YOU need a raise! Democrats need to focus on re-building the middle class

A few days before the last election, the Wall Street Journal published an article entitled, “Democrats lose their grip on voters with keys to the House.” The article began: “AITKIN, Minn.—The plumbers, drillers and truck drivers who arrive at the Birchwood Cafe before sunrise pour their own coffee, tuck away eggs and air gripes that help explain why some longtime Democrats now lean Republican. They are skeptical of President Barack Obama and don’t care much for his party’s support of federal safety-net programs. ‘You take a look at all the giveaway programs the Democrats have. Nobody wants to work anymore,’ said Dale Lundquist, a 69-year-old excavation contractor.”

The incomes of plumbers, drillers, truck drivers, and most other working class workers (not to mention most other Americans) have stagnated or declined over the last several decades. Workers’ productivity has continued to increase since the end of World War II, but their compensation became untethered from productivity in around 1979 and has not kept up since.

The median income of men with high school diplomas, adjusted for inflation, has fallen from $37,172 per year in 2001 (in 2013 dollars) to only $31,288 per year in 2013.[1] Plumbers, drillers, and truck drivers are falling behind despite working as hard as ever, but vote Republican because the Republicans have successfully branded the Democratic Party as the party that is in favor of taking YOUR money and giving it to “those people” who use it to avoid work.

A major sign Democrats need to change our economic messaging is that when registered voters were polled on “Do you think Republicans in Congress or the Democrats in Congress would do a better job of dealing with … the economy?” in late September, 50 percent said the Republicans would do a better job and only 39 percent said the Democrats. Voters are not diving into the details of what Republicans are actually proposing to deal with the economy, and Democrats are not doing nearly enough to help them understand what Republicans are really proposing. But Republicans know that the economy is the main issue, and have no problem staying on message that voting for them is voting for economic growth. Democrats need to pivot to focusing solely on a simple, compelling economic message while completely exposing the fallacy of the Republican policy prescriptions.

The Democratic Party is supposed to be the party of everyone who works for a living, or who recognizes that having a strong middle class is the surest way to broad economic growth. We are on the side of the white working class, who overwhelmingly vote Republican. We are on the side of everyone else who has seen his or her standard of living eroded over the years, because compensation has been unhooked from productivity, regardless of that person’s race, religion, or sexual preference. We should be the party that has proposals to do something about it, and that vows to fight for those proposals until they are implemented. Why should we cede the working class to Republicans?

We need one slogan that quickly encapsulates what we are about, that appeals to people’s self-interest, and that unites rather than divides us. The slogan needs to be simple, and focused on the one big thing.

It is: YOU need a raise!

Democrats believe that you should get a raise, and support policies that will give you a raise. Republicans support policies that prevent you from getting a raise.

While the specific proposals for giving YOU a raise are discussed below, Democrats should focus more on hammering on the slogan while explaining that Republican proposals prevent you from getting a raise.

Note that the focus is NOT on “income inequality.” People are less concerned about whether the rich have pulled so far ahead of most everyone else than they are concerned about how well THEY are doing. Giving YOU a raise has the effect of reducing income inequality without making income inequality a campaign slogan. Don’t demonize the rich per se, but do demonize the Republicans for advocating policies that have the effect of transferring wealth from the many to the few, that make sure that YOU DON’T get a raise.

The Democratic Brand

In an interview with the Washington Post’s Greg Sargent just before the 2014 election day, Guy Cecil, the executive director of the Democratic Senatorial Campaign Committee (“DSCC”), said: “It is our job to make Senate races about the two people on the ballot. Our advice to candidates is that when somebody disagrees with the president, they should say so, and that when somebody agrees with the president, they should say so… . For us to nationalize the election in a series of red states would play into the terrain that Republicans want us to play on.” 

It should be the job of the DSCC to promote the Democratic brand. If “nationalizing” the election makes a race more difficult for Democrats, we are doing it wrong. Democrats have let Republicans put us on the defensive, when it is Republicans who should be on the defensive. Their economic policies should be indefensible.

When the race is “about two people on the ballot,” people are just evaluating whether the Democratic or Republican candidate is a nicer guy, or by the end has the fewer negatives. We need to re-brand the Democratic Party as the party that wants to give YOU a raise, and to attack the Republican Party as the party that wants to keep your wages low. We should strive to get to the point where a majority of voters simply ask, “which one is the Democrat, that’s the one I’m voting for.”

Demand vs Job Creators

The Republicans’ policy prescriptions for “economic growth” uniformly proceed along the notion that it is businesses that are “job creators,” and that if businesses are just “unleashed” they will hire more people. Thus, all their policies revolve around cutting taxes for businesses or businessmen, or cutting back on regulations of businesses. Republicans have had remarkable success in implementing these policies, because they know what they want and go after them. Democrats have not had an organizing principle that tells them whether a policy that claims to be “pro-growth” is actually anything of the sort.

Here is the organizing principle: the problem today is not that businesses don’t feel enough love to hire more people, the problem today is a lack of what economists characterize as “demand.” Simply put, the customers of businesses do not have enough money to buy more from businesses, so businesses have no reason to hire more people or to invest. Republicans have this strange tendency to think that “customers” and “employees” exist in separate universes, and that if a business pays its employees less there will be no effect on customers.

