The Stock Market vs. the Labor Market
theatlantic.com
theatlantic.com
First, corporate profits are aberrantly high for a number of reasons, none of which are likely to be permanent. John Hussman, an analyst whom I respect deeply, has a good discussion of this from the perspective of stock valuations, but the basic point is relevant here. [http://www.hussmanfunds.com/wmc/wmc130408.htm]
Second, while I agree that this is "the story" in a purely journalistic sense, it's important not to get too carried in discussions about relative income distributions and miss the forest for the trees, as it were.
Income inequality is not an informationally useful statistic on its own. Income inequality can be thought of as a measure of the strength of incentives in a system. Those incentives can be good or bad on their own. In 3rd world nations, income inequality is a reflection of the strong incentive to be corrupt and steal. In the closed system of Goldman Sachs, income inequality (among employees) is a measure of the incentive to achieve annual performance targets. In the context of the public education system, it is a measure of the incentive to achieve seniority and bureaucratic promotions. In startups it reflects the incentive to get acquired or IPO. Et cetera.
In the United States, when people say that income inequality is too high, what they're usually thinking is that the wrong things are being incentivized and rewarded. That's a fine discussion to have, and I would agree that certain industries [health care jumps immediately to mind] suffer from deep and severe incentive problems that are reflected when you look at income distributions within those sectors.
But the problem is not the income distribution; it's the fact that income is being distributed unequally for the wrong reasons. That is the conversion people should be having.
The sheer magnitude of income inequality is a social problem in its own right. It doesn't matter all that much if the inequality happened with or without corruption. What matters is that some people work hard and are rewarded with quite little, and have unnecessarily difficult lives as a result -- and furthermore, that the system appears to be trending towards _more_ of that, not less.
It's much more profitable to do a mediocre job in banking than to do a world-changing job of actually building things. Proximity to money is worth more than actual ingenuity.
The city leaders ask why, since they didn't build the locks or create any of the system that makes it all happen, they should share in the wealth above others, and above the work they do.
The Union leaders reply that the small percentage they're asking for will pay total about the same as they're getting now, and it better aligns the interests of both sides. Of course the city leaders eventually agree. And of course, the "modest percentage" steadily grows over time, with a multitude of clever, more complex shipping arrangements.
That's the financial system we have. They didn't build it; their brain power goes to make it more opaque, and siphon more to them. And with regulatory capture, the federal gov't abets it all.
I'm not saying they're not smart, I'm saying that the proximity to money has a lot more to do with their earnings than the value they're creating for the economy.
http://blogs.wsj.com/wealth/2011/09/22/are-we-entering-the-a...
Ultimately though, all talk of policy is a fools errand and utterly useless unless the overarching corruption in our political system is addressed. The free market dictates that companies can be expected to maximize their profits by whatever means necessary, and it's up to government to make sure "whatever means necessary" stays within an acceptable domain that protects key public interests. The primary requisite for the advancement of any civilization is it's resistance to corruption, and nothing short of a total overhaul will even put a dent on the decline we're experiencing. Until the era of pay-for-play and superPACS is brought to an end, legislation will always mold itself to induce the greatest profits for big corporations at the expense of every other interest.
EDIT: I should add as well though that the other side of this coin is that we as consumers CAN have a great influence outside of politics by voting with our dollars. If everyone refused to buy cheap Chinese goods and boycott Wal-Mart, enacting protectionist policies to protect American manufacturing wouldn't even be necessary. If we refused to put our money in banks involved in scandals or do business with their partners they'd soon be out of business. Alas, there in lies the other doom of the free market; as consumers we can be expected to act exactly in our own interests, which dictates buying the cheapest goods and most attractive deals regardless of the greater effects. There has to be a mass change in psychology, a great awakening. Hmm, good start up idea???!!
I live in a liberal area and I'm facebook friends with a lot of Burners (people who have gone to burning man). I see a ton of image macros and posts where people are implying that it's a moral wrong that businesses are doing well while we have high unemployment. :-/ For me, once I understood the (technological, economic) reasons for the difference it became less of a moral issue and more of a practical issue. (i.e.--- had to throw out my semi-useless degree and learn a valuable skill. My valuable skill is copy-pasting coffeescript!)
keywords: "For me"
Everyone seems to lose their empathy for the poor and unfortunate once they become successful themselves. But I bet before you landed your sweet coffeescript gig, that you were pretty empathetic.
It's not a practical issue. It's purely a moral one. We all enter the earth on unequal footing. The system rewards luck and pedigree more than it rewards effort and hard work. The very conditioning brought upon youth by poverty makes it so unlikely that they'll ever aspire to the heights of the upper class, or even the middle class. Access to education is still not equal, neither is access to food, clothing, or shelter. Try getting homework help from your parents when they are on drugs.
