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Versions of the above chart are pretty common in news stories about inequality and middle class stagnation. While US output continues to rise decade after decade, the benefits don’t go to workers despite their obviously rising productivity. (And capital grabs more and more of national income.) There’s a big gap between the blue line (wages) and the green line (output). But Robert Lawrence of the Peterson Institute argues this chart better reflects the productivity-worker income relationship:
According to this chart, wage and productivity growth have pretty much risen together. (And the share of national income going to labor has been steady until recently. More on that later.) Why the difference between the two charts? Lawrence made several modifications: (a) adjusted for an overly narrow definition of workers; (b) added in benefits to wages, (c) used an inflation measure that better accounts for what workers purchase; and (d) used a more relevant productivity measure. Lawrence:
Between 1970 and 2003 the growth in hourly real product compensation matched the growth in hourly real net output per worker. In 2003, therefore, the share of net compensation paid to labor was the same as in 1970. If the rise in average net output per hour is a good measure of the marginal product of labor, for this 33-year period, the data are compatible with the assumption that workers have actually seen their wages rise as rapidly as their marginal product. Since labor’s share in income fluctuates over the business cycle, and was therefore unusually high in 2000 for cyclical reasons, we cannot be confident about dating when the decline in labor’s share in income began. But it is clear that labor’s share has been unusually low since 2008, and real wages and compensation for workers of all skill levels has been slow.
The explanation for the sluggish rise in real wages over the long run—1970 through 2000—may lie not with something that weakened labor’s bargaining power but instead in changes in the relative prices of the goods and services that workers consume and those that they produce. In particular, in thinking about policies to raise middle-class incomes, we should be concerned about (a) the rising relative prices of goods and services that workers consume such as housing and education; (b) the rising costs of benefits, especially health care, and (c) the slow productivity growth in services as compared with the rapid productivity growth in investment goods. In the period after 2000, the declining share of labor (and rising share of profits) does warrant further explanation (in a recent working paper, I argue this growing gap reflects a particular type of technical change), but prior to that, simplistic comparisons of “real” output per worker and “real” wages are likely to lead analysts to draw the wrong conclusions.
This an uncomfortable analysis for analysts who argue that workers have been getting shafted for decades — and that the big reason why is the decline of union power. Instead, as I mentioned in the previous post, we need to focus first and foremost more on faster productivity and output growth. Then look at how these gains are being distributed.
One really cannot overestimate the importance of innovation and productivity growth as a driver of broadly shared prosperity. The WSJ’s Grep Ip highlights one aspect of that reality, as it applies to inequality and income stagnation (italics mine):
It is true that since 1973, real wages have grown more slowly than productivity. Nonetheless, it’s still the case that in general real wages have done better when productivity has been strong. President Barack Obama’s Council of Economic Advisers demonstrated this with an intriguing thought experiment earlier this year. The council noted the median family’s income, adjusted for inflation, did not grow at all between 1973 and 2013. If inequality, as measured by the share of aggregate income earned by the middle 20% of families, hadn’t widened after 1973, the median family’s income would have been 18%, or $9,000 higher, by 2013. On the other hand, if productivity, which grew 2.8% per year in the prior 25 years, had maintained that pace thereafter, median incomes would have been 58%, or $30,000, higher. So lagging productivity growth had triple the impact of widening inequality. … Why the dearth of attention to productivity? Politically, it’s just not very sexy. Economists aren’t sure why it speeds up and slows down; random innovations matter more than specific policies, and the policies that do matter—from patent laws to telecommunications regulation—may not fit easily in either party’s platform.
In other words, even with widening income inequality, middle-class families would have been a whole lot better off — to the tune of $30,000 — if productivity growth had kept up the pace of the previous generation. An America where productivity is growing at near 3% annually looks a whole lot different after a generation than one where productivity is growing at less than 2% or less than 1%, the case during this recovery.
View related content: Pethokoukis
Have a read:
Evaluating the Lee-Rubio Tax Plan – Ramesh Ponnuru | “Second, Republicans have repeatedly overestimated the growth effects of income-tax rates — predicting a bust when Clinton raised taxes and a boom when George W. Bush lowered them. Neither occurred, and in fact growth rates were better under the higher Clinton income-tax rates than under the lower Bush ones. Any positive effect of lower tax rates on growth are small enough that other factors can overwhelm them.”
