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Sowell on What Makes Poor Folks Poor – Liberal Racism and Inferior Culture

by Brian T. Lynch, MSW

Thomas Sowell is a conservative “scholar” at the Hoover Institute and author of a new book, Intellectuals and Race. I haven’t read his book yet, but I did watch Sowell’s interview with Peter Robinson of the Wall Street Journal. I found Thomas Sowell’s interview disturbing in that it seems to boil down to an old conservative argument that the poor have no one to blame but themselves and the liberals who made them helpless. You can watch his WSJ interview on You Tube.

ThosasSowell

https://www.youtube.com/watch?v=H6ImP-gJvas

Several points stand out in Sowell’s arguments on the negative impact that ” liberal/progressive” intellectuals have had on our attitudes towards race vs. racism. First, he conflates liberalism with progressivism. These are two separate dynamics in their scholarly meaning. The opposite of progressive is conservative, but the opposite of liberal, in its classical meaning, is totalitarian. Within the actual social context of these two dynamics it is entirely possible to hold both liberal and conservative policy positions or progressive and totalitarian positions. For example, it would not have seemed inconsistent during the Progressive Era, in the early twentieth-century, to be for union rights but opposed to woman’s suffrage, Progressives then were not as liberal as most progressives are today. By treating these terms interchangeably, in their current colloquial sense, he maligns the liberal movement that seeks to empower today’s poor or marginalized people and make America more inclusive.

Secondly, he seems to conflate race with culture. These are also separate elements of sociology. The former is a largely subjective classification system based on superficial physical attributes associated with continent of origin. The latter is a complex set of rituals, customs, values, norms and shared history by loosely associated clans or social groups. There are as many different cultures within each race as there are among the races, even just within North America. Generalizations based on race as a culture are inherently flawed.

Thirdly, when distinguishing this amalgam of race based culture from “racism” he incorrectly identifies racism as primarily perceptual in nature. His concept of racism doesn’t incorporate the many physical racist acts that socially marginalized people endure every day. These foundational fallacies allow Sowell to make his larger points, the same ones often raised by other conservative thinkers. The first is that there are, and have always been, better and more adaptable cultures in the world. This is an accurate statement but he leaves it there, as if it were an immutable law. He offers no hint as to why this is so. He fails to mention our human capacity to alter social institutions in ways that improve the outcomes of individuals from variant cultures.

The other major point he raises is that marginalized people allow themselves to be defined by the racist perceptions against them by others. The “others”, he argues in his example, are liberal intellectuals, especially during the “progressive era”, who blamed the economic plight of African-Americans (among other groups) on broad social factors and government policies, rather than on the their mal-adaptive culture. This shift in the causal roots of their less successful living standards, according to Sowell, absolves the marginalized from responsibility for their own self-improvement and causes them to see themselves as helpless victims of a society organized against them.

The explicit argument here is that every person has within themselves the power to rise above all obstacles and prejudices set against them. It is the familiar argument of taking personal responsibility as the only condition for economic or personal success. The proof offered (as is so often the case) is the personal experiences of the writer and anecdotal examples of other success stories. The obvious logical fallacy is that these exceptions prove that everyone else can do what these few have done. Unfavorable social conditions are only controlling factors if individuals allow it to be so. The failing is theirs. It is their own fault. It is a weakness in their character or collective culture.

The empirical truth is that for the vast majority of those who are subjected to social or institutional discrimination, their chances for success in life are seriously harmed. All the physical racist acts they suffer cause immeasurable personal damage and have an accumulating effect on them as individuals. That there are rare exceptions who become successful doesn’t prove that the majority of marginalized people are flawed individuals. In fact, it proves the opposite, that the infrequency of exceptions is a measure of the extent of the damage discrimination causes.

If equal opportunity can’t produce equal personal outcomes under the best of circumstances, as most would agree, then why would unequal opportunity offer the same chances of success? And if policy  can benefit one group of individuals (as is certainly true), why is it an individual’s personal failing when policy choices disadvanges then. It makes no sense.

