Cracking the Mystery of Labor's Falling Share of GDP
bloomberg.com
bloomberg.com
The chart starts in 1950 with 63.6%. In that year, one out of three American workers in the private sector were in a union. Today one out of fifteen American workers in the private sector are in a union. In the rust belt, the Wisconsin government has been waging a war against its unions, as it and other states become so-called right to work states.
Insofar as this "increas[ing] the risk of social instability", one reason for this is that more and more money is flowing to capital which doesn't even know where to invest it. The main reason so much capital is idle is due to existing overproduction (which you could also call underconsumption, it's the same thing). Workers/consumers are short-changed, so can buy less, whereas more money goes to capital, to build more products - for people who can't afford them. You can see what the main problem is. Consumer debt can solve this temporarily, but if the cut of the pie stays the same, it just postpones the crisis and makes it worse.
Things are fairly simple - there is an aristocracy of heirs who own rights to expropriate surplus labor time (which they call profits) from those of us who work and create all wealth. They are very well organized in industry, government, and media. They don't want the people who do the work and create the wealth, us (most of us), to be organized and as aware as they are. They say unions breed laziness, but these heirs have never worked a day in their life.
Why take from the rich to give to the poor when the way they get their money is flawed (in the main). Address the root cause: fiat issuance against land.
edit: I cannot reply to you as yet again the faux HN "you're a georgist submitting too fast" has come out so here is my reply:
Not that many jobs are going to disappear overnight in a step change. BI alone is totally flawed as a concept because it utterly fails to comprehend credit issuance against land as the driver of "money" creation and the effect that has on rents.
Evidence?
Generalizing to all property markets, particularly ones not as supply-limited seems a stretch at best.
Furthermore, I see no evidence that SV landlords manage to soak up all the income of their tenants, not by a long shot, or where are all the fancy cars, motorcycles, planes, etc. coming from, never mind all the high tech gadgets?
Oh, absolutely. But so many of the cities in high demand are supply limited. I wouldn't expect this to hold in a Houston, Atlanta, Phoenix, or a rust belt city.
If housing were monopolistic in supply, and completely inelastic in demand, that would be remotely plausible.
> Why take from the rich to give to the poor when the way they get their money is flawed (in the main).
Doesn't the "when" part of that answer the "why" part?
Right, and we should bear in mind that housing competes not only against identical units in similar places but also longer commutes, alternative living arrangements, and leaving the area entirely.
As a Georgist, I tend to view Marxist critiques such as this as fairly superficial. We agree that something wrong is happening, but a Georgist is able to pin-point the point of unfairness and recommend a remedy, whereas the Marxist believes that any employment generates a "surplus value" (how?), which I'm skeptical is true much of the time.
In short, I see this line of reasoning as the result of conflating capital and land, at the expense of the honest employer.
Unions are clearly a powerful tool to allow for collective bargaining, and advance the position of labor. But I don't think it affects the fundamentals of the economy―what is being produced, where. I tend to think unions have declined in America largely because the efficiency of our economies have declined in the places they were most effective.
While both sides have perfectly valid arguments for and against unionization, there is no compromise or middle ground to be found, only partisanship from the politicans who are charged with finding compromises, who have the power to make and break unions.
I do agree with your point about efficency declining, but I also smell a fish when it comes to partisan politics surrounding unionization of workers. Both sides seem too concerned with ultimatiums and heel-digging.
Surely there is a way to compromise, but if neither side will sacrifice you can't get anywhere at all.
At some point, it's pretty easy to see that the anti-unionists simply want to destroy all unions and collective wage-bargaining. End of story.
Okay, let's imagine we unionised. Unions fight for better pay and they win. Wages go up, labour captures more of the surplus value they add. Disposable income is up.
Are happy days here? No. Our system issues credit against land. People have more money now, they can pay more for land. Banks, literally 2 days after your unions get their victory, start lending more. How do they know how much more to lend? They are going to saturate all that extra income with the cost of carry of debt.
How can we stop this? Land value tax. Tax land not income. Stop the speculators who know that our current system funnels all productivity gains into land.
