A lengthy book review by Thomas Lunde
Lower taxes scream the headlines of the business press in Canada. We are
not competitive shout the neo-cons and their corporate masters. These and
similar mantras have been bombarding us with relentless waves of media
support. In fact whole political party platforms such as Reform have made
this their guiding light.
Raise wages states James Galbraith, son of the famous John K Galbraith and
teaching economist at the University of Texas. What! Raise wages - what
heresy. And yet there is a logic in this simple thought that is not being
debated. Why have the rich been getting richer and the poor - poorer? JK's
answer is that wages - the primary source of income for most Americans - and
Canadians has been falling since the 70's while income from interest has
been rising. This has created a major inequality in income distribution
that has created many of the problems of our governments in terms of
deficits and cutbacks to social programs. I could go on and on, but
starting on page 162 to 167, his summing up provides a good overall summary
of his major thesis without all the mind numbing explantions, graphs and
paradigm shifts from conventional economic theory used to prove his new
perspective. I will let him explain in his own words. Where I start is
were he has finished his analysis of knowledge workers, consumption workers
and service workers.
Page 162
In the period since 1973, investment and investment above all has driven the
interindustry wage structure. This is true within the manufacturing sector
proper, and it is true between manufacturing and services, once the two are
properly demarcated.
The story of services, therefore, is that there is no separate story.
Industries associated with capital investment, with the production of
capital goods and particularly with the production of capital goods and
particularly with the production of new technologies, have done
comparatively well in modern times. Industries and activities that rely on
any other source of prosperity, whether it be consumer demand or the
national security state, have done poorly. The bottom has fallen away for
the non investment sector.
The implications of this finding go well beyond the analysis of the sources
of rising inequality. They suggest that an entire civic mantra, on the
virtues of saving and of investment and on the deficiencies of American
society in this regard, has been misleading as both diagonsis and
prescription. Comparatively speaking, we have not in lacked for investment.
Therefore we cannot have lacked for the saving required to finance
investment. To the contrary, private business investment is the singular
activity that the American economy has continued to pursue, willy-nilly, at
a high rate and in a state of frenetic self-renewal, within a general
environment of stagnation and decline. We lack for everything else that
accompanied rising private investment in the period from 1946 to 1973:
rising living standards, rising wages, falling poverty, increased employment
in the high-wage, nonmanufacturing sectors as government itself, and
especially for the public investmensts that raise collective living
standards and provide amenities that every citizen can enjoy. Thus, the
floors that society had formerly placed under wages in the S(ervice) sector
have been progressively eaten away.
It is impossible to square this picture with the prevailing image of a
country afflicted by declining savings and private consumer profligacy,
though that image is relentlessly touted by a certain school of policy
advisers and their allies in academic economics. The evidence presented
here contradicts it. What we see from the movements of the wage structure
leads to the opposite conclusion. Investment is the activity that has
survived and prospered, at least in relative terms, in an otherwise
declining economy. And those in position to profit from spending on
investment equipment have done well, almost alone among manufacturing
workers, in the distribution of wages.
A surfeit of investment! An excess of technological change! But, on
reflection, how could it be otherwise? Private business investment is the
source of the technological revolutions to which we are repeatedly
subjected. These revolutions would be hard put to occur in a society that
was not investing; indeed they would not and could not occur in such a
society. They therefore fit oddly into the picture of a savings-starved,
investment-short, happy-go-lucky culture with which we are constantly fed.
Investment brings us technology. And these technological revolutions are
themselves the instruments of a massive transfer of wealth, away from
technology users and toward technology producers. This pattern of
transfers, following the rhythms of the business cycle and of the
unemployment rate, is an ultimate source of rising inequality in wages.
But, one may ask, aren't the comparative gains of the manufacturing sectors
and particularly of the knowledge-based industries due to their superior
productiviy performance? Isn't this just the proper working of a market
system? Haven't things always been this way?
The answers ae surely yes, but then no, and no. Certainly the technology
sectors and the goods-producing sectors below them enjoy high rates of
pruductivity growth, compared to pure services. They always have. This is
in the nature or activities that use technology and capital: they can
change, and they do change, with the progress of technique and the renewal
of equipment.