Black Families, Structural Racism and a Decision to Raise Social Problems to a Public Issue – Part 1

by Brian T. Lynch, MSW

I read a great article in The Atlantic by Ta-Nehisi Coates entitled “The Black Family in the Age of Mass Incarceration“. (Oct. 2015). I highly recommend it to readers of my blog and I hope to write more about it from my own perspectives in the future. The lengthy nine chapter article begins with a discussion of Daniel Patrick Moynihan’s famous report, now 50 years old, “The Negro Family: The Case for National Action.”

 

For those of you currently blessed with youth, Moynihan was a scholar, US ambassador, a New York State Senator and a very influential intellectual in the waning decades of the 20th Century. (It still feels odd for me to say it.) At the time he wrote his report, he was ensconced as a young career civil servant in President Johnson’s administration on the eve of passage of the civil rights bill. He was one of many invisible administration officials who work behind the scenes in every public administration in government. He would have been a colleague of Bill Moyers and Chris Matthews, all of whom were among the anonymous legions that make governance possible in every administration.

The thrust of Moynihan’s report was the premise that structural white racism caused poverty in the black community and destroyed black families through a particularly devastating impact on black males. The intractable joblessness, poverty and social impotence of black males was forcing black families to become matriarchal: a status in conflict with the rest of American society. His critique of the public welfare system centered around the fact that it reinforced this matriarchal shift while marginalizing (some would say demonizing) black fathers. He argued that the federal government was underestimating the damage that this was causing. Moynihan wrote, as quoted in the article:

“The Negro family, battered and harassed by discrimination, injustice, and uprooting, is in deepest trouble… While many negroes are moving ahead to unprecedented levels of achievement, many more are falling further and further behind.”

In his view, the marginalization and emasculation of black males, even within the black community, is the root cause, and not the symptom, of the problems that we still read about today in local news accounts. Juvenile delinquency, higher high school dropout rates, gangs, higher black on black crime rates, etc., and all symptoms of structural racism, he would argue. Moynihan went on to write:

“In a word, most Negro youth are in danger of being caught up in the tangle of pathology that affects their world, and probably a majority are so entrapped. Many of those who escape do so for one generation only: as things now are, their children have to run the gauntlet all over again.”

Moynihan’s report was a prescient analysis of critical social problems that foreshadowed the accumulating impacts of structural racism, including mass incarceration and the ongoing destruction of black families today. His report made enough of an impact on Lyndon Johnson’s thinking that it was the subject of a subsequent speech that Johnson gave on the breakdown of black families in June of 1965. The speech was written, in part, by Moynihan himself. Johnson understood Moynihan’s point that white structural racism was responsible for the ongoing destruction of black families.

Johnson’s message in that speech, however, was quickly turned upside down in a social atmosphere that was in no mood to accept any blame for the plight poor black communities. The unreceptive public, and the media interpretation assigned to the Johnson’s speech, was that the root of poverty and social ills in the black community was a result of a weak black family structure, and of black males in particular.

Moynihan’s report was only an internal administration document at that time. Coates writes that Moynihan printed one-hundred copies of the report, submitted just one copy and kept the other ninety-nine copies in a safe. Moynihan had also removed from the report a whole section he had written on government policy recommendations for solving these problems. His rationale for this omission was that squabbling over proposed solutions would distract from sounding the alarm bells and raising a discussion on the plight of black families.

While the Moynihan report was not a public document at the time, internal discussions of the report spilled into the public domain and became a matter for public speculation. The false narrative that black families are responsible for their own social ills was ascribed to him and Moynihan was ridiculed by social activists for the black community. A moment had passed, the damage was done and the inverted perversion of Moynihan’s report seeped into the public consciousness despite efforts to dispel it.

Much more can be said at this point about the subsequent history of government policies and the negative impacts it has had on black families. This is covered quite well in the subsequent eight chapters on Coates’ article, and again I recommend you read it. My own experience working with public welfare families over the past three decades affirms Moynihan’s views and his criticism of the matriarchal federal public welfare system.