And in fact if you did this you would let labour save again and they would be able to refuse to work for a pittance or for a bad boss. We would still need unions, but labour would be less oppressed because we have solved the problem at the root rather than seeking to counter a side effect of the main problem: rentiers exploiting a flawed system.
as far as I understand it, no, it doesn't. the currency issued against NOTHING except "the full faith and credit" of the Federal Reserve. the only thing backing the currency is the principle that loans made by the Federal Reserve will be paid back, with the stated interest, no matter what.
It's true that to some extent, their assets are land (real estate is a common collateral). It's not shocking that land busts and banking crises tend to coincide.
there are many other categories of credit that rarely use land as collateral. small business loans don't (or almost never do, in any case). corporate bonds don't either. consumer credit (including student debt) is totally non-collateralized.
Banks create mony when they lend. Fed doesn't constain this.
My older either used to be a professional chef working at top restaurants in NYC. One day I asked him what the most important thing a restaurant owner can do to be successful. His answer: "own your land or else your landlord takes all the value you create by raising rents to the most they can get before you call it quits."
Evidence?
I would (and already have, for myself) condense your post down to: Capital has figured out how, and decided, to keep a larger share of labor's product.
The so called recovery from the Great Recession included the paradox that corporations were recovering and thriving, but individuals didn't feel so. "But we're doing so well!" they say, as they gaze at the ticker. Well, not so much. Look down.
"JPMorgan CEO Dimon says in annual letter that there's 'something wrong' with the US"
http://www.cnbc.com/2017/04/04/jpmorgan-ceo-dimon-more-busin...
It appears that business and political leaders recognize that a problem exists, but are not willing to concede that the solution might not be beneficial to corporations. Income inequality is not going to be fixed with the rollback of regulations and a reduction in the tax rate.
So you have a high demand for labor coupled with a lower supply and thus increased wages. Labor was a contributor to it, but not the main driver. As other countries became industrialized and more people that had previously not been in the workforce entered, the supply and demand for labor in the United States changed and the industries that were heavily unionized got destroyed by the competition (see the auto industry)
I recommend checking out his work, but if anybody is curious about details of his economic theories, AMA.
Edit: I'm not complaining, this effect has dramatically increased the values of the two properties I have owned (one after the other) during that time. I fully expect to come out well ahead, but it will be a problem for my children. I expect to have to help them fund their first property purchases, perpetuating the cycle.
This is a big reason so much of urban planning today has latched onto Value Capture of a way of financing infrastructure. In cases like Hong Kong's subway system, you can pay for world-class transit without any additional taxes, merely letting the subway capture the increases in land values that it creates.[1]
[0] https://en.wikipedia.org/wiki/Henry_George_theorem
[1] https://www.theatlantic.com/china/archive/2013/09/the-unique...
That seems like a side effect of the global crash in interest rates: People buying homes with cash are currently competing with borrowers with much less than 20% down and low interest rates.
btw, this is somewhat intended, and is the reason the Fed dropped rates to zero in the first place. If assets were not reflated, the recession would have gone much deeper. Unfortunately, "assets being reflated" means, as one example, people buying assets (homes) with cheap money.
It will be interesting as rates return to normal and the Fed starts to shrink its balance sheet later this year.
1) Economy sags, people have little demand to borrow money for investment
2) Interest rates are lowered to spur investment
3) Investment takes place, economy recovers
4) People are much hungrier to borrow money for investment, so interest rates increase
We haven't reached (4), and in addition, it should seem surprising that borrowing money to put it into real estate will help the economy to recover. Unlike investments into production, an investment into land doesn't seem to actually affect supply and demand in a way that will help the economy grow.
Completely unrelated.
Usually that's right. Since there were a ton of MBS (and CDO's etc) based on real estate, there was a lot of incentive for money to flow to individuals and reverse the crash.
Now that the banks have delevered, a crash in real estate would not be the systemic event it was in 2008. Of course, the bagholders would be those holding the assets.
