The economy has undergone massive shifts over the last several decades. The opening of new markets exposed domestic workers to fierce competition and increased the returns to scale and management. The evolution of the product cycle contributed to the hollowing out of established industries. A decades-long shift from goods production to service provision changed the allocation and intensity of capital investment. New technologies increased the returns to education and disrupted established occupations. The shifting nature and intensification of competition begat the rise of a “winner take most” model and “superstar” firms. And a rising dispersion of productivity across firms and the slowing diffusion of innovation altered the competitive landscape for businesses.
The thrust of the article is that populist economic resentment is not justified.
1. He argues that average wages have kept pace with productivity. I view all aggregate productivity estimates with suspicion, so I am not a participant in this particular debate.
2. He argues that low-skilled workers have gained in real income. This depends a lot on long-term measurement of changes in the cost of living, which is quite difficult. I lean on the side of those who think that official statistics overstate the increase in living costs and by the same token understate the gains in real income.
3. He argues that although high-skilled workers have gained ground relative to low-skilled workers in recent years, this is not because elites are rigging the game.
I agree that there is no conspiracy to exploit low-skilled workers taking place. And for years I have cited four forces that converge to weaken the relative standing of low-wage workers: the New Commanding Heights (shift of demand toward health care and education; globalization; computerization; and assortative mating.
But I would count credentialism as rigging the game. It artificially inflates the incomes of professors and adminsitrators by raising the demand for higher education. It artificially inflates the incomes of health care professionals. In government, it artificially raises incomes for people who obtain degrees that have no bearing on their ability to perform.
Credentialism, especially, is rigging the game. But Harvard having some 10% (or more? 20?) of its students come from families in the top 1% of income is another form of rigging the game. The college-educated vs non-college educated divide is growing, as is also the “top” vs “bottom” colleges in terms of job offers.
While income inequality is, for wealth purposes only, not such a big deal. The fact seems to be that many rich folk get treated by the law / justice system in a “more equal than others” way. Unequal legal treatment, for instance for shoplifting, drug use, driving drunk, etc., is also hugely unfair.
And as income inequality increases, it’s no surprise that the “happiness” of the poor is less. Yes, less absolute poverty. But “keeping up with Joneses” has always been part of social ranking, social standing, and internal self respect. More wealth differences decrease the happiness of many less rich folk.
Whether the inequality should increase the resentment, it does, even more than Schneider writes: a system in which a rising tide doesn’t eventually lift all boats is undesirable.
He also talks (and talks and talks; ok writes) about labor markets and low-skilled men without mentioning illegal immigration. Few deny that illegal immigration keeps wages down, especially for the low-skilled men. Rather than deny this explicitly, he just avoids mentioning it. Instead:
The problem with their approach to America’s challenges is not in their prescriptions but in their diagnoses. They insist that our problem is leaders who hold the public in contempt.
Leaders who don’t honestly talk about the real effects of illegal immigration DO hold the public in contempt.
Including Schneider and many other elites.
Schneider writes ” the best way government policy can encourage productive investments is through tax reform. The ideal solution would involve transitioning the existing corporate income tax into a destination-based cash-flow tax (or DBCFT).”
It would be interesting to see an analysis of the DBCFT versus a VAT. I suspect that a VAT makes more sense since it appears to have been more widely adopted globally and by highly successful countries like Singapore and Australia.
The corporate income tax appears to be the most underappreciated or even recognized factor in what has happened over the decades in the US economy. Decades of tax policy based on “high taxes on domestic production, no taxes on imports” has had immense repercussions that mainstream economists refuse to acknowledge.
Rather than focusing on industrial policy, the US would do better to focus on international tax competitiveness and formulating an integrated and cohesive business tax structure that minimizes economic distortions.
This is not just to benefit employers in the US, but also consumers and workers. One of the facts that we used to know (see Krzyzaniak and Musgrave) is that US corporations shift 100% of the burden of corporate income tax onto consumers in the short run. But we also knew too that there is a significant and negative
association between wages and top corporate tax rates across countries and generally that increases in those rates cause wages to fall. (See Hassett and Muther; Felix; Desai, Foley, and Hines).
Yet there is near unanimity among US economists today that the Trump reduction in top corporate tax rates is completely unrelated to the recent return to wage growth. US economists instead keep flogging more subsidies to higher education and new government training programs for worker re-education. (See the recent econtalk with Daron Acemoglu).
The US economics establishment will heartily cheer President Warren’s return to punitive taxation of US corporations and will only increase their braying for more higher education subsidies and government retraining programs when the inevitable fallout again ruins economic prospects for middle Americans.
