The recent Congressional Budget Office report on incomes from 1979 to 2007 has depressing news for believers in egalitarian free-market capitalism. Since 1979, the after-taxes income of the bottom 80% of Americans as a share of the total national after-taxes income has dropped from 57% to 47%; every one of the first four quintiles has seen a drop in its share of the national income. Yet even the gains in economic strength for the top quintile have been unevenly shared. The 81st-99th-income-percentile range has seen its share of the national income stay the same. Meanwhile, the top 1% of earners have seen their share of the nation's after-taxes income climb from 8% in 1979 to 17% in 2007. These numbers suggest that the profits of the national economy (broadly considered) have increasingly flowed to the top.
There are broader policy reasons that explain this change. For much of the past decade and beyond, the prevailing Republican (and, frankly, bipartisan elite) orthodoxy has been as follows: lower wages, lower prices, and an empowerment of capital over labor. The CBO numbers reflect this dynamic, as they show the share of income due to labor declining since 1979, while the share of income due to the combination of capital and business income increasing. The claim made continually on behalf of statist globalization over the past twenty years has been that lower prices on various goods through cheaper labor would reward the American consumer, and that the increase in spending power on tchotchkes would exceed the decline in wages due to outsourcing. Similar claims have been made on behalf of massive amounts of illegal immigration: poor workers in the shadows enrich Americans as a whole through providing a plentiful peon class to act as babysitters, home-builders, fast food workers, and other assorted "service" positions.
This decline in labor cost provides a de facto empowerment of capital: if you earn money from investing rather than collecting a paycheck, having cheaper resources of labor allows your dollar to go much further. The "ownership society" sought by President Bush attempted to leverage this dynamic. By making as many Americans investors as possible (especially through investing in the housing market), the Bush administration tried to place hundreds of millions of Americans in the position of the victorious investor class in order to compensate for the decline of the labor class.
However, there are noticeable shortcomings to this model. First of all, not all Americans can join the investor class, so a substantial number of Americans lose out in an investor-centric model. Moreover, housing, the investment vehicle favored by the Bush administration, is a dangerous institution on which to base an investor-centered economy: an individual house is nowhere near as fluid an investment vehicle as a stock portfolio, and the fact that most people need somewhere to live complicates the role of a house as an investment commodity. Since most people need to take on a mortgage in order to buy a house, using the house as the doorway to the investor market requires Americans to take on considerable amounts of debt, and the debt needed to keep the housing-investing game going will balloon (as the 2000s proved).
And the decrease in prices due to cheaper labor is not spread equally across all sectors of the economy. Those sectors least undermined by outsourcing and domestic and international low-skilled workers, such as health-care, have seen some of the biggest price increases over the past decade. Jeans at Walmart may be less, but your health insurance premiums have doubled. With wages stagnating or declining, health-care bills and others like them eat more and more into a worker's paycheck. So the decline in wages is not fully compensated for by cheaper goods and services.
A final limit for the low wages=low prices model is that the consumer often does not feel the full price benefits of the decline in worker wages. Instead, the "savings" that many companies find through shipping work abroad or otherwise cutting labor costs are translated into bigger compensation packages for elite management and the investor class. While current "globalization" has witnessed the decline in wages for the middle and working classes, it has also seen the the pay of upper management (those who control large amounts of capital) increase. The recent history of American business is saturated with stories of companies that close down their American factories while giving upper management colossal paydays. So many of the presumed benefits of declining wages are accruing to an increasingly narrow band of the population.
With wages shrinking and the spigot of easy credit turned off, it's no wonder that public demand has withered.
What might be slightly more interesting, though, is a movement among some factions on the right and left toward a policy reversal: using higher wages and not lower wages as a stimulant for economic growth. Under this model, rising incomes for working- and middle-class workers would increase consumer demand. Rather than the cost of jeans production going down, workers would have more money to spend on jeans---and housing and cars and medical care and foreign trips. Economic growth for the bottom 90% of wage-earners would in turn provide new opportunities for the top 10%. Things weren't exactly bad for top-tax-bracketers during the egalitarian 1950s and 1960s or during the later part of the 1990s, when the income of a broader range of Americans increased in real terms (though income inequality increased in the 90s, as well). Rather than trickle-down economics, we would instead have foundation-up economics.
Nurturing this foundation in part depends upon increasing the skill level of the American workforce, so that workers can make the most of cutting-edge technologies. Education as driving future economic growth has perhaps acquired the somewhat dusty ring of tired dogma, but, like many things that may seem trite to the jaded, it has some truth to it. Reforming our immigration system, making new investments in fundamental research, and pushing back against social dysfunction (among other policies) would go a long way in the direction of improving the skills of America's workforce and would likely improve the wages of many workers.
But mere training is no panacea. With all due respect to current education "reform" movements, people are not mere containers for educational inputs; they exist in vibrant, heterogeneous communities, where all do not all have the same aptitudes. America will not and probably cannot be a nation populated solely by Facebook founders and investment bankers and political pundits. It will have maids and clerks and factory technicians and farmers and truckers, too. We can and we should have an economic system that offers advancement to all productive enterprises of worth and merit.
(And make no mistake: the People's Republic of China is witnessing great economic growth not because some of its students are doing well on international standardized math and science tests but because it has pursued an aggressive policy of protecting and developing Chinese industry. The decline of the US economy has less to do with the notion that it is graduating "insufficient" numbers of math and science majors and more to do with the fact that whole sectors of the economy have withered.)
Part of foundation-up economics also thus depends on protecting the livelihoods of so-called "lower-skill" workers (though, in reality, it does take considerable skill to build a house or run complex machinery or sundry other tasks). It may be true that the current statist flavor of globalization may increase inequality somewhat, but the extent of this inequality is in part due to other domestic policies. Our immigration and trade policies in particular have allowed those on the higher end of the ladder to leverage worker against worker in the pursuit of maximizing profits. Moreover, many of the gains for the wealthiest have been due not to the fair functioning of a free market but to the manipulations of state power.
It is possible to realize an economy that combines the exuberance of the market with a sense of popular prosperity. However they may differ in their methods of reaching this goal, many Republican and Democratic presidents have aimed for it. For a number of years now, we have empowered capital through cheapening labor; now may be the time to increase the value of labor in order to find new opportunities for capital.
From a conservative perspective, an egalitarian economy, where all may have ready hope of living a comfortable life and of advancing economically, is far better than either an economy where the vast majority of workers need government checks to survive or an economy where the super-wealthy plunder the resources of the public and leave the populace as a whole to malinger. Some extremists of the left and of the right would push the economy in one direction or the other.
Neither extreme is sustainable. A happy, prosperous workforce is not only the best environment for defending the free market; it is also one of the greatest promises of the free market.(Crossposted at FrumForum)