These Superhumans Are Real and Their DNA Could Be Worth Billions – Caroline Chen
Bank of Asphalt – Darren Samuelsohn | “The details vary by proposal, but the principle is similar: Big highway and bridge projects are expensive, and the government can make them a lot cheaper by offering low-interest loans and other forms of financing. In some schemes the bank would replace direct federal funding. In others, it would supplement it. But despite so much love from powerful players on both sides of the political aisle, the infrastructure bank maintains the unenviable status of being one of Washington’s perennial policy bridesmaids — ‘the next best idea for the last 25 years,” one transportation observer put it.'”
Clinton, Uber and the political impact of the ‘gig economy’ – Nicole Lee
Gig Work Used to Just Be Called ‘Work’ – Stephen Mihm | “This new face of labor is anxiety producing, but there’s not much new about it. In fact, the replacement of steady jobs by unpredictable gigs marks a return to what passed for normal for most of U.S. history. The gig economy was the economy.”
Confronting the Sharing Economy – Christopher Koopman
Technological Change, Occupational Tasks and Declining Immigrant Outcomes: Implications for Earnings and Income Inequality in Canada – Casey Warman, Christopher Worswick | “We interpret the finding as indicating that the underlying causes of the cross-cohort decline in immigrants to Canada apparent in the earnings data have been manifested in occupations that have relied in a generally increasing way on manual skills rather than cognitive skills.”
My baseline belief here is that US economic policy is far from optimal for growth. Is consistent growth of 4% — the Jeb Bush growth target — realistic, even with smarter policy? Well, let’s just say it is pretty ambitious, even aspirational (as I have written here, here, here). But I have no reason to believe we can’t do a lot better than 2%ish. Economist John Cochrane looks at a slightly different question, that of whether or not the US could grow at 4% for a decade. His short list contains ideas such as moving to a consumption tax, massive deregulation, ending tax subsidies, and so forth. A very kind of libertarian, small gov list. Cochrane:
This program removes a lot of level inefficiencies. 10% increase in level over 10 years is 1% more growth per year. Labor force participation increases. The labor force itself grows. We get a spurt of productivity growth just from greater efficiency without needing big investments. And then innovation and new businesses, investment, technology kicks in. There would be a lot of lawyer, accountant, lobbyist, compliance officer, and regulator unemployment. Well, Uber needs drivers. Politically, this is free-market libertarian nirvana.
If I had to suggest alternative policies to the ones John suggests (and keep in mind I like some of his), I’d recommend: A) spending more on road, rail, water, electrical, and broadband infrastructure while dramatically cutting costs; B) spending more on basic and applied research; C) reforming the patent system, especially with regards to software and business-process patents; and D) reforming urban land-use policy, especially by means of land value taxes or close equivalents.
Structural reforms don’t generate massive short-term changes in growth rates because they are fiddling with marginal decisions, making people marginally more likely to invest, or change jobs, or get an education, or start a company. By permanently changing those marginal decisions, structural reforms act like glaciers, slowly carving the economy into a new shape over long periods of time. Think of occupational licensing reform. If you enacted that tomorrow, GDP would not move at all. But over the course of the next few years, as new people graduated high school or college, or lost jobs, some of them, on the margin, would now find it worthwhile to become a physical therapist, or a hairdresser, or an interior decorator. They’d presumably be more efficient in these positions than flipping burgers, so the economy would be more efficient and GDP would be higher. But this takes years.
This is what happens when humans are free to think, imagine, create, innovate, disrupt, profit, and flourish. Similarly, here is Deirdre McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World:
Give a woman some rice, and you save her a day. That’s the simplest form of what Christians flatter themselves by calling “Christian charity.” Give a man some seed and you save him for a year. That’s the plan of investment in capital, tried for decades in foreign aid without much success. But give a man and a woman the liberty to innovate, and persuade them to admire enterprise and to cultivate the bourgeois virtues, and you save them both for a long life of wide scope and for successively wider lives for their children and their grandchildren, too. That’s the Bourgeois Deal, which paid off in the Age of Innovation.
