by Adam Tooze
The Great Divergence: Labor Productivity and Compensation
Source: Lawrence Mishel, “The Wedges Between Productivity and Median Compensation Growth,” EPI Issue Brief 330 (2012): 1–7, http://www.epi.org/publication/ib330-productivity-vs-compensation/.
II
The decay of the American Dream had been a staple of Barack Obama’s political discourse since his days as a junior senator. It was a common thread in the Hamilton Project agenda. In December 2013, a year into his second term as president, Obama visited a community center in Ward 8, an African American section of Washington, DC, to make a major speech about America’s ongoing social crisis.18 He described the “daily battles” of ordinary Americans struggling against the “relentless decades-long trend” toward “dangerous and growing inequality.” The “basic bargain at the heart of our economy has frayed,” he declared. Of course, the trend toward growing inequality was not confined to America. But, Obama insisted, there must be no more evasion, “this increasing inequality is most pronounced in our country. . . . [S]tatistics show . . . that our levels of income inequality rank near countries like Jamaica and Argentina.” Comparable “wealthy allies, countries like Canada or Germany or France . . . have greater mobility than we do, not less.” Half of all Americans would experience poverty during at least one period of their lives. “The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life and what we stand for around the globe.” Inequality was, the president declared, the “defining challenge of our time.”
The racialized distress of cities like Detroit was clearly shocking. But, as Obama emphasized, America’s crisis was not confined to predominantly African American communities. Across the country, class, not race, was the most important determinant of an American’s life chances, and the big story of his second term as president was rural white working-class despair. It was Appalachia—West Virginia and Kentucky—held back by structural change, educational failure and immobility, that lurched into the headlines. At its most extreme, this lethal cocktail came to be symbolized by an epidemic of drug addiction, fed by cheap heroin from Mexico and rampant opioid abuse.19 Already in 2007 deaths from drug overdose had overtaken road accidents as a major cause of death in the United States.20 Among white Americans, deaths from overdose increased by 297 percent between 2010 and 2014 alone. Unlike in any other developed society, life expectancy among working-class white Americans had been decreasing since the early 2000s. In modern history the only obvious parallel was with Russia in the desperate aftermath of the fall of the Soviet Union. One journalistic essay and academic research paper after another confirmed the disaster, until the narrative was capped in 2015 by Anne Case and Angus Deaton’s famous account of “deaths of despair.”21
The crisis was undeniable. The question was what to do about it. When the left wing of the Democratic Party had taken up the issue of inequality in the 1990s at the time of the Clinton administration, the standard diagnosis had been technical and economic.22 Globalization had pushed top incomes up and lower incomes down. Since the 1990s, the impact of these factors had only increased. Imports of cheap manufacturers opened up by NAFTA and Chinese accession to the WTO benefited consumers, but depressed wages and robbed blue-collar Americans of secure manufacturing jobs and the health and retirement benefits that went with them. By 2013, experts close to the American labor movement estimated that the trade deficit with China had cost 3.2 million jobs and the competition of low-wage foreign labor had depressed the wages of the 100 million American workers without college education by $180 billion.23 These were substantial effects, but in an economy with a workforce of more than 150 million and a wage bill of more than $7 trillion, they were nowhere near large enough to explain the huge surge in inequality. So globalization was supplemented by the thesis of skills-biased technological change.24 This postulated that, independent of globalization and foreign trade, the trend in technological development had offered disproportionate benefits to those with higher skills in every walk of life and across the entire American economy, whether exposed to trade or not.
The standard reformist response was to advocate for a role for federal and state government in improving education, providing affordable access to community colleges and offering trade adjustment assistance. Hence, the focus of the Hamilton Project in 2006 on making sure that underprivileged kids made good use of their summer vacations. But after twenty years, given the mounting inequality and declining mobility, these measures could hardly be deemed a success. Disillusionment with conventional reformist solutions was a hallmark of the “new” inequality debate that sprang to life after 2011. Though there had been many well-intentioned efforts by government agencies to modify and improve the condition of average Americans, on balance their net effect had been modest, to say the least. Between 1977 and 2014 the share of national income going to the top 1 percent before taxes and benefits had risen by 88.8 percent. After fiscal redistribution their share increased by 81.4 percent. Nor did the tax and welfare state prevent the share of the bottom 50 percent from declining from 25.6 to 19.4 percent.25 Nor was this by accident. Every conceivable source of leverage and influence had been exploited by those with money to maximize their advantage. As billionaire investor Warren Buffett famously put it: “Actually, there’s been class warfare going on for the last 20 years, and my class has won.”26 Buffett was so appalled at the consequences that in 2011 he made himself into a spokesman for proposals to impose a minimum 35 percent tax on America’s highest earners, a proposal that Obama had backed but that had been blocked by the Republicans in Congress.27 It was a sign of both Buffett’s personal decency and the utter lopsidedness of the balance of power in twenty-first-century America that a program of social improvement should consist of well-meaning billionaires volunteering to pay a bit more for the greater good of American society.
