A word economists love to throw around is productivity. The most important thing, we’re told, is to increase productivity. The more we can produce, the more productive we are, the richer our society will be. And before there can be increases in real wages, there must be increases in productivity. If there isn’t more stuff to go around, then, on average, we just can’t have more stuff.
Yet, for 30 years, the US economy’s productivity has continued to grow, and the average American hasn’t had much of a pay raise, if any. The reason lies in the difference between productivity and surplus, and in the key observation is that it doesn’t just matter how big the pie is, it matters how much of the pie you’re getting. Let’s explore this with a simple model.
Let’s take a really simple model. You’ve got one hundred workers working in your economy. The first year they cost $10/hour and produce $18 worth of goods an hour. If we take productivity to be value/time – their productivity is $18. Note that productivity in this model isn’t related to pay rates.
Next year they’re producing $27 worth of goods and being paid $11. Their productivity has gone up 50% (27/18), but the surplus you’re getting from them has gone up 100% 16/8) and in absolute terms it’s gone from $8/hour to $16 hour. That’s $16/hour more in the owner’s hands.
Where that surplus goes is an important question. The owner could use it to increase his employees’ wages and benefits – thus reducing the surplus and making his employees better off. That’s the European solution and is one of the causes of so called “Eurosclerosis” – increases in productivity for much of the last 30 years have gone to those already employed much more than in the US.
You can hire new employees and try to make even more money. America did that during the 80’s and 90’s while Europe was increasing wages and benefits instead.
You can spend it on consumption – buy that yacht, or jewelry or expensive holiday you want. That’s another part of what the US has done and is why luxury retailers have done very well this last decade.
You can invest it in capital infrastructure. With better tools and methods your worker may improve his productivity even more and you might make even more money and more of a surplus.
You can invest it in the secondary security market or real estate and try and make returns that way. If everyone is doing this security prices go up relative to return and you might have a bubble. The US did this too.
Now what would happen if instead wages went up to $22 while productivity went up to $27? Well – productivity has increased – the worker is more productive, again by 50% – but the surplus has actually gone down by about 30% – and in absolute terms the employer has $2 less surplus an hour to spend. He’s probably not going to be hiring a new worker, increasing his spending on luxury goods, investing in capital or the secondary capital market.
But that money has gone somewhere. It’s gone to the workers. They are most likely to spend it on consumption – on buying goods. But they might save it, making it available for the owner to borrow to spend trying to increase productivity. However the key point is that there isn’t less money in the economy – there is still the same amount of money – it’s just that it’s going to someone different.
As noted, this is a very simplified model. Still, it illustrates some basic things about productivity and about surplus. Remember profit = surplus and when productivity goes up if wages and other costs remain constant, profit goes up. In the most recent period of productivity gain that’s pretty much what has happened – gains in productivity have gone to profits and to senior management – not to workers.
When this happens there are simple consequences. Demand for general goods doesn’t rise as fast as it would otherwise, or if it does it is driven by debt, not by earnings. Since the rich spend more of their money on investment goods than real goods you get asset bubbles, whether in stocks, bonds, real estate or commodities. Money is power and if it pools in a few hands those people can use it very effectively to buy power, whereas when spread out it has less effect. Plutocracies tend to purchase their own continuation.
The structure of US markets is thus, in large part, a consequence of how productivity gains have been divided up. By giving them to people other than workers – to corporations and to the rich – the US has chosen a lower demand path which has pushed money into assets and thus into bubbles. As it has concentrated money, so it has concentrated power in the hands of the few.
Increasing productivity is like baking a bigger pie. It’s who eats it that matters.
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Ian! (And a place for everyone at the table.)
((( Ian )))
How’s it goin’, eh ?
Another excellent post, Ian!
What Laura said!
I loved the Gretzky and Oiler comment from Chafee…! ;-)
I choose this selection!
“You can invest it in capital infrastructure. With better tools and methods your worker may improve his productivity even more and you might make even more money and more of a surplus.”
So if American knew which companies pay their employees well, and kept CEO salaries reasonable, and supported only those companies, we could turn this ship around?
I choose this one too!
“The owner could use it to increase his employees’ wages and benefits – thus reducing the surplus and making his employees better off. That’s the European solution and is one of the causes of so called “Eurosclerosis” – increases in productivity for much of the last 30 years have gone to those already employed much more than in the US.”
It was all I could do to hold back from commenting further on the Glory Days of Hockey in Edmonton … *g*
Those were the days…! *g*
Yep, I read your blog as well, nicely done !!!
Oh and sorry for beating up on your BoSox … *g*
Thanx and 8-P
Michael Dell thinks you are a radical numbnutz. He sold us on this concept in the mid-nineties. Sometime we’ll have to talk about how that worked out for most of us! It was a nice ride for a while, there actually were free lunches, while Michael, borg-like absorbed all of the independent shoestring operations in Austin (It’s good to have rich parents!) But some people simply know they are worth billions a year, but most of the others that actually do the work-not so much… After all it’s the
AmericanRobber Baron way.Demand for general goods doesn’t rise as fast as it would otherwise, or if it does it is driven by debt, not by earnings.
Thanks for the Saturday Seminars Ian. I’m paying attention and I’m trying to learn stuff I didn’t while I was focusing on day to day family issues. Maybe, in my own way I was learning, but your posts are greatly appreciated in the here and now.