The FED has predicted they'll do something about their amount of debt pretty much every month (except, I believe, 2 months) since 2009. Initially they were going to raise interest rates to 0.25% in 2012. They repeated that prediction, increasing the rate they were going to hike to (e.g. in 2015 the prediction was a raise to > 0.5% immediately). They finally "hiked rates"[1][2] in december 2016.
[1] With the VERY important caveat that there are no plans to reduce the balance sheet. In other words, as long as you owed billions to the fed 6 months ago, you're still lending for free to some extent. In other words, we can have an intelligent argument about whether interest rates are "really" above 0% or not.
[2] Also to be taken into account is that European, English, Japanese and Chinese interest rates are still negative. (QE = negative interest rates)
Excellent Graphic of FED predictions here: https://www.bloomberg.com/graphics/fomc-dot-plot/
It's a fantastic read. Great author. Great person. Once you see his ideas you will view our "economy" utterly differently and IMHO for the better.
If that seems a bit too much, I recommend first essay in Robert de Fremery's "Rights vs. Privileges" as a short overview of George's concepts.[0]
[0] https://books.google.com/books/about/Rights_vs_privileges.ht...
A la carte, experience and evidence would seem the way to go. Unfortunately, if you adhere to a system, some of the items on the buffet are just off limits.
However, what confuses me is that they justify land value tax by claiming that society is what gives value to the land. Eg: Making a subway increases the value of all houses in the area, subway is built by tax payers money, hence the value should accrue to everyone.
But by this logic, shouldn't all luxury goods also be taxed similarly? Eg: Diamond/Gold etc. You pay some money for it and keep with it you. The value increases in proportion to its scarcity (society's inability to find more of it) and decreases with their abundance.
Similary, every product's market price can be split into its intrinsic and community-driven price. Simply because they aren't sold at cost price but at the one decided by the market. Also, every company utilizes community resources (transportation/electricity etc). I am not sure how to even start thinking about this final segment. How is the land value going to compensate for these additional services? Or are we ignoring these because their contribution will too less?
And building up isn't necessarily a solution -- it's exponentially more expensive to go up, because you start needing things like elevators and full time building engineers and so on. So going up only keeps things the same, as the price per square foot of going up is higher, only elevating the cost of that land.
Building out also isn't a solution, because people want to be close to the city center or the things they go to the most. Self-driving cars may help with this issue in the long term, but not the short term.
This blog post[0] summarizes some of the issues.
[0] http://meetingthetwain.blogspot.com/2017/01/live-work-commut...
Self-driving cars won't help in the long term either, for the same reason traffic is terrible in sprawling cities like LA today. Fast, high-density regional transit is needed and even that is only a better constant factor. The N^2 or whatever scaling problem remains.
Building costs are not a complete explanation for the current astronomical prices. Political choices to restrict construction play a huge role.
If a tax on holding onto unimproved land is nearly zero, we're very likely to implement zoning laws banning development, because citizens have little reason to change things. But if the holding cost increases, (say with a significant Land Value Tax) folks now have a reason to legalize development.
...Californians should consider the role of Prop 13 in its current housing crisis.
Artificially suppressing property taxes to protect entrenched owners is a lot like taxing the internet to support newspapers and record stores.
Currently, why do people buy real estate as an investment? It's not because they believe the actual building materials will become more valuable, but rather that the land will. We see far more of "land banking" than speculation in commodities, insofar as commodities tend towards marginal cost.
Anyway, if a land value tax is in place, the land value increase won't be captured as profit, and thus all locations will only be used by people who mean to use them.
There is no reason to believe that middle class residents will be "chased out." However, we would see market incentives that would lead to gradual densification in residential areas that are encountering rising demand.
Then you won't have people hold on to inventory just for the taxes, and eventually things will even out as people sell each year.
Anyone who's been in this situation could explain the reason why: because most of the good jobs are in cities. But then answering the question of "Why are the good jobs in cities?" brings us back to square one, where we have to consider China, robots, monopolies, etc.
To find that a small city that used to have a manufacturing plant is now struggling shouldn't really be surprising―the city never really had a robust economy, and it's hard to say that it really has a future.
