Productivity is a constant conundrum in economics. Labor-saving investment reduces costs of production of goods and services. In other words, there is more output per hour of work. Lower costs mean more sales, and more sales mean growing industries. But doesn’t more productivity then reduce employment?
Most mainstream economists believe in something of an economic miracle. Lost jobs will be replaced by new, even better-paying ones. I have been writing about this subject since the publication of The End of Affluence more than twenty years ago. The long history of U.S. capitalism seems to serve as a lesson that mainstreamers are right. For the most part, wages did rise along with productivity. The bounty of capitalist growth was widely shared.
But too often the economic analysis underestimates the political partnership required between substantial government social policy and regulation and the entrepreneurship and capital investment of the private sector. Public investment in waterways, railroads, highways, education, parks, and sanitation was critical to creating wealth. Meantime, antipoverty policies were undertaken as far back as the 1800s. The abuse of child labor was eventually forbidden. Antitrust policies were created. Pensions for widows were established.
And the sweeping policies of the New Deal were enacted a generation later. A minimum wage was adopted. Unions were supported by labor laws. Progressive taxes were instituted. New regulations included strong antidiscrimination policies by the time of the Great Society. Thus, wages rose across the demographic spectrum until a long drought for the bottom 80 percent began under Ronald Reagan, with only a short respite in the late 1990s.
In this same period, since the Reagan era, productivity adjusted for business cycles also grew slowly. The exception was the late 1990s during the Clinton boom, when, at the same time, wages rose for all income categories. Is there an inevitable relationship between productivity and wage growth?
If there is, that relationship clearly broke in the last generation. One major reason is that many social programs were restricted, social spending was reduced, and regulation was emasculated. Fiscal stimulus was abandoned. Indeed, high productivity seemed to cost jobs. But here is what it is necessary to keep in mind. We cannot get higher wages overall without higher productivity growth. Without fairly rapid productivity growth, there will soon be no well of available profits to draw from.
So mainstreamers are partly right. But here is where they fail. They too often take productivity growth as a given, a function of business investment, while they neglect the need for government to make social interventions in the market.
Maybe most important, they ignore the role played by the rapid growth of demand for goods and services. Slow growth on balance for a generation was partly a result of tight Federal Reserve policies to stanch inflation and austerity fiscal policy, which neutered strong Keynesian fiscal policy. These restraints led to slow growth in aggregate demand and fairly slow productivity growth.
In this issue of Challenge, Josh Bivens makes the case in persuasive detail that stimulus is still needed in an economy, even with a 4.4 percent unemployment rate. The evidence he cites is what all should be familiar with.
Given the gaps in the distribution of market benefits to workers, noted above, an intelligent and ample safety net is a requirement of the modern mixed economies. How do America’s social welfare policies stack up against other Western democracies? Most analyses measure what America spends on redistributing income in the form of unemployment insurance, Social Security, Medicare, Medicaid, Social Security, food stamps, the Earned Income Tax Credit, the Child Tax Credit, and so on. Counting up the benefits, the social welfare system is considerably lower as a percent of GDP than in almost all rich nations. But a lot of America’s social spending is really private spending incentivized by tax credits. Notably among these are tax-subsidized health benefits for workers in corporations and pension funds as well. Thomas Hungerford totals these up in his piece for us and finds they are about equal to social-welfare spending in other nations as a proportion of the economy. The problem, based on Hungerford’s regression analyses, is that in terms of redistribution of income, income inequality, and poverty, the American social system of tax incentives is highly inefficient. It doesn’t produce the amount of spending it should. This is especially true in health care.
Those who reprimand some social policy advocates for leaving out the tax incentives—which, of course, are revenue in effect spent by the federal government as tax expenditure—should take into account how skewed these incentives are toward better-off Americans. Hungerford provides fresh evidence of this.
In an important piece for Challenge, Mildred Rein writes that the cultural theory of poverty that brought us such antagonism toward federal welfare policies in the 1980s and 1990s is making a comeback. I am not as sure as she that it ever left us. But new social policies, including the expanded Earned Income Tax Credit and many others, have brought poverty levels down from where they otherwise would be. Still, many believe there is an aversion to work, marriage, and educational norms among the poor—a culture of poverty. Rein firmly disagrees. As she writes, applying the 1960s culture theory to the present are columnists like the New York Times’s Ross Douthat, who wonders why “in a substantially poorer American past with a much thinner safety net, lower income Americans found a way to cultivate monogamy, fidelity, sobriety, and thrift to the extent that they have not in our richer, higher-spending present.”
Douthat writes foolish stuff. The job market has substantially changed. Skill requirements to get decent pay have increased rapidly. Manufacturing jobs have virtually disappeared from the inner cities. Black men are widely incarcerated, often for minor drug-related crimes.
Rein writes that such critics are denying the harsh reality of changes in America’s economic structure. She says the middle class is now also suffering from the same structural changes. She fears we may all now fall into a cycle of poverty,
I was struck a few years ago, when Occupy Wall Street was emerging, how many of my acquaintances were somewhat agitated by protests in the streets. As a Vietnam War protestor myself, I came to learn the value of such political activities. Sociologist and long-time professor Herbert Gans argues in this issue that people have to be taught how such political activity can be effective. He doubts the stagnation of incomes for middle- and working-class people will come to an end without considerable political activity. He urges education about not just government but also politics in high schools, for adults, and for the media.
I grew up thinking of Africa as the dark and mysterious continent inhabited by simple often war-like peoples. Like any American boy, I was the product of Hollywood and TV and an occasional novel about the heart of darkness. But Africa is now an awakening giant of enormous economic potential. I learned from Fernand Braudel, the great French historian of capitalism, about Africa’s natural geographic limitations due to many unnavigable rivers. No doubt he was not the first to note this. Geography is still a curse in Africa—many countries are landlocked by neighbors. Emigration of talent is a problem just as immigration into Europe is a problem for southern Europeans—indeed the entire Eurozone. Economic dependence on a single commodity is a burden. Aid from foreign nations that conceals desires for African resources and the creation of monopolies on future development is also a problem. Economic development without democracy is still another persistent problem.
Roland Benedikter has written a comprehensive and detailed piece for Challenge on the paths to development for Africa. The United Nations has initiated a program to create bridges to Africa. The migrant crisis in Europe has awakened Europe to the need for Africa to develop its economic and human resources. Are we at the beginning of a new age? Many think so.
As hurricanes ravage America’s south, few climate change deniers seem to be changing their minds. Mike Sharpe writes a typically eloquent piece about what may well be America’s most important dilemma. Seventy-one percent of Americans think global warming is a danger. Donald Trump and his appointees look the other way.