Can you explain more about demand being driven by debt, please?
Ian, in another great post, this is my fav line … Increasing productivity is like baking a bigger pie. It’s who eats it that matters.
That, in a nutshell, is the problem and the travesty of our current economic regime…! 8-(
“Plutocracies tend to purchase their own continuation.” True but to hear the GOP tell it they are all self made millionaires. They make their money with old boy network insider information and government contracts.
They hate government regulation of how they make money like those pesky rules about not using downer cows in hamburger. But they scream when Bear Stearns needs help.
Real self made men care about helping the poor and or vote Dem, George Soros, Warren Buffet, Bill Gates, Steve Jobs.
The GOP has old money, government contact money, and screw the poor new money.
Most productivity comes from the substitution of capital for labor, so the benefits accrue to capital, i.e., corporate profits. That is what has been observed. The false idea that labor productivity accrues to labor comes from the 1960s when labor productivity & real wages rose together. But correlation does not necessarily mean causality. Real wages rose in the 1960s because labor was scarce enough that companies had to bid workers away from each other. Thus wages, in real & nominal terms rose. Companies increased labor productivity because labor was expensive. In the 1980s forward, labor became expensive owing to medical costs. Thus companies looked for labor saving methods and corporate profits soared despite rocketing medical benefits costs.
“So if American knew which companies pay their employees well, and kept CEO salaries reasonable, and supported only those companies, we could turn this ship around?”
Sounds like a list of criteria to look for when you invest in a company.
I pretty much live that at the moment, CT. Working to get the hell out of it. It’s the standard among much of the retail pharmacy corporations–but there are still corporations that pay their techs better than i’m getting paid NOW with my current company. Which seems to pay the absolute worst wages possible to their workers and then proceeds to have the worst management techniques possible in return for all the effort they put out to try to get a little more for their families.
Pie!
With a topping of Class War, please.
no nuts for me.
The only criterion you look for when you invest in a company is the prospects for a rising stock price. Fergettabout anything else. It just ain’t gonna happen.
As always, I like your thinking and your question.
A ship sailing around this sphere called earth as opposed to a train on a single, straight track, waiting for a wreck to occur.
and my econ education continues…
Thanks Ian for the (as always) informative post.
I feel a little smarter *g*
By moving/outsourcing to cheaper labor markets…
here’s the truth about prices and wages in most of the market;
1) the wages of our workforce have nothing to do with the price of that product
2) the cost of making a product has nothing to do with the cost to the consumer
the price of a product relies on what a consumer will pay, nothing else, if the product costs more then a consumer will pay that product become extinct
all other excesses go into the pocket of management at the highest levels, the excess does not go into the workers pocket not the consumer’s pocket
Sounds like it to me, but do such companies exist? Can we get some IPO’s going??
Hi, Great topic!
If you haven’t read it, Ravi Batra’s A Guide to Common Sense Macroeconomics (2004) has a great couple of chapters on this subject.
As long as productivity gains in the economy are shared equally by capital and labor, share prices rise roughly at the rate of productivity, but if real wages trail the production … we get these bubbles in things and then crashes… Bubble economies are the direct result that capital returns have been outpacing returns to labor.
Yes, among many other things. It is important to remember that medical “benefits” are not cost free to labor, even before companies starting passing some portion to labor directly. In foreign policy, I believe that is call “blowback.”
I like pie.
But is it conceivable that a company could grow based on people spending and investing their money based on fair wages and benefits? Kinda like the opposite of Walmart? A company that starts out on made in America/invest in America?
Why would productivity be passed on to labor at all if it comes from the substitution of capital for labor? Under that circumstance, all the benefits accrue to capital, as I detailed in my 18.
Thanks, and I know what you mean about having the time to get involved in the politics of how things work now that the kids are older.
Don’t you think it would behoove us to move to a Single Payer(Govt) Universal Healthcare system? It would greatly relieve the Corporations of that Legacy cost…!
Ummmm…is Ian here, and, uh what else? Oh, yeah I like pie, too. Even some with nuts. Variety and all.
how does teh increase in “professional” (and even some hourly i.e. MallWart) forced overtime/”comp time” and inability to take vacations/sick days play into the increases in “productivity?”
How do you get equilibrium in the labor markets if wages trial output per worker? Productivity is the main sooure oc supply, and if they are not in sync with each other aggregate supply and demand cannot be in equilibrium for long … are you assuming something like the stick price neokeynesian model, in that it never really quite syncs any way? If labor CAN’T buy output, output prices fall. The only way labor’s been buying stuff right now is by cashing out their home equity and running up their credit cards. How long can that last?
I kinda liked “Greenspan’s Fraud” by the same author. Pretty much told the story, didn’t it?
You have to ask yourself the Q about how the economic signals get transmitted. A rare business person like Ford figured out that you can make more profits by having more customers. Thus low price, affordable, products generates gigantic demand. Most companies don’t evaluate their demand that way. For example, raising prices (versus selling more product), costs nothing, and thus the profit potential is huge. Wal-Mart figured out low every-day-pricing, but in the process, unlike Ford, formed a business model that made their employees too poor to shop in Wal-Mart. When will such employers face up? Only if labor organizes or the govt intervenes. Wal-Mart et al will never realize they are impoverishing their customers (i.e. their employees) because of the problem of aggregation.
definitely… he’s one of the first that called greenspend for what he was
Naw. It ain’t part of the plan. The health care industry is sucking the money out of people’s estates. It is the last chance they have to plunder an individual’s worth. The secondary gain is that it makes the next generation more dependent and compliant.