There is nevertheless no necessary reason, no dictate of economic logic, why
a rapid rate of productivity gain inside a sector should necessarily lead to
proportionately higher relative wages in that sector. The rule that real
production wages track productivity growth applies only at the most
aggregate level, to the averages for a society as a whole. It does not
apply to the internal distribution of income. In a different institutional
setting, the result might as easily have been generalized catch-up to rising
manufacturing wages and an accompanying general rise of the level of prices
-- a mild and steady inflation. Or we might have seen falling pices for
manufactured goods and a stable structure of nominal wages. In that case,
the benefits of higher manufactuing productivity growth and new
technolgogies are spread through the society rather than being concentrated
on the technology generators and goods producers.
Such institutional settings are not merely hypothetical. They are part of
history and have occurred at other historical moments in the United States
as well as overseas. They were in fact the prevailing pattern during the
first generation following World War II. They remain the pattern, to a very
substanial extent, in Northern Europe. What has happened in the United
States since the early 1970s is therefore historically and politically
specific. To put it most briefly, politics and history govern our fate.
We can now round out our analysis of the rise in inequality of wages and
salaries in the United States that began in the early 1970's. We have seen
that the explanations so far offered - that technology did it or that trade
did it- are at best partial and inadequate. Although technology did play a
major role in the income transformation of the past two decades, the role of
technology cannot be fitted into the model of a competitive labor market.
That framework offers a distorted idea of what technology is. It is biased
toward the computer at the expense of the full array of other technologies
undergoing almost equally rapid change. It has no comprehensive measure of
technological change that can be matched to the rise in inequality that has
occurred. It offers no foundation for the belief that technology should
have changed in such a way as to produce higher inequality after 1970, when
it did not do so before that date.
What emerges from this analysis is the industry-specific and policy
dependent character of the technical revolution. Some industries design,
make and sell capital goods. These industries-whose exact boundaries are
broadly but not precisely captured in my industrial classifications- hold
the cards in the game of technological winner-take-all. Workers in these
industries are defined to be the workers with scarce and valuable "skill".
Outside of these sectors in the realms of machine-using mass production and
pure service activities, there is comparatively little that workers can do,
as individuals, to enhance their position. Working "smart" here is an
illusion: the number of winners in a winner-take-al lottery is necessarily a
small fraction of those would like to play. "Technological revolution" is a
game that only a few can win.
Once the increase in dispersion in manufacturing wage and salary incomes is
measured with satisfactory precision on a year-to-year basis, it can be
substantially explained. Macroeconomic developments and polcy
measures-changes in unemployment, the rise in the dollar's exchange rate
after 1980, economic growth, inflation, and the minimum wage-can all be
shown to have had significant effects on increasing inequality in
manufacturing wages. This exercise removes the mystery behind the
moverments of inequality in the manufacturing wage structure. And a similar
story holds of the larger movements of wages between manufacturing and
services, though here an even greater explanatory weight must be laid on the
investment cycle.
What remains to be explained is why the movements of the macroeconomic
variables took the form that they did. And this we have now also done. We
have shown that what happened was a collapse of the political forces that
had previously supported mass consumption. Up until the early 1970s, a
broad-based improvement of living standards by working Americans had been
achieved through a range of means working in parallel and including high
volumes of output and employment, trade protection, and government
expenditures on national defense. This is what disappeared. The worker's
state, it would seem, did not just decline and finally collapse in the
Soviet Union. Rather, a much more powerful, much more successful one also
fell into decay, over the same period of time, in the United States.
