"The Only Way to Keep the Economy Going Over The Long Run is to Increase the Wages of the Bottom Two-Thirds of Americans"

Robert Reich:

Totally Spent, by Robert Reich, Commentary, NY Times: We're sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.

The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going. ...

The underlying problem has been building for decades. America’s median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Most of what’s been earned in America since then has gone to the richest 5 percent.

Yet the rich devote a smaller percentage of their earnings to buying things than the rest of us... They already have most of what they want. Instead of buying, and thus stimulating the American economy, the rich are more likely to invest their earnings wherever around the world they can get the highest return.

The problem has been masked for years as middle- and lower-income Americans found ways to live beyond their paychecks. But now they have run out of ways.

The first way was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. ... But there’s a limit...

So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

But there’s also a limit to how many hours Americans can put into work, so Americans turned to a third way of spending beyond their wages. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks... But this third strategy also had a built-in limit. With the bursting of the housing bubble, the piggy banks are closing.

The binge seems to be over. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth.

The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans. The answer is not to protect jobs through trade protection. ... Most routine jobs are being automated anyway.

A larger earned-income tax credit, financed by a higher marginal income tax on top earners, is required. The tax credit functions like a reverse income tax. Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. ... We also need stronger unions, especially in the local service sector that’s sheltered from global competition. ...

Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities. This will require, at the least, good preschools, fewer students per classroom and better pay for teachers in such schools, in order to attract the teaching talent these students need.

These measures are necessary to give Americans enough buying power to keep the American economy going. They are also needed to overcome widening inequality, and thereby keep America in one piece.

The idea that the rich need to spend lavishly to prevent a recession is an old one, see for example the debate over the corn laws and the possibility/impossibility of gluts between Malthus and Ricardo. Later classical economists argued economy-wide gluts were impossible because the interest rate would move to equate saving and investment and, since all saving is converted into investment and investment is part of aggregate demand, there could be no loss of demand from saving (and hence no gluts: supply creates its own demand). Keynes, of course, had something to say about all this, and it's partly a difference in the propensity to consume at the margin (the mpc) that is behind the argument above. But it's easy to anticipate objections to the idea that transfers from rich to poor are needed to maintain a healthy, growing economy, or objections based upon the notion that transfers from rich to poor would harm economic growth.

But here's how I see it. Expanding the EITC is a good idea in any case, so none of that really matters.

Comments

[reason]

Of course he is technically not correct. You can export. But growth than only benefits the already privileged is morally unacceptable anyway.

[hari]

This is one of his better pieces and deserves a good hearing here from both sides. However from the primaries and the debate, so far, one cannot discern a clear understanding from the candidates on what Reich is trying to diagnose. They all talk about bits and pieces, to be fair, but none of them is able to simplify the issue in order to educate the masses - as to what the hell is going wrong - the growing inequality of incomes last three decades or more.

Labour unions are essential to redress the purchasing power of the working class, once again, but I'm not confident even HRC/OB will buy it lock stock and barrel.

[reason]

hari...
I think it is more complicated. "User pays" for public services is part of the problem. But increasing income for the ordinary worker starts a virtuous circle. Markets are expanding, so new businesses find profitable opportunities. People are optimistic about the future, and so are prepared to invest in themselves and their families. When it goes in reverse, you get a vicious circle. I think he is correct about EITC being the way to go, but are less convinced by the training mantra. I think we need to completely rethink training anyway. Learning needs to be spread over the whole lifetime, not concentrated during exactly years when people are the least motivated to learn (because they are trying to find their place in society at that time).

[hari]

@reason

I agree learning must be a lifetime occupation....
I keep teaching that to my retired (lonely) friends. However they find modern technolgy intimidating and whatnot. So me thinks the sooner you get them involved with changes in technolgy and life-style the better they're likely to adjust to schocks when they come in life. Me I'm falling into my seventh decade and going strong!

[lonesome moderate]

Of course he is technically not correct. You can export. But growth than only benefits the already privileged is morally unacceptable anyway.

Hmm. If we export our way out of this, then those places we are exporting to would have to do more spending. Which would almost certainly mean that more money is getting to the bottom two-thirds somewhere, but perhaps not here, at least not right away.

I would be willing to defend the morality of that, but not in an election.

[pgl]

Reich's consumption theory puzzles me. He asserts that the marginal propensity for the rich is less than the marginal propensity for the poor. But then he notes that income distribution has shifted towards the rich and away from the poor. OK, then wouldn't we expect the national savings rate to have increased? The data shows however that the national savings rate has declined over time. Can Reich explain this with his theory?

[reason]

pgl...
Clearly he is of the opinion that the poor have become net borrowers.

[groucho]

Well done Robert! A good labor piece.
Where he needs to expand, though is on the role of the state and how they drive the economy through the currency depreciation process.

At the end of the day, the winners are the state and those that derive their wealth from the state.

While many find it commendable that the state has found it virtuous to depreciate the currency "only" around 5% per year. The long term damage is the same....inequality.

The current inequality is a DIRECT function of how those in society are able to adjust to the ongoing depreciation. Capital players and workers in monopoly unions have done well at fighting off the loss of purchasing power.

Those in competitive industries, in particular, global manufacturing or service have not been able to keep up.

Ironically, the most productive workers get the least compensation.

Just as compound interest is the 8th wonder of the world. Currency depreciation is clearly the number one inequalty creator.

[save_the_rustbelt]

Economists seem to think we can replace good jobs with more EITC (oversimplifying to be sure).

It won't work.

We are in the process of sacrificing a generation of blue collar workers on the altar of globalization, and now we find that comparative advantage doesn't work in the short run. Oops.

(Reich should get credit for predicting this, in 1992 or 1993 I believe.)

The avalanche has started. It cannot be stopped. We can only dig out the bodies.

[marcel]

Interesting: this argument is known as underconsumptionism. It has a long, and among economists, disreputable, pedigree. The last time it got a wide hearing was during the Great Depression. You can get some idea why by checking out these two web pages:

The Fallacies of Underconsumptionism at the von Mises Institute

Paul Marlor Sweezy (1910-2004), an intellectual appreciation of Sweezy in an Indian Communist Party weekly following his death. See the 2nd section.

If you search on underconsumptionism in this page, you will also find an interesting paragraph where the political positions associated with underconsumptionism are made clear.

NB: Saying that it is disreputable among economists may tell you more about that field than about the quality of the idea.

[Don Quijote]

You can export.

Export what? to whom? Is there anything that we make that the world wants? other than weapons?

[groucho]

"Export what? to whom? Is there anything that we make that the world wants? other than weapons?"

Don, US could become an export powerhouse, again, if it can get great leadership. With the US still having amazing technological advantages over all other countries, a moderate shift away from the DoD and towards civilian development would be dynamite for the US economy.

It will take new leadership that's focused on the civilian population and their standard of living. I hope the US population makes some well thought out decisions this election. It looks like a "make or break" decision.

[a]

I'm afraid it's expressed in that positive way which is the undoing of Americans.

The best way to say what needs to be done is: the rich need to be made poorer. A lot poorer.

[reason]

Don Quijote...
I was making an in principle argument (and not necessarily one that I think is relevant). An economy can still grow even if most incomes are static if it exports a lot.

[ken melvin]

By jove, I think he's got it.