I went into a Walmart once.
Whoa! Now that was heavy!
Whatever it meant.
sorry, that was economist to economist … just ignore the man behind the curtain
Heh, and Wally World further exacerbates the communities in which they operate by under-cutting prices forcing local businesses out of business, and, on the macro scale, by forcing manufacturers to move to China… Not a healthy proposition all the way around…!
So is Class War then inevitable? Is the Capitalist System so predicated on exploitation of all resources in it’s quest for ever greater profit margins that it would destroy itself rather than manage and conserve the very resources it requires to prosper? Sounds like Mr. Marx was correct, blinded by greed, the Capitalists will indeed do themselves in.
I think the evidence supports a market failure in the determination of wages. Only when labor gets so scarce that a bidding war ensues (unemployement rate 4% or lower from evidence of the 1960s) will real wages rise. If there is a market failure, then a nonmarket intervention is a prospect. Labor organization. Minimum wage. Etc. Otherwise, the market signals are such that real wages and/or employment will decline until the economy fails.
Workers/consumers are fundamentally insatiable. Thus they have used every trick in the book to continue to increase spending: working longer hours, more workers per household, lower savings, refying mortgages at higher amounts & spending the excess. All the sellers see is that demand is hunky dory. They have no reason to understand that their labor policies may be detrimental to demand in the long run. And until they do, don’t expect their labor expense cutting behavior to change.
We need to do research I would guess Toyota is ok I read somewhere but can’t find a link that their top guy makes much less than the head of GM but Toyota has grown in size and profits while GM has shrunk.
If pay were based on performance GM’s CEOs would have worked for free since the 70’s.
Still we need our own Lefty business channel. The TV talking heads are talking about a bottom already they think we should buy now to take advantage of their insight.
I think they are trying to prop up the market with more happy news. A realistic business channel with news you can trust rather than news which tries to get you to buy crap stocks would really take off I think.
well, isn’t the main problem that our government has been captured by all that rent-seeking? Our labor unions aren’t around to offset all those oligopolies and monpolistic competitive markets that behave that way … i mean it’s working rather well in its various formats in other places. we don’t really have capitalism here, we have monopolism. Just like russian didn’t have communism, it had bureaucratism…
Jon Stewart was funny this week, when he showed the OilCo executives getting “lectured” by Congressman Markey, and then showed clips of previous lectures by congressmen in 2007, 2006, 2005, and 2004. It was quite clear that Congress won’t do anything about OilCo profits as long as their campaigns are funded by fatcats.
But they will sternly lecture when the cameras are rolling.
ThingsComeUndone [and what an appropriate name for what’s happening in the financial markets] –
This is certainly not the bottom of the stock market. Buyer beware.
Well, we live in an adversarial system. I don’t like it, and think it’s not the optimal system, but until it changes, ….
Labor needs to organize & stand up for itself. If you don’t fight for yourself, who will?
This is a Co-Reply to you and Loo Hoo at 43.
I bought my 20 year old son who has no insurance two pairs of glasses at Walmart at month ago. It was the only way I could afford it.
Am I going to go to hell?
True! A blathering bunch of idiots on both sides…! ;-)
i agree with that….if you look at any country with long-term stagnation or deep recessions, there’s alaways been a persistent wage-productivity gap, are we just doomed to repeating the same stupidity?
No need to apologize, cuz I’m gonna be using that.
I’m gonna be layin’ ’stick price neokeynesian model’
on everybody!
Like you even have to ask?
No. But if you have Costco go there next time. They also have group health insurance for small businesses. Create a small business by getting a local license.
When the system stinks, no participant in the system can be faulted. I can afford not to buy at Wal-Mart, and never do, but for those who can’t afford to shop elsewhere, go with god. A system failure is not onn your shoulders.
then i need to tell you about my typo ;-) … it should be STICKY as in slow to change and adjust
well, occasionally we get a teddy roosevelt or some one like that that actually course changes the stupid tricks monopolists play
I have insurance. He’s not on my plan. He’s 20 – doing his own thing, man. Ha. Broke his glasses and needed them, like, yesterday. But, next time he turns to me, I’ll remember Costco. Thanks. :)
When the workers understand they are regarded as consumables, like toilet paper, they are going to be extremely pissed off. Economic theory aside, pitchforks and torches are going to be unpleasant for the gentry. Hungry people with starving sick families are not going to be easy to mollify, even at gunpoint. At least according to historical precedent. We’ll just have to see who is right on this, the creation of the new reality has been remarkably successful up to this point, I must regretfully admit. Perhaps we deserve what we are about to receive, and receive it we shall, unless we wake up.
Bear Stearns apparently got a lot more people’s attention that I initially thought. Public sentiment is running high on this one. We have a real issue here. The question is if we are populist enough to seize it and run with it…
Demi,
Costco’s insurance for your son would be $165.00 monthly.