The sound bite question to ask voters is: “Do you think the problem with the economy is that businesses are not making enough profits, or is the problem that YOU need a raise?” That distills the whole debate of supply versus demand down to an easy-to-grasp question, with an answer that most people would give, “I need a raise!”

Some Democrats are bound to ask: “What about our commitments to women’s reproductive issues, to immigration issues, to civil rights, to gay rights, to help for the poor?” Two answers: (1) The vastly overwhelming majority of women, immigrants, minorities, gays, are also people who need a raise. We are not stopping fighting for them when we change the focus from them as a separate interest group to them as a part of almost all of us, together, who need a raise; (2) Much of the backlash against women, immigrants, minorities, and gays comes from the powerlessness that so many working class people feel. People who are left behind tend to look for someone to blame, and Republicans have masterfully focused their attention on “undeserving others” who are getting goodies that are being denied to them. If people start to feel like they are getting ahead, they will be less resentful to others. Seeing to it that YOU get a raise will help all of those groups that Democrats traditionally fight for.

A word on education

More and better education is often advanced as a prescription for stagnating incomes. Be wary of claims that the problem with American incomes is that Americans need more education. It can be a way of trying to shift the blame for income stagnation on to the workers while continuing to implement policies that depress incomes. While more and better education is a great goal, this alone will do little to help with stagnating incomes. Consider that the median, inflation-adjusted income of men with bachelors degrees fell from $66,391 in 2000 (in 2013 dollars) to $58,270 in 2013. The income of men with doctorates fell from $96,409 in 2000 (in 2013 dollars) to $93,712 in 2013.[2] An individual may benefit from more education, as he or she moves up average income levels with each addition of educational degrees, but America has a whole does not see median income improvements, and without action on other fronts an increase in the number of Americans with bachelors, for instance, would tend to push down the median incomes as the supply of well-educated potential employees increases.

Democrats, therefore, should continue to advocate for policies that expand the educational opportunities for all Americans while resisting claims that these policies are all that are needed to address stagnating incomes.

How to Give Us Raises

There actually are policies that, if implemented, would give the American worker a raise. Republicans are against all of these policies, and will fight against them. That should give Democrats all the more reason to fight for them.

1.         Full Employment Policies. In practice, nothing produces across-the-board compensation increases like a tight labor market. To get an idea, consider that from January 1993 to January 2001, the period during which Bill Clinton was president, the number of employed people (total nonfarm) in the United States increased by 22.6 million.[3] From January 2001 to January 2009, the period during which George W. Bush was president, the number of employed people in the United States increased by only 1.3 million.[4]  In 2000, the per capita income in inflation adjusted dollars was 25 percent higher than it was in 1992.[5] In 2008, the per capita income in inflation adjusted dollars was 3 percent lower than it was in 2000.[6] Incomes were increased during the Clinton years because the labor market tightened as more people were hired, leading to increased demand, leading to more hiring, leading to higher wages, in a virtuous cycle. Incomes declined during the George W. Bush years because of slack in the labor market, pushing down wages, leading to decreased demand, leading to more job losses, in a death spiral.

How does America get closer to full employment? The Republican plans all insist that the way to do this is to cut regulations. For example, this was Ed Gillespie’s economic plan in the 2014 Senate election in Virginia: “The onerous tax and regulatory burden on U.S. businesses and American families is a boot on the throat of our economic recovery, and simplifying our complicated tax code and streamlining regulations are essential parts of any pro-growth agenda. We need to reduce one of the highest marginal business tax rates in the world to make American companies more competitive, while at the same time easing the tax burden on individuals and families, allowing them to keep more of their hard-earned money. Federal regulations should be subject to cost-benefit analysis, and outdated and unnecessarily excessive regulations should be repealed. Employers—and small businesses in particular—are being strangled by an unending cascade of burdensome regulations.”

Once again, the problem is NOT that businesses have too many regulations. Abolish all regulations tomorrow, and businesses would still have no reason to hire more workers because there would still be nobody out there who could afford to buy more of their products (and in fact businesses could very well lay off employees in charge of regulatory compliance without replacing them with anyone else). The problem is a lack of demand.

How does one create demand, when the crash in the housing market has left so many people with more debt than the value of their homes, when incomes are stagnating, and businesses are reluctant to hire? Republicans just hate the answer, and do everything in their power to deny it, but the answer is that when the private sector is unable to pick up the slack, it is up to the government to do something about it.

When the United States entered World War II, it had been recovering gradually from the Great Depression, but the economy still had a ways to go. The Federal Government immediately began a huge spending program to gear up to produce the weapons of war. The budget deficit exploded, but the Gross Domestic Product (“GDP”) nearly doubled in four years. Federal spending plummeted in 1946, but, after a short pause, the economy took off, as all the money that had been put into people’s pockets through that jolt of Federal spending were put to use to power consumer spending, which, in a virtuous cycle, stimulated more growth. Tax receipts rose as the economy grew and the Federal Government saw a balanced budget through the ‘50s. World War II increased the Gross Federal Debt by about $200 billion, but the growth of the economy after 1945 meant that this amount of debt was quite manageable. Americans agree that it was worth it to incur such debt.

We can do that again, except that this time we spend to re-build our infrastructure rather than on war machines. The benefits from infrastructure far outweigh the benefits from building B-17s, as repaired roads and bridges and upgraded power grids make our businesses run more efficiently and productively, whereas once a B-17 was built, it was sent overseas where it created a need to rebuild infrastructure in Germany.