If you think that corporate “short-termism” is a problem — and it may well be — what’s to be done? In a recent The Week column, I explored several approaches to encourage business spending on investment rather than on investors. (As I did in this blog post.) It’s an issue also on the radar screen of Harvard business professor and innovation guru Clayton Christensen. Here is one bit from a Harvard Business Review piece he authored:
One way to repurpose capital is through tax policy. Our alumni had a spirited exchange on the wisdom of imposing a Tobin tax on financial transactions to reduce high-frequency trading, which would increase illiquidity and therefore (it is thought) investment in innovation. Such a tax would be anything but simple to devise and enforce, but a growing body of academic and empirical evidence suggests it could be effective at repurposing capital by lengthening shareholder tenure.
Now as a new Federal Reserve study notes, trading costs have dropped by more than two-thirds over the past 30 years. The study does not look at the short-termism issue but rather at the impact of low transaction costs on asset prices and financial stability. Maybe if a “stock market is more strongly regulated and stabilized, managers have less incentive to take large risks, as the upside gain becomes limited.” This is very much linking stock–driven executive pay on Wall Street to the Financial Crisis.
But author Bo Sun offers a caveat to the conventional wisdom in that this “may overlook the increasingly important role of the stock market as an information provider. Trading frictions induced by regulations in the stock market may reduce speculative trading activities and may help stabilize market prices, but they may also reduce the benefits of information produced in the stock market in limiting managerial risk-taking. The real effect of the information contained in stock prices calls for more studies on the costs and benefits of financial market regulations.”
If you believe that markets provide useful information to decision makers, then you want to be careful in making trades harder or pricier to execute. As the author notes, “One recent development in the corporate finance literature is the emphasis on the ‘feedback’ effect. This literature challenges the traditional view of the financial market as merely a mirror image of real economic activities, emphasizing that activities in the financial market reveal information and affect (thus ‘feed back into’) the behavior of firms and other economic actors.” An interesting perspective especially as financial transaction tax ideas seem to be gaining some momentum on the left and among Democrats generally.
Much like the suits at Cyberdyne Systems, James Sherk and Lindsey Burke of Heritage do not fear the rise of the robots. From their new paper “Automation and Technology Increase Living Standards”:
Automation reduces both labor costs and prices. Lower prices leave customers with more money to spend elsewhere, increasing the demand for labor elsewhere in the economy. Automation changes where and how people work, but it has not historically reduced the overall need for human employees. Little empirical evidence suggests this time is different. … Businesses do not appear to be automating human tasks at a faster rate than before. If they were, this would increase measured labor productivity growth. This has not happened.
And their chart to partially support the above point:
I dunno. For one thing, I am not sure whether I believe that chart’s ability to reflect accurately what’s happening in the digital economy. More importantly, I think it’s easy to fall into the trap of believing that just because automation so far has not eliminated the need for lots of human workers means it won’t in the future. It’s a comforting thought. Sherk and Burke offer the textbook, Econ 101 answer: “Automation reduces the need for humans in particular tasks, but employees have historically moved to new or different sectors of the economy as a result. Little evidence suggests this time is different.” Yet even if they are correct, this process can be a wrenching one. As my colleague Michael Strain has explained:
Today, real wages and per capita income are both enormously higher in the West than they were when the Luddites were destroying labor-saving machines during the Industrial Revolution, and to date the machines have not eliminated the need for human workers. Why would a technological revolution today have a different outcome than the Industrial Revolution? No need to worry, argue many economists.This dismissal is too flip.
Even if the standard economist’s answer is correct when comparing the 21st century to the 19th, it omits the fact that living through this period of transformation was wrenching. Many economic historians believe that the British working class had to endure decades of hard labor with little improvement in their quality of life before they were able to enjoy the benefits of the new economy. Real wages fell dramatically for some occupations. Many who held those occupations couldn’t be retrained to compete in the new economy. Lives were shattered. Some families suffered across generations. People flocked from the countryside to dirty, disease-infested cities. For decades, there was deep social unrest. British society was shaken to its core.
