Who cares. they create a valuable utility for me and mine" is kind of fatal. The counter argument was that you can get all the Utility with deregulation, and indeed more. Well that argument is breaking down.

For a New Deal kind of guy this is all pretty exciting to watch unfold, particularly with the parallel development in the finances of the biggest, baddest government program out there. As a democracy we were simply sold a bill of goods, and as a democracy we have the power and the right to correct the imbalances that were introduced in this 25 Year Adventure in Voodoo Economics.

[evagrius]

Institutions can only exists if there's an ethical consensus for them to exist.

Essentially what happened in the U.S. is an abandonment of the basic ethical foundation for a "good" society and the replacement of that foundation with one advocating no ethics but that of "self-interest" in its most crude form.

[anne]

http://en.wikipedia.org/wiki/Washington_Consensus

Here then are the 10 points of the Washington Consensus:

Fiscal policy discipline;

Redirection of public spending from indiscriminate (and often regressive) subsidies toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;

Tax reform – broadening the tax base and adopting moderate marginal tax rates;

Interest rates that are market determined and positive (but moderate) in real terms;

Competitive exchange rates;

Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;

Liberalization of inward foreign direct investment;

Privatization of state enterprises;

Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions; and,

Legal security for property rights.

[anne]

http://en.wikipedia.org/wiki/Reuther%27s_Treaty_of_Detroit

The five-year contract negotiated by trade union president Walter Reuther between the United Auto Workers (UAW) and the Big Three automakers in 1950 became known as the "Treaty of Detroit". The UAW agreed to a long-term contract, which protected the automakers from annual strikes, and gave up the right to bargain over some issues in exchange for extensive health, unemployment, and pension benefits; expanded vacation time; and cost-of-living adjustments to wages. This contract shaped labor-management relations in the auto industry for decades, and the Treaty was used as a model for Labor-Corporation agreements in a variety of other industries.

[James Killus]

I would say that evagrius nailed it.

The question of the day then becomes, "Can an ethical society be re-established?" I am optimistic in the sense that most people I know remain ethical, despite everything. I am pessimistic in the sense that even ethical people seem committed to unethical ideologies.

[anne]

Interesting comments.

[dissent]

I agree that this is an ethical issue, and it is signif that the right has been hurtling accusations of immorality at liberals and moderates as part of their climb to power.

What moderates and liberals must do is attack the morality of the right. The results are in. The wishywashy niceness of the liberal style has to be dropped if we are going to mount an effective response to the decline of America which is a result of the ascendancy of free-market, no tax, special interest dominated conservatives.

I think the right has understood one thing correctly: style of argument communicates as much to the voters as contents of argument. The defensiveness of moderates and liberals has allowed the rightwing to show itself to the American people as strong and decisive: after all, everyone can see Rove's footprints all over the last 2 Dem presidential candidates.

[Noni Mausa]

"Disenchanted"? "Disenchanted"? Did this fellow never talk to an office worker or read "Dilbert"?

All right. all right, I know the authors have to keep a cool vocabulary. But the retooling of the US workplace was seen by the workers, at the time it was being changed, as a deliberate assault on their ability to profit from their effort, time and attention -- most people's entire stock in trade for survival.

The language used to unsuccessflly conceal the magic trick was seldom taken at face value.

I compare the trick to getting a cat into a travel cage -- you pet the cat and tell him how good he is, and put him in the cage backwards. The "backwards" in most worker's cases consisted of keeping the same hours and salary while increasing workload and eliminating support people. I'm actually surprised there wasn't more anger, then and now.

Noni

[James Killus]

It may also be noted that mpost people seem to believe that ethics are a matter of convenience (hence my pessimism about unethical ideologies), and, in any case, inferior to "morality." Then one needs to remember that most people believe "morality" to be entirely about sex. Thus, a large number of people, even those who find current circumstances horrific, believe George W. Bush is more "moral" than William J. Clinton.

says...

James Killus-

That's exactly correct. Ask people what morality is about and it's usually linked with sex in some way, ( abortion, gay marriage,etc;).
Ask people what's ethical and they'll respond with something about legality.