Now you’re delving into ths issue about how to handle market failure in labor markets, a deep issue. Since the answer lies in non-market methods, the A to your Q is that we might not be doomed to repeat past errors if we learn from them. (Duh. That seems like a particularly unenlightened statement of the obvious.)
Knowing nothing about economics or business, I will give my two cents. I would be happy to spend my 403B money on a company that behaves decently and produces something worthwhile. Anybody know one?
And eCAHN, how many hoops are there for a company to be on the Nasdaq or NYSE. I’m sure there are lots of criteria, but very basically, what are they?
I think the benefits of public healthcare are over looked sure it costs rich people money but the cost of doing nothing is too much.
My GrandAunt cleaned houses on the Gold Coast she got TB and was locked up until she nolonger was showing symptoms she lost a child and an exhusband to TB.
Too bad she didn’t get regular heath check ups or paid sick days. I wonder how many Gold Coasters died because the help was sick.
Today we are breeding new antibiotic resistant disease of all kind among the masses without healthcare like me!
If nothing is done one day a lethal, very contagious, antibiotic resistant disease will arise from the masses and the rich with their house keepers coughing on the bed sheets, their nannies coughing on their kids, their pool boys coughing on their wives will find that as a protected population they have less defense than a person who caught this disease before or who has survived because of some adaptation.
I missed that. Must check it out!
If I were queen, I’d design another system. But that’s pie-in-the-sky. Wathcing the slo-mo suicide of the U.S. economy over medical benefits, and watching the polictical process, I’ve some to think that single-payer’s the way to go. But I retain an open mind for alternatives.
Heh, we did learn, we passed Glass-Steagal in the thirties, but, then we repealed it… Go figure!
Vulnerable institutions include small and medium sized banks and life insurance companies who over-invested in the derivatives madness and are now severely undercapitalized. But not to worry, the big banks and insurance companies will buy up most of them.
Well, we know the reasons for the rising wage gap …it’s not like economists are operating in the dark … i mean you can even look at it from the vantage point they’ve instituted many many more regressive taxes since the 70s … all those sales taxes and the increases in the social security taxes … those are policy decisions economists provide data and analysis… can’t they speak up and say something about who those hurt?
Imagine what would happen if we all stopped paying out health insurance and medical bills. Unrealistic I know.
yeah, but this trouble is not coming from the banking system … it’s coming from the frankenstein financiers…it’s just spilling all over because those derivatives are usually securitized with real assets.
No, silly. Walmart was cheaper than Costco?
See, I’m just thinking there has to be a way for a new glasses company to emerge, BASED on the fact that the glasses are made here in America, and that employees were treated respectfully.
Does anyone know if labor is trying to unionize Walmart?
Well, if workers aren’t making as much the sort of things they buy won’t get as much demand as they would if they were getting big raises.
Unless you lend them the money.
And the advantage of lending them the money is that it creates investment opportunities for the people at the top who need somewhere to park all those extra suplus profits they’ve gotten.
Of course, debt also winds up reducing demand long term, and eventually you may have to pay it off. But if you just keep increasing lending limits, well, you can put off the day of reckoning for a long time and have a debt paid “consumer” economy in the meantime. For years I was amazed that every year Americans would have record debts, then spend more.
We’ll see how much longer that can go on, if at all. If it fails, given that Americans are massively in debt, the value of their houses is down and they haven’t been getting raises, you could see a massive demand drop.
same here. another reason I stick with mom and pop businesses (when possible). they (many) have a different view of the role and importance of their employees
and with all that debt, you get all those sexy new debt securitization products … bankers get to pass their risk on and can avoid due diligence on lending
Let the class warfare begin.
Oh, Hell. He just happens to be my hot button at the moment.
I know I said a while back that he moved in with me, but, that just means he put a bunch of his stuff here. He’s spent two — count them — nights here in 3 months. Haven’t talked to him in 3 weeks. He brought a hamster home and hasn’t been back.
I took over his room the other night — a place to go read or whatever, still share a room with the mister. The good part of throwing his stuff in the closet and bringing in plants and candles was We Found The Hamster!
She’s fine. :)
Extremely, regressive both! I think the $88,000 cap on SS should be raised to $250K or even $500K, and then, reduce the sales tax rate and increase the luxury goods tax…
People who are really self-made generally don’t care too much about high taxes, or the estate tax. They know they could do it again, and they expect their kids to make do with a decent, but not obscene boost from mum and dad.
The folks who got lucky aren’t sure they could do it again, they know in their heart that they aren’t really self-made, that they just lucked into being at the right time and place – sure they worked hard, but they don’t how to make the right time and place themselves. Or they got it because of who they know, and to justify it to themselves they have to believe that they deserve it because of who they are.
But in general, real self-made men and women aren’t all that concerned with taxes. They know they can make more money.
I got some gold if Helicopter Ben drops interest rates and by so doing drops the value of the Dollar. I got some Toyota if gas prices keep going up.
My plan is to try and figure ways to make money off the disaster Bush is creating in the economy. I try to think what are the consequences of Bush’s actions on the real world and what is likely to happen if things go wrong.
I think the Market is nowhere near a bottom.
Thanks for the compliment on the name I try to be prescient LOL.
Yep.