I hope to say more about this in the future also, but in part II of this article I want to shift gears and focus attention on that tactical decision the young Daniel Patrick Moynihan faced when he pull his policy recommendations from the original report. In doing this an important lesson may be learned about elevating a social problem to the level of a public issue within the context of the times. Where there alternatives might have been more effective? Would having raised a social problem to a public issue failed to happen if he left his proposed solutions in the original report? And what is it about the compressed and rarified air where civil servants work behind the scenes of public administrations that would cause him to lock up ninety-nine copies of his original report?

Debunking the Myth that It’s Your Fault You’re Poor

by Brian T. Lynch, MSW

The first time I saw a version of the graph below, depicting how worker compensation suddenly diverged from national wealth, I was horrified. My statistical training caused me to see right away that something took place in the mid-1970’s to stifle the rise of worker compensation. And the gap between wages and wealth keeps growing every years. I have written several articles about it since, but the implications have still not penetrated our public awareness.

 

The most recent appearance of this graph was from a report by the Economic Policy Institute confirming some earlier findings of the huge disconnect between worker productivity and worker compensation. I wrote an article summarizing their findings and received a lengthy comment that read, in part:

“Although I agree that the average wage is trending lower than productivity growth, I do not attribute it all to the greed at the top… The question I have is that how much of the deviation from the past are due to changes in society, where the average person has less room to negotiate a better price?”

The commentator went on to suggest the following reasons to explain the growing wage-to-wealth gap:

1. The trend of the two paycheck family led to a weakness in the labor force’s ability or need to demand higher compensation. 


2. Expanded social service programs and income eligibility caps aid to the working poor created incentives for workers to keep their compensation low so they qualify for government assistance.

3. Employer fixed benefit packages reduced competition for the affordable healthcare, driving up insurance costs since individuals were not “shopping around” for competitive bargains.

Let’s begin with the last point; fixed healthcare benefits. If these were anti-competitive purchases by employers, the rise in employer costs for these programs would correspondingly raise, not lower, hourly worker benefits. The more an employer pays for employee health insurance, the higher the wage compensation is per worker.

Healthcare costs have risen faster than inflation. The reasons for this are many, but the topic is too broad to address here except to say that higher insurance costs led many employers to drop healthcare coverage for their employees. This is a factor contributing to the lower growth in wage compensation. Note, however, that the flood of individuals entering the private health insurance market corresponds with the period of high rising premiums, not lower rates. The collective bargaining leverage of large corporations for competitive health insurance bids was actually a constraining factor on policy costs.

1. The trend of the two paycheck family led to a weakness in the labor force’s ability or need to demand higher compensation. 

To the main point, the impact of two paycheck families on wage compensation: Is there evidence that the gradual transition to two paycheck families contributed to lower hourly wage compensation? I believe the graph above provides the answer.

First, the wage/wealth graph above represents actual, verifiable economic data collected over a span of seven decades. It is not a trend graph, but you can easily imagine superimposed trend lines on it. The first would be a linear line rising steadily upward and to the right representing hourly Gross National Product (GDP). This is a measure of our nations’ wealth and it has been steadily growing.

The second trend line, representing hourly wage compensation, would rise perfectly in step with GDP from 1947 to 1973 (which is also the period of rapid expansion of the American middle class). Then it bends sharply (if somewhat erratically) over a seven year period before settling back into to a straight, but much shallower trend line.

Superimposing a trend line on worker compensation data reveals that there was a brief transition period from 1973 to 1980 during which the growth rate of worker compensation radically changed. The gap between new wealth and wage compensation has grows wider every year since.

What does this mean? It means the social forces that altered wage compensation began abruptly and remained active over a brief period of seven to eight years. The social forces created a persistent structural change in America’s hourly wage compensation that remains in effect today. It means that long term social trends don’t account for this structural change because they don’t fit the data.