The American Society of Civil Engineers has estimated that America will need $3.6 trillion in investments in infrastructure by 2020. At first blush, this seems like a lot of money, that would bankrupt America if the government spent this much on infrastructure over the next six years. Let’s put this amount into perspective.

The Congressional Budget Office projects that the total GDP over the ten years from the first quarter of 2015 through the fourth quarter of 2024 will be $188 trillion.[7] That’s clearly a figure that’s based on a number of assumptions, and the actual number could easily be within plus or minus ten percent of that number. So the $3.6 trillion needed for infrastructure represents just 1.9 percent of that projected GDP. Spent upfront in the beginning of that ten-year period could easily result in the GDP winding up being significantly higher than $188 trillion, just like all the spending for World War II jolted the economy into nearly doubling from 1946 to 1955. With interest rates on Federal debt so low these days, it makes sense to take advantage of these rates to invest in America.

The administration should invite the captains of industry into a room and tell them, “we want to pay U.S. businesses $2 trillion to rebuild America’s infrastructure, but, let’s face it, you’re not getting that money unless you can convince the Republicans that it needs to be spent.” Not only can we afford it, we cannot afford not to invest that money. It just takes the will to do it.

All that spending on infrastructure would require businesses to hire many more people to build that infrastructure, taking up a lot of the current slack in the labor market. The natural result would be that labor becomes tighter, and workers would tend to get higher raises.

2.         Strengthen Labor Laws and Enforcement. The business class has put a lot of effort into demonizing organized labor, and has worked tirelessly to weaken organized labor at the state and national levels. There is a reason for all that effort—organized labor works. Strong unions mean that workers get their fair share of the increases in productivity that the American economy generates. It is no mere coincidence that the unhooking of productivity and compensation came about as organized labor was weakened.

It has been the genius of the Republican Party that it has persuaded people to say, “look at all the things that union members get—they shouldn’t get them,” rather than saying, “look at all the things that union members get—I should get that too.”

It has been the genius of the Republican Party to call laws that weaken unions “Right to Work.” Thus, for example, Barbara Comstock’s Issues page on her web site in her 2014 congressional election in Virginia touted that she is a “Pro-jobs Right to Work leader.” The claim behind “right to work” is that if unions are crushed, there will be more jobs because businesses don’t have to pay each worker so much. While the lower pay part definitely works--

·         The average worker in states with right to work laws makes $1,540 a year less when all other factors are removed than workers in other states.

·         Median household income in states with these laws is $6,437 less than in other states ($46,402 vs. $52,839).

·         In states with right to work laws, 26.7 percent of jobs are in low-wage occupations, compared with 19.5 percent of jobs in other states

--the more jobs part does not. People in states that make less money, by an amazing coincidence, have less money to spend on the businesses that hire people based on the demand for that business.

Democrats need to fight back.

Not only do unions win higher wages for their members, but the competition for good workers forces even non-union companies to offer higher wages so that their workers will not defect to union shops. That’s what happened in the 1950’s and ‘60’s, as unions bargained (and sometimes went on strike) for higher wages. All workers benefited. When business stepped up its union-busting activities, all workers suffered.

Democrats need to do everything we can to roll back the laws that have weakened unions, and to make sure that the U.S. Department of Labor, and the National Labor Relations Board (and their state counterparts) work tirelessly to enforce the rights that workers have.

3.         Raise the Minimum Wage. The national minimum wage was last increased in 2009, when it rose from $6.55 to $7.25 an hour, the last of a three-step increase approved by Congress in 2007. The minimum wage had been set at $5.15 for the previous ten years. Republicans routinely and consistently block increases in the minimum wage. Current efforts before Congress to gradually raise the minimum wage to $10.10 are stalled due to Republican intransigence.

Twenty-one states and the District of Columbia have raised their minimum wages higher than the federal rate. Four “red” states—Alaska, Arkansas, Nebraska, and South Dakota—just voted to raise the minimum wage despite strongly voting for Republican legislators (another sign that Democrats have a serious problem convincing voters that we are on their side, or emphasizing strongly enough how Republicans are dead set against giving you a raises). A number of cities, e.g., Washington, DC, Seattle, San Francisco, San Diego, have set minimum wages that have or will rise considerably above $10.10.

Republicans always predict dire consequences if the minimum wage is increased. The problem with their arguments is that the minimum wage has been raised many times in the past, and there are numerous instances in which we can compare the consequences in a higher minimum wage state to a lower minimum wage state right next to it. The results are always that the dire predictions do not come to pass, while the workers always benefit from the higher minimum wage.[8]

Economist Jared Bernstein recently wrote: “Opponents of {minimum wage} increases complain that the pay raise will just lead to higher prices. But the question is one of magnitudes. Research finds that a 10 percent increase in the U.S. minimum wage leads to less than half a percent increase in the overall price level, with larger increases of 1 percent to 4 percent in low-wage sectors. In other words, here as in Denmark, even once you factor in price effects, low-wage workers’ buying power is a lot higher after the increase.”

Workers with higher minimum wages benefit, and taxpayers benefit, because those workers do not need to rely on food stamps to get by. Workers who currently make more than the minimum wage but make less than $10.10 would also receive pay increases to keep them from being paid only the minimum wage. The middle class benefits from increased demand generated from workers being paid more, thereby increasing the need to hire workers at all levels, resulting in pay increases for all workers, in another virtuous cycle.