[kthomas]

I love Prof. Reich. Never have I seen a person jump from the middle, to the left, and back to the middle with such awesome dexterity. Bravo!

[Worker]

Krugman underestimates the US overconsumer's reptile brain.

Having sold the house to buy his crack (plastic crud from China and new Lexuses), the overconsumer will now do what other crackheads do- steal from his neighbors and family.

Of course, the politicians (drug dealers) will support this, as long as the addict keeps buying (voting). And so we will have a series of $600 checks, paid for by other voters or, even better, future generations.

Krugman has to know this can continue for much longer, as politicians enable overconsumers to start running up a tab with the gubmint.

[bob]

The whole point of the republicans class war against the non-affluent is to keep from increasing the wages of the bottom 2/3rds.

That has been the basis of their policy since raygun.

Now it's causing them to crash and burn for a second time since 1992.

It's obvious that repubs have never done any hard analysis of their loses at the ballot box.

If they did they would be forced to realize that their inability to deal with recessions /depressions is their biggest weak spot.

And in some cases they have to learn first how to not induce a recession.

[bob]

How lame are you when you have to be told that american workers need to make a decent salary in order for the economy to work.

[bob]

>> Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities.

100% wrong.

Ah Mr. Reich

You have tons of well educated computer scientists and engineers that can't find work.

Your education mantra is outdated in the age of h-1b guest workers and outsourcing. Has been for a good 7 years.

That makes your "solution" totally worthless.

[knzn]

Reich is taking a position that squarely contradicts orthodox macroeconomic theory. The idea that we have a long-run problem with underconsumption is one that must sound like nonsense to most macroeconomists. The "long run" is precisely when all those Keynesian problems are supposed to resolve themselves automatically. The debate is usually about whether the short run is sufficiently important to warrant the use of Keynesian demand management policies (such as redistributing income to those who are more likely to spend it) that are assumed to have no major long-run macroeconomic advantage.

I've tended to be out on the lunatic fringe that believes in the possibility of protracted periods of inadequate aggregate demand that aren't necessarily balanced by other periods of excess demand. But Reich's conception of the "long run" is a bit much even for me. Perhaps it's mostly a semantic problem. I think the short run can turn out to be a lot longer than most economists seem to think, but when the run gets sufficiently long, I can't see encouraging consumption (by shifting the income distribution toward those with higher propensities to consume) as a good idea when we already have a savings rate that seems far below what would be optimal from a growth point of view.

[chris]

The most effective and rapid way to put more money in the hands of the lower orders of society is for the government to redistribute income. A reverse income tax would be fine, paid for by higher taxes on the rich. It's about time Americans saw through the boogey-man of "socialism" and accepted the role of the government in making society fairer. Certainly one reason the Gini index has been lower in Europe for some time is that there is more redistribution of income there than here.

[reason]

Chris...
You are one with me. I have always pushed for the monopoly rule. Pass go and collect $200.

[Lafayette]

Good for the Gander

Article: Enlarging it would mean giving workers at the bottom a bigger wage supplement, as well as phasing it out at a higher wage. ...

This is Conventional Wisdom. It will work, in the short run, but inevitably it pits the BCs (Blue Collars) against the Top Management WCs, and the former typically lose that battle unless their job cannot be dislocated. And, with the Flat Earth upon us, how many of those are left? (Street sweeping, perhaps?)

I submit that what is good from the Goose is good for the Gander, meaning that workers should negotiate their total compensation to include discounted stocks and stock-options against performance targets.

Only by profit-sharing (from equity positions) will personnel be able to benefit from the Returns to Capital (since Returns to Labor are going nowhere) just like the guys in the corner offices.

And, why shouldn't they? They deserve profit-sharing less?

says...

knzn...
I agree with you. I tend to think for long run problems you need micro-economic solutions. There are clear problems in international finance and in market competition that need to be addressed. I'm also impressed by the argument (that nobody seems to have picked up on) that borrowing to support consumption inevitably pushes up inequality. The reason is that wages are a cost to business and spending is income. If people spend more than they earn, automatically business has a profit opportunity. Put another way, higher savings rates should push down real rates of return to investment which would reduce inequality (the distribution of wealth being even more unequal than that of income).

[reason]

Typepad AGAIN!
That was me above.

[paine]

"Expanding the EITC is a good idea in any case,
so none of that really matters"

right on mark
borrow from the rich
and funnel it back
to the bottom third of the job class
my system
half a trillion's worth
this plus a mandated
galloping
min wage floor
indexed to median lab productivity
and boom

now for my next trick

the amazing re appearing production base
aka the dollar dive

[Denis Drew]

I see the schools/inequality thing the other way around from Reich. I say the schools are not going to work if the parents don't work or are not paid enough for work (the latter of which is Reich's main point after all). When all families are middle class, all schools will work just fine (my comparison being with the worst ghetto schools -- I'm not sure that is exactly what Reich is talking about.

I also think that the richest OECD nation in the world (the richest nation in the world) and the poorest paying modern OECD nation can do a lot better to reduce so-called "inequality" (a weak term for a "great wage depression) than increasing the wage supplement for lowest income families with children.

Maybe its time to push sector-wide labor agreements -- the sure cure for the race to the bottom. Walmart enters retail food: fully middle class supermarket unions around the USA are forced into two-tier contracts insuring their incomming generation will live more than a step below the comfortable niche their union had previously carve out. Collective-collective bargaining has WalMart shedding 88 big boxes in German with no one over there shedding a tear.

I think that the ULTIMATE in collective bargaining power may be the EASIEST way to re-seed unionization in America. Sector wide contracting is such a sure cure for the race to the bottom that it should take no effort at all to sick (YOU GOTTA TELL THEM ABOUT IT!) America's most desperate labor segments on (a Democratic) Congress (backed by a Democratic president) to roll sector wide out -- job done.

The rest of the nation being duly educated by the happy labor results, we could have sector-wide (the French/French Canadian style is extremely noninvasive) coast to coast overnight. No Republican crackpot ideology would have a chance against it.

[robertdfeinman]

Several issues get conflated in discussions like this.

1. The increase in wealth inequality is a bad thing for a democratic society for a number of reasons. Let's call them broadly the money buys (political) power argument, the moral argument, and the economic efficiency argument. The first one is of obvious concern in a democracy, we see its effects all around us. The second one is beyond the scope of economics, but acts as an unacknowledged motivation for people making the other two claims. The last one needs some more hard data. Since Veblen people have been mocking the stupid purchases of the wealthy, but I haven't seen any solid economic studies which show that a $10,000 ice sculpture at a posh wedding is worse for the economy then the same amount of money spent on feeding the poor. The same problem arises with militarism, it provides jobs, but is it the best use of public funds?

2. Assuming you buy some of the arguments of point one then the issue becomes one of how best to redistribute the funds. This is a valid area for economists to work on, but, once again, it gets mixed in with the moral component. The UK did pretty well breaking up the hereditary landed gentry by a combination of death duties and high marginal tax rates, but it took 50 years or more. Americans always want quick fixes.

3. Assuming you implement a redistribution plan and allow it to run long enough to make a difference will it then solve the underlying long-term problems? I see these as all resolving to the basic one of having a sustainable economy in a world where the population is growing and the available resources are finite. Right now the debate is over short term stimulus, with a slight nod to the longer term problem. If we put in a short term redistribution plan will it actually make a difference? Moving, say, $100 billion from the top to the bottom won't do anything about the declining position of the US relative to the growing economies of Russia, China, India, etc. It won't make oil any more plentiful. It won't improve the water problems in the Southwest.

