In “Matewan,” the 1987 film about organizing West Virginia coal miners, union activist Joe Keenehan, played by Chris Cooper, tells a group of dubious miners: “There’s two types of people. Them that work and them that don’t. You work. They don’t.”
With that as a Labor Day message, let’s consider some very important structural changes in our economy and on that some economists believe is a major reason why we’re not seeing very much of a recovery from recession.
Wage inequality is a rising phenomenon that has not been dealt with, according to Robert B. Reich, former Secretary of Labor. Despite the entry of women into the labor force in a big way and two wage earners per family in many cases, the purchasing power of average wage-earners has been decreasing over the past several decades. One result is that the middle class no longer has as much dollar clout to buy enough goods to facilitate more production and more jobs. Hence, our unemployment rate hovers at about 9 percent or so without much change.
How come? One reason is that many of the economic gains over the past several decades have gone to the richest people. Reich writes:
“In the late 1970s, 1 percent of American families took in about 9 percent of the nation’s income; by 2007, the top 1 percent took in 23.5 percent of total income.”
Okay. So, the rich are getting a lot richer. But if we believe in trickle down economics a la Arthur Laffer and Ronald Reagan, this is a good thing since everyone will share in the benefit, lower taxes on the rich will generate more wealth and we’ll be very happy.
Well, not exactly, as Reich notes, the new rich do not spend all that much of what they have. And these days, if they do invest, their money is just as likely to go to the Cayman Island, China, the Isle of Man, Cyprus or anywhere but the U.S.
The data about the income flows at the top comes from Thomas Piketty and Emmanuel Saez, two Berkeley professors, who have studied income tax returns since the taxes were first levied. Income patterns were fairly similar among the rich of various countries until the 1970s. After that they remained stable in Europe and Japan, but “increased enormously in the United States and other English-speaking countries.”
The chief reason, they say, is that the pay for top corporate managers suddenly rose exponentially. In fact, According to BusinessWeek (my alma mater), in 1980, the average CEO of a major firm made 42 times the average worker’s pay. That rose to 85 times by 1990. By 2000, it had reached an incredible 531 times that of the average hourly worker.
Reasons given for this anomaly, according to Saez and Picketty, are that being top boss is a lot harder, but they note it doesn’t explain why CEO pay did not rise by the same rate in countries such as Japan where one might assume running Toyota or Sony is not much easier. A second reason could be that labor unions have been beaten down so much that they no longer can act as a reasonable brake on CEO greed. A third reason could be that CEOs have been allowed to set their own pay terms and “extract rents at the expense of shareholders.”
The same pattern can be seen on university campuses where being president has gradually become enormously lucrative. John Casteen, the former president of the University of Virginia made $797,048 in 2008 while the median pay for a public university was $427,400. Eugene Trani, former head of Virginia Commonwealth University made $532,000, but that doesn’t include perks such as directorships of corporations. He made $159,000 this year as a director of tobacco firm Universal Corporation.
This kind of largess has made London’s Economist magazine question if America’s colleges are going the way of car companies. Against a backdrop of such big salaries for top administrators, college fees have soared beyond the ability of many Americans to pay for them. Between 1993 and 2007, administrative costs at Harvard have gone up 300 percent. Does this mean schools are hiring superstar professors? Not really. They tend to spend more on the president’s office or on luxurious dorms or fancy sports stadiums than on actual teaching.
The libertarians who dominate this blog stick their heads in the sand and choose not to see these harmful trends. Instead, they want more tax cuts for the rich or they want to keep George W. Bush’s tax cuts, which, in a big contradiction, have led to the budget deficits they have recently discovered and despise. If you raise any of these issues, they scream, “income redistribution!” as if it were the Bolshevik Revolution.
But if you’ve ever visited the Winter Palace in St. Petersburg you might realize that the Bolshies had a point.
Peter Galuszka