Getting a functioning economy that works is really a sort of black magic―when it happens, capture it! Our big cities are one of the surest places we see it, so maybe the real question isn't "why are people moving towards larger cosmopolitan cities," but "why are we making it so hard for our cities to accommodate them?"
[0] http://www.efficology.com/the-gift-of-relationships/apprecia...
And that's aside from all of the other issues such as friends, culture, things to do, and, frankly, local politics.
A lot of Europe is 2-6 stories over large areas, and that works pretty well and is quite doable with the technology of 200 years ago.
These are all understood problems.
While it is true that the surface area of the ellipsoid is not changing, economic resources are only counted when they can be brought to market. You don't usually create new [economic] land by dumping dredged sand into a harbor--though such projects do exist. More often, new land is brought to market by building a road to it, or an airstrip on it, or a pier on its shore.
And such land is not fungible, it most often has multiple competing uses, and some non-competing uses. And those uses can be amplified by capital improvements.
When I want "land" in a city, that's usually at least 75 m^3 of interior building volume as a safe location to sleep and store all my useful stuff. You can make more of that in the same footprint by erecting buildings with more floors--not even necessarily taller, just more floors. Or you can dig down, and again, add more floors.
And I value proximity by time, rather than distance. So you can make land "closer" to the city by enabling faster transportation. The 50th floor of a building with a fast elevator is closer to the ground than the 50th floor at the same physical height, but with a slow elevator. The suburb next to an expressway is closer than the one without convenient roads.
We really still have plenty of available land, barring situations like Hong Kong or Singapore. The Chicago-Pittsburgh megalopolis has more untapped land supply than the Boston-DC megalopolis, but those acres can all be gridded and developed to the limit of human engineering ability, which is a pretty darned distant limit.
The problem is usually that development is often politically constrained such that supply cannot change as quickly as demand. You just can't build fast enough in Silicon Valley, and you just can't demolish fast enough in Detroit.
Bringing land into use is a service ie Labor.
Hope this helps.
I suppose we're all buying and selling the labor from surveyors and the register of deeds then. It is certainly convenient for some people to call this legal right to exclude all others from exploiting resources from a defined area on the surface of the ellipsoid as "owning land".
Same thing as natural resources. You are conflating two separate things.
What gives Land its economic value and meaning is its relative difference in productivity ie marginal vs inframarginal Land.
The Saudis are rich because their oil reserves are cheap to exploit relative to those found at the margin of production, like Canadian Tar Sands.
That difference isn't due to the efforts of the Saudis supplying it. It is purely natural advantage ie Land.
What is true of oil is true of all natural resources, but particularly 3D space ie Location.
Hope this helps.
It is all humans. The energy and engineering requirements of exploiting land pale before the sociopolitical requirements of exploiting it for any particular person's benefit.
A human is not a sellable slave until a slaver captures him and drags him to the block. The stolen goods are just goods that have been detached from the previous labor of legitimized title-service and security providers.
Inanimate objects have no intrinsic value. Every last speck of their value comes from human desires and expectations.
Imagine, if you will, two planetoids orbiting a star 1000 light-years away. One of them is 100 million metric tons of shiny 24K gold. One of them is 100 million metric tons of stinking manure. Which is more valuable?
Their solution was to buy off labor with democratic socialism, and then once the threat of exapropriation had past (1970s), claw back the capital. They neutralised the threat of labor ever being a threat again by identifying the potential leaders and co-opting them into the upper-middle classes via universal education and scholarships for the very talented - they wanted to make sure there was no risk of another Lenin arising.
All in all it has been a brilliant play, but we should not forget the rich have been advised by the best and brightest for sometime now.
Anyway, I find it unfortunate that the most frightening reform in the face of the rentier class is Marxism-Leninism, a system that simply doesn't work. It honestly seems strange that the radical proposals of Henry George (and his Land Value Tax[1] that would confiscate all rents) aren't used anymore to challenge this class.
Last time Georgism infused economic reform, we had the age of trust-busting and worker protections. I hope I'm not dreaming when I think this could return.