 The Stump Speech

The Greatest Generation fought World War II. The United States government spent a lot of money to build the weapons of war and to pay the soldiers, and our economy finally came out of the Great Depression. When our soldiers came home, they went back to work in the reinvigorated economy, and built families, and bought houses and cars. Our businesses quickly pivoted from building for war to building for us. Businesses continued to become more efficient, so that each employee generated more and more revenue for that business.

And guess what? As each worker generated more revenue for that business, the businesses paid each worker more. For decades, workers’ pay rose in lockstep with the rise in revenue each worker generated. A solid middle class was built. Your fathers and grandfathers could see that they were getting ahead, and passing along a better life for their children. 

But things began to change right around the time that Ronald Reagan became president. Workers continued to generate more and more revenue for the companies that employed them, but companies started to take more and more of that revenue for themselves and their shareholders, and found ways to pay their employees less and less. You may have noticed that. Your company has announced record earnings, but those record earnings are no longer shared with you.

This has got to stop. YOU need a raise.

We Democrats, together, will do everything we can to get YOU a raise. Republicans will claim otherwise, and claim they are for “economic growth,” but when you look at the actual policies they propose, Republicans are really in favor of taking wealth from the many and giving it to the few. There may be “economic growth” as a result, but you haven’t been seeing it in your paycheck, have you?

The Republicans claim that economic growth will follow if we cut business taxes and cut back on regulations. That is the extent of their prescription for growth. Oh, and they will also tout making it harder for unions to organize. How will that help YOU get a raise?

Just ask yourself, do you think that the problem with the economy is that businesses need to make even higher profits, or is the problem that YOU need a raise? Just ask yourself, who are businesses going to sell to if your costs go up but your paycheck doesn’t? You know the answer. How will it help YOU get a raise if regulations are cut so that businesses find it easier to dump toxic chemicals into our water?

Instead, we need to invest in rebuilding our roads and bridges, and our schools, upgrade our electrical power grid, and fix our leaking water supplies and sewers. This gives us a double win. Our crumbling roads, bridges and schools are made better and more efficient. And if you don't have a job we put YOU back to work helping to build those things, while if you already have a job, the paychecks of those with new jobs helps the economy grow and leads to YOU getting a raise.  

Don’t let the Republicans tell you that we can’t afford it. We can. In fact, we cannot afford NOT to do it. Just like the spending for World War II finally got us out of the Great Depression and set us on the road to prosperity, spending for a new World War II, but for peace, will get us moving again. And that will help YOU get a raise, just like it helped your fathers and grandfathers get a raise.

We need to raise the minimum wage, not just in the states that have already enacted higher minimum wages, but all across America. Raising the minimum wage would mean that those of us working at Wal-Mart would no longer need food stamps in order to get by. Raising the minimum wage would put more money into the pockets of those of us who would put our higher earnings right back into the consumer economy, giving YOU a raise as well.

We need to recognize that ALL of us, whether driving a truck, working in a poultry factory, or working at the checkout line, are contributing to the increasing growth of our economy through our labor, but we have not been getting a raise. The extra money is going elsewhere. We need to be fairly paid for our contribution to our employers. Every one of us who works hard deserves to share in the greater prosperity that our hard work brings to America. We don’t want a handout, we just want to be paid fairly for our contribution, which has been happening less and less in America. Republicans do not want you to get a raise, but Democrats do.

YOU need a raise, but you will not get one if you elect Republicans.

---

[1] Source: US Census Bureau, Historical Income Tables, Table P-16.

[2] Source: US Census Bureau, Historical Income Tables, Table P-16. The incomes for women with bachelors fell less but started out lower and stayed lower, falling from $41,147 in 2000 (in 2013 dollars) to $39,201 in 2013. The incomes for women with doctorates started out lower and fell more, from $69,610 in 2000 (in 2013 dollars) to $64,001 in 2013. Clearly, women REALLY need a raise.

[3] Source: Calculated from Bureau of Labor Statistics, Historical data series from the Employment Situation News Release, Series ID CEU0000000001.

[4] Id.

[5] Source: Calculated from US Census Bureau, Historical Income Tables, Table P-1.The per capita income increased from $24,152 (in 2013 dollars) in 1992 to $30,228 (in 2013 dollars).

[6] Id.

[7] Calculated from data in spreadsheet “Data Underlying Figures” at http://www.cbo.gov/publication/45010.

[8] Republicans often cite to a Congressional Budget Office report from February 2014, “The Effects of a Minimum Wage Increase on Employment and Family Income,” and claim that it concluded that raising the minimum wage would result in the loss of half a million jobs, never mind the millions more who would benefit. They focus on the sentence on page 9 of the report: “According to CBO’s central estimate, implementing the $10.10 option would reduce employment by roughly 500,000 workers in the second half of 2016, relative to what would happen under current law.” The footnote following that sentence reads: “A central estimate is one that uses values at or near the midpoints of estimated ranges for key inputs.” Later on page 9, the report states: “The overall reduction in employment could be smaller or larger than CBO’s central estimate. In CBO’s assessment, there is about a two-thirds chance that the effect of the $10.10 option would be in the range between a very slight decrease in employment and a decrease of 1.0 million workers; thus, there is a one-third chance that the effect would be either above or below that range.” Thus, the “central estimate” is simply the midpoint of all the studies that the CBO consulted, rather than the CBO’s own calculation of the effect. But the most rigorous research confirms what our observations tell us: minimum wage increases do not reduce employment. 

