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Ninety-one percent of all increases in income from 2009-12 went to the wealthiest 1% of Americans, and millions remain trapped in disguised unemployment and part-time employment. The workforce participation rate has fallen to levels predating the widespread entry of women into the labor market in the late 1970s. The unemployment rate, including those working part-time involuntarily and those wanting a job but not actively looking is over 10%.
The American economy is not out of balance because of the natural laws of economics, nor the result of the inevitable evolution of capitalism. The rules shaping our current economy were formed by incorrect economic orthodoxy. Supply-side economics posited that constraints imposed by regulations and disincentives imposed by taxes and a generous welfare system were limiting growth, a sharp break from Keynesian economists' emphasis on insufficient demand as the limiting factor in today's employment scenario. Per Stigler, when the rules no longer work, it is time to rewrite them.
Wages for most Americans are stagnant, but worker productivity continues to grow - the disparity between the two has become unprecedented. CEO and bankers' incomes soar, with no concomitant improvement in the performance of the firms for which they are responsible. We have a deficit of 3 million jobs needed to reach pre-recession employment levels and absorb those who have joined the potential workforce. Eighty percent of job growth has been in low-wage service and retail employment. More and more piece together a living as 'micro-earners,' working through a variety of platforms to offer rides, rooms, or services - cleaning to computer programming.
Since the late 1970s, we have seen a decline in our growth rate, four significant economic downturns - including the worst since the Great Depression, and an increasing share of the limited growth that has occurred going to the top, with stagnant incomes for many and a hollowing out of the middle class. Policies that focus only on the symptoms of our dysfunctional economy - eg. remedying the worst extremes of inequality, will not tackle the underlying causes. Piecemeal proposals that tinker at the margins of our current economy will not suffice to get our economy back on track.
Skill-biased technological change cannot explain why highly skilled workers have had to move into lower-skilled jobs. It cannot explain why what has been happening to wages in the past decade - even skilled workers are not doing well. Nor can it explain the magnitude of the rise of pay at the top - including CEOs and those in the financial sector, or the rising gap between growth in worker productivity overall and average wages. Historically, wage and productivity growth moved in tandem, but this has not been true for the last third of a century.
Technology, globalization, shifting demographics and other major forces are important, but largely global in nature. All advanced countries should be similarly affected if they are the primary drivers - but among advanced economy countries, the U.S. has the highest level of inequality. Regardless, even those global factors are not out of our control.
The economic crisis of 2008 and the Great Recession that followed demonstrated that the promise of a deregulated market economy was empty. Only through an $800 billion government bailout were the banks and the market sustained. Further, saving the financial system did not trickle down to ordinary mortgage holders or average workers, who lost over 4 million homes and whose real median income declined nearly 8% between 2007 and 2013.
Much of the increase in wealth is attributable to the increase in the value of fixed assets, not an increase in productive value. The most obvious and widespread example is the massive rise in real estate values. If the value of real estate increases thanks only to the rising price of the property and not to physical improvements, this does not lead to a more productive economy - no workers have been hired, no wages paid, no investments made. Much of this is due to the financialization of the economy, including the increased supply of credit that typically goes to those that already have wealth. Land rents, monopoly profits, drug pricing, patents and other forms of intellectual property have become the major sources of increased wealth.
Financial services comprised 7.6% of GDP before the 2008 crisis, then fell back to 6.6% in 2012, and back to 7.3% in 2014. In the 1950s, when the U.S. economy was growing more rapidly than recent years, financial services constituted 2.8% of GDP, and between 1950 - 1980, generated between 10 and 20% of total corporate profits. After 1980 it generated between 20- and 30%, and still is well over 20% today. Between 1979 and 2005, finance professionals increased their presence among the top 1% by 80% (from 7.7 to 13.9%).
A recent target of market manipulation has been the LIBOR rate, bringing higher profits. The growth in asset management income accounts for about 35% of the growth of the financial sector as a percent of GDP. The other core growth business for finance has been shadow banking - moving traditional commercial banking functions to the financial markets where they are outside regulation of traditional lending banks. Long chains in the provision of credit are complex, creating leverage and more vulnerability to fraud etc.
Economist Thomas Philippon has shown that the U.S. financial sector's cost of supplying credit was 2.4% in 2011, compared to 1.6% at the end of WWII. Thus, for all the growth in the financial sector, we cannot see any improvement in the performance of the economy.
The average stock was held for about 7 years in 1940 and two years in 1987, seven months in 2007. In the 1980s, half of all U.S. corporations were the objects of takeover bids.
There is little relationship between pay and performance. CEOs are often compensated simply for luck, such as when oil company executives get paid more when global oil prices increase. New proprietary data show public firms invest substantially less and are less responsive to changes in investment opportunities compared to similar private firms. Thus, pay incentives are now tipped towards underinvestment. Before the 1980s, a firm borrowing a dollar would invest 40% of that on average. Shareholder payouts have nearly doubled since the 1980s and corporate profits are at record highs - with no increase in investment. Finance before was a mechanism for getting money into firms, now it functions to get money out of them. Executives at nonfinancial corporations in 2014 U.S. spent 705 of pre-tax corporate profits paying shareholders in the form of stock buybacks and dividends; in the year prior to September 20008, corporations spent an average 107% of profits buying their own shares and paying dividends. In the postwar period, nonfinancial corporations only dedicated an average 18% of profits for such.
According to the CBO, 'in 1979, households in the bottom quintile received over 50% of transfer payments. In 2007, similar households received about 35% of transfers.' Again, per the CBO, 69% of the $161 billion annual capital gains tax expenditure goes to the top 1%, only 7% to the bottom 80%.' Advocates of cuts to top marginal tax rates contend the reduction was supposed to encourage more work among top earners and increase the size of the pie. A Congressional Research Service report found 'no conclusive evidence...to substantiate a clear relationship between the 65-year reduction in the top statutory tax rates and economic growth.' Evidence from the 2003 dividend tax cut shows the only effect was to increase dividend payments.
Over the 40 years between 1973 and 2013, productivity grew 161% while compensation rose only 19%. There are roughly 8 million undocumented (illegal) workers in the U.S.
Bottom-Line: Nobel-winner Stiglitz wisely counsels against proposals that tinker at the margins of our current economy - that they will not suffice to get our economy back on track. And then he does exactly that - recommending more and stronger unions (ignoring the fact they were major factors in driving the Big Three and the legacy airlines bankrupt), more equality between races and gender. And then he ignores the two elephants in the room - illegal immigration (currently an estimated 8 million workers, plus their progeny) and exporting jobs to Mexico, Canada, and the Far East. A major disappointment.