One can argue (as I think Mark Thoma does, implicitly) that improving economic equity in the US is the moral thing to do without delving into any of the economic issues, but that still leaves the other problems unresolved.

I hate to keep flogging the same hobby horse, but appeals to more growth as a way to solve domestic and foreign problems are not realistic. We need to see some new ideas that go beyond the capitalist/consumption model. Economists are being too timid, we need a few visionaries to shake things up.

Robert Reich's populist impulses are primarily based upon the moral argument. This is fine, he's not an economist, even though he plays one in public life. Some others will need to come up with workable implementation plans that are both realistic from a technical point of view and achievable in the present political context.

[Bruce Wilder]

Lots of good comments.

I am suspicious of the EITC as a remedy, though.

It seems to me that EITC can amount to little more than a government subsidy for low-wage jobs. If you want more of something, subsidize it. Do we want more low-wage jobs?

It would be harder work, to think seriously about increasing the median wage / median productivity.

A simple, logical hypothesis about stagnating median wages / median labor productivity is that capital per worker has not increased. That brings us back to investment and savings.

Whatever the other dubious merits of concentrating income and savings in the hands of the very wealthy, I know of no way to efficiently concentrate and centralize non-market investment opportunities into their hands. Business investment, which flows through financial markets, as far as I can tell, has not suffered in the U.S., from our low savings rates or from the increasing concentration of wealth. What does seem to have suffered our the non-market investments: public investment has suffered, as the plutocrats have waged class warfare in the form of a relentless ideological campaign against "big" government spending. And, non-market-mediated investment by individuals and families in education, job change and small business formation has suffered, both from the squeeze on savings and from the lack of public investment, and from the erosion of public provision of cheap insurance.

Taxes on the incomes of the very, very rich are not the only honeypot of resources and income available for "redistribution".

As effective as a modest increase in the EITC would be a usury cap on credit card interest rates and a well-structured campaign to get low-wage workers out of check-cashing palaces and back into banks.

Simple jawboning could bring health care cost inflation to zero. If it wasn't for health care cost inflation, we would have seen a very small, but positive increase in real wages, even under the Bush Administration. Creating a real system of national health care could free up significant resources and income, and increase the mobility of workers worried about retaining health insurance.

I don't think globablization, per se, is the enemy. Increasing (marginal) labor productivity requires both investment in U.S. capital stock per worker and increasing specialization and scale. A simple tariff undermines the latter, even if, somehow, it promotes the former. But, there is no reason to support a strong dollar, just so 25 Hedge Fund managers can make more money than 500 overpaid Fortune 500 CEOs. We've allowed China to subsidize and insure manufacturing investment with a cheap yuan and access to U.S. markets, undermining the profitability of investment in industry in the U.S. With the profitabity of U.S. business at very high levels, investment in the U.S. has lagged. Capital stock per worker has eroded and wage have stagnated. We can change that policy without resorting to a simple-minded protectionism.

[donna]

Actually, the way to save the economy is for us to produce something instead of selling stocks and houses to each toher.

Just sayin'.

[paine]

rf

if its not a moral motive
and we need to escape productionism and growthism
what in hell are you suggesting motivate us

ya ya

save the earth for our great great grand children

hey maybe they'll like
three fingered hands
dickensian london skies
and mile after mile
of post industrial marl

[Bruce Wilder]

P.S. Let's get out of Iraq, immediately, and cut Defense spending by several percentage points of GDP.

$200B+ in a sand hole in Iraq? Beyond stupid and wasteful.

Anti ballistic missile technology? Idiotic.

Just stop. That's income that can distributed, investments that can be made.

[pgl]

Reason - the fact that one has more debt than assets (net borrowers) does not necessarily dictate either one's marginal propensity to consume (remember marginal does not equal average) nor whether one will continue to consume out of the same level of income. I guess one can dust off the borrowing constrained argument but hasn't the fact that households have gone into debt sort of undermined this arugment per an alleged constraint? Like I said, Reich needs to better articulate his consumption model. Your short defense of his oped fails to do so.

[moderation]

Reich is right, but with two major flaws and incomplete prescriptions
as pgl proves above, the old notion the rich consume (much)less is no longer true. Fed studies show that the top 20%, who used to provide most of the personal savings, dropped themselves to near zero savings rates.

Reich like most other "D"s still insists inequality must be fixed by new equalizing tax or welfare measures like income credits.

The reality is the system now artificially distorts in favor of the rich. you ought to look first there to fix the system in a good way. Examples

1. corporate governance. i could cite examples all day, my favorite is large severance. When is $10,000,000 plus to leave the company not a corrupt bargain?
2. S corps. there are now 4 million, with gross sales over $4trillion Their extremely low profit rate suggests they are inflating costs massively. Hummer and foreign golf trip writeoffs for everyone!
3.Other income tax dodges. Wealthy tax rates actually paid are lower in spite of AMT.
4. Recent reductions and scheduled elimination of the inheritance tax. Known by "R" wags as the death tax, I like to call it the worthless heirs tax. I cant think of a better way to raise revenue, properly designed

5. the highly regressive social security withholding.

Fix whats broke before adding new distortions

[pgl]

Bruce - I'm all for reducing defense spending by getting out of Iraq ASAP. But wouldn't that reduce aggregate demand? Reich seems to be of the opinion that national savings is already too high. Then again - I agree with knzn's critic of this underconsumption view.

[paine]

"OK, then wouldn't we expect the national savings rate to have increased? The data shows however that the national savings rate has declined over time"

pgl

we're borrowing the rich mans overage from
him
that nets out the savings of the aggregate

and you are a pro at this ???

t'is the age of
massive shylocking
read reich point three

[paine]

"less convinced by the training mantra. I think we need to completely rethink training anyway. Learning needs to be spread over the whole lifetime, not concentrated during exactly years when people are the least motivated to learn (because they are trying to find their place in society at that time)"

reason sweet reason you are soooooooooo right

[paine]

Currency depreciation is clearly the number one inequalty creator.

groucho
you got it right but upside down
the tilt goes from too high north
to too low south

movements among north cuurrencies
ie dollar down vis a vis euro
is just for trans nat fun and games

[paine]

"We are in the process of sacrificing a generation of blue collar workers on the altar of globalization, and now we find that comparative advantage doesn't work in the short run."

right on rusty

as to reich and his work of nations line

that was a bum detour
he still pushes
beyond the comp for loss bit
he still expects us to de industrialize
and make it up with school built skills
the post industrial
amerikan symbol worker
mass employment sector
with 30 million
bobby reich and stevey speilberg and ed witten jobs

the hope of generation zebra

[paine]

bob writes
"The whole point of the republicans class war against the non-affluent is to keep from increasing the wages of the bottom 2/3rds."

yup
at least domestically speaking

[robertdfeinman]

Paine:
Motivation is a psychological issue. As people are continually discovering there is a great deal of "innate" moral sense in humans. I have no objections to Reich making a moral argument as the basis for his policy proposals, but he is also implying some economic benefits that need to be substantiated as well.

I've yet to see any coherent studies which show that shifting money from the top to the bottom will pull the US out of its current decline, or will make the future course of the US vis a vis the rest of the world any different. I'm fine with fairness as an argument, but if one also wants to make economic claims then they need to be proven.