Inequality and Wages

From the title of this blog, income inequality will clearly be a major topic.  In my last post before a quickie, I highlighted the growing gap between productivity and compensation.

Nobody tries to deny the existence of growing income inequality anymore.  Instead, some have tried to shrug away the consequences, arguing that income inequality is okay because there is income mobility, or that income inequality is the price of liberty.  Somehow, these arguments are losing their resonance, as it has been pointed out that the facts show that income mobility becomes more difficult as inequality increases.  And there has been no positive correlation between increasing income inequality and increasing liberty (quite the opposite).

Cries of class warfare have become less effective, as the claim has been turned around--yes, there has been class warfare, and the one percent (or 0.1 percent) have been winning.

The question then arises as to what has caused increasing income inequality, and, therefore, what can be done about it.  If you conclude that the main cause is technological change, or increasing international trade and foreign competition, then you are off the hook because those trends are not going to reverse and increasing income inequality is just going to have to be something we have to live with.

President Obama, in his excellent speech given in Osawatomie, Kansas, last December, talked about income inequality.  The new Chair of his Council of Economic Advisers, Alan Krueger, gave another speech in January, complete with slides, that focused specifically on income inequality and its adverse consequences on the U.S. economy.  That speech noted what we have talked about in this blog in several postings, that during the Clinton Administration, income tended to rise across all income groups, whereas during Republican administrations, the increase in income tended to be concentrated at the very top.  This is not a coincidence.  Republican policy, in deeds if not in words, regards income inequality as a feature, not a bug.

Obama and Krueger have made policy recommendations to address income inequality, which a Talking Points Memo posting succinctly summarized as: "Obama wants to raise taxes on high earners to Clinton-era levels, uphold the estate tax, implement health care reform to bolster low-income uninsured people, and implement Wall Street reform so as to limit excessive risk-taking in the financial sector."   


TPM is, of course, basically on Obama's side, but its posting questions whether, even if all if these policy recommendations were fully implemented, income inequality would be significantly reduced.  These policies do not really address the root  of the problem.  For example, the typical working person might feel better if his rich boss were taxed more fairly, but then that working person is still bringing home the same lousy paycheck.

May we humbly suggest a couple more policy recommendations?  Strengthen labor unions and raise the minimum wage.

Business, of course, has always been at war with unions--sometimes shooting wars.  The period of the unions' greatest strength in the United States, from World War II through the '50s and '60s, corresponded to the period of the greatest improvement in the living standards of the middle class.  Again, this is not just a coincidence.  But beginning in the '70s, unions began to lose the war, and at the same time the middle class dream began to slip away for millions of Americans.

Republicans, of course, have always opposed raising the minimum wage, and always supported weakening the unions.  Whenever it is proposed that the minimum wage be raised, they ALWAYS claim that it will result in mass layoffs.  The fact that the minimum wage has been raised many times in the past without this result never fazes them, they always raise this claim.

Giving workers wage increases in line with increases in productivity, which, as we have noted, have diverged dramatically in recent years, especially during Republican administrations, would do far more to reduce income inequality than any tax plan.

Freedom and Liberty

In the middle of working on another posting, but I thought I'd post this short piece.

Republicans often invoke their love of freedom and liberty, with the implication that Democrats would impair those wonderful American characteristics.  In practice, they tend to be slippery concepts.

Jim owns his own house--or rather, he has a mortgage on it.  He lives in a small town in which the economy has been flat for a while, so selling the house might be difficult.  One of his children has asthma, and another has a birth defect, although his children's medical costs are helped by SCHIP (State Children's Health Insurance Program).  He has worked all his adult life in the coal mine near his town.  The mine is not unionized, and what raises he has received in the last ten years have not been as high as the inflation rate, so he is falling behind.  But at least the mine has a good safety record, thanks to government regulators, and the mine cleaned up its act after being fined by the EPA, so the water is cleaner where Jim likes to fish.  Both of Jim's parents are retired, but Jim does not have to support them, because they are doing okay on Social Security and Medicare.  Jim attends church service every Sunday.  Jim is free to vote, and he always votes Republican, because those Democrats are just a bunch of socialists.

Is Jim free?  Does he have liberty?

Roger owns the coal mine in which Jim works.  The government is always restricting his freedom by telling him how to run his mine.  It made him install new safety equipment and undertake certain procedures to cut down on the risk of coal dust explosions.  It told him that he was polluting some local streams, fined him and made him change his practices so that pollution would be reduced.  But due at least partly to his ability to keep wages down, Roger was able to take home $5.1 million in profits last year.  But without those damn government regulations he would have made $5.5 million.  Roger attends church service every Sunday.  Roger is free to vote, and he always votes Republican, because those Democrats will always try to take away his freedom and liberty.

Is Roger free?  Does he have liberty?

Discuss.  I expect to be lectured that I don't really know what freedom and liberty are about.

Productivity and Compensation

I promise from now on to be more regular in posting.

The Bureau of Labor Statistics (part of the U.S. Department of Labor) is a great source of raw data.  The online Monthly Labor Review takes a look at their data in more aggregate form, to highlight trends, etc.