One thing I have thought about recently is that with better ML if it would be possible today to model the economy well enough to now make Marxism work in practice. The soviets tried in the 1960s using linear algebra, but their models were not practicable. At some point it should be possible to model the economy well enough that capitalism is no longer the only viable alternative.
But like any man-made system, how do we guarantee that the system isn't trained on inputs that generate bias? For in a large economy, bias in allocation is a form of human suffering, large or small.
It'd be a very poor outcome for a neural network that it refuses to consider a new industry that it wasn't trained on... imagine a network trained in the 1950s introduced to the technology of today. (Though perhaps a different way of framing things would let this fall away.)
In general, a market of prices is a useful system for measuring how much people want things. Without a price system, we'd need some new way to measure this...
It is much more effective in moving wealth from one elite to a new elite. The problem with Leninism is that it basically sets up a "us vs them" system where those best at exploiting that mentality ends up on top. Hence people like Stalin.
It was not lack of supporting technology that made the Soviet Union fail, but that they started with a coup d'etat against a liberal socialist government that actually had a support base, and from then on whether or not a theory was pleasing to the party elite mattered more than whether or not something was productive or scientifically valid. See for example Lysenko.
You can not achieve productivity in a system that is geared towards punishing you if your ideas displease a leadership that is there largely because they are the ones most willing to grab power and with least compunction to use it.
This is also by design, as this was the Reaganite answer to the stagflation of the 70s and a reversal of the income distribution that was forcibly enacted by the New Deal.
America had the prosperity of the 20th century due to explicit programs to create a middle class. Beginning immediately following the 1929 stock market crash with the New Deal, and through the social welfare programs of the 40s of the GI bill and mortgage lending we intentionally created a middle class and society prospered.
If we as society want a middle class we need to create it. In action will remove it as things fall back to historical normal, and actively working against activities that build and support the middle class (like destroying unions) will end it faster.
The other issue is the difference between short term and long term economic efficiency. Optimizing for capitol over labor will almost always provide more short term efficiency. Adding more cheap labor will almost always increase profits. But longer term our society will be always be better off if a larger percentage of our population can be educated, and financially stable enough for invention and improve productivity through technological innovation.
The more people who can have an idea and join the capital class, the more efficient our economy will be. A middle class is exactly what provides this.
Long term economic productivity is dependent on a middle class. Look back throughout human history, times of huge social and technological innovation almost always follow a sudden increase in free time for the average person (ie time beyond the work needed for survival).
If their employer is a monopolist of labor, and the laborer has no ability to move and find employment elsewhere, their employer enjoys full rein to demand whatever wage they can.
However, if an employer functions within a competitive market of labor, you should see labor fetch a fair wage. This could be in the form of self-employment.
...If employers are able to negotiate more effectively and take more of the share from labor, it almost certainly means that labor is being denied alternatives.
The real question, I think, is which alternatives have changed, and why.
Anyway, when the "company town" economies were thriving, they usually coexisted with unions, to help balance the ability to negotiate wages.
...The fact that we're seeing labor's share decline within cities (where there are clearly many employers) dispels me of the concept that monopolies/oligopolies are responsible for this decline.
Meanwhile, working in a funded startup and just getting a salary is a much better and sure way to earn money than investing in one. Who knew - different supply/demand balance from a mostly automated factory gives you a different outcome.
surely you're joking. there are not free markets in the entire world. there are only variations (in degree and kind) of market distortions in the real world.
Unless you and your counterparty exist in a vacuum, there is no such thing as a free market.
We've lost control of terminology, we are using rentier terms to debate against them and therefore we are going to lose. This is a classic way to control.
edit:
But they may well be producing absolutely nothing. If you have one company creating wealth and another appropriating the same amount Bloomberg would say that is twice the "productivity" of one entity. But we don't have more. Often many modern companies, due to our fantastic surpluses as a society, destroy value by inhibiting wealth creation as part of their appropriation.
It's critical we get control of these terms otherwise you are walking straight into a trap that will defeat your point.