Don't forget it's a moral issue, just because you've experienced some relative prosperity. Society is selfish to boot.
What evidence do you have for this?
What's your explanation for the income distribution among different races? White people are just harder working? What evidence do you have that effort and hard work are rewarded more than luck and pedigree?
http://www.bls.gov/news.release/atus.t03.htm
Another data point - poor people work very little (by choice).
Lets say I was born in Darfur. Bad luck, bad pedigree.
Lets say I was born in Afghanistan. Bad luck, bad pedigree.
... do I need to continue
BTW, pedigree is not the same as "breed" -- it is the totality of everything, including what family you come from, who your parents are, and all that. Society judges you heavily, just based on that, starting with your first day at school.
To become an elite upper class person, family helps a lot.
What I'm saying is that we should get rid of the idea of not having a wage job at all as inherently less respectable than working with anything and introduce a guaranteed minimum income.
I can't help but agree that a policy of full employment or guaranteed minimum income is going to be necessary in the not-too-distant future, unless we're comfortable living in a society where most people are destitute because they weren't born to already-rich parents.
Ultimately you end up with a large portion of the populace dependent, and hence politically powerless, undermining democracy and our republic.
The real answer is, as usual, the harder one - continually improving education and access to education for the lower and middle segments, breaking cycles of poverty (and violence where applicable), eradicating Learned Helplessness [1], building better tools that enable more people to adapt to a new environment where machines have supplanted humans for some tasks but not all (FOSS and 3D printing being particularly interesting here).
It's a hard, imperfect task that will never be finished, but better than making the entire world completely dependent on a few.
Nixon tried this in 70's. It came surprising close to passing on the grounds that it would be far more efficient and lead to better outcomes than the patch work system of social programs we currently have.
http://www.goodjobsfirst.org/corporate-subsidy-watch/hidden-...
Is it because the employer isn't paying employees enough or is it because the employee made poor life decisions (had kids too early, didn't learn any marketable skills, etc)?
Minimum wage isn't meant to support an entire family. There are plenty of places you can rent these days that are cheap (Just looking on craiglist, I can see rooms for rent that someone can easily afford on minimum wage) and you can buy cheap food (Walmart is the cheapest in my area).
It isn't ideal or easy, but it's not impossible. A bigger problem is the education of our citizens on life decisions that may cause difficult times for many years to come in their future. No amount of government regulation will solve these issues.
The other problem is globalization. Many people here love the Internet and the freedom it brings, but it also brings competition from countries like China and India.
WOW! This is not only textbook false dichotomy, but also a fundamental attribution error [1].
"Had kids too early" - what if their pregnancy was a result of rape, and they could not afford an abortion (or it was illegal in their state)?
"Didn't learn any marketable skills" - what if they weren't born into a good family and didn't have the role models that could teach them what skills are marketable in the first place.
[1] - http://en.wikipedia.org/wiki/Fundamental_attribution_error
The Walton's fortunes are built by trading for our labor, benefitting both. This does not obligate the Waltons to pay "living wages" where the value of one's labor does not rise to the cost of one's living expenses.
A thing is worth only what another is willing to pay for it. If others are willing to do the same work for the objected-to price, you're asking too much.
Of course the company gets more value out of the work than the employee. If it were just break-even, the question would be "why bother?" and either just not have the work done, or find a radically different way to get it done (say, hiring Roomba if the cost of human floor-sweepers gets too high). The great thing about employment is BOTH get more out than they put in - yes, that includes the employee working there instead of elsewhere for lower pay, or not being paid for not working anywhere.
Sucks, yes, at times. Most of human history involved a lot of effort to eek out a meager existence. If you want more, you gotta do more that others are willing to pay more for.
Oh, and yes - you ARE asking for a "living wage from somebody's personal bank account". The Waltons are people too.
although the comment that I was responding to (yours): "How moral is it to not earn a living wage, but expect others to supply it anyway?"
presents asking for--or rather receiving-- a raise as immoral.
I was pointing out that people are already earning a living, they are just not being paid it.
Supply-side economics do have a grain of truth to them, a very small one. The problem is they are "trickle down" and there are a lot of people who need a bit more than a light sprinkle to happen.
From an efficiency point of view, some inequality is interesting. You need to aggregate some capital for investments to occur, you need rich people for high risk investments to be possible. However, as in most systems, there is an optimum point. Beyond a certain level of inequality, the system becomes less efficient.