For this reason, Schneider’s assertion that:
“The notion that every economic development is the intentional result of some elite agenda makes it impossible to think clearly about America’s socio-political circumstances and to think creatively about solutions to the problems Americans face. The idea that these problems exist because someone with power wants them to exist is not sophisticated or worldly; it is naïve. It has too low an opinion of what elites in our society want, and too high an opinion of what they have the power to do. ”
must be considered a wholly false statement make knowingly with malice.
The only hope for the future of the US will be in the states that shield their populations from an authoritarian federal government and allow small businesses to develop in cracks and niches in the smothering wall of government oppression.
Why is there little opinion that the Trump tax cut increased real wages?
1) It was an obvious Keynesian tax cut.
2) Any chart of job growth and real increase in the post-2010 economy are:
2a) There is slow consistent job and wage increase.
2b) There has not been a substantial increase in business investment.
2c) The short term real wage, business investment and manufacturing jobs increase or decrease occurs because of oil price movements.
1) The two years with largest wage increase were 2015 and late 2018 which Oil Prices drop.
2) The biggest increase in business investment were 2014/2014 and 2017/early 2018 were when oil prices increased.
I still say the reality of assortative mating are grossly exaggerated and there has this since the beginning of time. I suspect some of the barriers of assortative mating were broken down in the post-WW2 boom/boomer years but we should think this era was the historical outlier not the norm of history. What has changed the last 40 – 50 years is the obvious sex discrimination against women has changed the job market and the realities of marriage.
I suspect the decline of assortative mating during the Boomers life was probably one of the reasons why the divorce rate also hit its high point in the 1970s.
I think it best if everybody with the left and right accepted the Post-WW2 boom is complete historical outlier.
1) The very broad based income growth of 90% of citizens was a result of the pent up demand Great Depression and especially WW2 while the devastation of WW2 controled labor supply for a generation.
2) The Post WW2 local benevolent religious local community and local Adam Smith economy was the last generation to live this reality. (Note the benevolence of the local religious community is grossly exaggerated for modern audiences. In reality, the Jimmy Stewart character in It’s A Wonderful Life takes the Potter job and closes the S&L in 1935.)
3) In terms of religious impact, look up Lyman Stone chart on church attendance and we are still seeing higher church attendance today than most of 19th century. (I will chalk this up to not a lot people could afford losing a day to spend 5 hours round trip going to church.)
I was thinking along the same lines and agree with some of your points but my main objection is with the label. Assortative mating is real and, like sex discrimination, it is correlated to the core underlying cause but I don’t think that it is the critical factor which is probably what you mean by “grossly exaggerated”.
The main shift can be labeled something like “female meritocracy” and can be thought of as feminism through a libertarian lens. I think other models such as Charles Murray’s “Coming Apart” underemphasize the importance of this shift in female meritocracy.
+1…you explained much better than I did.
Women are certainly exposed to more mating options than in the past without mass media. If they are prone to seeking only the highest status mates that they know about, then that means the bar is being raised.
I don’t see how the barriers to assorts rice mating broke down (at least in a permanent way). Who people reproduce with has become consistently more determined by who one gets along with (usually people psychologically similar) than by class, religion, etc. Modern society continues to make it easier to avoid even minor interactions with people with whom one doesn’t want to interact, so I’d be surprised if there hasn’t been a significant secular increase in assortative mating.
Immigration for low-skilled workers
Occupational licensing for high-skilled workers shielding them from international competition
Preferential tax treatment and bailouts for finance
No conspiracy?
In line with the credentialism, I would also say the massive increase in interventionism regulation of any business that deals with physical products and production. The regulatory burden inhibits the low-skilled from forming small businesses in such areas as retail, workshops, etc. Digital products and production enjoyed very light regulation until recently which is why it attracted the talent. Someone with an innovative mind is going to work in areas where they can invent and not spend their days feeding government regulators, inspectors and nickel and dime tax forms.
We need only look to the start of so many of the sweets companies in the 1920s and 30s by people who were mostly just looking for a way to make a living. Today, such requires a large front-load investment before the government man will let the product even be advertised to the public.
Gosh wow gee. Some of us old timers have rather vivid memories of certain elite souls (google Steven Jobs if you never heard that name) telling the plebian Bill Clinton that he could like it or not but manufacturing jobs in the computer industry were going to be moved out of the US to various Asian nations regardless, and that he could just lump it. There was even a term cooked up for this — “off shoring”. Economists used to use it.
So that never happened, eh? It’s all fake news or my sick imagination.
I feel so much better now.
I agree with Kling.
On the credentialism issue, I’d highly recommend this classic post from SSC: https://slatestarcodex.com/2015/06/06/against-tulip-subsidies/
A nice read at Slate Star Codex. Thanks for the link.