I found the article in the January 2011 issue, "The compensation-productivity gap: a visual essay," to be particularly interesting.  True to its role of being a governmental body that tries not to be political or provocative, the BLS article merely presents the data without offering an interpretation.  But let's look at the data presented.

The article presents data on changes in labor productivity and labor compensation.  As the article notes:

"Productivity growth provides the basis for rising living standards; real hourly compensation is a measure of workers’ purchasing power. Increases in labor productivity—the most commonly used productivity measure—reflect investments in capital equipment and information technology, and the hiring of more highly skilled workers. Employers’ ability to raise wages and other compensation is tied to increases in labor productivity. Since the 1970s, growth in inflation-adjusted, or real, hourly compensation has lagged behind labor productivity growth."

The first chart shows this trend:

From the end of World War II until the mid-70s, compensation tended to track along with increases in productivity.  That is, employees shared in the benefits that businesses realized from increased productivity.  The gap began in the 1970s, and has widened ever since.

Chart 2 of the article breaks out these trends by selected periods:

This chart shows that average productivity growth was fairly high between 1947 and 1973, and compensation more or less kept up with productivity.  Productivity growth was much lower in the period 1973 to 1979, and compensation growth was also considerably lower than in the prior period.  Productivity growth, however, started coming back, increasing in every decade, until by the last decade productivity grew at nearly the same rate as it had grown in the period 1947-1973.

But in the period 1979-1990 compensation growth plummeted at the same time that productivity growth started its comeback.  The period 1990 to 2000 saw compensation increase much more strongly, although not at the same rate that productivity growth increased.  The period 2000 to 2009 saw productivity growth increase at the same time that compensation growth reversed course, and employees once again saw fewer benefits from their increased productivity.

While the periods are imprecise overlaps, the period 1979 to 1990 was predominantly during the Reagan/Bush Republican Administrations, while the period 1990 to 2000 was predominantly during the Clinton Democratic Administration. The period 2000 to 2009 was predominantly during the Bush Republican Administration.  Is it a coincidence that compensation growth was substantially lower during Republican Administrations?

I don't think so.  Policies matter, and while administrations cannot turn around an economy on a dime, they can affect economic trends.  Republican administrations are unabashedly administrations of "Business," and they can and do promote policies that benefit business, even if it is at the expense of business's employees, who also happen to be business's customers.

In short, do not be fooled into buying the claim that whatever is good for business is good for America.  The interests may or may not coincide.  Policies that promote strong labor laws and enforcement, on the other hand, do not penalize one particular business over another if they all need to follow the same rules.  At the same time, policies that promote increased labor compensation (or at least do not suppress it) will benefit business's customers, and benefit business as well.  A win/win.

"Business Friendly": The Democratic Version vs. the Republican Version

The leaders of Fairfax County, Virginia, where I live, tout the county as being regarded as "Business Friendly."  The Chairmanship of the Board of Supervisors, which runs the County, has been held by a Democrat since 1995, while Democrats have also long been a majority of the nine supervisors who are also on the Board.  How does a government run by Democrats come to be Business Friendly, and is a Democratic Business Friendly different from a Republican Business Friendly?

Last month, I was at a meeting of the Northern Virginia Democratic Business Council, where the current Chairman of the County Board of Supervisors, Sharon Bulova, spoke about how they enticed Northrop Grumman to move its headquarters to Fairfax County.  They pointed out that Fairfax County has the best schools in the country, has a fine park system, and the residents are relatively well-off, with one of the highest per-capita incomes of any county.  OK, so roads can be congested, but other than that, it's a great place to raise a family.  Bulova said that Fairfax County did not offer any tax incentives. 

So, now there are 11 Fortune 500 companies that have their headquarters in Fairfax County.  That means that just over 2 percent of Fortune 500 companies are located in a county that has less than 0.4 percent of the U.S. population. 

"Business Friendly" for a Democrat should be offering a place where there is a good quality of life, where the business's employees would want to live.  The Republican version of "Business Friendly" would be few taxes and fewer regulations.  Oh, and workers get paid less as well.

The problem with state and local governments trying to entice a company to move its headquarters or facilities to that state or locality with tax breaks, more lax regulations, or lower wages is that, from the point of view of the United States as a whole, no new jobs are created.  They simply move from one part of the United States to another.  One group of potential employees gets "luckier," while another group is unluckier.  Even more pernicious, this process creates a "race to the bottom," where states compete to hollow out their tax bases, make the country more polluted, and keep up the pressure to suppress wages.  Corporate profits may improve, at least relative to the economy, but that's about it.

But don't corporate profits mean more money to invest in more jobs?  Republicans continue to push this line, but as we showed in a previous post, businesses are not going to hire more unless the demand justifies it.  And if wages have been suppressed (or cut), demand is also suppressed.  Businesses would have higher absolute profits if they were able to increase sales to meet increased demand, even if their labor costs were higher.

The Republican "Business Friendly" model, therefore, does not create wealth overall, it destroys overall wealth, even as it concentrates what wealth there is into the hands of the few.

