Category Archives: regulation

New Left Economics: Wage credits

As David Autor has been documenting for the past decade, technology has been shifting the comparative value of labor in the United States to low wage jobs that are difficult to automate.  Routine tasks which required middle income labor are disappearing not just in the United States, but across all OECD nations.  His most recent piece for the New York Times paints a dire picture:  “How Technology Wrecks the Middle Class”.

As can be expected, the consequences of this displacement of labor to low salary jobs will be lower purchasing power for US consumers.  The BLS forecasts are startling.  Projections for the top 20 occupational areas that will experience the largest growth in the next decade have a median salary of $31,111 a.  The current median salary that BLS lists for US workers is $45,790 (source).  Clearly, the trajectory for US wages is steeply downward.

For the consumer economy, this presents long term contractionary pressure.  There is no indication that technology will not continue to eliminate high skill high cost labor jobs.   A cycle of contracting consumer economy fueling further layoffs which in turn further constricts consumer spending will continue until an equilibrium is reached.  If assaults on the minimum wage are successfully repelled, then eventually the consumer economy will end its death spiral to the level of consumption sustainable by a families of individuals being paid minimum wage.

Clearly this is not in the interest of citizens, but nor is it in the interest of businesses.  The systemic problem is that while business has accurate measurement of the cost of labor, it has no way of directly measuring the benefit to their business of paying their workers well.  Theoretically, they accept the proposition that businesses must continue to pay their workers well, otherwise there will be fewer consumers able to buy their product.  However no company will perform this service to the economic system out of the goodness of their hearts.  The current system behaves irrationally- expecting all other companies to maintain high wages, while they are free to cut their labor costs ruthlessly.  Of course all other businesses behave the same way.  Really, we cannot expect business managers to do otherwise.  Without an empirically measurable, monetary benefit they can point to in the company’s bottom line, businesses cannot be expected to maintain payrolls in order to support US consumer purchasing power.  Instead, what individual managers do in aggregate is methodically defund the US middle class.  They will continue to do this while this suicidal behavior is an unfelt externality.  The problem is that the full cost of eliminating jobs is not directly measurable by the business though the theoretical relationship to declining spending levels is acknowledged.

The Wage Credits solution.

Wage credits are, like Carbon credits-  a mechanism that allows corporations to measure the hidden cost that presents a fundamental threat to the long term health of their business.   Wage credits are issued by banks as workers cash payroll checks.  An equal number of credits are issued to the business for each dollar paid to workers.  The bank is required to accumulate and account for the Wage Credits just as they would cash.  Wage credits are the only form of currency accepted payment of a category of tax- a “Purchasing Power Defense” (PPD) tax.  Labor intensive businesses will have a surplus of Wage credits to pay their tax which is proportionate to the revenue they take in.  Companies with low labor requirements but extract large amounts of wealth from consumers will not have sufficient credits to pay their tax.  Their response is to buy surplus credits from labor intensive businesses, or to hire more workers.

This mechanism is intended to introduce a negative cost to business managers making downsizing, outsourcing, or automation initiatives that have unintended negative impact on the US economy.   It is not prescriptive- in many cases the business may no longer be viable- but the business manager is presented with a more comprehensive cost benefit calculation that leads them to seek the optimal choice for their business and the long term health of the US economy.  The mechanism has other uses which may optionally be used in some OECD countries, but its central reason for being is to arrest the cannibalization of the middle class by making the cost of its destruction immediately felt by a business that is participating in the destruction.

Those familiar with Carbon Credits can appreciate that such regimes have a weakness.  Products from countries free of the regime have a competitive advantage over domestic products.  Yet there are schemes for dealing with this.  For example, say wage credits accompanied components in a product’s value chain.  That is, say the Wage Credit must be paid as a tax only when the consumer pays for the finished product.  So say wage credits were required to be transferred as part of the transactions for components in the value chain of a consumer product.  Maybe the part from China is cheaper even though it has no accompanying wage credits.  When the finished good gets to the Walmart buyer, the Walmart executive will not always choose the Chinese product because it has no wage credits with it- Wage credits that Walmart must accumulate to pay the federal Purchasing Power Tax.

Wage credits represent a scheme that unions and businesses must come together to support.  Without some such mechanism to avert the self destructive market forces driving the defunding of the middle class, our economy will devolve to something more resembling a subsistence level third world economy.  Stiglitz has pointed out that market failure is the norm rather than the exception and that there is no “invisible hand”.  However this is not necessarily an argument for brute force industrial policy from central planners.  We must move forward and employ the best thinking from microeconomics research- game theory and behavioral economics.