I claim (with no evidence) that a shift of, say, $100 billion won't really fix any of the outstanding issues, but it will make a lot of people better off now and thus is worth doing for that reason alone.

I also claim (with some slight evidence) that we need to undertake a more fundamental restructuring of our society in order to prevent worse things happening in the future. I still waiting for this discussion to move away from a market-based framework and into some more innovative directions.

Sometimes far fetched ideas are impractical, but others adapt them and something both workable and innovative emerges. This is what I'm hoping to see, and why I keep pressing people to think outside the box of conventional economic theory.

[paine]

"I can't see encouraging consumption (by shifting the income distribution toward those with higher propensities to consume) as a good idea when we already have a savings rate that seems far below what would be optimal from a growth point of view."

hopeless muddle

[paine]

bw

if "real" hourly labor
value added is growing
at a fair clip
and it is
has and will
the basis for a rising median wage
is already present

if the system
paid out like it did prior to the 70's
class train wreck ...
we'd be in another better place entirely
err
job class wise

[paine]

"I keep pressing people to think outside the box of conventional economic theory"

are you to be only a cheer leader
or a player too

[chris]

I don't see the reason or need to link more money going to the lower orders with making the whole economy competitive, etc. I think they are different issues and need different solutions. The US economy can be made quite competitive by lowering the value of the dollar more and in fact exports are rising quite nicely since the dollar has dropped. But this need not prevent us from distributing more of society's earnings to the lower orders. After all, few of them will vacation in Europe. I fail to see why we can't remedy the mal or unfair distribution of income quite promptly and let the gradual drop in the value of the dollar take care of competitiveness.

[paine]

to me morality plays no part

the increase in a wage earner's wage rate
oughta at least keep up
with her own increased productivity

[paine]

oh my an ought for an is

forgive me pastor hume

[robertdfeinman]

Paine:
I think I'm doing my share, I have my web site where I post essays on transitioning to a steady-state society periodically.

As a matter of fact I added a new just today dealing with the rise of private philanthropy in the international aid area and why I don't think this is a good idea.

You are free to read them anytime you wish, however one voice in the blogosphere is not as effective as a discussion carried on with a larger number of thinkers.

How about you? What do you do besides post in poetry?

[yoghurt]

As much as I, with Reich abhor the economic model that has lead us to our obscene GINI. But the idea that if we returned the GINI to more civilized values we return to our former economic glory has a whiff of Manifest Destiny about it.
How much of the US economic advantage was due to a superior system and how much was due to a number of one-off factors?
We alone,of the major powers, did not suffer from the ravages of war.
With Russia and China our imperial conquests were contiguous which allowed us to escape decolonization. This gave us a large land-mass to exploit for cheap energy etc.Finally we were able to attract immigrants with above average Moxie.

Perhaps what we are seeing today is simply a regression to the mean. We are just like the next guy. But our national fantasy is hard to give up No?
We cannot just be like the next guy we have to be special.
For the last eight years we have been on a binge of denial worthy of Brittany Spears.

As those in 12-step well in order to radically change we must first hit bottom. Then and only then can a coherent recovery commence. Some people hit bottom and are able to go through recovery. Some never do.
Remedies from the past will be in vain. They are just enabling

[greg]

moderation said:

"Reich is right, but with two major flaws and incomplete prescriptions
as pgl proves above, the old notion the rich consume (much)less is no longer true. Fed studies show that the top 20%, who used to provide most of the personal savings, dropped themselves to near zero savings rates."

Whoa! That would be a pretty stunning change. Anyone have a link to those studies? It would go a long way to explaining how we can have increasing inequality and decreasing savings rates, too...

says...

paine: "if "real" hourly labor
value added is growing
at a fair clip
and it is
has and will
the basis for a rising median wage
is already present"

Maybe.

Average compensation has risen smartly, because compensation at the top has been ballooning.

Median wages have stagnated.

Wages are a function of marginal productivity, not average productivity.

One stylized scenario I can imagine is one where Executive Bossman (that would be, Mr. Bossman to you) pours new investment into plants in low-wage China, allowing his U.S. plant to become obsolescent. Unit cost of production falls and return on capital increases; Executive Bossman and his team of marketing and financial wizards do great work and get new computers, but the manufacturing workforce is laid off. Executive Bossperson, who runs the Buy More chain of superstores, hires the laid-off workers, but chooses to minimize training and "save money" by paying a minimal wage.

Capital-per-head is increasing for one portion of the work-force and declining for another.

The conservative viewpoint on all this appears to me an extreme form of technological-determinism: "technology" drives Executive Bossman and Executive Bossperson to maximize profit in the only ('best') way possible, and the chips fall where they may. All we can do is redistribute a bit at the margin with income taxes and the EITC: it is all very regrettable, you see, especially because tax-and-transfer is undermining the optimal efficiency of it all, but efficiency isn't everything, equity counts, too, don't you know? Equity and efficiency are opposed; there's a cost to efficiency in providing a bit of equity, but I am such a humanist that I think we should pay that price for a bit more equity, and feel good about ourselves. Oh, and if someone should notice that rents play a role in wage determination, then, by all means, turn up the volume on the more-education, higher-skill sermon and drown them out.

If expanding the EITC a tiny bit makes Reich feel better about reducing a third of the populution to low-wage, debt peonage, and relieves him from the hard work of writing a book no one reads about using industrial policy to raise median wages, then I guess the EITC is the way to go.

Restructuring the economy to be both fairer and more productive would require actual creative, critical thought.

I don't think there is much theoretical justification for thinking that the distribution of income is technologically determined. The Production Function is two big lies rolled into one. Actual production processes are managed, not maximized, and the distribution of income is tied to the distribution of risk and residual.

Increasing income inequality is directly related to increasing income instability and risk. Jacob Hacker has the right idea. The Great Risk Shift: The Assault on American Jobs, Families, Health Care, and Retirement Reich is out to lunch with the Plutocrats.

We could have a more just, and more efficient economy. We won't get there, trying to paper things over with an EITC.

[paine]

rf
i've visited your site several times
and found it rewarding

i guess i'm stuck
on the "outside the box "bit

u don't provide any specifics
it helps me to know
where you're headed ..outside

as to my own agit prop activity
long since over
not yet restarted
besides my posts at the site hiding under my name at the bottom
not economics

btw i realize all too well
my thinking is still in a box
i guess i'll just have to keep trying
to punch my way out

ps
this is a format
its hardly poetry and its not verse

its bumped
to slow speed readers

give em time
to get pissed
or better yet skip
the god damn contrived bugs
all together

[dissent]

I find it depressing that the best liberal policy that the best establishment liberal can come up to deal with what is by now an extremely serious and entrenched income inequality problem is the EITC.

This is the best the establishment can do? To me this signals the exhaustion and intellectual impoverishment of liberal/centrist conventional economic wisdom.

"America’s median hourly wage is barely higher than it was 35 years ago, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Most of what’s been earned in America since then has gone to the richest 5 percent."

How much worse do things have to get for there to be some substantive innovative and serious changes proposed?

Sometimes I think that "free trade" (outsourcing manufacturing to china and service jobs to india), pegged currencies, and corporatist domination of American democracy has replaced our constitution as the basic governing principles of this nation.