Long-term trends present as long slow arches rather than sudden bends in a trend line. This means that the social actions that permanently altered the wage and productivity balance happened quickly and none of the major social trends happening before or since the transition period have had much impact on wage compensation.

The hypothesis that this change was the result of the rise of two paycheck families doesn’t fit this pattern. Woman entering the workforce would have had to started abruptly in 1973 and end by 1981. Of course we know that woman were entering the workforce much earlier and the trend wasn’t complete by 1981. It is also difficult to imagine how this phenomenon would actually cause a persistent structural change in worker compensation over the decades.

The relatively brief transition, represented in this graph, also rules out other long term trends that are often cited by economists as reasons for lower wage compensation. For example, it’s often said that globalization of our economy accounts for the wage/GDP disparity. It is true that globalization affects employment rates and puts downward pressure on American worker incomes, but the trend itself is also a longer, slower process that doesn’t fit the pattern. Even the process of shipping business operations overseas took place over a longer period of time. None of the explanations offered by most economists seem to fit the narrow window in which hourly GDP and hourly wage compensation diverged.

Seven years is a short period of time to bring about such a persistent structural change of this magnitude. Something big must have been happening at the time. What was it?

Consider what was happening in the 1970’s. This was a hyperactive period for Nixon era conservatives which gave rise to the new conservative movement, also known as the Neo Con’s. They laid the groundwork that swept Ronald Reagan into office in the 1980.

This was a time of rapid formation of organized business associations and industry trade groups. This was unprecedented in our history. It was the business answer to the growing influence of organized labor. These associations and trade groups pooled the considerable resources of big business to create the powerful business lobby we have today. They embarked on a massive anti-union marketing blitz to demonize unions and turn public sentiment against them. In 1973 the organized muscle of the newly formed corporate lobbyists got congress to pass legislation creating political action committees (PACs) which gave big business a means to funnel large sums of money into candidates political campaigns.

At the same time, the coordinated collision of big business, with a nod from business funded politicians, weakened the effectiveness of collective bargaining. Businesses everywhere were emboldened to end the practice of sharing their profits (wealth) with their employees.

In a span of less than a decade nearly all productivity raises ended for most Americans. All the new wealth (profits) generated since then have gone to top executives and wealthy business investors. The “raises” most employees received since this structural changes were merely cost of living adjustments.

Adjusted for inflation, most American families are making today what their parents family made decades ago, yet the nation’s wealth has more than doubled. The median income of a family of four today is around $51,000 per year. It would be over $100,000 per year if wage compensation had continued to rise proportionally with the wealth we produce.

2. Expanded social service programs and income eligibility caps aid to the working poor created incentives for workers to keep their compensation low so they qualify for government assistance. 

Regarding the second point about (#2), expanded social services and income eligibility caps creating a disincentive to work: I have addressed this topic in previous articles. This disparaging of social supports for the economically disadvantaged echoes a frequent conservative talking point. It goes by many names, such as the “welfare state” or the “nanny state. ” It promotes the idea that there is a giant dependency on social welfare programs.

But this attack on working families distracts from the fact that a growing number of people require government aid to the working poor to maintain basic stability. Their plight is a direct result of lower worker compensation caused by premeditated structural changes in the 1970’s. It hides the fact that subsidized assistance to working families allows corporations to have lower labor costs and higher profits. (A government supported labor force is a hidden corporate subsidy.) It dismisses the power of higher wages as a motivation for people to work hard and inspire hope for a better life. It obscures the fact that many companies have found ways to exploit the poor to profit off taxpayer subsidies. Most disturbingly, it blames this suppressed wage compensation on its economic victims.

For a fuller explanation of lower wages on social services, please read “Making the Case for a Living Wage.” http://aseyeseesit.blogspot.com/2012/07/making-case-for-living-wage.html

A Best of Times, Worst of Times Economy

by Brian T. Lynch, MSW

How is it possible that the investment economy is booming while the economy of ordinary citizens is still in such a slump? Stock prices are at an all time high and big time investors are getting high rates of returns while worker wages have declined and are just starting to rise. The raises in wages so far is still not keeping up with inflation. It seems like there are two separate economies not entirely connected to each other. Right?

