OK, So We All Agree Inequality Has Gotten Out of Hand: What Next?

No one said anything last night about black smith wages

No one said anything last night about black smith wages

Almost everybody now agrees we have an acute problem (in the U.S. and in most advanced economies) around income inequality, wage stagnation, and the disappearance of the middle class.  President Obama made these issues the centerpiece of yesterday’s State of the Union message. The other day, the President’s 2008 opponent, Mitt Romney, said he may run for President again because he wants to help the poor, the disadvantaged, workers, and the beleaguered middle class.  Mitt was a “severe conservative” before he became a severe liberal.  Go Mitt!

Here is the best single chart — heretofore called, “The Chart” —  I’ve seen depicting the inequality and wage stagnation problem.  (Thank you to my friend and colleague Kurt Lightfoot for sharing  this).

Workers’ Hourly Compensation Versus Productivity

The upper line tracks “productivity” in the U.S. economy since 1948.  Productivity represents the combined effects of technology and harder/better work to (potentially) raise prosperity and the standard of living.  The lower line shows the trend in the compensation of workers. The two lines tracked perfectly from the end of World War II to the mid 1970s. Since then, workers haven’t shared in the prosperity.  You can see full analysis and discussion here.

So, what might Mitt do if he becomes President?  Am afraid the things which need to be done are anathema to Mr. Romney’s party and even to many (a majority?) of Americans, at this point in time.  Mitt and his party will support their usual remedies for greater prosperity (and for any other ailment):  lower taxes on the rich and corporations, less regulation, and more “freedom” for all. Of course, not all of that is bad. But is there any evidence it works?  Maybe giving lip service to wage stagnation is a step forward; but it can just as easily be a bait and switch.

Obama’s State of the Union address proposed other remedies, which could help move the lower line on The Chart a little higher, like a raise in the minimum wage and better access to education, but those won’t (and really can’t) by themselves get us back to the trend of shared prosperity.

If we want compensation to track closely again with productivity, It will take reviving organized labor (with reforms), tempering the effects of “free trade,” genuinely repairing an unfair tax system, and seriously containing health care costs (so that some of employers’ premium costs can move to the wage column).

Regarding “free trade,” the President last night championed the Trans Pacific Trade Agreement (some call it NAFTA on steroids). Those agreements, which Democrats supported as heartily as Republicans, have contributed greatly to the dismal trend in wages.

As this blog has voiced many times, we need a new paradigm and intellectual basis for “free trade” agreements,  which doesn’t make them bobsled vehicles for race to the bottom.  That said, this blog doesn’t champion “protectionism,” nor yearn for Smoot-Hawley II.


4 thoughts on “OK, So We All Agree Inequality Has Gotten Out of Hand: What Next?

  1. Norm Olson

    Back in the last elections a Batman movie was big with a character named Harvey Dent, “Two-Face”. Romney is the ultimate Two-Face. He changes his opinion more than most people change their underwear. He cannot be trusted. The rest of the republican party are no better. John “The Orange One” Boehner sat like a statute throughout the President’s address. There is little hope that the many proposals, which will help the middle class, will pass because the republicans don’t want to see Obama succeed. That is too bad because the republicans think that obstructionism that hurts our country isn’t as important as their politics.


  2. Irv Lefberg Post author

    Romney has no core. Boehner has been in survival mode for some time. But many of the House R’s do have a core and heart felt beliefs, though I don’t agree with most of them. I have more respect for House far right wingers than for either Romney or Boehner.


  3. Kurt

    Comparing1979 to today, how badly has the middle class been screwed?
    – Larry Summer’s answer: $11,000/year.

    What would that $11,000/year mean to someone in the American middle class?

    “If the United States had the same income distribution it had in 1979, the bottom 80 percent of the population would have $1 trillion — or $11,000 per family — more. The top 1 percent would have $1 trillion — or $750,000 — less. ”

    Seems clear that we know who has had the negotiating leverage since circa 1979.



    1. Irv Lefberg Post author

      Thanks Kurt. Too bad Summers wasn’t saying these things when he was in power , so to speak. Nice that his estimate of how much each worker:household lost because middle class didn’t retain it’s share of the pie is slmost exactly what we calculated earlier -/ $11000 versus $10000. That buys a lot as you suggest. Every thing from better health insurance to childcare to owning a modest home to getting one nice vacation a year



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