[paine]

"Wages are a function of marginal productivity, not average productivity"

so i take it you feel marginal outputs
are growing slower then average ?????

long run eh ??? thirty years now

as to balloooooons at the top

value added surely needs to be carved up intra firm
and that is indeed often circular
always in part assumptive
and unrelentingly obscure

my puzzle seems to arise precisely here :

1979-1984

after several decades of tracking
with productivity
bottom half wage rates
start to drop behind ....noticeably
all this after
volcker-reagan's
new morning in amerika

[paine]

"I find it depressing that the best liberal policy that the best establishment liberal can come up to deal with what is by now an extremely serious and entrenched income inequality problem is the EITC"

couldn't agree more

[paine]

btw is that you laff
behind the big tent longo

" don't think there is much theoretical justification for thinking that the distribution of income is technologically determined. The Production Function is two big lies rolled into one. Actual production processes are managed, not maximized, and the distribution of income is tied to the distribution of risk and residual."

reminds me of the rainy days
when my older sister and i
played grown up
by wearing mom and pops duds

[paine]

"if someone should notice that rents play a role in wage determination, then, by all means, turn up the volume on the more-education, higher-skill sermon and drown them out"

you could use a dose of abba lerner

rents are partly perspective partly time frame
much of it disolves as one pulls back to wider time frames
and yet as one pulls back from firm to sector to economy
it gets bigger and bigger

but that aside looking at any actual market economy
and its myriad structural rent traps

these rent trappers
have a thousand an one ways
to catch retain and extract
surplus value (marshall sense )
on its way to consumers
in the final form of a lower relative price

[paine]

"Increasing income inequality is directly related to increasing income instability and risk"
"related to "
as in co related to ...right ??

not for heaven's sake
related to
as in
caused by

[calmo]

so...less consumption
an more chewin
when it comes to
paine character strings.
That tag, "poetry" or "verse", is from the prose side which trucks with no bipartisan agreements with the heterodox.
Well defended box, paine
U B such a distraction
and wish Reich had a sprinkle of you
Esp here in his closing:They are also needed to overcome widening inequality, and thereby keep America in one piece. Which piece would that be? GM's latest report conspicuously transnational --global, not national; shareholder profit, not national labor oriented.

[paine]

btw to me
most "marshall type rents "
going to people for their services
are worth seperating out
from rents trumbling forth
in the form of
profit wind falls
market specs and scams
land zoning change
population shifts
resource market price flux
famines
droughts
alienated patent rights
royalty and license fees
and the rest
of the hoo haa haah
that passes for precautionary
stand by
just in case needed
incentives

[paine]

calmo

"They are also needed to overcome widening inequality, and thereby keep America in one piece "

i think you got the man by his soul there

a brutishly class cloven national society
can be harmonized into
one big joyous human chorus

[paine]

"free trade" (outsourcing manufacturing to china and service jobs to india), pegged currencies, and corporatist domination of American democracy has replaced our constitution as the basic governing principles of this nation"

exactly

[paine]

well maybe not our original constitution
but surely our bill of rights
and the spirit
of our declaration of independence

[Economic layman]

"I find it depressing that the best liberal policy that the best establishment liberal can come up to deal with what is by now an extremely serious and entrenched income inequality problem is the EITC"

If you want to help the poorest part of the workforce, what would be a better policy?

I'm European and some people here think about an unconditional basic income. Let's say 10 000 Dollar per year. But even for most Natural Born Left Europeans this sounds crazy.

As a economic layman, I'm asking: is there any innovative idea for creating more equality out there?

[dale]

"is there any innovative idea for creating more equality out there?" Guaranteed minimum income. Decouple work and income.

[billy]

If you want to help the poorest part of the workforce, what would be a better policy?

Workers dream about getting into the club, so that they too can get a cut of the

" ..rents trumbling forth
in the form of
profit wind falls
market specs and scams
land zoning change
population shifts
resource market price flux
famines
droughts
alienated patent rights
royalty and license fees
and the rest"

This ends up with workers basically screwing each other, and none of them ever getting into the club. For eg. look at the Telco employees shilling for more monopoly rents for their masters, of which they hope to capture some scraps. Which of course is got from screwing the rest of working America.

A very efficient belief to create a society of brown-nosers. You suck up in the hope of getting into the club and being saved. Hallelujah.

Until ass-kissing gets disgusting, it does not matter who wins the elections. Addicts are not saved before they hit rock bottom, and it's not bottom yet.

[paine]

dale you know where my class stand is

and its from here among the white working gobs of amerika
i say
any plan must tie into A JOB
wage rate min max
lowered premium hour ceilings
free public daycare
the ww's will buy into
bigger longer
more widely universally applied
unemployment comp plans
yup
anything that preserves the job ethic

now the lynch pin becomes
job creation max

and that we can get to
with supply side mark up trading (MAP)
and full throttle effective
demand management thru fiscal budget
tax and borrow optimization
and of course a balance trade dollar
high but measured immigration
and a massive rebuild
of our production platform

as to pro union laws

---and i write this as a union man
all the way from my bald pate
to the dermatophytes in both my big toe nails ----

we the workers of the job class
oughta fight our way
to those goals we determine for ourselves
and make it happen
right there at the job site

like wage stiffs
did in the 30's-40's
like black folks
in the 50's -60's
etc etc

no job site class struggle
will ever be really won
by act of congress

[Bruce Wilder]

paine: not for heaven's sake
related to
as in
caused by

I am not sure what you mean by "caused by". The distribution of wealth, income and risk is intimately and functionally related.

If you are a Republican policymaker and you want to re-distribute income and wealth upward, you want to reduce government-provision of cheap insurance to people, who have little wealth, so that rich people can make themselves richer by profiting from providing expensive insurance, and otherwise stacking the deck in negotiations over wage, credit and insurance contracts.

In an ideal Republican (aka plutocratic) world, you would like to even magnify risk in the economy, to increase the transfers that occur from the regular abrasions of economic life.

You might want to propagandize in favor of deflation, bank deregulation, utility deregulation, private health insurance, and responsible payday lenders.

You might want to privatize Social Security, for example, because relatively wealthy people would be able to invest their Social Security contributions more aggressively, add them to family wealth, etc., while a small, but financially significant proportion of low-wage workers would, inevitably, lose their shirts in every generation, while the lucky ones continued to provide a base of fees for the managers of these private accounts.

There are, of course, substantial productivity and efficiency losses associated with concentrating wealth and increasing the risk experienced by the greater mass of households. People, who are underinsured, act, variously, in less than optimally efficient, risk-averse or desperate ways. People, who can no longer get cheap insurance, in the form of quality public education, for example, underinvest in education, while the wealthy overinvest in education for their doltish children -- in place of meritocracy, a Yale education is wasted on a George W. Bush, who is then put in charge, of, say, the government. Talk about deadweight loss!

The popular model, where "the market" gives us a technologically-determined, and approximately pareto-optimal income and wealth distribution outcome, which, then, can be modified a bit around the margins by government tax policy, so to speak, after-the-fact, is misleading.

The general liberal view, expressed by Dolly Levi, as the thesis that money is like manure, and should be spread around to make young things grow, becomes a crabbed and illogical thesis of underconsumption, when one looks only at government tax policy as an after-the-fact remedy.

If, on the other, you think, the median wage is declining because of declining investment in capital stock for the lower two-thirds of the work force, and that this has something to do with a lack of public investment, and an erosion in the provision of public insurance, well, that's a different story, and a different worldview.