To understand what’s happening we have to begin by acknowledging that most of the richest billionaires today have gotten much of their wealth increases at the expense of lower wages for the rest of us. This trend is more than thirty years old now in the United States. There is plenty of evidence supporting this fact for those who care to look. And this wage suppression is a global phenomenon, not just a U.S. feature.In order to increase consumer spending while wages remained flat we have had to make a series of changes, beginning with mothers entering the workforce, longer work hours followed by layaway plans, credit cards and then home equity loans to pay for spending beyond our means. These have run their course and the long hard pay down of personal debt (including college loans) means that consumer spending will be sluggish for the foreseeable future.

The impact on the economy of stagnant wages is ever slower consumption of goods and services over time. There isn’t as much money to buy things. This slower rate of consumption suppresses demand. Lower demand means fewer jobs and even lower wages for the rest of us. This is the cycle were we find ourselves today.

The consumption of goods produces the profits from with owners of capital collect returns on their investments. Lower demand due to suppressed wages would normally also lower returns on capital investments but for the factors that have kept consumption afloat. Now there are no hours left in a day, fewer household members available to work, no more capacity to borrow against future earnings. Now the impact of low wages has come home to roost and lower sales means less profit to be made.

Before the 1970’s this situation would right itself when owners shared a portion of their wealth by offering productivity raises to reward their workers. Productivity wages are based on growing productivity and are separate and above cost of living increases. Productivity raises, along with cost of living adjustments, allowed the labor/consumers to increase spending and boost demand. Increased demand would spur on manufacturing and stimulate the whole economy.

But today’s billionaires have found another way to profit without sharing their wealth with wage earning consumers. They spotted the growing ownership stake of many in the middle class and created an opportunity to take it all back. It is hard for most of us to see in our lifetime, but this is the first time in history of the world that the middle class (upper-middle mostly) has accumulated a significant stake in capital ownership. Many of us have retirement accounts, money market funds, etc. People in the upper-middle class, doctors, lawyers, middle-managers etc., have become mini-investment capitalists. Prior to the vast destruction of property caused by the world wars in the last century, wealth was concentrated at the top as is happening again today. Middle class gains in the 20th Century directly correspond to capital losses by the wealthiest owners during the two world wars.

Billionaire capitalists, the “true heirs” to wealth ownership, have responded to middle-class ownership of capital by creating a massive financial investment casino filled with elaborate new investment vehicles. The object is to entice new wealth owners to play in the billionaire’s casinos. Mortgage backed securities and swaps are just two small examples that nearly bankrupted the economy in 2008.

These new and incomprehensible investment products has spawned a whole new class of hucksters, like Bernie Madoff, who use these bewildering new instruments to create slick ponzi schemes. But the bulk of these new investment opportunities are just a big casino games in which the house (billionaire owners) always wins. Billionaires are quickly siphoning away middle class ownership stakes in capital through high finance games of chance. In this way they can boost returns on investments and entertain themselves without sharing their wealth through higher wages.

Because these billionaire owners, who make up less than .01% of the population, control the investment odds, they are sure to win back all the capital they lost in the war years of the last century. Middle class gains in the 20th Century correspond to capital losses by the wealthiest owners during the two world wars. This now explains why the stock market and investment economy seem to be booming while the economy on Main Street slumps. Billionaire capitalists don’t have to share wealth to make wealth like they use to. There are enough small investors with an ownership stake willing to gamble what little they have in this new investment casino to keep billionaire fortunes growing.

