Are Wages Too High?

Here's a good one for the right-for-the-wrong-reasons file.

David Glasner is one of an increasing number of Fed critics who would like to see a higher inflation target. Today, he takes aim at a Wall Street Journal editorial that claims that the real victims of cheaper money wouldn't be, you know, people who own money -- creditors -- as one might think, but working people. Higher inflation just means lower real wages, says the Journal. Crocodile tears, says Glasner -- since when does the Journal care about wage workers? So far, so good, says me.

"What makes this argument so disreputable,"he goes on,

is not just the obviously insincere pretense of concern for the welfare of the working class, but the dishonest implication that employment in a recession or depression can be increased without an, at least temporary, reduction in real wages. Rising unemployment during a contraction implies that real wages are, in some sense, too high, so that a falling real wage tends to be a characteristic of any recovery, at least in its early stages. The only question is whether the falling real wage is brought about through prices rising faster than wages or by wages falling faster than prices. If the Wall Street Journal and other opponents of rising prices don’t want prices to erode real wages, they are ipso facto in favor of falling money wages.

And here we have taken a serious wrong turn.

Glasner is certainly not alone in thinking that rising prices are associated with falling real wages, and vice versa. And he's also got plenty of company in his belief that since the wage is equal to the marginal product of labor, and marginal products should decline, in the short run higher employment implies a lower real wage. But is he right? Is it true that if employment is to rise, "the only question" is whether wages fall directly or via inflation? Is it true that unemployment necessarily means that wages are too high?

Empirically, it seems questionable. Let's look at unemployment and wages in the past few decades in the United States. The graph below shows the real hourly wage on the x-axis and the unemployment rate on the y-axis. The red dots show the two years after the peak of unemployment in each of the past five recessions. If reducing unemployment always required lower real wages, the red dots should consistently make upward sloping lines. The real picture, though, is more complicated.

As we can see, the early 2000s recovery and, arguably, the early 1980s recovery were associated with falling real wages. but in the early 1990s, employment recovered with constant real wages -- that's what the vertical line over on the left means. And in the two recessions of the 1970s, the recoveries combined falling unemployment with strongly rising real wages. If we look at other advanced countries, it's this last pattern we see most often. (I show some examples after the fold.) So while rising employment is sometimes accompanied by a falling real wage, it is clearly not true that, as Glasner claims, it necessarily must be.

This is an important question to get straight. There seems to be a certain convergence happening between progressive-liberal economists and neo-monetarists like Glasner on the desirability of higher inflation in general and nominal GDP targeting in particular. There's something to be said for this; inflation is the course of least resistance to cancel the debts. But we in the party of movement can't support this idea or make it part of a broader popular economic program if it's really a stalking horse for lower wages.

Fortunately, the macroeconomic benefits of a rising price level don't depend on a falling real wage.

"Ten People Acting Together Can Make a Hundred Thousand Tremble Separately"

Suresh's excellent post on the Occupy Wall Street movement reminded me of Hannah Arendt's On Revolution. It's a funny book; I don't know if it's much read today. One of its innovations, or eccentricities, is to place the American Revolution not just in the revolutionary tradition, but right at its center. Another is the focus on the idea of "public happiness" -- the idea that there's a distinct kind of wellbeing that comes from participation in collective decisionmaking. And most relevant to the current conversation, is its emphasis on the role of local councils -- non-elected but representative -- in every revolutionary situation, from 18th century New England town meetings to the soviets of 1918. These have independently developed, she argues, the"federal principle" -- the idea that democratic politics consists not in selecting leaders who then exercise power on behalf of the public, but rather of local bodies delegating specific tasks to more centralized bodies.

The connection to the Occupy movement is perhaps obvious, though Arendt isn't one of the writers people usually associate with this kind of politics. Her insistence that broad participation in public life is an end in itself, even the highest end, is a nice corrective to people who are impatient with the inward-looking nature -- meetings about meetings! -- of a lot of conversations around OWS. And the General Assembly structure looks different when you imagine them as proto-soviets. Of course the US today isn't anywhere close to a revolutionary situation, and one can't imagine General Assemblies exercising dual power. Or more precisely, there's no way anything like that will happen; people are imagining it, that's the point. Maybe the best evidence that Arendt is onto something important is that her book, written in the 1960s mostly about the politics of the 1780s, has distinct echoes not just of OWS, but of popular movements around the world, like the idea of "delegation" rather than "representation" coming out of Venezuela and Bolivia. 

I think the connection is interesting enough,it's worth putting some long quotes from On Revolution here. Which requires us to deploy the new-to-Slackwire technology of the fold. So, after it, Arendt.