[James Killus]

Bruce Wilder (I hope accidentally) creates a flawed argument here:

"If you want more of something, subsidize it. Do we want more low-wage jobs?"

No, I want the more labor expended in activities that currently bring low wages, but I want the workers to get higher wages. For example: cleaning public restrooms, inspecting cargo containers, in fact, inspecting almost everything, including meat, produce, toys, etc.

Moreover, I want people who currently make low wages to get higher wages, so more money for meat packers, more money for farm workers, more money for night watchmen, etc. etc.

And lest anyone think that this is me being altruistic, let me note that I think that, up to a point, people do a better job if you pay them more, and I want cleaner buildings, better swept streets, more recycling and reuse, and on and on.

What I do not want is more money for those whose jobs are already overpaid, where the biggest battle is getting the job in the first place, and then keeping it while everyone else around is trying to knock you off the perch so they can get the big jackpots.

A management consultant once said something that I repeat every now and then: In every organization, there is a line. People above the line are paid more than the job is worth; people below the line are paid less than the job is worth. Everybody in the organization knows about where the line is, but no one can ever talk about it, because to admit the reality would destroy the organization.

It sounds like Reich is beginning to realize the organization is in need of some "creative destruction."

[Bruce Wilder]

paine: my puzzle seems to arise precisely here :

1979-1984

after several decades of tracking
with productivity
bottom half wage rates
start to drop behind ....noticeably
all this after
volcker-reagan's
new morning in amerika

Yeah, funny how that worked out, isn't it?

Probably just coincidence, though. After all, Brad DeLong can't find the mechanism.

says...

That's right Dale. And if the splendors of globalization are worth the sacrifices, there ought to be enough to go around.

[Lafayette]

It takes will

rdf: I've yet to see any coherent studies which show that shifting money from the top to the bottom will pull the US out of its current decline

The logic of it is self-apparent.

The rich do not spend their surplus disposable income, they invest it. The poor and lower middle-class do, which sparks demand. So, the question is less of Why? and more of Why not?

The question worth answering is also, How? Handouts wont do, but tax decreases at the bottom conjoint with increases in the top should work to spur demand. To actually create jobs would require a vast range of infrastructure programs that put the unemployed back to work and off unemployment / welfare.

The suggestion is entirely plausible. There may be a hitch with financing an expansive New Deal II, for a country already miles and miles into debt. But if we are able to finance that Idiot War over in the sandbox, we can finance renewal as well.

It takes will, that's all. Unfortunately, the will to do it is precisely what is lacking. For the moment, we have politicos throwing darts at one another. Which is getting us nowhere.

[paine]

billy goes profound

"This ends up with workers basically screwing each other"

the pure associated producer market model
is indeed subject to all the usual market failures
if the real producers capture all their own rents
the result is indeed fare better
but pareto prefered results are possible
and this must be co ordinated by a plan
before the producers
become too vested in their rent streams

says...

JK: "Bruce Wilder (I hope accidentally) creates a flawed argument here"

I understand what you say about "the line" in organizations. Efficiency wages are not part of most people's economic intuition, though. If you suggest that raising the minimum wage, for example, will actually benefit low-wage employers as well as employees, most people just cannot get their minds around the concept, even though there is actually pretty good evidence.

People, including most economists, understand the logic of markets, but not the logic of hierarchical organization.

I can see how unionization and minimum wages address the problem, but I don't see how EITC helps. If anything, EITC seems to me, to make the problem worse, and just confirms and subsidizes this kind of organizational dysfunction.

[john c. halasz]

Well, I'm late as usual to the party, but I'll add my deflated $.02 worth.

In the first place, as Bruce Wilder pick up, EITC is by no means a cost-free transfer, since it amounts to a de facto subsidy to low wage, low productivity employers. It's as if a deal were being struck, whereby the rich can still keep the bulk of their rents and the poor can receive their enhanced widow's mite, the enhancement and distribution of productivity, "efficiency", be damned. Further, styling labor's "fair" share of the distributable surplus product as "redistribution", via government mandated transfers, whether it occurs through progressive taxation/negative income taxes or provisions for government services, ideologically begs the question as to why "market" distributions have been occurring as they do, as if regulatory capture of governments, via rent-concentrating "deregulations", de facto union suppression, corporate subsidies and tax abatements, and "free trade" policies didn't function to tilt the "playing field" in the direction of upward redistribution of productivity gains, (which, after all, in the first instance, dislocate labor forces anyway), even as stagnant wages leave little pricing power to businesses, rendering cost reduction the key to profitability, with labor, of course, always the most obvious "cost". No, an adequate distribution of income, (since the distribution of income, i.e. the distribution of the surplus product between wages and profits, effects both the level and composition of real effective aggregate demand), should be derived, in the first instance, from the core institutions regulating the economy, (since, I, for one, don't believe that markets are autonomously self-regulating, but rather, as well as themselves being a mode of social regulation, require regulatory frameworks to function effectively). And asset inflation, partly occasioned by low interest rates, which disencentivize ordinary saving, since it raises the price and lowers the return of assets, is symptomatic of a lack of opportunities and incentives for innovative investment, which would tend to lower the relative value of extant capital stocks. Which is to say that much of the promulgations of "free market" ideology, with appeals to "freedom of choice", "virtuous" competitiveness, equality of opportunity, and innovation, have actually been a cover for the preservation and increase of anti-competitive rent-extractions on the part of oligoplistic corporations, (even to the point of stripping home equity out of the assets of ordinary households). If profits are to be maintained, there must be adequate demand and adequate real investment to sustain that demand. But adequate levels of demand increase the relative power of labor with respect to capital, and increased and innovative investments depreciate the value of extent capital stocks and the financial assets attaching to them. Very well, I contradict myself! But the alternative is for profits to feed off themselves, to the detriment of economic balances and long-run "efficiency".

[anne]

Hillary Clinton has proposed raising the minimum wage significantly, while freezing foreclosures for 3 months and fixing subprime mortgage rates for 5 years, along with increasing the ceiling on the loans that can be bought by Fannie Mae and freddie Mac. I would like Barack Obama to support similar policy, beyond the competing for the nomination which seems sure to be Obama's.

[piglet]

"I've yet to see any coherent studies which show that shifting money from the top to the bottom will pull the US out of its current decline"

But the US isn't in decline! What do you want whiners? The upper class is doing fine. The top 20% are doing fine. The top 10% are doing great. The top 1% are doing extraordinaire. The top .1% are doing vastly better than any upper class in the history of humankind has ever dreamed of.

"Pulling the US out of decline" is the wholly wrong question. I guess what you are really asking is how to pull the lower and middle classes out of their current decline. Taking some money from the top and redistributing it sounds like a good start. At some point however, a revolution will be inevitable. The problem is really that most of you, especially the economists of course, don't see this as a class issue. You want the growth machine to continue in the hope that the underlings get a few spoils (or give the underlings a few spoils so that the growth machine can continue - it's nice to put it that way to create the illusion of a perpetuum mobile). But much of recent US economic growth has been an illusion anyway, a profitable illusion for the top 1% to be sure. How blind can one be? The US economy doesn't need more growth. There's enough stuff already and there is no real material basis for more growth. What we needs is distribution.

[Arne (not anne)]

Am I wrong?

