Analysis: Sanders Raise the Wage Act Would Benefit 40 Million People

The federal minimum wage hasn’t been raised since 2009, and wages for most American workers have been largely stagnant for decades. There’s been a significant upwards redistribution of income from most workers to the wealthiest people in society, which was caused by deliberate policy.

If the minimum wage had kept pace with productivity growth (gains in worker output and technological advancement) since the early 1970s, it actually would be at about $20 an hour today. The Sanders legislation on raising the minimum wage (which would not necessarily increase unemployment, as seen by some of the highest minimum wage states having some of the lowest unemployment) would thus provide a substantial standard of living increase for many.

By increasing the federal minimum wage over the next five years, the Raise the Wage Act of 2019 would boost the incomes and improve the lives of an estimated 40 million Americans, according to an analysis out Tuesday from the Economic Policy Institute (EPI).

Introduced last month by Sen. Bernie Sanders (I-Vt.) and Rep. Bobby Scott (D-Va.), the bill would raise the federal hourly minimum wage from $7.25—which Sanders calls “a starvation wage”—to a living wage of $15 by 2024. It would also require employees to pay the new minimum to tipped workers, who currently can make as little as $2.31 an hour.

[…]

In addition to helping millions of Americans escape poverty, the bill would also benefit the economy more broadly. “Because lower-paid workers spend much of their extra earnings,” the report outlines, “this injection of wages would help stimulate the economy and spur greater business activity and job growth.”

Advertisements

Excessive CEO Pay Takes Money Away from Other Workers

The op-ed provides a good analysis of the problem with the economic structures that allow CEOs to be excessively overpaid — the substantial amount of money that the CEOs are overpaid with could instead be going to other lower-level workers. Wages in the United States have hardly increased in decades for most American workers, and the CEO pocket money would make a significant difference in their lives.

The problem is the structure of corporate governance. The people who most immediately determine the CEO’s pay are the corporation’s board of directors. These directors have incredibly cushy jobs. They typically get paid several hundred thousand dollars a year for perhaps 150 hours of work.

Members of corporate boards largely owe their jobs to the CEOs and top management. They almost never get booted out by shareholders; the reelection rate for board members running with board support is over 99 percent.

In this context, board members have no incentive to ask questions like, “Could we get someone as good as our CEO for half the pay?” There is basically no downward pressure on CEO pay and every reason to boost pay. After all, if you were sitting on some huge pot of other people’s money, wouldn’t you want to pay your friends well?

Of course, the CEO pay comes at the expense of returns to shareholders, and these have not been very good in recent years in spite of the best efforts of Trump and the Republicans to help them with tax cuts and pro-business regulation. In the last two decades, stock returns have averaged less than 4.7 percent annually above the rate of inflation. By contrast, in the long Golden Age from 1947 to 1973, real stock returns averaged 8.2 percent.

With the bulk of stock being held by the richest people in the country, there is no reason to shed tears for stockholders, but the fact is they are being ripped off by CEOs and other top management. Given the choice, we should prefer the money ends up in the hands of shareholders rather than CEOs. After all, people below the top 1 percent do own stock in their 401(k)s, as do public and private pension funds. By contrast, every dollar in additional CEO pay is going to someone in the top 0.001 percent of the income distribution.

More important than the money going to the CEOs is the impact that their outlandish pay has on pay structures in the economy more generally. When the CEO is pocketing $20 to $30 million a year, other top executives are likely earning close to $10 million and even the third-tier managers might be topping $1 million.

[…]

If a successful CEO of a large company was pocketing $2-3 million a year, instead of $20 to $30 million, the ripple effect on the pay of others near the top would leave much more money for everyone else. This gives us very good reason to worry about excessive CEO pay.

If the structure of corporate governance makes it too difficult for shareholders to collectively act to limit CEO pay, threatening them with a return to the pre-Trump 35 percent tax rate might give them enough incentive to get the job done. It has always been in the interests of shareholders to pay their CEOs as little as possible, just as they want to pay as little as possible to their other employees.

If shareholders pay a CEO $20 million more than needed to get someone to run the company, it has the same impact on the bottom line as paying $2,000 extra to 10,000 workers. No company deliberately overpays their frontline workers.

Democratic Socialism in the Era of Ocasio-Cortez and Sen. Sanders

Democratic socialism has been more in the news lately since the most popular American politician — Senator Bernie Sanders — and a rising star in the progressive movement, Alexandria Ocasio-Cortez (who won an upset victory in a primary vs. an incumbent New York House politician) both profess to be democratic socialists. With this being the case, it is worth examining what the ideology represents and how it’s being used.

