June 28, 2020
I hate to be nitpicky when the NYT writes a very strong editorial arguing that we need more money going to ordinary workers and less to the rich, but it is important to get the story right. Unfortunately, the editorial misses much of it.
First and foremost, there has not been a major shift from wages to profits during the period of wage stagnation. Most of the shift from wages to profits took place in the weak labor market following the Great Recession. It was being reversed in the last five years until the recession hit. If we use the data from 2019, the median wage would have been 4.2 percent higher than it actually was if the wage share was back at its 1979 level. This is a bit more than 10 percent of the gap between productivity growth and wage growth over the last four decades.
Rather than going to profits, the upward redistribution went to high-end workers like CEOs and other top executives, Wall Street traders and other high flyers in the financial sector, and doctors and other highly paid professionals. If we want to reverse this upward redistribution, these should be the focus of efforts at redistribution.
The piece also implies that stock returns have been extraordinarily high through the last four decades. This is clearly wrong. While returns were very high in the 1980s and 1990s, they actually have been well below long-term averages for the last two decades.
In this vein, the piece also proposes banning share buybacks as a way to reduce returns to shareholders. It is not clear what it hopes this would accomplish. It is hardly better for workers or anyone else if companies pay out money to shareholders through dividends rather than share buybacks. (There are tax issues, that make buybacks preferable for shareholders, but since shares turn over frequently, the tax consequences are limited.) For some reason, share buybacks have become a big cause in some circles, but it is difficult to see why the form of payments to shareholders would be a big deal.
The piece also is very modest in suggesting that the minimum wage should be raised to $15 an hour. While this is a good near-term target, if the minimum wage had kept pace with productivity growth since 1968, it would be over $24 an hour today. The country would look very different if the lowest-paid worker was getting $24 an hour today. This comes to $48,000 a year for a full-time, full-year worker. A couple with two full-time minimum wage earners would have an income of $96,000 a year.
In order to be able to raise the minimum wage back to its productivity-adjusted level from 1968, and not see excessive inflation, we would have to take steps to reduce high-end wages. This would mean things like fixing the corporate governance structures so CEOs could not ripoff the companies for which they work. This would mean they might get $2 million to $3 million a year, instead of $20 million. We would have to eliminate the waste in the financial sector, thereby ending the exorbitant pay in this sector. We would also have to weaken the importance of patent and copyright monopolies, making it less likely that Bill Gates types could get $100 billion. And, we would have to subject doctors and other highly paid professionals to competition, bringing their pay in line with their counterparts in other wealthy countries.
Anyhow, this is a big agenda, but if we want to bring about real change we have to understand the nature of the problem, and for the most part, it is not high corporate profits. Yeah, this is the story in Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer (it’s free).
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