Even in this divided nation there are some goals and values on which there is general agreement, but only if these are very general - reduced crime, safe streets, good schools, wholesome children with strong work ethics. Motherhood and apple pie are good; tooth decay and soil erosion are bad - all but the truly recalcitrant and maladjusted will agree.
So it is with belief that a prosperous middle class is the bedrock of America. All except the pathologically myopic, or those who choose to be, will agree that for the last several decades income and wealth of the broad middle class has stagnated or declined, even as the size of the economy has grown tremendously. The fruits of our growing economy have accumulated exclusively to the 1 percent at the top, and especially to the top one-tenth percent of our wealthiest citizens. But here agreement ends on cause, what to do about it, and even whether anything can or should be done about it.
Until recently, only a few of us spoil-sport economists have paid much attention to the income distribution problem - and indeed, it is a problem, both for our economy and our democracy. Even President Obama, who readers of this column know I support, has been slow to use his bully pulpit to pound on this issue. He is right to do so now.
Apologists such as columnist Thomas Friedman assert that with ease of movement of capital and jobs, it was inevitable that America compete with countries with lower labor costs. He insists that education, and a more efficient work force is the solution.
As an economist, I'm all for efficiency and a well-trained work force. And as one who has personally benefited from formal education, I'm all for that too. But Friedman misses the point. Those with the hands-on skills who perform the work in factories, offices, classrooms, and on the roads and streets that get the jobs done to make this economy function, deserve to share in wealth that they help create. The shrinking share of national income garnered by the middle class and the working poor was not inevitable. It happened only because through our public policy we let it happen.
Other apologists for increased income inequality hold the market as the Holy Grail. Because our nation's largest employer can get away with hiring part-time workers at low wage and no benefits or job security, it's okay because the market allows it. Therefore, since the market allows it, nothing can or should be done about it, or so these faulty arguments go.
What the free marketeers and apologists for rising income inequality forget, or choose to ignore, is that the rules of the game under which markets operate are set and enforced by society through rule of law. These rules can be changed. Our international trade agreements, for example, wouldn't have to result in a race to the bottom where American workers have to compete with sweatshop and slave labor abroad. We don't have to allow our nation's largest employer that sits on mountains of cash to pay such paltry wages that their workers, or "associates," as they are called, have to be subsidized through taxpayer-funded programs in order to have food and shelter.
This is more than a matter of "fairness." Greater income equality - no, I'm not suggesting that outcomes be equal or that slackers be rewarded - is better for the entire economy. Here's why.
In my previous column (Monroe Times, Feb. 28) I explained that this is a demand-driven economy. Lack of aggregate demand is the major reason for our anemic slow recovery. There is not sufficient demand to purchase goods and services forthcoming from a fully-employed economy. The middle class and working poor simply do not have the income to make that demand effective. Without effective demand with which to purchase the goods, business has no incentive to hire more workers. Unemployment persists, and with it, continued lagging demand creating a downward spiral.
Deficient aggregate demand can be remedied by increased government spending on goods and services, and by the American labor force sharing in the ever-increasing productivity of this economy.
Increased returns to labor would increase middle-class purchasing power. With increased effective demand for goods and services, business would hire more people to produce. Here's why:
In beginning college economics, we introduce students to a concept called the "marginal propensity to consume," or MPC. In every day English, the MPC is the proportion of an additional dollar that is spent on consumption. The MPC for a low or middle-income earner is higher than the MPC for the movie star, professional athlete, or CEO with annual incomes of tens of millions. This means that additional income to working guys and gals will generate more additional economic activity than additional income to the super-high earners.
But doesn't the CEO also spend his additional several million? Sure, but generally not on goods and services that benefit the typical citizen. The average Joe or Jane will spend on food, clothing, shelter, and stuff needed for day-to-day living. The citizen who is already super-rich will spend additional income on items such as bidding up the price of ranch land, making it harder for the working rancher to acquire land. Or, bidding up stock prices - not necessarily a bad thing. But it doesn't generate much activity that will help the average worker, as an already-wealthy minority owns the vast majority of stocks, even when counting retirement funds of working people.
Rising income inequality is a major factor holding back recovery of the American economy. An increased share of economic prosperity going to the middle class and working poor is more than a matter of fairness - it is crucial to moving this economy to full employment.