Democratic socialism (at least by what it should mean by definition) at its core means the democratic control over the means of production. This would mean that instead of institutions such as factories, banks, and media companies being controlled primarily by a small group of (often wealthy) people pretty much functioning outside of democratic controls, there would be much more stakes of shared ownership among the public. Under such an ideology, many more people would, for example, have the authority to join together and hire and fire their managers instead of the other way around.

When Ocasio-Cortez and Sanders mention democratic socialism though, they don’t usually say much about democratizing the distribution and organization of production. In truth, what they’re usually referring to is what’s called social democracy — letting the means of production still be controlled pretty undemocratically in capitalistic fashion, but at least in a way that also includes significant government intervention benefits for the general public. This includes a national healthcare system (which all OECD countries besides the U.S. and Mexico have), decently high taxes on rich people, educational costs being covered by the government, and a variety of other social programs such as paid maternity leave.

In the United States, subscribing to social democracy is often regarded as being pretty far left on the political spectrum. This is really just a reflection of the immense rightward shift of U.S. politics since the 1970s though. For one example, Republican president Dwight D. Eisenhower of the 1950s was a strong supporter of both unions and the New Deal social welfare programs implemented under president Franklin Roosevelt. Eisenhower said that those who didn’t accept the New Deal programs didn’t belong in the political system, but not accepting those programs has now become the norm among Republicans and among many Democrats as well. That Eisenhower would today be regarded as clearly on the left side of the political spectrum truly says a lot about American political discourse.

In terms of socialism, older Americans tend to associate socialism with the Soviet Union. The problem with that is that the Soviet Union practiced state socialism — there wasn’t any democratic distribution of resources there. The Soviet Union was in large part a dungeon for a lot of its people that provided some minimum subsistence benefits to let many of them survive.

And it should be noted that the achievements of the Soviet Union were when it was able to use the power of the state to direct people and resources to useful developmental ends, such as its space program. In the 20th century, it grew quickly from a largely poor and illiterate society that had been invaded multiple times to a world superpower for a few decades, and whatever criticisms of the USSR, there is something to be learned there. It’s a similar parallel to why China has grown and continues to grow as fast as it does — a fairly efficient use of resources (evidently quite powerful), even if the conditions that’s done under happen to be cruel.

The Soviet Union replaced the employers that hold so much power in capitalism with state officials. This didn’t change the fundamental dynamic of workers being quite disempowered, and in many ways made the situation in the Soviet Union worse than it would have been under capitalism. Democratic socialism seeks to absolve the everlasting struggle between the employer and employee, those who own and those who don’t, and in truth the ideology has never been tried much at scale. There are reasons to think that it would be a better way to organize society, such as research showing that today’s employees become more productive when given more autonomy, but there isn’t enough data to know for sure. The experiment of having a large worker cooperative sector of the economy could be run, just like the massive experiments of tax cuts for the rich have been run multiple times, although that’s obviously rather dangerous — it may actually provide a significant benefit to the lives of average working people.

It should also be noted how puzzled some people in the media are by young Americans’ embrace of socialism over capitalism. A now well-known Harvard study that was conducted in 2016 — and was redone once since the ones commissioning it were stunned at the results — showed that 51 percent of young Americans rejected capitalism and 33 percent preferred socialism.

This isn’t really an acceptance of socialism — it’s more of a rejection of capitalism. Young people in general have a vague awareness that the system isn’t working real well for them. Letting the money speak, real wages (wages with respect to inflation) in the United States have been almost entirely stagnant for decades. The only times most workers have seen real wage gains since the late 1970s have been in the later 1990s and over some of the last several years. Both of these periods had tight labor markets from the Fed allowing interest rates to remain low. In the 1990s it was because Alan Greenspan was a somewhat atypical economist and, for some reason, bucked the mainstream of his profession by allowing interest rates to remain low — in other words, something akin to dumb luck. In recent years it was because the Great Recession forced the Fed to drop interest rates to zero and near zero in order to provide a stimulus to the economy (in other words, a massive disaster had to happen).

Additionally, it’s probably pretty irrational to regard capitalism as the only or most viable economic system. It’s just an economic system, but those who reject it are often deemed heretics. In America there are plenty of debates, but for a few generations at least, the debate over the fundamental distribution of resources has been to a significant degree left out.

One view on that though is that this debate between capitalism and a different economic system isn’t really necessary or prudent, and that it would be better to have the debate over how markets are structured and to advocate for structuring them in ways that don’t redistribute income upward. Good Keynesian economists that primarily represent the working class may tend to advocate this view. That may admittedly be a better way to help the modern working class, but will there nonetheless be a massive cost to future generations if capitalism is maintained?

Real Wages Today

Why inflation and real wage gains are low isn’t really a mystery. It’s because worker bargaining power has been largely destroyed by the policies of the last generation.