Clearly society will be forced to draw the line somewhere in defending purchasing power.  The question is whether it is at the minimum wage, or at a dynamically determined middle class minimum wage.    Wage credits allows the market to decide where the tradeoffs are made, and so will be superior in selecting optimal balances for particular labor activities of greatest value for particular industries.

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Notes:

The median wage for new jobs forecast for 2010-2020 is $31,111.  BLS Occupational Outlook 2010-2020:  Most new Jobs. (link)  Multiplying the number of jobs by the median wage for each occupation, the total income for these new jobs is $230 billion.  Divided by the number of new jobs, (7.4 million), we arrive at a mean of $31,111.

 

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Merry Christmas, Zuccotti Park

… Seriously guys, you just can’t say stuff like this:

You spin your little webs and you think the whole world revolves around you and your money.”

It’s un-America.  But it this goes further, claims National review:  Zucootii Park is overrun with Communists (source).    Although the quote above was officially identified by the FBI as Communist propaganda 1, and could have been spoken at Occupy Wall Street, it’s actually  from the movie, “It’s a Wonderful Life”.   George Bailey (the good financier) says these words to Henry Potter (the evil financier).

What?  One of the most beloved movie of Christmas was considered Communist propaganda?  Really?  What was the FBI thinking?

The fact that both George Bailey the Hero and Henry Potter the villain are both capitalist financiers goes without notice: such “nuances” have never been in the interests of the right wing to acknowledge.  Let’s face it.  This is a very very old story.  Whatever the regime in power, throughout history conservatives have  portrayed complaints against excesses of the powerful as the delusions of a mob seeking to pull down the entire system.  The tactic seeks to gather around them the public who naturally  self identify as the responsibly rational as opposed to all those of the irresponsible / irrational rabble.  This is Nixon’s silent majority against the rabble  of McGovern.  It is the Loyalist majority lawfully following King George against the rabble complaining about unequal government policies.

It is not just the National Review who is portraying the rhetoric of Occupy Wall Street as anti-capitalist.  What gets reported is that there is a strong feeling of resentment towards arrogant Wall Street laissez-faire financial practices.  What goes unreported is that few have any problem with the Steve Jobs kind of capitalism.  The Occupy Wall Street protesters cry out against the financial casino of  naked default swap gambling, but is it true that the protesters are anti-any-kind-of-finance?  No.  They are for all the George Baileys engaged in responsible finance activity that makes loans to small businesses and low income families buying homes.  Microloans are cool, Citigroup screwing the public isn’t.

The fact is that the public has always had a much more balanced view of finance, and this should come as no surprise.  In “It’s a Wonderful Life”, every viewer  makes a big distinction between the kind of  finance that George Bailey and Henry Potter are involved in. When there is a run on George’s Savings and Loan, it is clear that all of the townspeople are investors, and all of them are getting interest. (Potter “magnanimously” offers to buy the townspeople’s shares in the Bailey S&L for 50 cents on the dollar.) George explains the complexity of the finances to the people, but what wins the argument is that George appeals to everyone’s sense of sticking together, trusting one another, and making sacrifices during hard times. George chooses to behave honorably, while Potter’s behavior is regarded as dishonorable.  The message is moral, not political.  It is not left vs. right horizontal, but up versus down vertical.

George and his “miserable Savings and Loan”  is part of the 99%.

As benevolent as this film was, it was regarded by culture warriors of the period as part of a communist conspiracy. Secret FBI memos described Capra’s movie as communist, advocating “an irresponsible economy in the name of moral responsibility.” (source) Capra was indeed suggesting it was good to have an economy that was built on positive human traits rather than being predicated on pure self interest.

Ironically, the system of Wall Street that the Right is defending is in fact Socialism.   It is hard for conservatives to accept that the business models of AIG, Goldman and Lehman all relied on implicit governmental support for their positions. Ultimately with a wink and a nod everyone knew that it was a game they could not lose- whatever happened the government could not let them fail.  Now, conventional wisdom is that investors should be allowed to take as many risks as they like, so long as they not threaten to take down the entire global economy if one or a group of Wall Street firms go bankrupt.  But with Dodd-Frank we only marginally less vulnerable from that sort of scenario, as in 2008 when Wall Street had the “Too big to fail” gun to America’s head.  Because we will not allow our economy to be bombed back to the stone age, the de facto situation continues to be that the US government is still providing an implicit backstop to  Wall Street financial institutions.