Remember the days of “public health?” Those are the days when communicable diseases destroyed people & economies. Of course, those days are long done, courtesy of vaccines.
However, the next layer of the onion is revealed. Unhealthy children cause societies to underperform when they reach adulthood (ditto criminal behavior). Unhealthy adults influence all sorts of economic performances. The goal is to fiugre out a way of dealing with the aggregation problems without creating an atmosphere where people feel no responsiblitiby to look after themselves.
Try looking at green companies.
definitely … why more of this isn’t being discussed by our candidates is beyond me … unless they feel beholden to some one who wouldn’t like this
I’m glad you said that. I can’t afford to shop anywhere else.
Why is TB spreading if there’s a vaccine?
The repeal enabled the financiers to run amok…! ‘Course, a little more regulatory oversight would’ve helped too…!
See what 300 million in lobbying by the investment banks and brokerage firms will get you?
I call it the Walmart/CostCo effect. Walmart treats their employers like crap, while CostCo pays them more, gives them benefits and treats them relatively well.
And somehow CostCo, despite having a higher cost structure, makes more money on most metrics. You rarely get more out of your employees than you put into them. You can get less, but not more.
And yet, there have been time periods where that was not the case.
Why?
but the problems we have now wouldn’t have been solved by Glass-Stegall…it’s the credit derivatives market that started a lot of this … this is more SEC stuff
Hellooooo Ian.
Thanks for the explain. That makes sense to me.
Ever since my divorce 6 years ago, the only thing I’m paying interest on is my trailer-trash (and loving it!) house.
I crack up when the retailer asks me debit or credit? Debit, baby. The only way I go!
I think you don’t need to look at minor influences to understand wage behavior, though they may play a role. I think the overwhelming influence is the relative power of management (wage setters) vs. labor (wage takers). Consider the following: next month the unemployment rate is reported at 3%. The following Monday, workers line up at their bosses’s doors and demand higher wages because they are “scarce.” Bwahahahahaha. Never happens. Companies must be forced to pay higher wages by bidding workers away from other companies, or must confront organized labor on the other side of the table.
and stop relying on black market labor.
I’m wondering if Moody’s and Standard and Poors will see a similar fate as Arthur Anderson and KPMG after Enron’s demise…?
I’m an economist, not a public health official, but as I understand the A to your Q, it is because of the overuse of antibiotics which cause some drug-resistant strains to survive & prosper.
You guys are awesome. This swine surely appreciates the pearls.
they should, but the problem is, in these particular markets, we’re dealing with oligopolies… you get that too big to fail mentality happening in the beltway
A study of the psychology of the rich and their participation and impact on politics especially how it relates to shaping economic policy would be interesting.
The not really self made as they rise in numbers would be expected to go into government more to perpetuate their power as you suggested.
I think the self made only get involved in politics when the not really self made have messed up the economy, like right now.
But some real data I’m sure would lead to some interesting observations.
they use the excuse of ‘market discipline’ to avoid regulation until the consequences happen, then they run for the bail-out door and scream that their demise will hurt too many folks … drives me nuts!
The bigger they are, the harder they fall…!
The vaccine isn’t very effective.
Black market labor is only one of the many ways that companies circumvent the influence of labor. The hurdles for labor are huge.
I tried to do an experimental economics “experiment” at U of AZ right before I was forceable retired in 2000, but the academics I was collaborating with had too complicated a design, so the initial results were useless. I sometimes think of resusitating the experiment, since I have a hard science background, and would be better at design than the flakey academic economists.
The Senate Banking Committee met with the Neurastheniac Suicide Club last Thursday to honor the Free Enterprise System.
The Neurastheniacs feel that congressional oversight is killing their System.
Costco is more profitable than Wallmart when adjusted for size? Bwahahaha!
Thanks for the tip I’ll do some research:)
i think labor economics has really been ignored recently. I’m not a labor economist but had Wally Peterson when I was at NU. Now, there was a man that could put together some great models …
That reminds me of Ann Richard’s memorable statement; “Poor George, He can’t help it. He was born with a silver foot in his mouth!”
Step 1, make the money.
Step 2, pay the taxes.
Sounds like we need some government regulation
Egregious @105 Sounds like we need research into a better vaccine.
Yes. I am.
Plus, Costco does carry quality merchandise in comparison to Walmart.
If capital is scarce and labor isn’t, then supply and demand indicates there should be an increase in the share of returns or whichever side is more scarce. It’s not clear to me that there’s a shortage of capital in the last 10 years though, in fact there’s a huge glut of the stuff. There has been so much of the crap running around it has caused repeated bubbles. Yet the percentage of productivity gains going to wages during that period was lower than in any other post war period.
I also don’t tend to think of labor scarcity as being entirely an unrelated variable – it is a variable that is manipulated deliberately through political choices. Domestically H1B visas are an excellent example, as are other guest-worker programs as well as things like Welfare “reform”. Trade policy in the form weak or strong dollars, tariffs and technology transfers also has a huge effect on the effective labor pool US domestic workers are competing against.
Bottom line: it is fairly trivial, as an economic exercise, to create policies which would see wages increase more than they have, because if folks want access to the US consumer, they can be forced to play. And suddenly you aren’t competing against the entire world’s labor pool, much of it, forced to be priced properly, is out of contention.