Expanding the EITC puts more money in the hands of those who spend it. But a significant portion of the spending that occurs is on consumer goods that come from overseas, so there is a drain on the effectiveness of the EITC for fixing the US economy.

Expanding the work on US infrastructure will produce new jobs that create distinctly US goods. The drain from consumer goods purchases becomes one level removed.

Isn't rebuilding a better use of economic stimulus funds?

[Arne (not anne)]

Addendum:

It requires increasing taxes to accomplish this and to raise taxes without reducing spending requires that it come from the rich.

[piglet]

Talk about recession is beside the point. The majority of Americans already are in a recession, and have been for years. Economists haven't seen any of this only because the upper class has gotten richer at the same time, which cancels nicely out in the average doesn't it. I guess what they call a recession is exactly the moment when the wealth of the top 1% stops accumulating, temporarily of course.

[Economic layman]

What if the economy has more and more transformed into a "winner takes it all"-game? I think Krugman once talked about a "Sierra Madre"-economy, where it is natural that only some get lucky. In this case you can only redistribute money from the lucky to the rest 'cause it is just not possible for everybody to find gold.

[ken melvin]

Good work.

[Jas Jain]

"Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities."

I think that the US is organized to increase the inequality via unequal opportunity in education from the start. See the appended (copied for easy reference). In the Bay Area, people who are beneficiaries of Scam Options are in the best position to send their kids to best schools. Systemic fraud, or corruption, is an integral part of inequality in any society. Manhattan and Silicon Valley are very bad places to raise good human beings. There kids are "raised in a culture of fraud."

Jas

-x-x-x-x-x-x-x-x-x-x-
February 12, 2008
“Palo Alto Parents Lie For Kids To Attend Better Schools”
Some Palo Alto Parents Lie For Kids To Attend Better Schools - News Story - KNTV | San Francisco
Some Palo Alto parents are lying and cheating to get their children into the best schools possible.
Palo Alto Unified School District administrators said they carry out more than 200 investigations a year about parents possibly lying about their residence to qualify to attend a school.
“They do all sorts of different things,” said Steve Lawrence of the Palo Alto Unified School District. “We have people saying they are living with relatives that are really living someplace else.”
Margie Mitchell of the Palo Alto Unified School District said, “We have parents that come in and try and give us falsified lease agreements and property tax statements. We are on an overflow basis right now, especially in the elementary grades.”
[snip]
One Palo Alto parent, who did not want to identify herself, said she does not feel bad lying about where she lived.
“Why should my daughter come home after the first day at school and be so depressed and sad?” she asked. “If my choice was to send my daughter to that school or and try and cheat the system I chose to try and cheat the system.”
The mother sends her children to a high performing school in the town where her relatives live. She uses their address.
“Why we don’t live there is economic reasons at this point in our life that’s where we want to live,” she said. “Under our circumstances we can’t.”
Palo Alto is not the only school district facing the residency-cheating problem. The Fremont Union High School District said it investigated about 200 fraud cases last year. Of those cases the district said it found about 10 percent of the parents cheated their way into the district.
This is the kind of stuff that makes the Real Bay Area special.

This is the kind of stuff that gives kids going to Real Bay Area schools the advantage.

Think about it… if kids weren’t exposed to these sorts of things, how would they ever become successful C-level executives? Would they even be able to fathom something as obvious as backdating options? Or getting their company to buy them a corporate jet, and pay them for using it?
Even worse - how would the kid learn that one should do things like that, and not feel bad about it?
Silicon Valley has always been about being an entrepreneur, about “asking for forgiveness is easier than asking for permission”, about can-do spirit. And this is how it all begins - by going to the right school.
No wonder Palo Alto real estate is so expensive. Actually… given the life lessons… it’s a deal.

http://www.burbed.com/

[save_the_rustbelt]

Good discussion.

Henry Ford I eventually came to the conclusion that unless auto workers could afford to buy the autos they assembled, his business model would fail.

With the new UAW contracts, newly hired auto workers will not be able to buy the cars they assemble (unless they live in the parents' basement.)

And the former Delphi workers (80% job offshoring during bankruptcy) aren't buying much either.

The EITC is fine as a band aid, but not as a long-term solution.

The Clinton administration said that manufacturing jobs destroyed by NAFTA would quickly be replaced with high value service jobs. Neither Clinton or Bush could deliver.
And the offshoring continues.

[Bruce Wilder]

rdf: "I haven't seen any solid economic studies which show that a $10,000 ice sculpture at a posh wedding is worse for the economy then the same amount of money spent on feeding the poor."

Do you think any thing can be better or worse "for" the economy, the economy being an abstraction?

It seems to me that an economy that produces ice sculptures for party-goers in place of nutritious food for hungry people is a prima facie case of poor economic performance. Poverty is its own evidence of poor economic performance. Duh.

Obviously (I would think obviously), if most everyone is well-fed, well-housed, and free of fear, I don't begrudge anyone a good party. Party On, Dudes and Dudettes!

The economic relations between a society's elite and its masses can have a variety and, indeed, a multiplicity of characters. Historically and globally, the most common theme, at least since the advent of agriculture, has been variations on kleptocracy, in which domination and deprivation have functioned to extract a surplus to support a few in such leisured pursuits as politics by warfare and intrigue. As machines have replaced slaves, business investment has replaced plunder, and democracy, aristocracy, some of us hope for better.

[evagrius]

Why not reinstitute the "Upstairs, Downstairs" class system of Victorian England?

The lower classes would serve the upper being their chauffers, maids, gardeners etc.

Ooops. Already done with imported labor- much cheaper wages.

[Bruce Wilder]

economic laymen: "a "Sierra Madre"-economy"

In a Sierra Madre economy, it is important to provide insurance structured in such a way that many people have resources and expected incentive to search for gold, so that at least a few find it.

[evagrius]

Why not reinstitute the "Upstairs, Downstairs" class system of Victorian England?

The lower classes would serve the upper being their chauffers, maids, gardeners etc.

Ooops. Already done with imported labor- much cheaper wages.

[gordon]

Ok, we already knew that US wages were falling behind productivity increases (.pdf) and that "...wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960’s".

But "Over the longer term, inequality can be reversed only through better schools for children in lower- and moderate-income communities"?? Are we going to have the argument about PhD plumbers again?

Aside from the Earned Income Tax Credit (for a short-term fix), Reich seems to have no other proposals. This is worrying, since he is (I thought) a leading US liberal thinker.

[Dickeylee]

NAFTA has to go-no matter what. It's not good south of the border, and it's not good here. We've destroyed our manufacturing base, hell the DoD is proud-overjoyed-that it met it's requirements for boots manufactured in the USA by meeting 104% of its goal of 60% in 2005 (last year it has released this info). This was really good news for Puerto Rico, which counts towards this production quota, by the way. We now also sub-contract small arms ammo (5.56-7.63-.30 cal) to Israel, lower shipping costs you see, closer to the action and what not.
Oh, and I think I've found a new revenue stream for us, inheritance! Think of the possibilities, especially in 2010. Wonder how many seniors will be hiding from the grandkids that year? Let the party continue!