The reality is that there are socialists here- but the National Review has it backwards.  The socialists  populate Wall Street firms and not Zuccotti park.   This inconvenient fact violates the narratives promoted by the Right-   the narratives that seek to demonize traitorous  liberal industrialists  like Warren Buffett, Steve Jobs,  Steve Case, Bill Gates,  Eric Schmidt.  Unlike the Right’s darling Wall Street sponsors, these individuals are the real capitalists:  The real job creators  building the real economy.

Wall street reforms

Here is a place to start with street reforms.

  1. Wall Street lobbyists outnumber congressional representative 10 to one. If such influence is not curtailed, even if a perfect system were put in place tomorrow it would quickly revert to its current state of corruption. Some measure is necessary to limit or eliminate this force.
  2. The Glass Steagal Act should be reinstated. Because the public cannot allow Banks to fail, Banks cannot be permitted to engage in investments that would risk their failure. Had Glass- Steagal not been repealed, the 2008 meltdown would have been impossible since it would have have had access to securitized mortgages and credit card debt.
  3. Dark financing must be prohibited. US regulators must have access to all transactions, and regulatory agencies such as the SEC and Federal reserve must increase their staffs significantly so that spot checks are frequent, deeply intrusive and conducted by personnel with the sophistication necessary to not be fooled by complexity or opacity of the exotic instruments and systems in common usage.
  4. Derivatives cannot be allowed to be weapons of mass destruction as Buffett calls them. All derivatives must be properly collateralized. Allowing people to take out insurance on their neighbors houses (such as with naked credit default swaps) encourages a casino atmosphere with perverse incentives that rewards financiers for vandalizing the credit worthiness of businesses, and city, state and national governments.

Managing River Levels with Tax Policy

It is hard to dispute the observation that the exponential growth of productivity is vastly outpacing the (at best) linear rates of increased consumption. The systemic risk to the consumption engine is a slow walk but we seem to have been going at it since the 90s as evidenced by the flat rate of job growth since then. Your book provides a thought provoking metaphor to model what is going on here- The purchasing power river has companies along its bank that are withdrawing substantially more purchasing power than are returning in the form of lower cost products and employee wages.

What if purchasing power as a public resource was managed with a market mechanism that provided disincentives for net withdrawals of purchasing power? For example, assume the yearly consumption of the average middle class family was calculated and the company does not have enough employees with the wages to balance that inflow of capital. When the imbalance becomes egregious, there is a monetary penalty- for the sake of simplicity, let’s say the penalty is a progressively higher corporate tax rate, so that at some point the business either figures out jobs for enough workers or gives up any further automation. What this does is make explicit the rule that Henry Ford intuitively grasped. The implementation is an orthogonal subject but I would think it would rely on an arms length mechanism like taxation rather than micromanaging regulation mechanisms.

I have been throwing rocks at this particular approach to see if it will collapse and I wonder if you would care to join in. Here are the objections I have posed and the responses I have to them.

Objection1: Growth relies on venture capitalists taking risks on new ideas. They won’t be as willing to take those risks if the returns are capped as this scheme proposes to do. Answer: The cap is only on the domestic river. That is we are only concerned in regulating the balance between revenues from domestic consumption versus the returned purchasing power expressed as domestic price reduction and employment of US workers. This also has the benefit of provoking the corporation to have strong plans for competing in foreign markets. Global revenues often dwarf domestic revenues, so this will provide the substantial returns for venture capitalists that is vital for a vigorous entrepreneurial environment.

Objection2: Depending on the business, the revenues could be huge, but there are substantial other costs such as research on future products 90% of which are not productized. These added costs are generally correlated with vigorous growth companies. The proposal only measures incoming purchasing power versus returned purchasing power, so keeping them in strict balance prevents revenue from getting directed towards expansion and further research, thereby retarding growth. Answer- the proposal could allow for set asides for research and expansion. These set asides would be substantial for startups. After say 5 years, the set asides are reduced to fixed amounts which may be adjusted by appeal to regulators. There is a disincentive to game the set asides (labeling other budget items as “research” or “expansion” to pump up the numbers) because to qualify for the reductions, the books on research and expansion budgets must be open to spot checks by regulators.

Objection3: If this proposal were in place since the 20s, the percent of population involved in farming would not be 2%, but closer to the 25% it was in the 30s. How do we allow for progress in the kinds of jobs we do. The proposal does not allow for justifiable job destruction. Or do we think farming really ought to be done with hoes and rakes? Answer: For farming in particular the same answer as for Objection 1. Due to substantial international sales of American farm products, This may not be a satisfactory response for other industries, and if there are no other market based responses, it might be necessary to resort to more intrusive regulatory rulemaking for specific industries.