Next week: The role of government spending in economic recovery.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
So it is with belief that a prosperous middle class is the bedrock of America. All except the pathologically myopic, or those who choose to be, will agree that for the last several decades income and wealth of the broad middle class has stagnated or declined, even as the size of the economy has grown tremendously. The fruits of our growing economy have accumulated exclusively to the 1 percent at the top, and especially to the top one-tenth percent of our wealthiest citizens. But here agreement ends on cause, what to do about it, and even whether anything can or should be done about it.
Until recently, only a few of us spoil-sport economists have paid much attention to the income distribution problem - and indeed, it is a problem, both for our economy and our democracy. Even President Obama, who readers of this column know I support, has been slow to use his bully pulpit to pound on this issue. He is right to do so now.
Apologists such as columnist Thomas Friedman assert that with ease of movement of capital and jobs, it was inevitable that America compete with countries with lower labor costs. He insists that education, and a more efficient work force is the solution.
As an economist, I'm all for efficiency and a well-trained work force. And as one who has personally benefited from formal education, I'm all for that too. But Friedman misses the point. Those with the hands-on skills who perform the work in factories, offices, classrooms, and on the roads and streets that get the jobs done to make this economy function, deserve to share in wealth that they help create. The shrinking share of national income garnered by the middle class and the working poor was not inevitable. It happened only because through our public policy we let it happen.
Other apologists for increased income inequality hold the market as the Holy Grail. Because our nation's largest employer can get away with hiring part-time workers at low wage and no benefits or job security, it's okay because the market allows it. Therefore, since the market allows it, nothing can or should be done about it, or so these faulty arguments go.
What the free marketeers and apologists for rising income inequality forget, or choose to ignore, is that the rules of the game under which markets operate are set and enforced by society through rule of law. These rules can be changed. Our international trade agreements, for example, wouldn't have to result in a race to the bottom where American workers have to compete with sweatshop and slave labor abroad. We don't have to allow our nation's largest employer that sits on mountains of cash to pay such paltry wages that their workers, or "associates," as they are called, have to be subsidized through taxpayer-funded programs in order to have food and shelter.
This is more than a matter of "fairness." Greater income equality - no, I'm not suggesting that outcomes be equal or that slackers be rewarded - is better for the entire economy. Here's why.
In my previous column (Monroe Times, Feb. 28) I explained that this is a demand-driven economy. Lack of aggregate demand is the major reason for our anemic slow recovery. There is not sufficient demand to purchase goods and services forthcoming from a fully-employed economy. The middle class and working poor simply do not have the income to make that demand effective. Without effective demand with which to purchase the goods, business has no incentive to hire more workers. Unemployment persists, and with it, continued lagging demand creating a downward spiral.
Deficient aggregate demand can be remedied by increased government spending on goods and services, and by the American labor force sharing in the ever-increasing productivity of this economy.
Increased returns to labor would increase middle-class purchasing power. With increased effective demand for goods and services, business would hire more people to produce. Here's why:
In beginning college economics, we introduce students to a concept called the "marginal propensity to consume," or MPC. In every day English, the MPC is the proportion of an additional dollar that is spent on consumption. The MPC for a low or middle-income earner is higher than the MPC for the movie star, professional athlete, or CEO with annual incomes of tens of millions. This means that additional income to working guys and gals will generate more additional economic activity than additional income to the super-high earners.
But doesn't the CEO also spend his additional several million? Sure, but generally not on goods and services that benefit the typical citizen. The average Joe or Jane will spend on food, clothing, shelter, and stuff needed for day-to-day living. The citizen who is already super-rich will spend additional income on items such as bidding up the price of ranch land, making it harder for the working rancher to acquire land. Or, bidding up stock prices - not necessarily a bad thing. But it doesn't generate much activity that will help the average worker, as an already-wealthy minority owns the vast majority of stocks, even when counting retirement funds of working people.
Rising income inequality is a major factor holding back recovery of the American economy. An increased share of economic prosperity going to the middle class and working poor is more than a matter of fairness - it is crucial to moving this economy to full employment.
Next week: The role of government spending in economic recovery.
- John Waelti's column appears every Friday in the Times. He can be reached at jjwaelti1@tds.net.