[don]

"The only way to keep the economy going over the long run is to increase the wages of the bottom two-thirds of Americans." This sounds like nonsense. America has plenty of demand. In fact, it has excess demand. America is now spending at a rate that exceeds its income by from 5% to 6% each year. This rate of borrowing is not sustainable. At what point would Reich agree that U.S. foreign debt is big enough? Yet, the only solutions being proposed involve ways to keep up U.S. borrowing (interest rate cuts, greater government debt, and now income redistribution). These are long run solutions?

[jm]

...more even than the notoriously industrious Japanese...

This is most emphatically not so!

Not only do Japanese companies, like American, make liberal use of the "exempt" classification to avoid paying overtime, they also force hourly employees to put in substantial amounts of unpaid overtime "off the clock" -- there's even an idiomatic Japlish name for it: Saabisu zangyo, with "saabisu" having come from the English "It's a service" to mean "free" in Japan, and "zangyo" the Japanese for overtime.

I learned of this many years ago when a Japanese colleague complained that for months he'd been getting only one day off a month, and that on top of that our company was restricting overtime. When I responded that I must have misunderstood him because that was contradictory, he explained "saabisu zangyo".

Earlier, I had been working for a company in which about half the employees had a "manager" title, so they'd not be eligible for overtime at all.

Japanese are still working many, many more hours than Americans.
With the economic stagnation in Japan, "saabisu zangyo" has increased, not decreased.

[john c. halasz]

Paragraph 2. The claims of the conventional technocratic macroeconomist above about long-run trend growth and the identity of savings and investment involve some abtractive flaws, IMHO. In the first place, underlying long-run trend growth, I think, are technological complexes, which alternately constrain and enable it, but which economics doesn't necessarily have a good handle on, though economic conditions and ratios also effect how the development of technological complexes proceeds. But a projection of truly long-run trend growth can not be derived from current macro-economic states and factors, since long-run productivity growth might "inexplicably" speed up or slow down. Nor is there necessarily a long-run identity of savings with investment, for all that is an accounting feature of GDP measured growth. If "investment" is not simply the replacement of depreciated capital stocks, but involves the development of new processes and products, which increase productivity and expand real wealth, then there is an alteration of underlying economic ratios, which won't necessarily be readily expressed in terms of nominal prices, however index-adjusted. In other words, investments might actually "produce" savings rather than the other way around. To be sure, techical innovations must be financed and thus draw on savings, whether those of the firm, those of the public, intermediated through the financial system, or those of the government, as surplus tax revenues, and it is not a priori evident which innovations will pan out,- (and often the originators are not those who reap the market rewards),- so, in addition to perhaps high upfront costs, there are deadweight losses, as markets, of themselves, do not determine the supply of innovations, nor always provide and incentivize the conditions for their feasibility. But it's not simply true that the supply of financial savings is equivalant to either the supply of or demand for undifferentiated real investment. Nor does the distribution of gains from increased productivity/real wealth necessarily conduce toward short-run or even medium-run macro-economic equilbrium: intersectoral dislocations and structural unemployment resulting from innovations might disrupt optimal demand conditions, which help to spread new surpluses between firms, workers and consumers, and which incentivize further innovations. The upshot is that conventional macroeconomics can’t necessarily predict long-run growth paths, and associated macroeconomic policies do not necessarily optimalize, nor smooth out “growth”. In particular, increasing financial savings does not necessarily create demand for real investment, nor is it flat-out true that increased demand expenditure now is borrowed from future “growth”, since increased demand now might not only prevent good investments from going unnecessarily bad, but might also sustain the demand conditions required to both correct intersectoral imbalances and incentivize technical innovations. But, in general, abstracting macroeconomic aggregates from both the distribution of incomes and intersectoral balances, that is, “the level and composition of real effective demand”, weakens the case for macroeconomic predictions and interventions. (Cf. Sraffa’s account of “negative Wicksell price effects”). “Underconsumption”, “secular stagnation”, and positive technological “shocks” are all possibilities, though not necessarily the case. Asserting that general equilibrium long-run assures reversion to statistical means hardly suffices to guarantee a projection of long-run growth trends, which the present “borrows” from the uncertain future. Indeed, the future “borrows” just as much from the present. And optimalizing long-run “growth” is not something that conventional macro-economics monopolizes, even aside from the fact that macro-economic “balances” have now been “internationalized”.

As for the current situation, from a U.S.-centric perspective, I’m highly skeptical that conventional macro-economic nostrums can correct past “mistakes” in policy. (The “stimulus” package, in particular, strikes me as largely misguided. Investment depreciation tax credits were part of the Bushevik tax cuts and didn’t stimulate any noticeable investment before their expiration. The civilian tax cuts are mistargeted and will likely only be saved to pay down debt. And the extention of GSE lending limits is not only counter-productive in returning housing prices to affordable levels and thereby fulfilling their function of maintaining the fluidity of mortgage lending markets, but down-right dangerous to their capitalization/stability in performing their appointed function, which threatens further fiscal bail-outs). What is required is a large destruction of debt/inflated financial “assets”, at least concurrent with, if not prior to, any “rebalancing” and rebuilding of the real productive economy, not to mention the institution of “new” regulatory regimes, which might not only prevent the recurrence of past “mistakes”, but be more effective in targeting investment and income flows to where they are more truely “needed”. Lowering targeted interest rates doesn’t just run against the lower bound of a liquidity trap, (which might already be the case with real inflation rates), but is further constrained by $ devaluation. At any rate, lowering short-term rates to rebuild bank capital might not only already be outpaced by in-the-pipeline back losses, but might be further lowering the international desireability of foreign investment re-capitalizations. What’s actually has been going on amounts to a domestic capital-strike , in favor of foreign investment out-sourcing. Chickens might be coming home to roost, to the detriment of golden goose eggs.

[cm]

reason, paine: Why do you think "learning" and "finding one's place in society" are antithetical?

[dale]

Paine says: "any plan must tie into A JOB"
That may be. But it sometimes seems to me that we need to demonstrate the contradictions in a way of life that demands that people work a paying job to get the material stuff of life as well as the social status that the work ethic demands of us- all this in a society capable of producing all that is needed.

The rich don't need to work. Let's share that love. Work is way over rated anyway. My depleted body is testament to that. Of course, intellectuals and academics have been playing that anti work thing forever. Hiding it behind an aura of respectability.

[zinc]

American policy will swing from a doltish acceptance of slash and burn mercantilist trade to a sensible policy of free trade. Like the housing crisis and next years stock market returns, it simply has to get bad enough before the obvious becomes the accepted.

We are all protectionists, it just a matter what each is trying to protect. The mercantilist trade protectionists are interested in manufacturing goods in third world labor gulags and shipping them, unfettered into the American market.

Americans interested in protecting our domestic well being and quality of life are against this type of profiteering and have just as much right to demand payment for access to our market when trade becomes destructive. I would consider supporting a 35 percent value added tax assessed against the dollar value of the trade deficit, on a country by country basis. Oil included.

And I would definately shut down any trade agreement bush and the boys are working on.

[reason]

cm...
they are both forms of learning - but they compete with one another. Are you telling me that school children are more interested in their books than their classmates? And you?

[reason]

But there is another issue. Teenagers are still undecided about what they want to be. They rarely have clear goals to focus them. Adults learning as part of lifetime education are more likely to know what they want to concentrate on.

[reason]

cm
Did you ever read Ivan Illich "Deschooling Society". It is hard to obtain these ideas, but is VERY radical in its view point. It is worth entertaining such radical positions sometimes. Mind broadening.