>From the end of World War II until about 1970, the pressures of creative
destruction on the wage structure were under control, for the United States
pursued policies of full employment, reasonably steady economic growth, and
rapid actions to prevent or end recessions. These were accompanied through
the 1960s by an explicit policy of wage discipline and solidarity. All
workers in the society came to expect an average increase in real
compensation approximately equal to the average national rate of
productivity growth. This was the "guideposts" policy. Its intent and
effect were to squeeze the wage structure, gradually reducing differentials
between professions and jobs. The sqeezing was promoted by a low
unemployment rate (3.5 percent by 1969), a steadily rising minimum wage
($6.50 in 1994 purchasing power by 1968), a strong union movement in
alliance with the governing party, and a War on Poverty whose intended
effect was to strengthen the poor in their struggle for jobs and incomes.
After 1969 the government took a different turn. Wage-price guideposts were
abandoned, freeing business firms to raise prices. Macroeconomic policy
became dramatically unstable, creating and tolerating recession in 1970 to
tame the inflation that the end of price restraints produced. An investment
tax credit further boosted the investment sector. In 1973, OPEC raised oil
pricers, partly to finance enormous pruchases of American arms, and monetary
policy again responded with high interest rates and unemployment. The
pattern repeated at the end of the decade following the revolution in Iran,
with a short recession in 1980 and a deep one in 1981-1982.
Through this time, full employment , protectionism, and later national
security expenditures were proggressively stripped away, and though there
were occasional election year booms, the first in 1972 and the second in
1984, consumption expenditures fell with the declining average real wage.
After 1980, the dollar went up, and imports flooded in. Minimnum wages fell
sharply in real terms. All of these changes had the effect of breaking down
the structures of solidarity that had held the American middle class
together for the first quarter-century after the end of World War II.
The new instability of macroeconomics gave a powoerful boost to investment
and techology, both in absolute terms and as compared with consumption.
With each recession, waves of older factories disappeared. With them went
the hard-won, high-paying jobs of the traditional blue-collar workforce.
But with each recovery, firms faced an imperative to replace lost capacity,
and to do it in the most cost-saving, labor-saving, technologically advanced
way available at that moment in time. Waves of layoffs were followed by
waves of investment. But the new investments were never designed to relieve
the distress of the previously unemployed. They were designed instead to
substitutue entirely for them, and this they accomplished.
At the same time, incomes policies were abandoned. The idea that all
society should benefit equally from national productivity gains was replaced
by an ideology of the market, in which winner-take-all and the
devil-the-hindmost. Minimum wages were allowed to fall in real terms;
safety net social expenditures came under assault. There began a cult of
the entrpreneur, laying great stress on the wonders and virtues of new
technology but no accompanying concern for its fantastic propensity to
redistribute existing income and wealth from the many to the few. The
technology-producing sectors, which had been present all along (but tamed)
in the old Keynesian economy, began their drive for an ever-expanding share
of incomes. And they succeeeded, at the expense of the middle-class society
that America once was, not long ago.
What was left was a technology empire. In that empire, a comparatively
small number of firms and their salaried employees, plus a fair number of
independent professionals, could reap the rewards of an immense predatory
raid on the previously existing structures of production. The weapons in
that raid are selected and even deployd by the victims themselves. But
participation is involutnary nonetheless. "Invest or die" becomes the creed
in every industrial activity under technological assault. The consequence
is an enrichment of the technology producers, a weakening of the technology
buyers, a successive displacement of C-sector workers into the S-sector.
Ultimately, the losers end up in debt or on the dole, in the
ever-less-welcoming arms of the Transfer State.
In presenting this story, one might be drawn to the idea that the rush to
new technology as such was at fault. The rebuke of Luddism haunts this
argument, just as the protectionist urge lurks behind the trade-did-it
position. But neither technolgy, properly measured and accounted for , not
the expansion of trade in themselves brought on the rise iin equality of
which the country was the victim. They were merely the battering rams with
which the old structures were knocked down, with technical revolution in th
senior and the high dollar in the junior position.
Behind the battering rams, behind the decisions to use them in this way,
behind the creation of the situations in which they could be used in such a
way, were political figures and policy decisions-decisions, for example, to
tolerate unememplyemnt. The economy is a managed beast. It was managed in
such a way that this was the result. It could have been done differently.
It was not inevitable even given the progress of technology and the growth
of trade. It was, in sense, done delibertately. That is the real evil of
the time.
