According to the Urban Institute, the distribution of income and wealth in the United States has become distressingly imbalanced. Since 1963, the income of families in the top 10% has increased by roughly 90%; while the income of those in the middle has risen by only 20%. And the income of those in the bottom 10% is up only 10%.
Net worth of these top, middle, and lower income groups has changed similarly. Those in the 99th percentile of wealth saw their wealth increase by sevenfold and the top 10% saw a fivefold increase. Those in the middle didn’t do nearly as well, doubling their wealth; while those at the 10th percentile actually went down. They had no wealth in 1963, but they were an average of $1,000 in debt in 2016.
In 1963, those near the top had six times the wealth of those in the middle. By 2016 they had 12 times the wealth of those in the middle.
How did this happen?
Productivity increases taken away from workers
Economists have long felt that wages increase as productivity increases. That is if it takes five hours of work to produce a widget, and new technology reduces that to three hours, some of that gain goes back to the workers in the form of increased wages.
That relationship changed in the 70s. In the next 40 years, productivity doubled, but wages stagnated. Why did this happen?
One of the big reasons was that companies, with the help of the Republicans, managed to beat the unions. Overall union membership dropped from 20% in the early 80s to 10% in 2019. In the private sector membership was only 6.2%.
Without unions to stop them, companies stopped sharing productivity increases with their workers. Instead, they used the productivity increases to buy their company’s stock on the open market (a “buyback”), reducing the number of shares available and increasing the stock price (and the value of their options).
Raising the stock price becomes paramount
Harvard Business Review research shows that “…more than half of corporate profits in the U.S. now go toward share buybacks. Between 2003 and 2012, the 449 publicly listed companies on the S&P 500 allocated $2.4 trillion —some 54% of their earnings— to buybacks. In 2019, stock buybacks by U.S. companies totaled nearly $730 billion.”
Some economists and investors believe that using excess cash to buy up their stock in the open market is the opposite of what companies should be doing. Not only does this money not go to raising wages, but money that goes to shareholders in a stock buyback program could have been used for growth, maintenance of production facilities, and upkeep.
Republicans have only one solution to every economic problem: Lower income taxes (except for regressive payroll taxes like Medicare and Social Security). And they say they want smaller government, although they never actually make it smaller.
Republicans are smart politicians. They knew they couldn’t go after what they wanted without at least appearing to do something about stagnating wages. So they came up with a plan. If it weren’t so disingenuous, I’d say it was genius.
They assigned blame for the stagnation in wages to free trade and increased immigration. Then, instead of looking to the government to fix the problem, they blamed the government for causing it. Ronald Reagan famously said that the government wasn’t the solution to the problem it was the problem.
The myth of Supply Side economics
They topped off this attack on government and the working class by bringing in the good fairy, Economist Arthur Laffer. His “supply side” theory of economics argued that if you increase the supply of goods and services by reducing regulations and cutting taxes, then sales, revenues and taxes will all increase. Lower rates, more revenue.
This was the opposite of the Democrats’ liberal economics, which argued that demand, not supply, was the driver of the economy. Increasing supply without increasing demand was like pushing on a rope, they said. To make the economy grow, government had to do what was necessary to increase incomes for the middle class. (Two-thirds of GDP is consumer spending.)
There was one part of Laffer’s theory that the Republicans really liked. In certain circumstances, he argued, cutting tax rates would actually increase government revenues.
The Republicans went wild on this one. There was a free lunch after all. They ignored the bit about “in certain circumstances,” and set about convincing working-class Americans that there was a free lunch.
Trump accelerated this plan with his viciously anti-immigration attacks and his use of tariffs as weapons. Less educated white men, many from a long line of Democrats, voted Republican in increasing numbers. And in 2016, they turned the government over to an imbalanced, delusional misogynist.
There were some problems, however. Removing regulations from the housing market led to “liar loans” and “no doc” loans (“whatever you say, we’ll believe”), and a huge crash in the economy at the end of the second Bush era, leading to the election of Barack Obama. And rather than retreat, deficits and debt soared (Arthur Laffer said his theory had been misunderstood).
Doubling down on debt
Trump ignored Laffer’s retreat, cutting income taxes yet again. This drove deficits and debt to levels not seen since WWII. Looks good for a while, but eventually it will result in disaster.