The United States labor market is closing in on full employment in an economic expansion that just began its 10th year, and yet the real hourly wage for the working class has been essentially flat for two years running. Why is that?

Economists ask this question every month when the government reports labor statistics. We repeatedly get solid job growth and lower unemployment, but not much to show for wages. Part of that has to do with inflation, productivity and remaining slack in the labor market.

But stagnant wages for factory workers and non-managers in the service sector — together they represent 82 percent of the labor force — is mainly the outcome of a long power struggle that workers are losing. Even at a time of low unemployment, their bargaining power is feeble, the weakest I’ve seen in decades. Hostile institutions — the Trump administration, the courts, the corporate sector — are limiting their avenues for demanding higher pay.

[…]

Slow productivity growth is another constraint on wages. When companies are able to produce more efficiently, they can absorb higher labor costs without sacrificing profit margins. But such gains have been elusive in this recovery, so businesses are increasing profits at labor’s expense.

More than ever, the dynamics of this old-fashioned power struggle between labor and capital strongly favor corporations, employers and those whose income derives from stock portfolios rather than paychecks.

This is evident in the large, permanent corporate tax cuts versus the small, temporary middle-class cuts that were passed at the end of last year. It’s evident in the recent Supreme Court case that threatens the survival of the one unionized segment of labor — public workers — that still has some real clout.

It’s evident in the increased concentration of companies and their unchecked ability to collude against workers, through anti-poaching and mandatory arbitration agreements that preclude worker-based class actions. And it’s evident in a federal government that refuses to consider improved labor standards like higher minimum wages and updated overtime rules.

Why the Fed Raising Interest Rates Matters

The Federal Reserve is the central bank of the United States. There are many valid criticisms of it as an institution, but it can act as a valuable force for the public interest if used properly.

As is the standard of central banks, the Fed has a powerful tool that allows it to have a major impact on short-term interest rates. Interest rates are basically bread and butter to the number of people who have jobs in the economy.

Raising interest rates has the effect of slowing the economy and keeping people — potentially millions of them, as shown in recent years — from finding jobs. Higher interest rates naturally mean less loans to businesses and organizations that could use them to hire more workers. The standard argument for raising interest rates though is to control inflation, as higher interest rates reduce pressure in the labor market, which then leads to workers having less bargaining power for pay increases.

The problem with the argument to control inflation is that inflation has already been quite low in past years, well below the Federal Reserve’s 2.0 percent annual target. The 2.0 percent target is supposed to be an average, and considering recent years, it hasn’t even been near that target. The Federal Reserve was set up with the dual mandate of both adequately controlling prices and maintaining what’s known as full employment. Full employment basically means a strong labor market with low unemployment, where workers can have good access to jobs with fair wages, and it’s quite important as a policy measure. (Due to slow wage growth among most, the U.S. economy clearly isn’t at full employment now, contrary to what you’d likely read in the newspapers.)

If unemployment is low, it means that there will be an increased demand for labor, which should both mean higher wages for workers and that the economy’s resources are being used decently well. The increased demand for labor raising wages is because employers cannot so easily hire other workers if their employees happen to leave the firm. Without enough employees, the firm risks being losing profitability to its competition and going out of business. This situation would allow an existing employee to say something like “Give me a raise or I will find a job elsewhere,” and it would potentially allow a prospective employee to refuse a job unless the wage is adequate enough.

The increase in worker bargaining power leading to higher wages and then higher inflation is due to firms needing or deciding to raise prices some after seeing that workers generally can pay more. There is nuance needed in this description, and it should be noted that wages for most workers in the U.S. have been mainly stagnant for decades due to the policy-driven upwards redistribution of income to the wealthy, but it’s a standard point. If the policy is actually directed towards the interest of the general public, the increases in prices will be more than offset by the increases in wages, however. There is evidence of this worker-friendly approach doing well in the U.S. from about 1947 to 1973.

It should also be noted that the only times that many American workers have experienced even minor real wage increases in the last four decades have been when there were tighter labor markets. This occurred in the later 1990s and over the past several years, and it points to the immense importance of the Fed keeping interest rates low.

Alan Greenspan was the economist at the head of the Fed in the 1990s, and for whatever reason, he decided against raising interest rates as the unemployment rate got lower. This was at a time when it was standard in the economics profession to claim that the unemployment rate couldn’t go below about 6 percent without leading to rapid inflation. Inflation never got that high in the 1990s though, and even if Greenspan deserves serious criticism for failing to contain the housing bubble that was the main cause of the devastating economic crash and Great Recession, he does deserve praise for doing this one thing to help low- and middle-income workers.