If you, the reader, are still with me at this point let me assure you that the geometrically rising gains by the wealthiest owners of capital are not an inevitability. There are difficult but concrete steps we can take to bring capitalism back into balance for everyone. A discussion of these solutions does require a much deeper understanding of problems that I can provide here. I firmly believe it is in our best interest to arm ourselves with a much better understanding of the forces creating our two economies; Forces that are threatening our democratic institutions. For a fuller understanding I recommend Thomas Piketty’s excellent book, Capitalism in the 21st Century. I encourage you to strike up conversations with others and share your thoughts and questions.

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Image Credit: (and recommended site) http://oxfamblogs.org/fp2p/is-doing-something-about-inequality-just-a-choice-between-bash-the-rich-v-tackling-poverty-some-thoughts-for-blog-action-day/#prettyPhoto-img/0/

Declaring War on the Poor

by Brian T. Lynch, MSW

Thom Tillis is now Senator elect from North Carolina, having beaten Democratic incumbent Kay Hagan in the 2014 election. During his campaign Tillis berated the poor and suggested that those people who can’t help being poor, like the truly disabled, should rise up and opposed welfare for the unworthy poor. What he actually said was:

“What we have to do is find a way to divide and conquer the people who are on assistance,” 

North Carolina has 1.1 million poor. That’s 13.1% of its population. If these folks voted it would be hard to imagine Tillis getting elected, but Hagan and the Democrats have abandoned the poor and working class in this country as well. Now the poor are under attacks like this:

“We have to show respect for that woman who has cerebral palsy and had no choice, in her condition, that needs help and that we should help. And we need to get those folks to look down at these people who choose to get into a condition that makes them dependent on the government and say at some point, ‘You’re on your own. We may end up taking care of those babies, but we’re not going to take care of you.’ And we’ve got to start having that serious discussion.” – Thom Tillis

Watch for the U.S. Senate to put Tillis on the Health, Education, Labor and Pensions Committee to replace Kay Hagan. He is destine to become the chair of the Children and Families Sub-committee with his attitudes. His appointment would amount to a declaration of war on the poor.

So how should sensible people respond to divisive attacks like this on the poor and vulnerable? Should we begin making similar distinctions between the worthy and unworthy rich? Should we affirm those who earned their great wealth and provide social benefit but rescind all advantages given to those who use their inherited wealth to squeeze the people and their government for still more?

How we respond to these questions will define who we are as a nation.

Should Living Wage Minimums be Based on Individuals or Families?

by Brian T. Lynch, MSW

FDR

 
“No business which depends for existence on paying less than living wages to its workers has any right to continue in this country… By living wages, I mean more than a bare subsistence level — I mean the wages of a decent living.” (1933, Statement on National Industrial Recovery Act – Franklin Delano Roosevelt)
 

Question:  In looking at the Living Wage calculator, I see that $10.83 for a single adult in Morris County, New Jersey  where I live. This seems fair to me for a single person, but when you add one child to that scenario the rate jumps to $22.12 per hour. This raises a serious question.  Does the Living Wage Movement suggest that wages should be adjusted according to need? [ http://livingwage.mit.edu/ ]

Answer:  That’s a great question. I am not a spokesman for, or advocate of, the living wage movement as an organization. I do believe that living wages should be the minimum wage in this country.  Minimum living wages should be what we pay summer college help or student interns, not full-time employees. It might also be appropriate for part-time seasonal help. It shouldn’t be what we pay permanently hired employees.

To answer your question, I researched what a living wage is in the 130 cities that have living wage laws. It turns out that their wage base is for a single employee, not including any dependents. A living wage in Manchester CT equals $15.54/hour (the highest) while it is $8.50 in Orlando FL (the lowest).  It would appear that the Living Wage Movement is looking to index a minimum living wage minimum to local economies based on one adult with no dependents.

That said, the minimum wage in 1986 was $10.86/hour  as opposed to its current level of $7.25/hour.  If it had been indexed to inflation in 1986 the current minimum wage today would be $23.59/hour today. That clearly was intended to provide for a worker with a family. The current median family size is 2.54 persons per household. That inflation adjusted wage equals about $47,000 per year while the current median family wage is a little over $51,000 per year (and still declining, I might add).

