Why Is It? Wages, Profits, and Civil Unrest

Why is it that when pressure builds to modify laws and regulations so that our national wealth can be spread a little more evenly it is called class warfare, but when those laws and regulations are abolished so that the wealthiest among us can exploit the rest of us more than in the past, it isn’t?

Why is it that class warfare is asymmetrical? When the poor push back it is class warfare, but when the rich scarf up billions it isn’t.

Why is it that the current crisis seems to have been caused by “free spending governments”? Was there not a private sector crisis prior to the onset of government budget woes in most of the western world?

Why is it that businesses are apparently beset with uncertainty and thus incapable of hiring because they perceive a flood of new regulations that would eat into profits? Profits that are at bloated fifty year highs, and which have recovered since the low point of 2008. Profits that are being generated by productivity gains that are not being shared with workers. Record profits that have been created during the tenure of a Democrat in the White House, a Democrat who is attacked as anti-business despite those record profits.

Why is it that we are bombarded with commentaries demanding the “fixing” of Social Security, when that system isn’t even broken?

Why is it that our workers are hapless, old fashioned, and lacking in the skills to compete, when they seemed to be doing just fine before the crisis erupted when unemployment was low? Did they all suddenly forget their skills? Are we suffering from some massive worker amnesia that requires us to to endure long term high unemployment because our workers are simply not high quality?

And why is it that we are introducing policies to fight inflation when there isn’t any?

All these things vex me. All these examples are drawn from the press of the last few days.

All are illustrations of just how much in control of the public discourse business interests have become.

The skew towards profit and away from wages in terms of sharing of productivity is one of the major reasons our middle class is shrinking. It is a reason that it borrowed so much. Faced with the attack from a business community intent on creating shareholder value – at all costs – our middle class had to resort to desperate measures to maintain an increasing living standard. First it was two wage earning families, then it was debt. Now those are exhausted and the middle class is faced with a bleak future. No wonder some of them have turned to right wing extremism. The loss of the future is enough to make anyone angry. It is only now, with the “Occupy Wall Street” movement that we are seeing an equivalent left wing effort. And already our the plutocracy is hitting back: the mayor on New York accuses the occupiers as attacking struggling people. Wall Street? Struggling people? Only in a twisted world.

Back in the mid-1950’s Kaldor developed a Keynesian theory of distribution. Its essence was that there is, or ought to be, a balance in the way in which we allocate profit and wages from productivity gains. In periods when wages are dominant, the incentive for capitalists to invest drops because profits are low. Conversely, when profits gain the upper hand wage earners are squeezed and become rebellious. Either extreme represents danger for the economy. Too much emphasis on wages and we suffer excess demand and under-investment. Too much emphasis on profit and we suffer too little demand and idle capacity. Guess where we are today.

The model is simple and has been forgotten. But it deserves another look. It provides a sensible prism through which to look at contemporary events.

Wages are at a fifty year low as a percentage of GDP. Profits are at a fifty year high. The economy is out of balance. We lack demand. We have an excess of supply. The solution surely screams at us: we need more demand. We need to restore the balance. Wages must rise. That will add to demand and allow debt to be paid down. It will get us back on track.

So why is it that all those comments I gathered from the press tilt the other way?

Why is it that our elite and our media appear to think we need to double down on encouraging more profit and less regulation?

Because “we the people” no longer run our democracy.

Back in the 1970’s the business community broke away from the great post-war social contract that had powered the economy during the 1950’s and 1960’s. In the face of nascent globalization and rising competition profits were under pressure. So business poured cash into right wing politics. It funded the establishment of think tanks. It provided cash to lobbyists. It gave freely to politicians who advocated deregulation. It was a sustained and well financed attack on democracy. The result was the advent of Reaganism, which has subsequently morphed into modern Republicanism and its intransigent opposition to all social programs, regulation, and public or collective activity. Money talks. Money won.

The rising cost of getting elected caused both parties to become beholden to corporate money. Inevitably this moved the center of gravity of politics to the right. So much so that even Reagan who raised taxes several times appears to the left of today’s Republican mainstream.

This flood of money perverted democracy, twisted it, and ensured that business was able to dominate the debate. It was abetted by the legal process that made cash equivalent to free speech – a limit on the cash flow was seen as being a limit on the freedom of speech.

All this took place simultaneously with the emergence of the concept of “shareholder value” as the driving ideal of business. Other aspects of running a balanced business were marginalized. Nothing was to stop the generation of profit for the shareholders. Nothing. Downsizing, outsourcing, offshoring, gutting middle management, eliminating worker training, cutting benefits, switching from defined benefit to defined contribution retirement programs, opposition to unionization, opposition to minimum wages and a host of other approaches became the mantra of business. All in the pursuit of shareholder value.

Capitalism exposed it mean spirited and raw self.

Modern socio-economic history has been largely defined by the ongoing tussle between capitalism and democracy. They are antagonists. They are not, as they are frequently presented, complementary. Capitalism seeks to create wealth, and fares best in an environment where that wealth can be concentrated. It depends on the sanctity private property and exchange. It conflates these things with freedom. It ignores other sources of freedom. Unfettered capitalist style freedom inevitably allows wealth to cluster because wealth begets more wealth. And it tends to concentrate power too. Monopolies pop up. The supposed benefits of the struggle within free markets gets overwhelmed by the darker side of human nature. The urge to profit eliminates, eventually, all the feedback from competition that the textbook tells us mitigates the wilder excesses of capitalism.

Capitalism in the real world, rather than in the fantasy of right wing economics, needs to be limited.

By democracy.

The democratic urge is to share the wealth. Hence the creation of safety nets for retirement, unemployment, and health care. Hence regulation to protect the environment. Hence the introduction of worker rights in the work place and the protection of child labor laws. Inevitably the cost of such programs weighs more heavily on the wealthy, and on business owners than on the poor. But the poor are in the majority so they dominate in a purely democratic process. All these programs have been fought by business as being costly and as hampering employment. Without the power of democratic – collective – action none would exist today. As long as we are a democracy they will survive.

As long, that is, as money doesn’t intrude to destroy democracy.

The tension between the two rival systems prevents either from dominating. In a well balanced society we benefit from both. Capitalism creates wealth and rewards the innovation that allows growth in productivity. Society breaks free from the Malthusian trap of scarcity and squeezes ever more stuff from its limited resources. Hayek was right when he saw a capitalist economy as a great big learning device – it is that learning, that continual discovery spurred by the lure of profit, that induces the productivity we all benefit from. Democracy ensures that we do, indeed, all benefit, and that the few do not dominate the many. And by making sure the wealth is spread democracy produces a strong middle class able to spend on the goods and services the capitalists produce.

This is the virtuous cycle the apologists of capitalism so frequently point to.

It is also the cycle that has broken down since the 1970’s.

When business can avoid sharing the fruits of productivity improvement by capturing the system of government, and by playing off foreign workers against domestic workers, democracy can no longer act to mute capitalism. Big business by being trans-national can ignore the purely national. Capital flows more easily than labor. Shareholders reap rewards from activities that harm their country of residence. But, to them, the damage to their homeland is offset – more than offset – by the gains from increasing their share of the productivity improvement.

And as long as big business distorts politics the imbalance in wealth will grow, the middle class will wither, and social unrest will emerge.

This is the central issue of our time. It is the root of the crisis. And we will not restore balance until we eliminate the kinds of biased comments that I reacted against at the beginning of this essay.

Why is it that more people aren’t angry?

They will be. Just you wait.