You can have any two of – free trade – free capital flows – effective economic policy. If the US wants to have the first two, it can’t have the third. And it doesn’t.
Agreed. And unions in the US have been gutted.
However, the next layer of the onion is revealed. Unhealthy children cause societies to underperform when they reach adulthood (ditto criminal behavior). Unhealthy adults influence all sorts of economic performances.
What about a school lunch/breakfast program that had higher quality food and more fruits and veggies instead of fillers like potatoes,pasta and low quality meat?
That would help with the health and the obesity, diabetes these kids later face from poor diets loaded with fillers and sugar.
The only nodding acquaintance I have with labor economics is weak-willed, lilly-livered histories of labor unions. My hypothesis arises from forecasting necessity. Like, duh, why do real wages not rise when labor productivity does. You could be a Bush-like religious nut & say, against, all evidence, that it’s just a matter of time. Or you could be a left-wing flake and say that labor “should” share. But if you approach the evidence in a hard-headed way you might conclude that neither time nor sharing will “solve” the problem, and then as as prescriber (which I am not; I’m only guilty of forecasting) you might have recommendations.
This is what some people think caused the Great Depression, as an aside. Too much productivity gains going to capital and rentiers, too little to workers, causing a demand crunch. For a while you can have equilibrium because you can shift production/consumption from the future into the present–which is what the US has been doing with huge debt pile ups.
Me too. As if a company leveraged 32 times its equity (as in Bear Stearns) wasn’t in an obviously shaky position.
Regulators? We don’t need no stinkin’ regulators!
All that leverage led to some really huge bonuses every year; the overall health of the firm be damned.
Ha. You come to the crux. Capital is globally abundant. Thus its low returns are accomplished by busts, which destroys excess capital. Congrats on getting it.
But TCU’s point stands. Wealthy people are more likely to have had lots of antibiotics for whatever inconvenient illness plagued them throughout their lives. Peasants are more likely to have fought them off, and thus have immunizations built up.
But the money for those things is going into the pockets of the rich and to pay for the Bush war. The school systems can’t afford it. Remember that Reagan said that ketchup was a vegetable?
Costco’s one of the places i’m applying to. At least i’ve got the ability to be mobile now with the official Credentials i just got in february. The fun part’s just been dealing with a really crap employment market. A lot of places aren’t hiring because things are in such bad shape to begin with in michigan and have been for years, compared to the rest of the country.
It’s tied to the stupidity of the Big 3 for the most part, but it echoes across everywhere. I’m still looking, and really not giving up. I’m too stubborn(or is that tenacious) to stop trying. It’s why i’m so good in high volume workplaces. *grin*
The US has the most wealthy per capita of any reasonable sized country because of deliberate government policy, no question.
I think there is a lot of evidence we don’t really have free trade per se, i mean we subsidize agribusiness by so much we’ve ruined farmers in nearly every country in the world, also we bring in tons of heavily subsidized japanese electronics and don’t even get me started on the Chinese with their yuan pegging and significant state ownership of most businesses… how can you call bringing heavily subsidized exports into the country to underprice domestic markets free
I hope you will explain more about this. Perhaps its own post?
The only criterion you look for when you invest in a company is the prospects for a rising stock price. Fergettabout anything else. It just ain’t gonna happen.
A good business model is a must. But gambling,booze,tobacco, war contractors , finance companies (well I don’t trust their numbers.
I want a business I understand how they make money. Not an Enron that made money but nobody understood.
I like green companies they try and solve the problems Bush’s war for oil created granted they get more profitable the more Bush screws up.
I think you can be ethical and make money. You just have to be creative.
Awfully inefficient way of running things. Leaving aside the costs in human misery, it offends my sense of elegance.
Ah well.
So, what would constitute a rigorous study would include the points you mention and otherpublic health considerations. Seems like such studies have not been in evidence in since 2001.
Easy, it is free trade, just not fair trade…!
yeah and we just heard a bunch of folks including uncle ben say now they’re going to face the discipline of the FED… do we EVEN know what these guys are offering as collateral at the Discount window AND better yet, I’d like to know WHERE this is sanctioned thru statute and law? Have they actually allowed this to go on with out legal basis? If I were a consumer lawyer, I’d have the FED and the Treasury sued for acting without congressional authorization of some kind….
just invest in what Warren invests in …
Well, I’ve often argued that there is no free trade, so I’m hoist on my own petard. Let’s put it another way: in large areas the US refuses to protect domestic markets from what amounts to dumping by foreign actors. That’s not free trade, but it’s called free trade in the press. Mostly because in exchange the US gets to dump products or extract rents (IP expecially) from other countries. In general that has led to a world where the US deindustrializes and gets large profits for the already rich, while nations which need to industrialize and pick up large numbers of less lousy jobs than the ones they already have, get those. You could call it win/win in one sense, but not if you’re an ordinary American worker.
End the war and we will have the money we just transfer farm subsidy money to the production of food we want to eat. The School lunch program is not food anyone with a choice would eat.
IP…intellectual property?
If you look at a chart of union membership over the last century there’s this massive spike when FDR comes into power and when I read histories of the period it’s very clear that FDR strongly encouraged unionization, and made them one of his key constituencies. The theory was that the Depression had been caused in part because ordinary people hadn’t gotten enough money and that unions were one way to wring the money from corporations – plus, of course, FDR created a power bloc that he completely owned, because they completely owed him.