The Democratic "Business Friendly" model, on the other hand, creates wealth.  It invests in education, creating the opportunity for more people to obtain higher-paying jobs.  It creates the infrastructure to improve the efficiency of an area, and it creates a more appealing environment in which people actually want to live.  It actually works out that "People Friendly" is also "Business Friendly."  A place where employees are well-paid, well-educated, and are happy to raise a family there, is a place where businesses will thrive.  They'll just have to settle for the fact that corporate profits will be a smaller percentage of a growing GDP, even if the absolute profits will continue to rise.

Mitt Romney's Plan for the Economy and Jobs

As we have just discussed, the biggest problem holding back business hiring is low demand for what the businesses have to sell.  Given that, let's take a look at what Republicans have proposed to address the poor job market.

The most detailed Republican proposal to date comes from Mitt Romney, who recently released his Jobs Plan, which can be downloaded here.  Since there is very little in Romney's paper that did not come from mainstream Republican ideas, we can use it as a proxy for standard Republican "solutions."

First, some perspective, to see how well Republican solutions have worked in the past.  On job creation, Democratic administrations have tended to do much better than Republican administrations.  Only Reagan's second term, characterized by more tax increases than tax cuts, approached the typical Democratic administration jobs creation numbers.

Median family incomes have also tended to increase more during Democratic administrations.

While increases in income inequality have tended to take place during both Democratic and Republican administrations, it has tended to increase at a greater rate during Republican administrations, especially when one compares the Clinton and Bush 43 administrations:

As discussed before, this table examines whether the wages of each income group increased more than the overall increase in the economy.  If a group's percentage growth was less than the growth of the GDP as a whole, that group was "left behind."

Thus, when assessing Romney's Jobs Plan, it is a fair question to ask what, if anything, is different than what Republicans have always proposed, regardless of the economic situation, and what they have always implemented when given the power.

On this question, the answer has to be that, with the exception of China bashing, Romney's Plan contains absolutely nothing new.  One could therefore rightfully expect that were Romney, or another Republican, were to become President, the most likely results would be a repeat of the Bush 43 years, with perhaps worse results in that the effects of the horrible policies during those years continue to linger.

While Romney's Plan does a fine job of describing the current mess we're in, it does not do very well in describing why we got into this mess, and how Obama has made it worse.

He characterized Obama's Stimulus as "more than $775 billion in new government spending," without bothering to mention that a third of the Stimulus was in the form of tax cuts.  This is an inconvenient fact for someone who wants to argue that tax cuts are the cure for any ailment.  Another third of that amount was for state aid, to prevent layoffs of state employees, so it was not "new" spending so much as "replacement" spending.

Romney then complained about all the things that were either blocked or have not taken effect yet in any meaningful way, such as Cap & Trade for emissions control, Dodd-Frank Wall Street Reform, and the "uncertainty" that would be created by the Consumer Financial Protection Bureau.  Obamacare, of course, most of which has not taken effect yet, gets blamed for many of the current problems.

So what are Romney's solutions?  First, keep tax rates where they currently are.  Never mind that the economy has performed dismally in the decade since those tax cuts were initiated, compared to how well the economy performed in the almost eight years following the tax increases of 1993.

Then he proposes that taxes on capital gains, interest, and dividends be eliminated for taxpayers making less than $200,000.  Most taxpayers making less than $200,000 have little, if any, capital gains, interest, and dividends, of course.  Romney says this will encourage savings, and will free up capital for investment.  This goes back to the Republican conviction that the problem is not enough money for investment, when in fact there is considerable amounts of cash sitting in corporate books that could be invested, if only there was the demand to justify the investment.

Romney proposes eliminating the Estate Tax (which he of course calls the Death Tax), saying that "small family-owned" businesses risk having to be split up to deal with tax liabilities, ignoring the fact that the family-owned business that would most face such taxes is WalMart. Genuinely small businesses have no such problem.

He proposes to lower the corporate tax rate to 25%, following the typical Republican tactic of referring to the U.S. high corporate tax rate, as opposed to the U.S. actual corporate tax liability.  The real truth, which Romney should be confronted with, is the United States has the lowest corporate tax burden, relative to GDP, of any country in the OECD.  If lower tax burdens would help spur hiring in the United States, why hasn't GE, which had large profits but paid very little in corporate taxes for 2010 (and in fact pays a higher tax rate for income generated outside of the United States), gone on an orgy of hiring?  Instead, in the last several years GE's U.S. employment has declined as its overseas employments has grown.

Romney next attacks regulation.  He ignores the poor regulation and enforcement that helped lead to the huge housing bubble that destroyed the U.S. economy when it popped (and in fact claims that there was instead "mis- and over-regulation").  He singles out Dodd-Frank and Obamacare, and says he'll repeal Obamacare, as if that will create jobs.  He'll replace Dodd-Frank with "a streamlined regulatory framework," which has worked so well in the past.

This posting is already too long, so I'll cover the other proposals in less detail.  Romney would also gut environmental regulations.  Never mind the costs that would be incurred because of global warming, never mind the benefits that cleaner air and water bring.  It's just the costs.

Romney also would pass the stalled trade agreements with Columbia, Panama, and South Korea, and he would designate China a currency manipulator and impose countervailing duties (the one part of his Plan that would probably arouse the opposition of U.S. multinationals and be counter to what Bush 43 and all other presidents have concluded).  On energy policy, it would be "drill, baby, drill."