Here’s the thing, we have only been talking about wage adjustments to keep pace with inflation. We have not been talking about raising wages to reward workers for our growing productivity. We have not been talking about sharing the wealth that workers help create so everyone keeps pace with America’s growing economy. Cost of living adjustment are important, but they shouldn’t be confused with a productivity, or merit raise.

America is $1.7 trillion richer today than it was in 1976. Our economy has doubled, yet the share of all that new wealth created by American workers in this same period of time is insignificant.

In the 1960’s my father was an appliance repairman at Sears. His salary was enough that my mother could stay home to raise my sister and me. Her role as mother to the next generation of citizens was valued. Today, a typical family of four making about $51,000  does so because both parents work. And they are only able to make ends meet because of easy access to credit to shift their financial burdens onto their future earnings.

When I speak about a living wage I am thinking about getting back to a point where one breadwinner can hold one full-time job and still raise a small family without needing government assistance to do it. That’s what we had, and that should be our goal as a country.

Our Chronic Wage Stagnation, Symptoms and Treatments

by Brian T. Lynch, MSW

Decades of frozen wages relative to our expanding wealth is the root cause of many economic problems. More people falling into poverty, a shrinking middle class, declining retirement savings, increased welfare spending, higher unemployment, more aid to working families, declining government tax revenues, diminished funding for Social Security and Medicare, a sluggish economy (despite a record high stock market), slow job growth and heighten social tensions along the traditional fault lines of race, ethnicity and gender are among the many issues influenced by decades of wage stagnation.

Beginning in the late1970’s most American workers received only cost of living adjustments in their paychecks while their real earnings gradually diminished each year. Employers increased hourly wages to keep pace with inflation, but they suddenly stopped raising wages to reward workers for their productivity. Earned income has declined for most Americans as a percentage of our gross domestic product (GDP) This amounts to a dramatic and intentional redistribution of new wealth over the last 40 years. Nearly all this new wealth has gone to the rich and powerful.

The visual evidence of wage stagnation relative to hourly GDP is apparent in one powerful graph (below). You may have this it before.

hourly GDP vs Wage graph

 

SYMPTOMS

The effects of wage stagnation on our economy have been gradual and cumulative. Its impacts don’t raise red flags from one year to the next, but the cumulative effects are obvious. The trending rise in income inequality, for example, was missed entirely for 25 years, and then it still took another decade for it to catch the public’s attention.

According to USDA data on the real historical GDP and growth rates[i], the U.S. economy grew by $368 trillion between 1976 and 2013. That is a 109.4% rise in national wealth, more than a doubling of the national economy. Almost none of that wealth was shared with wage earners. If hourly wages continued to grow in proportion to hourly GDP, as it had for decades prior to the mid-70’s, the current median family income today would be close to $100,000 a year instead of the current $51,017 per year.[ii]

Think about that for a moment, and about all the implications for wage based taxes and payroll deductions. For simplicity sake, let’s say wages would have double if the workforce received productivity raises. That would significantly reduce the number of families currently eligible for taxpayer subsidies such as SNAP (food stamps), housing assistance, daycare and the like. At the same time the workforce would be generating much more income tax revenue.

Consider next the impact wage stagnation has had on payroll deductions. Social Security and Medicare premiums have not financially benefited from the growing economy. Double current wages and you double current revenues for these programs as well. Moreover, the economy has grown at an annual rate of 2.9% since 1976. If Social Security and Medicare had benefited from this new annual wealth, the effect on current revenue projections would be profound. We would not be looking at a projected shortfall any time in the future.

The impact of wage stagnation on consumer spending is perhaps the most insidious problem. While worker wages have stagnated, the production of goods and services has grown. How is that possible? Some of this production is sold in foreign markets, but domestic markets are still primary. And it is here where economic theories have done a disservice.

A generation of economists and business leaders have treated consumers and workers as if they were not one and the same. This has fractured how we look at the economy and given rise to the notion that labor is just another business commodity. It disguises the fact that labors wages fuel consumer spending. Wages help drive the whole economy while wage stagnation reduces consumption over time.