Demands, Democratization, and OWS

In formal political economy, Acemoglu and Robinson have a famous theory of democratization, which might illuminate the splits inside OWS. Non-democracies are characterized by elite control of the policy making process. Occasionally, non-elites are able to solve their collective action problems and temporarily threaten the elites with rebellion. Elites can respond to this threat by repressing, temporarily reforming, or democratizing. When a movement is weak, it can be easily repressed. If it is a bit stronger but not overwhelmingly powerful, elites might alter a few policies here and there, but not change the identity of who gets to decide future policies. Because politics is fickle and promises aren't worth anything unless they are institutionalized, the temporary policy changes won by a political movement aren't going to last unless the identity of the people deciding policy in the future changes. A sad example of a regime's worthless promises is the 1381 Wat Tyler peasant rebellion, where the king promised amnesty to the anti-landlord rebels, only to have them hanged once they put down their arms. Zuccotti square is our pitchfork, and we shouldn't put it down for non-credible promises from our elites. But what is a credible promise? What could we demand that would last and work well after we've gone back to normal life (in my case referee reports and regressions)?

In Acemoglu and Robinson, when protesting citizens have enough political power, they demand and win democracy instead of just redistribution. In this way, democracy is a commitment device, ensuring that non-elites get to decide policies even after they have demobilized from the streets. If one admits that de jure U.S. politics, while democratic in form, has certain parts of it (e.g. monetary policy, financial regulation, tax policy) captured by elites regardless of the politician in power, then this democratization model becomes pretty applicable. Perhaps it took Obama's election and subsequent ineffectiveness to really communicate the extent of elite capture of U.S. politics, although the evidence has been accumulating for decades. In any case, many of the folks in Zuccotti square think that electoral politics is completely run by the rich, and so it takes street politics to force reform. The problem is, as in Acemoglu and Robinson, that mobilization is generally temporary: you don't get people protesting on the streets for years. A lasting victory would depend on converting this mobilization into institutions and durable policy gains.

The claim that OWS is partially a democratization movement has been made by Hardt and Negri. I think they are right, because from the inside it exhibits the fractures that all democratization movements face. Social democrats want the movement to cash in the temporarily political energy for economic policies to generate economic growth right now. I understand this, as political power via the street mobilization and media is fleeting and there is a worry that we will lose it before we actually secure anything at all. But the radicals claim a bigger, better demand: "real" democracy. The ability to set policy is worth much more than any particular policy, and democracy is the institutional setup that gives everybody the ability to participate in setting policy.

So radicals want the movement to continue to try and build political power so that we can demand not just financial transactions taxes or even a jobs program, but all that and the ability to have a say over all kinds of other decisions, from incarceration to the environment. This is why the overarching concern for the anarchists is to build the organizational architecture of the occupation, growing its semiotic and spatial reach. This makes the whirring of activity around Zuccotti square an amplifier for all the popular economic justice struggles, from Sotheby's workers to anti-foreclosure activism to movements to democratize the Fed. I like the metaphor of OWS as a wildlife garden for a left political ecology, which is attracting and cultivating a biosphere of demands, grievances, ideologies and cultural practices to evolve a stronger left. This is also why we are sometimes accused of having a "grab bag" of disconnected issues: its because one of the promises of the movement is power for the majority over all kinds of decisions, instead of making demands from the incompetent and decadent elites that currently make those decisions. Its part of the idea that this is just the beginning; we have a long winter and a longer struggle ahead, and need to use this moment to set ourselves up for building more political power in the medium run. So we're not going to coalesce and harden into "demands", but instead continue to nurture a culture of a thousand different demands and recruit people and develop a hegemonic agenda (that we don't have yet!). But the promise of that power and hegemony is grander: democratic control over policy making writ large. Occupy Everything, until we get all our demands and we don't have to make any more.

Disgorge the Cash!

It's well known that some basic parameters of the economy changed around 1980, in a mutation that's often called neoliberalism or financialization. Here's one piece of that shift that doesn't get talked about much, but might be relevant to our current predicament.

Source: Flow of Funds

The blue line shows the after-tax profits of nonfinancial corporations. The dotted red line shows dividend payments by those same corporations, and the solid red line shows total payout to shareholders, that is dividends plus net share repurchases. All three are expressed as a share of trend GDP. The thing to look at it is the relationship between the blue line and the solid red one.

