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To Understand the Political Economy, Think about this Chart

Marc To Market's picture




 

income

 

This graphic was on the Washington Post's Wonkblog.  It shows the three key sources of income for the middle 20% of American households.  

Cash wages have fared the worst and are actually lower now in real terms (adjusted for inflation) than in 1979.  

Fringe benefits, the red line, most notably include health insurance and deferred compensation.  As you can see, the shift to defined contributions from defined benefits has seen the value of fringe benefits rise gradually until around 2004.  Since then they have drifted slightly lower.  All told, for the median quintile, the value of the fringe benefits rose about $3.1k since 1979.

The purple line tracks the value of transfer payments from the government.  Some transfer payments, like Social Security and unemployment compensation, are in cash.  Some, such as food stamps, are paid in vouchers.  Still other transfer payments, like Medicare and Medicaid, are paid in kind.  Transfer payments, not wages or benefits, has been fastest growing part of income.  They have risen by about $5.1k since 1979 in real terms. 

Many anarchists/libertarians will see in the rise of transfer payments the intruding hand of the nanny state that fosters dependency and distorts the incentive structure.    Some fiscal hawks see these transfer payments absorbing an increasing amount of the tax revenues the federal government collects.  They worry that the world's largest economy cannot afford these transfer payments any longer.  These are the arguments that seem to dominate the traditional and social media space.  

Yet there is another narrative at work.  It starts a bit earlier than the chart here does.  Some time in the late 1960s or early 1970s, depending the time series one uses, the post-WWII social contract broke down.  In exchange for accepting business authority to control the work process, men's wages had tracked productivity and inflation.  As businesses began feeling profit margins squeezed by increasing international competition (from Europe and Japan) and rising commodity prices, they quickly responded in the one area in which they had the upper hand:  labor relations.  

After all, business could not control the foreign competition, the price of capital or commodity prices.  They could and did unilaterally defect from what some economists refer to as Fordism.  This was in reference to Henry Ford's insight that if he paid his workers more, he could sell more cars.   The American household responded by dramatically increasing women participation in the workforce.  This too proved insufficient to procure the American dream (a car, a house and higher education for one's children).  Young people began to work again, but alas, this was not enough.  

Two other sources have filled the gap:  debt and the government.   Debt was terminable solution in that there is a limit to the indebtedness of households, even if it is not known a priori.  Moreover, the end of the credit cycle has blocked this path, though recent data suggest the household de-leveraging may be ending.  

Simply put, the transfer payments came from the government because people were unable to get concessions from their employers.   Wages are not a reflection of the marginal value of output, but are a reflection of the power relationship between employers and employees.  The largely unorganized employers could not extract concessions from business and the government filled the gap.

Consider a non-government analogy.  In the United States, considerably more so than in other countries, one is expected to tip service provider, waitresses, bartenders, barbers, deliveries, and increasingly fast food shops.  Tipping is not simply an expression of gratitude.  Surely, patrons are just as grateful in Japan as they are in the US, but tipping is seen as crass.  Tipping is a socially acceptable way consumers in the US, subsidize the wage bill for such businesses.   Businesses can and do pay workers who get tips less.  

There are various ways in which productivity gains can be distributed between employers and employees.  In some countries, the employers provide other services such transportation, a meal,  and/or an on-site physician.  It is not out of altruism, but a different sense of self-interest.  Perhaps it is also partly an expression of traditional paternalism in some countries.  Perhaps, it is what the French call noblesse oblige. 

In any event, the point is the way social product is shared is simply a function of the cash nexus, but a reflection of politics (as in power relationships), the institutional framework and traditional rights and responsibilities.  What US employees have not been able to win from employers, they have been able to get as concessions from the government.   

It may not be very satisfying, but it satisfices (think a combination of satisfy and suffice).  Employers have shifted and socialized some of the costs of production, which include the reproduction of its work force, and all that that entails.  Employees have a little more social security.  The government bureaucracy grows in numbers and influence.  

Reading the papers and blogs, and listening to the debates, one would think that the state was foisted on business, but historically and ontologically the growth of the state was in the interests of business.  

If this analysis is correct, the attempt to roll back the state and re-calculate the basket of goods one gets as a citizen, it will antagonize the employer and employee relations.  This is consistent with a new book of previously unpublished work by Hyman Minsky that argues in favor of addressing poverty through job creation rather than welfare.  

At the same time, it is possible that the increased application of science and technology to the production of goods and services has been so extended that a modern economy simply cannot create sufficient jobs for its population.  The US is producing around 7% more than it did at the last cyclical peak with about 3 million few workers.  Our grandparents fought (not a metaphor) for a 5-day 40-hour work week.  Conceding that some traits skip generations, shouldn't we be thinking how to extend their success?  

 

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Wed, 04/10/2013 - 12:16 | 3431837 suteibu
suteibu's picture

Considering the state of the Japanese economy, it seems odd that you would use how the Japanese regard tips to promote your ideas about the "social contract."  Their stance on tipping is, indeed, a cultural thing but it doesn't necessarily benefit the business community.  For 22 straight years (since 1991), Japan corporations with at least 10m Yen (about $100,000) in debt to enter bankruptcy have hovered around 12,000 per year.  So, who fits in this debt category?  On the low end are likely to be many food and service companies who might benefit from tipping as part of employee compensation.  And this figure doesn't count those bankrupt companies who fall below the $100,000 debt level and are sure to be a part of the food/service industry.

The real point that you didn't make is the corruption between powerful corporations and politicians and unaccountable bureaucrats.  Shifting the burden of employee benefits from companies to taxpayers is an example of this.  That said, the failed small businesses in Japan had no say in the creation of labor and tax laws that benefit the corporations and unions (and account for a decided minority of the Japanese workforce and job creation) while severely disadvantaging small businesses and start-ups. 

Competition in the private sector without interference and favoritism from government would go a long way to solving many problems in Japan and abroad, not the least of which is the declining value of labor.  In that environment, Ford's ideas on management might be valid.  But, one should not advocate (as you seem to be leading to) that government should force Ford's policies on business.  The government needs to be less involved, not more.

Wed, 04/10/2013 - 12:08 | 3431795 Atticus Finch
Atticus Finch's picture

You forgot to chart the transfer payments to War and the Banks over the last 30 years.

Wed, 04/10/2013 - 12:03 | 3431767 Fishhawk
Fishhawk's picture

Fordism didn't die, it was murdered by global free trade, resulting in US labor finding itself in competition with third world labor at $3/day.  Transfer payments are merely the politician's weak attempt to ameliorate the shock of finding that free trade had erased all the gains of US labor since WWI, or, said another way, welcome to the third world...

 

Wed, 04/10/2013 - 17:08 | 3433724 Ghordius
Ghordius's picture

yup... but free trade is a holy cow

"the growth of the state was in the interests of business" yes. Big Biz

small and medium sized corps don't need a bloated state

Wed, 04/10/2013 - 11:48 | 3431660 OutLookingIn
OutLookingIn's picture

Something for nothing...

And...

Your chicks for free!

Wed, 04/10/2013 - 11:34 | 3431575 Skid
Skid's picture

I would, but that chart is too small. 

Wed, 04/10/2013 - 11:50 | 3431667 Winston of Oceania
Winston of Oceania's picture

I know that is just plain sloppy or lazy or whatever you might like to call it. I tried reading it all anyway but just didn't have the interest since I couldn't see the graph.

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