To overcome this effect we have seen the need for mother’s to enter the workforce in mass, and for banks to invent credit cards to bolster consumer spending. These and other creative measures can no longer forestall the decline in worker spending. So while the financial markets ride the tide of America’s growing wealth, the fortunes of those who have been cut off from that new wealth continue to slip beneath the waves.

As for social tensions among different racial, ethnic and gender groups, the effect of stagnant wages relative to the nation’s growing wealth creates a lifeboat mentality and zero sum thinking. For the first time in many generations parents are worried that their children will have less in life than they had. When the whole pie is shrinking a bigger slice by one person means a smaller piece for others. This thinking exists because for over 95% of wage earners the economic pie hasn’t grown in 40 years.

TREATMENTS

You may not be ready to accept chronic wage stagnation as “the syndrome” underlying our economic woes, but it’s also true from my experience that having solutions (or “treatment options”) at hand often makes it easier to identifying the problems they resolve. With that in mind, I want to offer some solutions to America’s low wage conundrum.

One direct approach to raising worker wages is the one currently being discussed in the public dialogue, raising the minimum wage. This benefits the lowest paid workers and also puts pressure on employers to increase pay for other lower wage earners. The current target of $10.10 per hour would still leave many families at or below the poverty line. Workers making the new minimum wage would still be eligible for some public assistance for the working poor. While passing a minimum wage law is at least possible, this option is not a systemic solution to wage stagnation. Even index the minimum wage to inflation would not compensate for declining wages relative to GDP growth.

Another direct approach to ending wage stagnation is to pass a living wage law. This would set the minimum wage at a level that would allow everyone working full-time to be financial independent from government assistance, including subsidized health care. A living wage law could be indexed to the local cost of living where a person is employed. This is idea because it takes into account local economic conditions which are determined by market forces rather than government edict. But passing a living wage law in the current political climate is unlikely.

There are other ways of encouraging wage growth that don’t involve direct wage regulation. One idea would require the federal government to recoup, through business income tax rebates, the cost of taxpayer supported aid to working families from profitable businesses that pay employees less than a living wage. Employee wages are easily identified through individual tax returns. Eligibility for taxpayer supported subsidies are relatively easy to estimate as well, so recouping public funding to support a company’s workforce is a practical possibility. A portion of the recovered money could be paid into Social Security and Medicare to make up for lost revenue due to substandard wages.

A welfare cost recovery plan could gain popular support given the growing public resentment towards taxpayer funded social programs. At least 40% of all full-time employees in America currently require some form of taxpayer assistance to financially survive. More importantly, this plan places the burden of supporting the workforce back on profitable businesses where the responsibility lies.

Another solution has been suggested by former US Labor Secretary, Robert Reich, and others. They support proposed legislation, SB 1372, that sets corporate taxes according to the ratio of CEO pay to the pay of the company’s typical worker. Corporations with low pay ratios get a tax break. Those with high ratios get a tax increase. This would effectively index worker wages to CEO compensation in a carrot and stick approach to corporate taxes. The details and merits of this approach is outlined elsewhere.[iii]

Do U.S. businesses have the financial capacity to offer higher wages to their workers? I would like to answer that question with another graph that you may also have seen before.

Credit: Blue Point Trading http://www.blue-point-trading.com/blue-point-trading-market-view-june-07-2012

There is a clock ticking somewhere in the background on this issue. There is a point somewhere in the future where it will be too late to fix wage stagnation through the normal democratic processes. History has proven this to be true. We are not at that point now, but we are past the point treating wage stagnation earnestly.

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[i] Link: Real Historical Gross Domestic Product (GDP)

[ii] As of 2013 the median family income of $51,017 x GDP growth of 109.4% = $104,796 per year

[iii]  Link: Raising Taxes on Corporations that Pay Their CEOs Royally and Treat Their Workers Like Serfs