For those at the bottom of the pile, none of this was news. Opinion polls, especially those commissioned by the right wing, had for a long time been recording the profound resentment among the American population at the way that both the economy and the political system seemed to be engineered to their disadvantage.28 These views were often dismissed as conspiracy theory, and often deservedly so. Online news sources like Breitbart, which rode to prominence on the back of the Tea Party movement, provided a platform for toxic racial and anti-Semitic rhetoric.29 But if one stepped back from the poisonous language and crude logic, the assumptions that inequality was “systemic” and that “the system” was rigged against ordinary working-class Americans were not paranoid but simply realistic. From a radically different perspective and with completely different intent, the American Left had always made the case. Indeed, it was this radical skepticism that set them apart from the liberal centrists who dominated the Democratic Party. The Left did not trust the institutions. They did not believe that electing well-intentioned products of elite colleges to steer a machine designed to favor the wealthy offered any hope of fundamental change. As the Occupy slogan of 2011 put it, “The system isn’t broken, it’s rigged.”30 In many ways the liberal centrists were the last to know. They, of all the segments of political opinion, had the most invested in the idea that America’s social ills were amenable to technocratic remedy and that the state was a suitable instrument for making such change. It was precisely the conversion of commentators of this ilk to a more radical view that marked how serious the sense of crisis had become.31
In a remarkable series of articles following the 2012 election, Paul Krugman at the New York Times adopted a profoundly dark view of American society, economy and politics. “What do the pre- and postcrisis consensuses have in common?” Krugman asked in December 2013.32 “Both were economically destructive: Deregulation helped make the crisis possible, and the premature turn to fiscal austerity has done more than anything else to hobble recovery. Both consensuses, however, corresponded to the interests and prejudices of a
n economic elite whose political influence had surged along with its wealth. . . . Some pundits [might wish to] depoliticize our economic discourse, to make it technocratic and nonpartisan. But that’s a pipe dream. Even on what may look like purely technocratic issues, class and inequality end up shaping—and distorting—the debate.” This from a Nobel Prize–winning economist who in the 1980s and 1990s had counted squarely in the mainstream.
Robert Reich, a former Clinton-era Labor secretary, underwent a similar disillusionment at exactly the same historical moment. “For a quarter century,” he now admitted, “I’ve offered in books and lectures an explanation for why average working people in advanced nations like the United States have failed to gain ground and are under increasing economic stress.” He had pitted an interventionist state against the forces of globalization and technological change. What Reich now recognized was that much of this was “insufficient,” if not “beside the point,” because it overlooked a “critically important phenomenon: the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs. . . . The problem is not the size of government but whom the government is for.”33
After the events of 2008–2009 and the spectacularly lopsided bailouts, could anyone seriously doubt whom government was for? At the level of personnel, the revolving door that connected the Treasury, the Fed and the top banks continued to spin at a steady pace. By 2014 both Bernanke and Geithner were on their way from public service to well-upholstered positions in finance. Geithner went to the well-connected investment bank Warburg Pincus. Bernanke advises the Citadel hedge fund and chaired an advisory board for the giant PIMCO bond fund, owned by Allianz of Germany, which also included as its members Jean-Claude Trichet and Gordon Brown as well as Anne-Marie Slaughter of the Obama foreign policy team.34 It was like a mini reunion of 2008 crisis fighters. And they had plenty to celebrate. Share values were recovering to their precrisis levels and beyond. The banks were rebuilding their balance sheets. As they piled up capital and reserves, rates of return in the financial sector were down. But, as the stress tests had always intended, pre-provision net revenue was bouncing back and the extra capital made the banks safer. America’s financial giants were expanding their businesses, pushing into markets vacated by their ailing European competitors.35
Clearly, Wall Street enjoyed a privileged connection to government. After 2008 no one could doubt that. But what was striking in the aftermath of the crisis was how critical commentary on America’s political economy widened its scope beyond the banks. In so doing it followed the evolving contours of the economy itself. With the advent of the smartphone and social media boom in 2007, tech had regained the luster it had lost in the dot-com crash. Silicon Valley was the new cutting edge of American capitalism. Big Pharma continued to rake in profits. As oil prices resurged from their lows in 2009, big oil and the new technology of fracking were back. As the recession of 2008–2009 receded, what came ever more to the fore was a tendency toward concentration and oligopoly that went far beyond Wall Street. One of the side effects of Bernanke’s QE policy of low interest rates was that it made it hugely attractive for companies to borrow to buy out their competitors. In three giant merger waves, cresting in 2000, 2006 and 2015, with the antitrust authorities looking on, American capitalism remade itself in a more concentrated and monopolistic mode.36 By 2013 profits were booming to an almost embarrassing extent.37 Even chronic loss makers, like the airlines, were now making money. But the really big returns were elsewhere. As Peter Orszag, Obama’s former director of management and budget, now at Citigroup, and Jason Furman, serving as chair of the Council of Economic Advisers, reported in a research paper, two thirds of the nonfinancial firms that had managed to achieve a return on invested capital of 45 percent or more between 2010 and 2014 “were in either the health care or information technology sectors.”38 What allowed such gigantic profits and enormous salaries to be concentrated in these sectors were market power, IP protection and government-licensed pricing.39