Janet Yellen’s chair appointment at the Fed also saw the institution keeping interest rates quite low for her tenure, which is clearly one of the main reasons that the U.S. economy is doing decently well now in 2018 relative to the last four decades. Driving around America now would allow someone to see many more help wanted signs than in at almost any other time thus far in the 21st century, and there’s an advantage to this that may not be so obvious: Disadvantaged workers (typically those from minority ethnic groups or with disabilities) will have an easier time finding jobs. The increased demand for labor means that there’s less room for discrimination against them. As proof of this, the disabilities application rate and the unemployment rate for African-Americans have fallen to historically low levels.

The unemployment rate does of course have its flaws. It measures workers looking for jobs, not the amount of people who have dropped out of the labor force and are no longer looking for employment. There is plenty of good work that needs to be done, and there are idle hands that want to do it, but the dysfunctional American economy isn’t putting the two together enough. So while the unemployment rate is an important measure, there are other relevant indicators (such as the labor force participation rate among prime-age workers) that should be considered in assessing the economy.

But if the majority of workers benefit most from lower rather than higher interest rates, why does the Fed continue to raise them then? It’s largely because financial institutions exert significant control over the Fed, and their preference is to keep inflation as low as possible. More worker bargaining power via lower interest rates can mean a shift from net corporate profits to wages for workers, and bank loans also stand to depreciate in value with higher inflation.

The after-tax corporate profit share of national income has almost doubled since 2000, and this to a significant extent is because of wages for workers being diverted into corporate profits that are largely pocketed by executives and major shareholders. According to one reputable estimate, if the after-tax corporate profit share was back at its 2000 level, it would translate to nearly $4000 more per U.S. worker in wages, a fact that is undoubtedly quite disturbing.

Since the loans of banks and other financial corporations typically are set at a fixed rate, the repayments of those loans will be worth less to them if inflation rises. For one example, if a bank offered a 5 percent home loan while expecting that inflation would be 1 percent, the bank would assume that it would receive a real interest rate of 4 percent. If the inflation rate actually becomes 2 percent, the bank will take a considerable profit loss (receiving a 3 percent real interest rate) compared to what it expected.

In sum though, the issue of the central bank raising interest rates has historically been one that’s favored powerful financial corporations at the expense of the working class, and it’s a very significant issue that should be kept in mind more.

Wages of the Top 1% Still Growing at the Expense of Others

Who the economies of the world were rigged to benefit most. The latest data confirms the trend of the upwards redistribution of income often seen over the last several decades.

The world’s largest economies have grown at a steady pace and unemployment has consistently fallen in the years following the greed-driven global financial crisis of 2008, but income gains during the so-called recovery have been enjoyed almost exclusively by the top one percent while most workers experience “unprecedented wage stagnation.”

That’s according to the OECD’s 2018 Employment Outlook (pdf) published Wednesday, which examines recent economic trends and finds that wage growth for most citizens in the 35 industrialized nations studied is “missing in action” due to a number of factors, including the the rapid rise of temporary low-wage jobs and the relentless corporate assault on unions.

[…]

In a statement on Tuesday, OECD Secretary General Angel Gurría said “[t]his trend of wageless growth in the face of a rise in employment highlights the structural changes in our economies that the global crisis has deepened, and it underlines the urgent need for countries to help workers.”

[…]

snapshot

Inequality Shown as the Fight For 15 Movement Continues

The story of U.S. wage disparity: “In 2007, average annual incomes of the top 1 percent of households were 42 times greater than in­comes of the bottom 90 percent (up from 14 times greater in 1979), and incomes of the top 0.1 percent were 220 times greater (up from 47 times greater in 1979).”

The income share of the top 1 percent in the U.S. has doubled from its share during most of the 1950s to 1980. This is an amount high enough to increase the income of people in the lowest 90 percent of the country’s income distribution by over 20 percent, and it’s nearly enough to double the income share of the bottom 40 percent. That basically represents massive amounts of money being wrongly transferred upwards.

WageDisparity

 

realgraph - Copy

Today’s article that’s linked to here reports on the movement of employees fighting for a $15 an hour wage. This is hardly radical when it’s considered that the minimum wage would be about $20 an hour today if wage gains had kept pace with productivity rates since the late 1960s. That’s yet another absurdity about inequality in the United States though.

According to the compensation research company PayScale, fast food workers make an average of $8.28 per hour. Those wages, depending on hours, leaves those workers making about $15,000 to $21,000 per year.

According to the National Low Income Housing Coalition, the current minimum wage of $7.25 per hour leaves workers unable to afford a two-bedroom rental apartment in any U.S. state.

The Poor People’s Campaign and Fight for $15 are also planning six weeks of “direct action and nonviolent civil disobedience” starting on Mother’s Day.