Smart politics, smart economics.
Yup.
So, for you personally, you would need to find out if there were studies that showed relative performance of investment funds with ethical constraints versus those without. I vauguely remember such studies during the So African apartheid period which showed that you could omit companies that did business with S. Africa & not suffer competitive portfolio performance. Ditto some other “social investment” funds. Or you may be happy with lower returns, but more ethical investments. That would be one of the “market” ways of rewarding non-pecuniary business models.
Coke and McDonalds? Well there not healthy but they do make money ethically after that film where the guy ate only McDonalds for thirty days? Hmmm I think we just hit the edge of a grey area?
I seem to recall (vaguely) as well, seeing a study showing actual better performance than average. But I’m not sure how they chose the “ethical” companies.
Well, only smart in extremis. And it seems like the extreme has not yet been reached yet in this century, yet, more’s the pity.
The Great Depression was caused by the same unsound banking practices Wall Street uses today.
That’s part of it, yes. I don’t think it’s the only part.
i remember those also … think pollution, ethnic diversity in management, social outreach in giving were all included in that. Remember Ben and Jerry’s, Schmucker’s, Quaker Oats and a bunch of food companies looked best … however, with so much M&A activity in the 80s, I would assume they’d be much more difficult to find
It’s become fairly obvious to the informed observer that “free trade” is a euphemism for rich countries buying cheap from poor countries and preventing them from from benefitting from their comparative advantage. But maybe I’m just a cynic.
Current account deficit has to be on the list.
well, you got company … Paul Krugman just put out a paper relooking at this and has decided that the income parity that is supposed to eventually happen with the Stolper Samuelson model may be wrong because of “frictions” which of course has always meant hand wave reality… think its coming out shortly in the AER
I only have one gold fund which I am trying to get out of. I buy stock of companies I assume that they treat their people well. Mostly I like that they make money and many of their products are green. If I hear about problems I might sell depending on how bad the problem is.
By the way how do the studies on ethical funds performance compare to the average funds performance?
I think if we repeal the Taft-Hartley amendments to the original Wagner act we’ll see progress on the Labor front…
When day does this piece get printed in the NY times?
Yes we do. When I worked at Merrill, I believe we called it ‘Junque’.
It seemed much classier than ‘Junk’.
good luck, i hope you find something
Maybe you should do a post:)
Mortgage backed securities. One must weep at this stupidity.
Sorry you can’t come to mid-Hudson valley for FDL BBQ in June. Would like to drill down with an academic economist with respect to realeconomik that I think I’ve discovered thru the very stress-filled world of econ forecasting. I have a doppleganger in that regard but would love more than one.
it’s academic so I doubt it would be reprinted at the NYTIMES, you can probably find it on his Princeton website though,it’s for the spring meeting of the Brookings Panel on economic activity, you can probably find it on their website also … but it’s academic, and there’s no nontechnical summary so many parts of it are not written for non economists and you sort’ve have to know the major trade models to understand a lot of it
well, come down to New Orleans … we just had the meetings in january here, but we’re always open for fun and games, and I have a great b&b right next to the kathouse here
alias, are you able to move? I’d go with Costco. People I know really like the work environment.
Any individual investor, confronting a market, has limited ability to insert ethical issues into stock price performance. Some studies that I’m vaguely familiary with (meaning don’t take my word for it) suggest that you can do pretty well wrt returns & still be ethical, but it all falls in the garbage basket of aggregation, so maybe it’s not so.
Hmmm. Maybe. I’ll cogitate on it.
Plus, Costco does carry quality merchandise in comparison to Walmart.
But Sam’s Club part of the Wallmart Family has fruit fly swarms over their produce in Winter for extra protein.
Peasants are also more likely to live in conditions that facilitate the spread of disease – overcrowding, inadequate sanitation, poor quality water, inadequate food, etc.
Like the stick price neokeynesian model.
These non-economists; they just don’t understand.
(And yes, Kat, I saw your 61; I like it without the ‘y’ better!)
Who’s face value is the price the home sold for not the price the home would get on the market today which means tax payers get screwed if we ever have to collect.
Another great Ian post.
And Mr Perris has some good analysis on profit and price point.
The management and share holders are not interested in increasing consumer spending, because it does nothing to/for THEIR bottom line. They are interested in profits and share value which is mostly a perceived value of the shares and rarely based on real accounting. If a company like Bear Stearns’ shares can plummet like a rock it clearly shows that the value of those shares is based on very little.
Ford recognized that he need to put money in consumer’s pockets so that they could buy his cars. Banks and industry got together and came up with the credit hook. Now consumer’s needed earn money to spend it, they can borrow it and become indentured servants to the banks. This was a new “conspiracy” between retain/industry and banks to keep milking the public.
you know how it is, invent a lot of jargon, use a lot of calculus, confuse a lot of people, drive up the consulting fees.
make that INVENT
I applied once, before i’d gotten the Certification for a Pharm Tech. Now i can reapply in the spring/summer hiring phase with an actual Certificate in my hands. It might gain me an actual callback so i’m going to try again. Last time i didn’t even get a callback. But those stupid ‘profiling questionarres’ are also a very nasty practice i find. I can understand screening, but what i say on those things isn’t how i work either. Much less how those can be manipulated if you’re clever enough to catch the sneakier questions. Some of the questions have no bearing on my work decisions compared to my social life. (and i can figure out how to answer right, but i don’t always do so. Luckily i failed the Wal Mart one. heh. Glad i did.)