On labor policy, his proposals essentially amount to weakening unions.  Weakened labor unions have been a major factor the in the reduction of worker's wages, even if non-union, and have contributed to income inequality.  For Republicans, this is not a bug, but a feature.  For Democrats, workers are people, whose well-being contributes to the well-being of the United States.  For Republicans, workers are a cost, to be lowered to increase profits.  Romney goes along with this thinking, trying to convince voters that there will be more jobs if only we paid everyone less.

Finally, he would reduce federal spending and cap it at 20% of GDP.  Then he would push for a balanced budget amendment.  Romney adopts the "crowding out" claim, that "for every dollar that the government borrows for its operations is a dollar that cannot be invested in productive private-sector activity."  Romney utterly ignores the fact that when we're in a situation like the current Recession (or very slow Recovery), crowding out just does not apply.

Romney's Appendix lists all 59 specific proposals.  At best, they won't create jobs.  At worst, they will make the economy worse, except for perhaps the very upper levels of income earners (top 1 percent, and even more, top 0.1 percent).  Romney would qualify as in the top 0.1, or perhaps even 0.01 percent, of wealthiest Americans.  He at least would be helped by his proposals.

Is it Demand or is it Uncertainty?

The first step in addressing a problem is to correctly identify what caused the problem, or what has prevented the problem from being solved.

Why aren't we creating more jobs?

Republicans argue that the problem is either that businesses have uncertainty, or that they have insufficient money to invest in jobs (or both).

The alternative position is that the problem is a lack of demand, and that businesses won't hire anyone unless their sales increase.

Obviously, which diagnosis of the problem is right has a huge impact on which solutions would actually work.  The Republican  solutions center around removing that uncertainty, or providing more money to businesses (or both).  Those concluding that lack of demand is the problem propose increasing the buying power of consumers.

Play this mind game: Imagine Company A and Company B, both in the business of making and selling widgets.  Like a great many U.S. corporations, their sales have not increased greatly, but both have cut costs in recent years and have made record profits, and furthermore are sitting on record amounts of cash.  They don't know if the regulations that affect their businesses are going to change, and they don't know if their tax rates are going to change.

Now imagine that demand for widgets increases dramatically, as more consumers begin having more money to spend on widgets.  Company A responds by hiring more workers and stepping up its production line.  Company B continues to hold back, because it still doesn't know if the regulations that affect its business are going to change, and it doesn't know if its tax rates are going to change.  Which of these two companies is more likely to prosper?

Now imagine that demand for widgets remains depressed, but regulations are removed and tax rates are lowered.  Company A sees no growth in sales, and doesn't hire additional workers (although its after-tax profits go up).  Company B says that since uncertainty has been removed, it hires more workers.  But since it can't sell any more widgets, its labor cost per widget goes up, and its profits go down.  It thereupon fires the new workers it had just hired.

OK, a little simple, I admit.  The idea beyond the uncertainty theory is that if businesses suddenly became optimistic about the future, they would take the hit of hiring people before sales actually increased, and the act of hiring and paying those people (if a whole lot of businesses do the same) increases demand in the economy, thereby increasing sales, thereby requiring more employees, etc., in a virtuous cycle.  But the problem is that right now, businesses are looking at each other, saying, "you go first."  "I'm not going first, you go first."  Somebody has to take the first step.

That somebody, unfortunately, needs to be someone whose first goal is not self-profit, but rather a concern for the overall well-being of the nation.  Which business is going to be patriotic, by hiring more people when demand does not justify it?

When actual business people, as opposed to propaganda organs such as the U.S. Chamber of Commerce, are asked what the single biggest problem is, for most common answer for the last couple of years has been "sales."  More than taxes, more than regulations.

Source: National Federation of Independent Business, "Small Business Economic Trends, August 2011."  The preparer of this report is certainly not biased towards a progressive view, since he devotes his commentary to complaining about Paul Krugman.

Small business owners, who used to complain mostly about taxes, have singled out sales since the middle of 2008.

One way to test whether the problem is lack of sales (i.e., lack of demand) on the one hand, or taxes and regulations on the other hand, is to look at job creation  in the past compared to what business said was the problem at the time.  Unfortunately, I do not have the raw data that went into the NFIB charts, so I can't make one simple chart that superimposes the data.  Instead, we need to look at several charts at once.

So first is a chart that I made that counts the number of jobs added during each presidential term, by comparing the number of jobs reported by the Bureau of Labor Statistics in the first January of a president's term to the number reported in the last December of that term.  Here is what that looks like:

We note that the lowest terms of job creation--George HW Bush's one term and George W Bush's first term, correspond to the two previous humps in the NFIB chart above when businesses identified lack of sales as a growing problem.

Now note that the line in the NFIB chart identifying taxes as the major problem tended to be the highest during Clinton's two terms, when job creation was the best it ever was, and that job creation plummeted at the same time that complaints about taxes declined, during George W. Bush's first term.

Now we'll look at one more chart from the NFIB, which shows other factors that have been identified as the single more important problem, including government regulation:

Identification of "regulation" as the most important problem was highest during Clinton's first term, which did not prevent the best job creation record ever.  Concern about regulation was considerably lower during George W. Bush's two terms, but job creation was horrible.  Today, small business owners say that regulation is not choking their business.

So whenever you hear someone claim that all we need to do to create jobs is cut taxes and cut regulations, point out that these remedies have been tried before, with very poor results.  On the other hand, when sales have increased in the past, job creation is robust.

In a subsequent post, we'll look at ways to increase demand.