Seventy million Americans still believe in Trump. The magical formula (lower tax rates, higher tax revenue) remains their guide.
The conservative economists who bought Laffer’s argument have now recanted. Tax cuts do not increase government revenues. Tax increases raise government revenue. And President Biden (there’s a certain ring to that) will propose increased income tax rates.
Republicans will oppose tax increases, but they won’t have a plan to cut the deficit and halt the rapid rise of the debt after the pandemic. The reason they won’t have a plan is that the only other way to lower the debt is to slash Defense, Medicare and Social Security. As economist Paul Krugman says, “…the US Government is an insurance company with a defense department attached.”
A better idea: Raising the wages of American workers
Instead of measuring economic success by looking at GDP, increasing wages ought to be the priority of economic policymakers, and the measure of economic performance under the Biden administration. We’d all be better off paying less attention to quarterly updates on the growth of the nation’s gross domestic product and focusing instead on the growth of workers’ paychecks.
Set aside, for the moment, the familiar (and legitimate) arguments for higher wages: fairness, equality of opportunity, ensuring Americans can provide for their families. This argument is that higher wages can stoke the sputtering engine of economic growth.
Perhaps the most famous illustration of the benefits is the story of Henry Ford’s decision in 1914 to pay $5 a day to workers on his Model T assembly lines. He did it to increase production — he was paying a premium to maintain a reliable work force. The unexpected benefit was that Ford’s factory workers became Ford customers, too.
The same logic still holds: Consumption drives the American economy, and workers who are paid more can spend more. The rich spend a smaller share of what they earn, and though they lend to the poor, the overall result is still less spending and consumption.
For decades, mainstream economists insisted that it was impossible to order up a sustainable increase in wages because compensation levels reflected the unerring judgment of market forces. “People will get paid on how valuable they are to the enterprise,” in the apt summary of John Snow, the Treasury secretary under President George W. Bush.
The conventional wisdom held that productivity growth was the only route to higher wages. Through that lens, efforts to negotiate or require higher wages were counterproductive. Minimum-wage laws would raise unemployment because there was only so much money in the wage pool, and if some people got more, others would get none. Collective bargaining similarly was derided as a scheme by some workers to take money from others.
It was in the context of this worldview that it became popular to argue that tax cuts would drive prosperity. Rich people would invest, productivity would increase, wages would rise.
In the real world, things are more complicated. Wages are influenced by a tug of war between employers and workers, and employers have been winning. One clear piece of evidence is the yawning divergence between productivity growth and wage growth. Since roughly 1970. Productivity has more than doubled; wages have lagged far behind .
The point is not that economists were completely wrong. Productivity obviously plays a role in determining wages. McDonald’s cannot pay workers more money than it collects from its customers. But economists were partly and consequentially wrong. Power mattered, too .
The importance of rewriting our stories about the way that the economy works is that they frame our policy debates. Our beliefs about economics determine what seems viable and worthwhile — and whether new ideas can muster support.
Preaching the value of higher wages is a necessary first step toward concrete changes in public policy that can begin to shift economic power. It can help to build support for increasing the federal minimum wage — a policy that already has proved popular at the state level, including in conservative states like Arkansas, Florida and Missouri where voters in recent years have approved higher minimum wages in referendums.
Higher wages, stronger safety net
In addition to policies that raise wages, there is a genuine need for a stronger safety net to ensure a minimum quality of life. The pursuit of economic growth has to be balanced against other imperatives, notably environmental protection. Wage growth by itself is not a corrective for the accumulated effects of racism or other social ills.
But a focus on wage growth would provide a useful organizing principle for public policy — and an antidote to the attractive simplicity of the belief in the magical power of tax cuts.
The value of such stories extends beyond public policy. The government, too, has limited power to increase wages. The nation also could use some Ford-like executives who can see that the public interest —or at least their own self-interest— is served by raising wages.
That won’t be easy. The affluent live in growing isolation from other Americans, which makes it harder for them to imagine themselves as members of a broader community. Their companies derive a growing share of profits from other countries, which makes it easier to ignore the welfare of American consumers. The nation’s laws, social norms and patterns of daily life all have been revised in recent decades to facilitate the suppression of wage growth.