Silicon Valley saw no need to apologize. Theirs was the great technological and entrepreneurial success story of the late twentieth and early twenty-first centuries. Antitrust, data protection and intrusive tax investigations were, as far as Tim Cook of Apple was concerned, nothing more than “political crap,” antiquated road bumps on the highway to the future.40 As tech oligarch Peter Thiel told audiences and readers: “Creating value isn’t enough—you also need to capture some of the value you create.” That depended on market power. “Americans mythologize competition and credit it with saving us from socialist bread lines,” but Thiel knew better. As far as he was concerned, “[C]apitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear . . . [c]ompetition is for losers.”41
One could hardly ask for a more crass statement of robber baron hubris. The implications were bleak. America’s massively skewed distribution of income and wealth was the product of inherited assets, amplified by pervasive technological and economic change and Warren Buffett’s “class war,” which extended to every facet of the political regulation and deregulation of the economy. If this was so, what would it take to counteract the imbalance and to redress the astonishingly one-sided outcomes? A polite European social democrat like Thomas Piketty inferred from his inequality data that what the world needed was a global wealth tax. This was the message of his remarkable global bestseller, Capital in the Twenty-First Century, which redefined the public debate about inequality in 2014.42 That would certainly help to offset the tendency toward massive inequality. But in a system as starkly polarized and lopsided as that of the United States, what relevance did such well-meaning suggestions have? The tax proposal wasn’t wrong. It just sidestepped the reason it was needed in the first place, the brutal struggle for privilege and power, which for decades had enabled those at the top to accumulate huge wealth, untroubled by any serious effort at redistribution. The answer, if there was one, was clearly not technical. It was political in the most comprehensive sense. Power had to be met with power.
In January 2014 Reich went to Congress to testify. “I’ve served in Washington, and know how difficult it is to get anything done unless the broad public understands what’s at stake and actively pushes for reform. That’s why we need a movement against economic inequality and in favor of shared growth—a movement on a scale similar to the Progressive movement at the turn of the last century that fueled the first progressive income tax and antitrust laws, the women’s suffrage movement that got women the vote, the labor movement that helped animate the New Deal of the 1930s and fueled the great prosperity of the first three decades after World War II, the Civil Rights movement that achieved the landmark Civil Rights and Voting Rights Acts, and the environmental movement that spawned the Environmental Protection Act and other critical legislation.”43
Reich’s call to arms was powerful and compelling. To fix a rigged system, what was needed was a comprehensive mobilization. But as Reich was only too well aware, the progressive Left were not the only ones who could draw this conclusion. In fact, the American right wing got there first. Unlike liberal progressives, the libertarian right wing in the United States had never doubted that government was a problem. Indeed, they had always vociferously argued that it was the entire problem. America’s downward slide, the long-running trends toward inequality and oligarchy, the disaster of 2008, the lopsided recovery from it, were all symptoms of the profound corruption brought about by big government meddling and its capture by interest groups. Obama’s crisis politics were simply the latest phase. In response to Obama’s December 2013 inequality speech, Fox News speakers did not hesitate to mobilize the extraordinary Piketty and Saez data on the lopsidedness of the recovery, but only to turn them against the president: “He’s saying he wants to take out inequality and his policies from the
beginning have been to equalize.” But what had happened to inequality under the Obama administration, the Fox anchors demanded to know. “[T]he top 1 percent—their income rose by 31.4 percent between 2009 and 2012. Income for everyone else, you know how much that grew? 0.4 percent. These are just facts here. 95 percent of income gains have gone to the top 1 percent. So this system that he’s talking about, he is the system. It’s his system!”44
Of course the low top tax rates that had helped to create that outcome of extreme disparity were set by a Republican Congress and kept there by them. But the polemic was telling. A large part of the American Right agreed with Obama that the American Dream was in trouble, but for them, he was the personification of everything that was wrong. His defeat of Mitt Romney in 2012 only vindicated them in their belief that existing Republican politics were hopelessly inadequate. The Republicans would never achieve the transformation they craved with a candidate like Romney, an upper-class banker. In 2013, while the Democrats were still lulled by the sweet scent of Obama’s second victory, the Right counterattacked. Their target was the great social policy initiative of Obama’s first term, the Affordable Care Act. The hostage they would take was the budget.