Obviously morality is about more than sex and ethics more than what's legally allowed.

But most people don't think that far.

[Bruce Wilder]

I am having a little difficulty understanding the chart, and I'm hoping someone can help me out.

Does the 99.5 percentile line represent labor income or all income? Are the cashed-in capital gains included?

The 99.5 percentile line jumps over two years circa 1986.

I sort of had it in my mind, from previous reviews of the Piketty/Saez data that that jump had to do with people cashing in from both the rising stock market, and from certain compounding depreciation tricks inserted into the Reagan taxcuts. The implications of accelerated depreciation and tax credits are seldom appreciated by anyone, but the beneficiaries, at the time they kick in. But, of course, a jump in labor compensation for CEOs and Media Stars, over a two-year span, would seem like big news, that would be hard to miss.

Anyway, I'm sorry to say that my powers of reading comprehension are failing me. Could someone clue me in, to what I am looking at in that 99.5 line?

[Robert]

Another discussion about income inequality and not a word about immigration. This is a review of a paper by Dr. Chiswick, an economics professor who specializes in immigration. The review is on the BLS web site. http://www.bls.gov/opub/mlr/2007/01/bookrevs.htm. Some quotes:

“Chiswick’s research suggests that economic migrants have a "favorable net effect on the overall economic well-being of the native population.” However, the net impact on the native population is likely to change from positive to negative for illegal aliens with low levels of skill and nonworking dependents.“ translation – some of the immigrants will be marginalized by future waves of immigrants.

“It is the low-income native-born (and legal immigrant) population that pays the highest economic price from low-skilled illegal migration. On the other hand, a greater supply of low-skilled workers, whether illegal or legal migrants, increases the wages of high-skilled workers and the return to capital." Translation, most of us do just fine with all of that cheap low-skill labor floating around.

“He also discusses dirty jobs and the work (and working conditions) that the stereotypical illegal migrant might have to endure. "If employers have to pay the cost of attracting native-born workers to the less desirable jobs, they will have an incentive to invest in making these jobs less undesirable. A cleaner, safer, more pleasant workplace would emerge." Chiswick theorizes that a likely outcome could also be capital substitution (for the higher priced labor), with some jobs eventually disappearing from the destination labor market.” Translation, if the illegal immigrants weren’t there, working conditions at the low end would improve. There would be a lot fewer jobs, but they would be better jobs and recall that even with millions of illegal workers in this country, we still have a labor shortage.

[Robert]

Wikipedia has a pretty good overview with a breakdown by quintiles.
http://en.wikipedia.org/wiki/Household_income_in_the_United_States

Here is the link to the census bureau report:
http://www.census.gov/hhes/www/income/income.html
I looked through a few tables to see if they gathered information about immigration status and it appears that they did not. Looking at a couple of survey backgrounds I did not see a discussion on how immigration status might affect the results.

Anyway, the argument is twofold:
1. Illegal immigrants are disproportionately represented in the bottom two quintiles.
2. They depress the wages of other workers in the bottom two quintiles.
My conclusion is that if there were no illegal workers, that the median would increase slightly and the distribution around the median would tighten up on both sides. The lower income side would get better wages and benefits. The higher income side sees reduced benefit from all that missing low cost labor. In addition the total income would be lower. I do not believe that this is a bad thing. One might argue that the lower overall income might even depress the median. Not a significant issue to me if we can tighten the distribution around the median.

[jack]

"Another discussion about income inequality and not a word about immigration."

Had patterns of immigration changed all that much from the previous quarter of a century to the next? Probably not all that much, which is why it cannot explain the discrepancy.

[Robert]

Had patterns of immigration changed all that much from the previous quarter of a century to the next? Probably not all that much, which is why it cannot explain the discrepancy.

Yes it has, we had an explosion in illegal immigration.

[Noni Mausa]

Jack said...

Had patterns of immigration changed all that much from the previous quarter of a century to the next? Probably not all that much, which is why it cannot explain the discrepancy.

And then Robert said...
Yes it has, we had an explosion in illegal immigration.

Hang on, I saw you palm that card.

Jack said "immigration" and then Robert talked about "illegal immigration".