Capitalists USED TO extract their wealth from wages (marxist explanation). But now they do it by selling credit and financial instruments and could care less about workers and value added.
The oil industry is another case where workers do not even figure into the way that economy works.
I’m doing alright my dad died 3 years ago we sold the house and I haven’t had to work a real job since because of my investments and cheap living I drive an Echo. Although do I read a lot here and elsewhere about money, the economy etc to stay on top of the market though I only buy maybe twice a year.
Still I just can’t call this a real job cause I don’t need to get a beer after work.
A bank may have 25000 workers, and their productivity has nothing to do with the sale of their porducts. hahhaha
Wish you lived down here, cause I like the way you think! Rock on! Maybe someday I can buy you a drink…
You’re the coolest!
And a good sport.
Mrs. STTP and I were gonna come down to your neck of the woods for our 10th anniversary later this month, but when I looked for rooms the whole city was booked solid.
A little digging and I found out why; N.O.’s big bad music festival!
Whenever we reschedule, dinner’s on us.
As long as you can find us a place with great bread pudding!
No problem … we’ll go to the places the locals go which means lots of food, cheap, and EXTREMELY good. And we’re so happy folks are coming back to visit us down here! We so need the money!! And if you feel like doing any habitat for humanity stuff or any music events, let me know. I love this city and I love to share it with good people!
Excellante!
As for the ‘good people’ reference, Mrs. STTP qualifies, but, unfortunately I’m part of the package.
Are you in NOLA?
I’ve never seen fruit flies or anything else around Sam’s fruit section — or anywhere else in their store. Please be careful of broad, sweeping, unsubstantiated claims against anyone.
Yes. Beware if you are working in retail and they decide to “promote” you to assistant manager! That assistant manager position pretty much assures that you will make less money because all of the sudden you are on salary and are ineligible for overtime! My sister in law is an assistant hr person and they were thinking of making her a manager. Her father and I were both immediately suspicious. “How many hours do you have to work?”! So she never got promoted, but they instead transferred the other “assistant” in her department. Now she has to do the work of two people I assume. Sounds like a shitty way to have productivity “gains” if you ask me.
They get rid of half the staff and you get to deal with the aftermath.
Unfortunately it is probably true. They have been lying about the inflation rate and the Consumer Price Index for years. We make very little here anymore. So who are all these middle class Americans left who can still afford to buy stuff from China with the same salary that was worth twice what it is today last year? Oh and without all that home equity funny money that they can’t withdraw anymore?
Hmmm…Bad times ahead anyone?
by Ian welsh
the times that isn’t the case is when the provider is selling a product that can barely survive in the market on it’s own, the price is then based on product cost
it also happens when there is so much competition a consumer when needs a product doesn’t have to buy that product from any one supplier and all suppliers are operating on an equal playing field where none of them have the ability to externalize their costs more then the other providers, then price is based on the cost of providing the product and a fair markup
but even in these situations, the price is still based on what a consumer will pay, hardly ever is the price based on what a product costs in the end…if there are an abundance of providers the company that can operate the most efficiently will prevail, BUT as soon as the other providers are out of business prices rise yet again, this time even higher then before…even though profit margins are higher
if big business who are externalizing their costs are in the retail segment, they produce a product that puts the other suppliers out of business
now let’s look at home depot as the perfect example and business model for this discussion;
there used to be a hardware store in every single neighborhood, and a lumber yard every few neighborhoods
price was based on the market, if a product didn’t sell, the price went down until the merchant stopped stocking the product and it would become special order, special order would pay a premium but the merchant wouldn’t need as big a mark up since there were no stocking costs to consider
when home depot began their marketing scheme, their product was the same quality but because they bought in such quantity they were able to sell at lower prices
this put the local vendors out of business and very few survive
once the of putting the locals out of business was accomplished, not only did home depot raise their prices back to the original list, the quality also started to decline since the suppliers were getting payed on bulk and couldn’t or didn’t need to have the same quality control
so, the lower cost allowed home depot to charge less, but only until they achieved their goal of eliminating competition
It’s late to break in on this seminar, but if you remember your Solow model, a rising capital/labour ratio lifts the productivity of labour relative to capital and in principle raises, not lowers the wage/profit ratio in the steady state. From the 1970s, the wage relative to interest and profit has been declining. It is hard to come up with a standard diminishing returns model that yields this result through capital deepening.
Short point to your point: I don’t think so.
Ah, but here’s the thing–standard macro that I was taught tells me that in competitive markets what you’re describing shouldn’t happen. In fact, prices should be driven down to fairly near to cost of production. Of course, we both know that doesn’t happen–but it’s very interesting that it doesn’t happen.
And effective public policy seeks to make it happen, by making what doesn’t work, actually work (which is to say that creating competitive markets (or a reasonable facsimile) actually requires government intervention, something the free market fundies never seem to get).