In the pre-neoliberal era, up until 1980 or so, nonfinancial businesses paid out about 40 percent of their profits to shareholders. But in most of the years since 1980, they've paid out more than all of them. In 2006, for example, nonfinancial corporations had after-tax earnings of $800 billion, and paid out $365 billion in dividends and $565 in net stock repurchases. In 2007, earnings were $750 billion, dividends were $480 billion, and net stock repurchases were $790 billion. (Yes, net stock repurchases exceeded after-tax profits.) In 2008 it was $600, $470, and $340 billion. And so on. [1]

It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancings to pay for extra consumption. What nobody mentioned was that the rentier class had been doing this longer, and on a much larger scale, to the country's productive enterprises. At the top of every boom in the neoliberal era, there's been a massive round of stock buybacks, which you could think of as shareholders cashing out their bubble wealth. It's a bit like the homeowners "using their houses as ATMs" during the 2000s. The difference, of course, is that if you took too much equity out of your house in the bubble, you're the one stuck with the mortgage payments today. Whereas when shareholders use businesses as ATMs, those businesses' workers and customers get to share the pain.

One way of thinking about this increase in the share of profits flowing out of the firm, is in terms of changing relations between managers and the owning class. The managerial capitalism of Galbraith or Berle and Means, with firms pursuing a variety of objectives and "owners" just one constituency among many, really existed, but only in the decades after World War II. That, anyway, is the argument of Dumenil and Levy's Crisis of Neoliberalism. In the postwar period,

corporations were managed with concerns, such as investment and technical change, significantly distinct from the creation of "shareholder value." Managers enjoyed relative freedom to act vis-a-vis owners, with a considerable share of profits retained within the firm for the purpose of investment. ... Neoliberalism put an end to this autonomy because it implied a containment of capitalist interests, and established a new compromise at the top of the social hierarchies... during the 1980s, the disciplinary aspect of the new relationship between the capitalist and the managerial classes was dominant... after 2000, managers had become a pillar of Finance. 

When I've heard Dumenil talk about this development, he calls the new configuration at the top a "loving marriage"; the book says, less evocatively, that today

income patterns suggest that a process of "hybridization" or merger is underway. ... The boundary between high-ranking managers and the capitalist classes is blurred.

The key thing is that at one point, large businesses really were run by people who, while autocratic within the firm and often vicious in defense of their privileges, really did identify with the particular businesses they managed and focused their energy on their survival and growth, and even on the sheer disinterested desire to do their kind of business well. You can find a few businesses that are still run like this -- I've been meaning to write a post on Steve Jobs -- but by far the dominant ethos among managers today is that a business exists only to enrich its shareholders, including, of course, senior managers themselves. Which they have done very successfully, as the graph above (or a look at the world outside) shows.

In terms of the specific process by which this cam about, the best guide is chapter 6 of Doug Henwood's Wall Street (available for free download here.) [2] As Doug makes clear, the increased payouts to shareholders didn't just happen. They're the result of a conscious, deliberate effort by owners of financial assets to reassert their claims on corporate income, using the carrot of high pay and stock for mangers and the stick of hostile takeovers for those who didn't come through. Here's Michael Jensen spelling out the problem from finance's point of view:

Conflicts of interest between shareholders and managers over payout policies are especially severe when the organization generates substantial cashflow. The problem is how to motivate managers to disgorge the cash rather than investing it at below the cost of capital or wasting it on organization inefficiencies [by which Jensen seems to have mostly meant high wages].

Peter Rona, also quoted in Wall Street, expresses the same thought but in a decidedly less finance-friendly way: Shareholders "take pretty much the same view of the corporation as a praying mantis does of her mate."

You don't see the overt Jensen-type arguments as much now that management at most firms is happy to disgorge all of its cash and then some. But they're not gone. A while back I saw a column in the business press -- wish I could remember where -- expressing outrage at Apple's huge cash reserves. Because they should be investing that in new technology, or expanding production and hiring people? Of course not. It's outrageous because that's the shareholders' money, and why isn't Apple handing it over immediately. More than that, why doesn't Apple issue a bunch of bonds, as much as the market will take, and pay the proceeds out to the shareholders too? From the point of view of the creatures on Wall Street, a company that prioritizes its long-term growth and survival is stealing from them.

UPDATE: Ah, here's the piece I was thinking of: Forget iPad, it's time for iGetsomemoneyback. From right before the iPad launch, it's a gem of the rentier mindset, complete with mockery of Apple for investing in this silly tablet thing instead of just handing all its money to Wall Street.

Why is Apple hoarding its cash? A company spokesman explains: "We have maintained our cash and strong balance sheet to preserve the flexibility to make strategic investments and/or acquisitions." ... Steve Jobs really doesn't need an acquisitions warchest of around $30 billion ... He should start handing back this money to stockholders through dividends. ... The money belongs to stockholders: Give. Indeed Jobs should go further. Apple should -- gasp -- start borrowing, and hand that money back, too.