So okay, there's a difference, but when it comes to hands doing the work and mouths doing the eating, they can be lumped together. Maybe the number of illegal immigrants has surged, but that's in part a side effect of laws in place when the people cross the borders. Was Columbus a legal or illegal alien?

People have been pouring onto this continent for 500 years. Is there documentation of bald numbers per year, minus the legalities? That might help us in these discussions.

Noni

[Robert]

Right. My point was that a much higher proportion of the immigrants are illegal than in prior periods. This is not something that the census bureau tracks, so we have to make the assumption based on estimates. One would guess from the dynamics of the discussion that a “higher than usual proportion” of the foreign born population is in the country illegally. Somebody can probably provide a study contradicting that assertion.

Illegal immigrants have less negotiating power and are more subject to employer abuse. Employers do not provide benefits and many are off the books so neither side of the FICA, unemployment or workman’s compensation taxes are paid. So if we have 12 million illegal immigrants, that is 12 million people who are subject to additional exploitation by employers.

What the Census bureau does report (this is 2003 snapshot. Some immigrants who arrived in prior periods may have left and reduced the prior period numbers-I don't know ). I’m also assuming that this captures the illegal immigrant population in some way.
Foreign born
33,471 total as of 2003
4,536 arrived 2000-2003 (arrival rate seems to have slowed a bit from the 90s)
12,235 arrived 1990-1999
8,035 arrived 1980-1989
4,600 arrived 1970-1979
4,066 arrived prior to 1970
This table shows that the foreign born population peaked at 14 million in 1930, declined to 9.6 million by 1970. and is up to 33.5 million now.
http://www.census.gov/population/www/documentation/twps0029/tab01.html

[Robert]

Sorry, that 2003 census bureau report is here:
http://www.census.gov/prod/2004pubs/p20-551.pdf

It has income and education information as well.

[Jim]

Capital and technology are extremely mobile, and will move to where costs are lowest. Rather than asking why capital and technology are not acting in the best interests of labor, ask why is labor not competitive? The answer of course is that labor is not mobile. It is a better decade to be a capitalist or mobile laborer (read: immigrant) than a laborer fixed in place by car and house payments.

[real person from the real world]

Finally someone, other than PK, really lays things out, and all you do is quibble or pull in illegal immigration. If we hadn't been screwed over the last 30 years by the Republicans, no one would be squawking about immigration. There was illegal immigration then, too. When times get tough, it's human nature to look for scape goats and small disciplines that were previously ignored. I'm sorry. While I would agree that it is wrong to be in a country illegally, these illegal immigrants are not the cause of the problem. They are just the easiest target to go after. My foreign employer wants to outsource the odds and ends work that now employs a lot of w2 and 1099 IT guys, to his foreign country. Great for him. My praise goes to the IT lady who was promoting outsorcing to IT people in rural and less populous states. I like my paycheck but frankly, we ought to start employing our own citizens. Foreign economists from countries like India defend outsourcing, but that is because they see it bringing economic changes that help these foreign governments. And, they all figure Americans are sooo rich, they won't hurt much. Sorry, but one wrong does not justify another. These same governments often play by another set of rules when it comes to opening up to US goods and services. Elsewhere in this blog they mentioned that someone talked about Ricardo's theories being out the window because of cheap foreign labor. I agree. And I think the Mexicans are a different story.... any country will have porous borders. If things got good in Mexico, and went down here, the illegal immigration could well be the other way. Borders cannot be policed by walls and angry legislation.

[wjd123]

In the introduction to his book Emile Durkheim: Ethics and the Sociology of Morals Robert T. Hall makes this distinction between morals and ethics. I think it's helpful in keeping the two from conflating.

morality...the norms and values which govern people's behavior and which can be described and studied objectively....ethics...the philosophical discussion of the propriety or impropriety of actions.

emphasis mine

[real person from the real world]

Ethics and Morality. Do we agree on what is right, morally or ethically? Who is the final aribtrar of these? or is it a continuum, with a lot of grey between the white end and the black end?