The global economy is a complex dynamic system, and doesn't lend itself to accurate modeling. So finding cause and effect is an impossible game - especially a single one.
[1] https://en.wikipedia.org/wiki/Fallacy_of_the_single_cause
This is not U.S. centric problem at all. Labour share has been in decline in all OECD countries since 70's.
Pickety's argument amounts to (IMO) that this is the mature state of our current system. Capital generally grows faster than labour and (if it isn't spent), accumulates over time. I think he also implies that it's brought on (or exasperated by) prolonged peace.
One of many ideas... "Capital" is defined (often explicitly) primarily by it's income generating potential. The iconic economist's definition of capital is factories, but most capital today is almost entirely abstract. Companies are some IP, but mostly it's just people. Contracts with people, cultures of people.. Banks are neither. Banks are mostly capital and contracts relating to capital. What does destruction of capital even mean today?
I Krugman's point is tautological. If capital s big relative to labour in a company, that company is by definition labour intensive. "Capital" in modern times just means the amount of income that capital generates. Thinking in terms of factories is (IMO) just wrong if the economy isn't mostly factories.
In any case, I don't think we know what's going on with any useful degree of certainty.
From the article:
> Then there’s the idea that landowners, not corporate overlords, are taking money away from workers. While analyzing the work of French economist Thomas Piketty, Matt Rognlie found that national income accounts showed an increasing amount flowing to owners of land.
It's worth noting that in Rognlie's analysis, once we take away the effects of land, the return to capital ceases to outpace production.
Anyway, as far as explaining the non-productive forms of capital we have so much of today―I'd simply conclude that they're not capital at all... Henry George's definition of capital, for instance, excludes them―he made a (IMO very neat) distinction between "Value from Production" and "Value from Obligation"[0] that is a very useful way for considering things. In time, things like "GDP" cease to seem very accurate or meaningful.
[0] http://schalkenbach.org/henry-george/science-of-political-ec...
There was a short supply of people able to do some labor, but demand was high, so wages were high.
We've succeeded at that so wildly, and automated so much of our lives, that we have bountiful free time to train to be successful in modern jobs.
...while there is some specialization in modern jobs, there's a lot of jobs that are NOT THAT SPECIAL. So the pool of people who would be capable of doing them with no or a small amount of training is HUGE.
So wages are low.
There's no magic here, folks.
Meanwhile, Capital has chased not just profits, but OWNERSHIP of profit-generating entities. Rents, right? And they've been wildly successful at it.
If you read about the power labor had between WW2 and the 1970s it's so alien, it's like science fiction.
High taxes on labor both reduce wages and cut spending power of working Americans. Then, the money that is removed from the economy by income taxes is then re-created by the federal reserve system and lent out to banks at extremely low interest rates. This money is then lent as consumer credit which redirects wealth to those who own capital in the form of interest.
Essentially Americans are forced to borrow their own money to survive until they can no longer borrow and go bankrupt. The solution is easily executed and within the power of congress or even the president. Reduce taxes to create a deficit then offset it with higher interest rates on corporate credit. Then nationalize the dividends paid out by the Fed to other banks to offset the deficit even more and start charging banks for services they receive through the Fed.
Right now we essentially have a giant welfare system for banks in America that is slowly turning non-capital owning Americans into paupers through constant inflation and wage stagnation.
> Economists are therefore scrambling to explain the change. There are, by my count, now four main potential explanations for the mysterious slide in labor's share. These are: 1) China, 2) robots, 3) monopolies and 4) landlords.
...but rather an effect. (Labor's return is declining, so of course a greater share goes to corporations.)
Should we expect this to continue, or will the knowledge economy come to smaller cities, too? Will VR and telecommuting affect this trend?
I think the answer is self-evident: the inland cites are undergoing apoptosis by way of opioid suicides and migration to the coasts as inland economic nutrients dwindle away.
Building new cities on the coasts of Africa might be the best way to go.
With productivity falling in the last 10 years [1], companies that are labor intensive can't grow as quickly those that can grow faster by automating their production. https://www.bls.gov/lpc/prodybar.htm