Disgorge the cash!


SECOND UPDATE: Welcome to visitors from Dealbreaker, Felix Salmon and Powerline. If you like this, other posts here you might like include Selfish Masters, Selfless Servants; The Financial Crisis and the Recession; What Do Bosses Want?; and in sort of a different vein, Satisfaction.

[1] There's something very odd going on in the fourth quarter of 2005: According to the Flow of Funds, dividend payments by nonfinancial firms dropped to essentially zero. The shortfall was made up in the preceding and following quarters. I suspect there must be some tax change involved. Does anybody (Bruce Wilder, maybe) have any idea what it is?

[2] John Smithin's Macroeconomic Policy and the Future of Capitalism is also very good on this; it's subtitle ("the revenge of the rentiers") gives a better flavor of the argument than the bland title.

This Is What Democracy Looks Like

I haven't Occupied Wall Street, have you?

The protests are great -- more anger, please! -- but I don't have any particular insight into them. And those of us without first-hand knowledge should probably defer to those who do. Except, I want to think critically about one common criticism of the protests: that they lack a clear statement of what they're about.

It's not clear how much this is really true. But still, one can say, isn't there something circular about the idea of "Occupy Wall Street"? It's not identified as a movement against bank bailouts or foreclosures, or for jobs or free elections or socialism. It's a movement to, well, occupy Wall Street -- a protest to hold a protest.

I think there's an important sense in which this is true. And in which it's always true -- in which, indeed, it's the whole point.

If you've ever been to one of these things, you know that the most successful chants are the self-referential ones, like "Whose streets/Our streets!" and "This is what democracy look like." (Or "We're here, we're queer" and "We shall not be moved.") Whatever the ostensible reason for the protest, the real content is always simply We Are Here.

This is most obvious, and most powerful, when the participants are people who are not supposed to be political agents or be seen in public at all: The early civil rights and gay rights protests, undocumented immigrants today. The message is, We exist. Think of the Memphis sanitation workers strike, with its signs reading, "I AM A MAN." But it also works if the "here" is a setting that is not supposed to be political. The flipside, as everyone knows, is that a protest of recognized citizens at a place and time designated by the authorities is politically meaningless.

Most of us very seldom experience ourselves as political agents, in the sense of being active participants in the collective decision-making of our community. For better or worse, most of the time we delegate collective decision-making to specialists who represent us more or less faithfully, as the case may be. The only reason for protest -- for any kind of mass politics -- is that this system has broken down. The message of any protest is: There is a political subject, a We, that is not being represented. This, in the broadest possible way, is what the "99%" rhetoric is saying, and why it resonates. At some point, if a when movements like this are successful, some new more legitimate form of representation will be established, as people form new collective identities and new norms of collective action. But it's foolish to criticize an assertion of the failure of representation for not itself being an effective representative, with a specific set of demands and a strategy to carry them out.

It's a long time since I read any Habermas, but he has a passage somewhere about how politics is necessarily an open-ended discussion, a process for deciding a question that could in principle be resolved in many ways. So anything that becomes routine, that becomes part of the regular process of social reproduction, is no longer political. You can find a similar argument in Hannah Arendt, and Luciano Canfora makes it very powerfully. Democracy, he says, isn't a form of government, like in civics class and Civilization. It's something that happens, occasionally and intermittently. Any mechanism can be captured; you can't institutionalize rule by the non-rich, as long as there are rich. To assert ourselves we have to heckle from the sidelines, or once in a while storm the field.

With a legitimate system of political representation, the question is what we should do and how to do it. Without one, we first have to establish that "we" exist.


UPDATE: Once you start looking for this stuff, it's amazing how consistent it is. Pull up a photo of the protests at random, and there's at least even odds you'll see a sign with some self-referential message: "I am a human being, not a commodity," "We are the 99%", etc. Here's a particularly nice example:

"We" are made up of the people here with signs. Exactly.


UPDATE 2: Matt Stoller, who's actually spent time there, says the same thing: 

What do the people at #OccupyWallStreet actually want? What are their demands? For many people, this is THE question. So let me answer it. What they want, is to do exactly what they are doing. They want to occupy Wall Street. They have built a campsite full of life, where power is exercised according to their voices. It’s a small space, it’s a relatively modest group of people at any one time, and the resources they command are few. But they are practicing the politics of place, the politics of building a truly public space. They are explicitly rejecting the politics of narrow media, the politics of the shopping mall. To understand #OccupyWallStreet, you have to get that it is not a media object or a march. It is first and foremost, a church of dissent, a space made sacred by a community. ... There's no way to agree or disagree with a church or a carnival.