[wjd123]

I was enjoying reading these posts on how institutional change has contributed to income inequality until Robert brought in immigration and threw everyone off course.

The way immigration fits into this discussion about "institutional changes" is the growing willingness of the executive department to use its powers to help ensure that only those laws which it thinks important get proper enforcement. For instance, it sends troops to the border to help enforce security and then places restrictions on them to keep them from being effective.

[real person from the real world]

immigration - we send guards and then restrict them.... Restricts them from being effective? How? By not allowing them to gun down people who are not criminals, but merely fleeing economic problems? What about the people who crossed the Berlin wall. Perhaps they should have been shot at from both sides.... Boundaries are marks on a map, or useful for arguing over who pays to trim the tree. One of the big arguments by pro-arab and palisinian sympathizers is about Israel's boundaries. Well, they won the war to get the land? Where is your argument about boundaries there? Boundaries are arbitrary.

[Robert]

I find it interesting that this discussion about an ethical consensus harkens back to an era when the world economic order was largely shaped by the US/UK stategic bombing campaigns against Germany and Japan that went way beyond what was required to achieve a military victory. It is easy to create an un-economic consensus when the competition has been bombed into oblivion.

Whatever the new consensus becomes, it is not likely to change the ability of capital to flow to where it is most productive. It may however provide for meaningful enforcement of existing laws that benificial to our most economically disadvantaged citizens.

political comment follows. It seems that our new amoral consensus is not able to impose our will on the rest of the world as effectively as our prior moral consensus was able to do so when it used bombing raids that killed 100,000 people in a single air raid.

[Robert]

Where is your argument about boundaries there? Boundaries are arbitrary.

Boundaries are germane to this discussion because the focus is on Inequality and Institutions in America. If we want to focus on the world, then our bottom quintile moves above the median and rather than discussing competition for lousy $10/hour jobs in a country where almost nobody starves to discussing people eating garbage and children starving in massive numbers.

The reason I am basically in favor of globalization through out-sourcing (irrespective of its negative impact on my employment prospects) is because of its impact on hundreds of millions of the poorest of the poor.

The reason that I am opposed to globalization through illegal in-sourcing of low cost labor (this is demand pull, just like drugs) is because we have a decent size population of people here legally who are economically disadvantaged and could use a little less competition.

I am not all that opposed to in-sourcing of low cost labor if that is a conscious decision that we as a country make. I am opposed the oligarchy making that decision for all of us while perpetrating the myth that the decision has no impact on our poor. I believe that the immigrants that we can bring in are better equipped to compete and can help create enough national wealth that we can be explicit on how we warehouse our less able citizens. It is a grim discussion, but let's be honest about it.

On the other hand, as pointed out in the article, those countries that we bombed into oblivion 63 years ago have figured out how to effectively compete in a global economy. They even come over here and create more efficient factories than we can create ourselves. They decided not to join the race to the bottom in wages and compete in other was – quality and more effective management. We could also decide to not compete on labor cost and find other was to manage our productive capacity that would have more beneficial impact on income distribution.

[wjd123]

real person,

The law is always open to revision. The Dred Scott decision became positive law, and therefore part of the moral sphere. Protest that it was wrongly decided were part of the ethical, legal, and intellectual spheres. Just because you believe a law is immoral doesn't make it any less a part of the moral sphere.

Voters may decide to put more restrictions on trade; to increase regulatory authority. At this point the Republicans usually ask of voluntary compliance rather then have business face sanctions. Who knows what the Democrats will ask for; they have been compromised by corporation money and republican ideology. For instance, some of these merger and acquisitions look to me like conspiracies to defraud the public, especially the public invested in pension funds. I see them as obvious pump and dump schemes but congress can't seem to see anything wrong just like it couldn't seem to see anything wrong with financial companies saving stocks in IPO for their favorite customers. Since I want real change, I'll ask for laws with sanctions that are enforced. And they will be part of the moral sphere whether corporations like them or not.

I don't want some wimpy laws and regulations, I want laws with teeth that bite. I'm not encouraged that I will get them with this congress. It has already paved the way to extend Bush's fast track authority in exchange for vague promises.