Just think about the progress made in autonomous vehicles and the fact that the most common job in most states is that of truck driver. A rising technological tide may not lift all boats, at least over the short and medium term. And even if most Americans eventually prosper, many Americans may not. That matters. Indeed, if you believe the Great Stagnation scenario put forward by Tyler Cowen, a large majority will not flourish in the new economy. Sherk and Burke do offer a few solid policy ideas such as occupational licensing and education reform. But if markets do not provide a societal acceptable living standard, then society through government may need to respond more directly, such as through large income subsidies that make work pay more. It is a policy direction that many on the right are squeamish about, despite the success of our existing wage-subsidy program, the Earned Income Tax Credit. And that may create a bit of a blind spot when thinking about the challenges — as well as the opportunities — from advancing technology.
View related content: Pethokoukis
In his recent book, “The Conservative Heart,” AEI President Arthur Brooks discusses the fine line between abundance and attachment. Brooks retells his experience meeting Swami Gnanmuni, a management-consultant-turned-Hindu-swami at the Swaminarayan Akshardham Hindu temple in New Delhi. When describing his conversation with the swami about free enterprise, Brooks writes:
What would this rebel who had left the capitalist world behind have to say about free enterprise? I took a deep breath, and posed my query nonetheless: “Swami, is free enterprise good or bad for the soul?”
His response was rapid. “It’s a good thing! It has saved millions of people in my country from starvation.” This was not quite what I expected. “But you own almost nothing,” I pressed. “I was sure you’d say that money is corrupting.”
He laughed at my naïveté. “There is nothing wrong with money, dude. The problem in life is attachment to money.”
Natalie Runkle is an editorial intern at AEI.
View related content: Pethokoukis
In a recent TED Talk, Google’s Chris Urmson gave the world an insider’s look at how driverless cars see the road. It’s really mind boggling that this technology is anywhere close to working. For instance: Urmson’s self-driving system makes decisions approximately 10 times per second. That’s about 1,000 chances per mile to make a mistake – and to cause an accident. On the street, a driverless car must observe and predict even more accurately than a human driver. First, it establishes its position by aligning a map with sensor data. The car is also constantly “looking at” its surroundings – taking in and assessing information.
In his presentation, Urmson showed an image of all the things the car “sees.” Purple boxes denote other cars, the red shape in the middle represents a cyclist, and the small orange dots in the distance are caution cones:
Not only does the car need flawless perception of its moment-by-moment surroundings, it also needs to predict what each nearby car, pedestrian, and moving object will do. After accounting for every detail, the car then chooses a trajectory, a speed, and how much to accelerate or decelerate.
To work as flawlessly as Urmson intends, driverless cars must also understand human driving conventions. For example, they need to recognize emergency vehicles and react appropriately to officers’ hand signals. To make this possible, Urmson and his team are developing a way for their cars to learn from shared information. The cars analyze aggregated data about each type of object they encounter, and then create predictive models of those objects’ future behaviors.
A driverless car’s constant uptake of information can also help it handle nearby drivers’ reckless or anomalous behavior. Thanks to laser data, one of Urmson’s cars can observe and respond to a swerving cyclist more adeptly than a human driver ever could. Car accidents result in 1.2 million lost lives every year, said Urmson. If his technology is successful, it could save many.
But why develop driverless cars? Many would just as soon improve current driver-assistance technologies – which prevent accidents by correcting drivers’ mistakes – until they become essentially driverless. According to Urmson, this is a dead-end approach. As driver assistance gets better, drivers get more careless, he said. Urmson argued that we need to stop working around the driver, and instead, replace him with a near-foolproof, self-driving technology.
Urmson ended his presentation with an optimistic prediction about the future of driverless technology. “My oldest son is 11,” he said, “and that means in four-and-a-half years, he’s going to be able to get his driver’s license. My team and I are committed to making sure that doesn’t happen.”
Natalie Runkle is an editorial intern at AEI.
View related content: Pethokoukis
In his recent book, “The Conservative Heart,” AEI President Arthur C. Brooks looks at conservatism and how it relates to the American Dream:
Millions of Americans believe the American Dream is no longer within their reach and that conservatives don’t care. Millions of Americans don’t see the benefits of democratic capitalism extending to them, their families, and the poor. Millions of Americans no longer believe that their children will be better off than they had been. And millions of Americans see conservatives as oblivious to these problems. This is a crisis of confidence in American exceptionalism – and in American conservatism.
Natalie Runkle is an editorial intern at AEI.