Why am I so distrusting of corporations to do the right thing ethically? Their loophole mentality, their business practices, their rationalizations of means to ends. They need the full force of the law squeezing down upon them to get them to change their behavior.

I don't expect government to micromanage business. I do expect it to say, "In this society, these are the rules you'll play by." Obviously, I not happy about today's rules. I think free trade is weakening our economic morality, the laws and regulations guiding business behavior.

[real person from the real world]

Robert says: (Foreign Entrepreneurs) "They decided not to join the race to the bottom in wages and compete in other was – quality and more effective management. We could also decide to not compete on labor cost and find other was to manage our productive capacity that would have more beneficial impact on income distribution."

They don't compete on wages? Depends. I work for a Foreign Entrepreneur and he got me as cheap as he could manage, but would have like me even cheaper. As it is, he is after me to work 24/7 if he could get it.

In the 1970's the Japanese briefly had us shivering in our boots, quality circles, turning ideas into consumer products, inventory techniques.... all learned originally from Americans after the war!

The Japanese are still having problems becuase of Kairetsu and other ways they ignore economics to keep some of the older ways, to their detriment.

As for quality, how about selling dog fur coats to fancy US Retailers, or putting melamine into pet foods to disguise the protein content?

If you ever deal with an immigrant, you know they hang onto a buck. Also, if you live in an area with lots of Indians, ask some of the local contractors who provided services. The Indians are hagglers, and try to haggle down all the time. They think we are all overpaid, but at $10+/hr it is dam hard to pay an auto mechanic or service guy $60+/hr to $90+/hr for needed work.

The only reason some people in this country need protection from illegal Mexicans is because the Big Corporations want to cherry pick management and comoditize every other job. When you got too many comodities struggling for too few commodity jobs, someone has to be blamed. In the 1800's it was the 'drunken Irish Catholics' emigrating to get away from the potato famine and Blacks escaping from slavery in the south, today it's illegal Mexicans.

The Elites think they only need to redirect the attention of the masses. That we're all too dumb to figure it out.

[Robert]

I work for a Foreign Entrepreneur and he got me as cheap as he could manage, but would have like me even cheaper. As it is, he is after me to work 24/7 if he could get it.

Assuming that you are in this country, then I think that we agree. For a variety of reasons, your company has built a presence here because it believes that it can make more money here than building that presence in some other country. Part of that belief may be a desire to placate Congress. But part of that belief is centered on the fact that we have a labor pool with little negotiating leverage. Notice that the company is not filling your job with someone from the home office -it is more cost effective to use local labor.

It is not realistic to expect capital to act altruistically. It is realistic, as wjd123 points out, to establish some rules on how it operates in this country. I think that there are some fairly benign rules that we can establish that would have far-reaching consequences.

[real person from the real world]

I am not cheaper than his foreign labor, and am actually a significant expense. Foreign labor would be cheaper, but for "PC" reasons he needs an American front end who writes the language well, and can interpret some of the ways to respond to other US companies. I am not trashing him, he is a bright guy, but he is actively (and with my help) looking to sell remote (as in a foreign country remote) consultants for jobs that might employ contractors either remotely or on location here in the US. I do not begrudge him, and frankly, I don't think US Companies are getting the deal they think, with visa slaves. Saving in pennies from what I have seen. This article says that it was the INTERVENTION by gov't in terms of policies, that made growing up in the US, when I was a kid, pleasant compared to the gambling casino atmosphere today. This is what we need to go back to, if we are to save our middle class. We canot wait another 30+ years for you young 1099 guys to get your comeuppance.

[wjd123]

Robert,

Since I believe the ultimate purpose of business is to fulfill the needs of society, you're right, I'm not looking for altruism from business but utility. The best way to ensure it is with laws and regulations that say "act this way or else."

One can't rely on business to do the right thing for society without sanctions that are enforced.

Unfortunately, congress is in so thick with business interests that when it does get around to passing laws they are usually ones that favor business over the consumer, the worker, and even the nation.

I don't know what you mean by a benign law? Laws that aren't enforced?

If you are suggesting that we simply rely on business to enforce its own code of ethics perhaps you should take a look at how many CEO are being investigated for back dating their stock options. If they can't obey the law with sanctions attached what chance does ethics have. When push comes to shove one corporation's ethics would become another corporation's opportunity.

In law corporations are considered persons. I've been thinking about some instantly recognizable names in the financial sector. They all have rap sheet a mile long. How many times do financial corporations get to plea no-contest to crimes and pay a fine so small that they are able to keep most of their ill gotten gains?

I try never to have any dealings with the J.P Morgans of the world. But if I do, I try to remember that I'm dealing with a known criminal, corporate person. I wish congress would remember that the next time they invite financial institutions in to help write legislation.

[Robert]

Since I believe the ultimate purpose of business is to fulfill the needs of society

The obvious questions are what are the needs of society and which ones of these should business fill? I don't believe that business has ever acted ethically if by ethical we mean go beyond the requirements of the law to do the right thing at the expense of profits. IMHO, what is labeled as ethical above was merely expedient and profit enhancing for the reality of the immediate post-WWII era. When that reality changed, the institutions changed to adapt. To expect capital to do anything other than attempt to maximize return is like insert favorite leopard or rattlesnake metaphor here. Further I think that we need to extend the discussion to encompass more than business because globalization allows Capital to generate high returns even when not engaging in business in this country. Since the society protects that Capital, then that Capital should contribute in some way to society.

So our challenge here is to optimize the way that Capital meets its allocated share of the needs of society whilst minimizing collateral damage (fraud, usury, sweat shops, safety, pollution etc.). I know of no way to minimize collateral damage other than by legislation. Further, we want to extract the maximum tax from the fruits of Capital to address the remaining needs. That is the Laffer curve discussion modified by the notion that if we create a system that forces Capital to pay workers more (especially at the low end) and thus meet additional need, then we need not meet that need with government revenue.

My point herein has been that we have instituted an (essentially) open border policy in order to maximize total income as the primary indicator of societal well being with number of jobs (irrespective of quality) being the secondary indicator. A different policy would reduce total income, but would meet other needs, like more income/benefits for the lower two income quintiles.

Much of the benefit of that decision goes not directly to business, but to the holders of capital in general. Example: the house I recently purchased was probably 10-15% less expensive than would otherwise have been then case due to the labor contribution of immigrants. The benefit I receive from the cheap labor is a freebie. I don't pay additional tax to cover the social cost of that cheap labor and I get the house that I want for less. The builder did not make more money off of the labor because gross margins on residential real estate in this area are tight due to competition. He is merely a participant in the race to the bottom caused by the availability of all that cheap labor. He does not really care what the workers are paid as long as the workers on his houses are paid roughly the same as his competition. He is perfectly happy to compete and extract income based on his value added to the worker contribution. He cannot compete paying union wages if his competition pays half that or less.

[Robert]

I don't know what you mean by a benign law? Laws that aren't enforced?

By benign I mean that its not worth the effort to fight or subvert the rule. Property tax falls in that category. It is a tax on wealth that we pay every year, but it is small enough that there is not a lot of opposition. IMHO, switching Social Security and Medicare taxes from a payroll tax to a national and universal VAT falls in the same category. Assuming Congress is able to work through its corruption issues and apply it universally, it takes a hugely regressive tax off of low income workers. The Fair Tax folks make some extravagant claims that I have not investigated for using a VAT to replace all income taxes. However, we seem to have relative peace with marginal income tax rates topping out at around 50% in the high tax states so I see know reason why we would want to try to replace that. By taking FICA off of the wage side and putting it on the sales side, we remove one large incentive to use under-the-table labor. It would also bring millions of lower income people who under-report into compliance with the law. I think the Earned Income Credit is simply a return of FICA? Now we can actually make it a grant by recognizing that our low income workers are in that position in part due to the government's low wage policy and compensate them accordingly.

Another idea is to extend the property tax to be a wealth tax. So rather than try to get it all on death which the wealthy generally avoid, we extract a tiny bit each year. We don't need to worry about the death event as the tax will continue to be paid by the heirs. Not sure about this idea since I read that some country (Germany?) recently repealed a wealth tax.