Herein lies the problem with the job creators argument. It is not fundamentally wrong, but it is wrong for the current level of inequality. We are past the optimum and, for society and the economy to gain efficiency, inequality must be reduced.
Are you suggesting we get rid of the unemployed? That would certainly increase "society efficiency", I think (not sure how we measure that again). But if we want to reduce society to numbers, its easier to get larger swings in variables if we have smaller population sets to work with. We don't have to get rid of everybody to meet optimal efficiency numbers, because the process of getting rid of people will definitely provide job opportunities for others.
Just for reference, in terms of efficiency, you'd want every available worker producing added value. Unless your definition of "get rid" is deport or kill, having unemployment worsens efficiency.
But you're right, he was probably only suggesting theft.
No, you need economic capital for high risk investments to occur. However that capital is distributed is really besides the point.
From an efficiency point of view, high risk investments probably shouldn't exist at all. In a production model where goods and services are produced based on what the people need and can realistically attain in a sustainable manner, rather than tricking people into thinking they need things, you don't need to take very high risks.
2) High risk investments are needed to get out of local maxima. One easy example is electric cars. They're obviously inefficient today, because oil based transportation is a local maximum for the utility of cars. In twenty years? Probably gasoline powered automobiles will be a minority of sales. Another easy example: private space exploration (spaceX, Virgin Galactic and such). Hardly profitable today, probably very profitable in a few decades.
More people are increasingly willing to give more money to fewer people. The key is WILLING. People CHOOSE to hand over their money. For all the complaints/accusations about unfair business practices etc., fact is people wouldn't be handing all that money to "them" if not for receiving something of equal/greater value in return.
Are there centralized influences, operating toward their own interests? Of course. Always have been. Those pursuing an effective strategy of sales & social normalization of X do so because it pays off. In a world of increasingly homogeneous media domination, putting up significant sums to buy influence pays off - hence the increasing concentration of wealth, supplying what can be marketed to increase demand.
This influence is not, however, infinite/total in scope. Options exist. You don't have to buy into anything "they" manipulate you to. It's still a choice. You can say "no" and buy elsewhere or do it yourself. Corporations are not gods; they are not omniscient/omnipotent/omnipresent, and do not strike you down with brimstone if you fail to buy their goods/services. You can turn off the TV, choose your own teachers & influences, and spend your money with whomever will trade as you see fair.
That much of society submits to such influences, well, that's their choice. I've chosen not to abide by those choices in large part, and know that where I do it's MY choice, and that I have options thereto.
Selfish influence arguments aside, there's also the matter of just doing a good job supplying what people need. People need Y, company Z does a remarkably good job of supplying it, people pay what it's worth to them (or less, what a great value!), and Z pockets the net profits. So? What's wrong with reaping rewards for a job well done?
BTW: This is Hacker News, on Y-Combinator, devoted to the notion that anyone can concoct something techy and - with a goal of profit - persuade others to buy it.
As for the ultimate power of an individual to choose freely, I totally agree, but I won't pretend for a second that society doesn't always influence my choices in one way or another. That would be arrogant and short-sighted, especially since, no, most people don't get to choose their teachers and influences until they're 18.
Wealth acquired from evil means, like corruption, theft, coercion and taxation, is evil no matter your moral stance, and that's the only wealth that should be fought against and given back to its original owners.
Whatever the means and however the distribution methods.
Once people realize currency is a man-made thing, and is not necessary to live fruitful, productive, enriched lives (the one real hurdle left is energy self-sufficiency), the system will finally be able to balance itself.
The fact that more and more startups are learning to self-govern is more reason to be optimistic that the social constructs that rule our worlds today are going to be a thing of the past. Hopefully sooner than later.
Sure it wouldn't be as easy for many, but imagine a line below which folks who live in a currency-dependent economy would actually be better off to leave it. As more and more people fall below that line, the alternative way of life becomes more viable to sustain itself.
The thing that the wealthiest folks don't seem to realize is it's in their best interest to ensure the little guy has money. When a significant percentage of the population loses incentive to accumulate wealth you lose value on a global scale.
"The focus and concern shouldn't be how much the top 1% are making, it should be how much the 99% are making, especially the bottom 50%. I dont really care how much money Bill Gates and Donald Trump are making. Their income has absolutely no effect at all on my income, what I'm most concerned about is how much money I'm making.
The economy is not a zero sum game, where if the rich make a trillion more it comes out of the pockets of the workers. This notion is childish and wrong. Trade only happens if its mutually beneficial for BOTH parties, this applies to workers trading their time for money. The chart above shows corporate profits going through the roof but at the same time labour income is INCREASING.
The first chart shows labour income increasing over 1000% in forty years. It's not noted if these are nominal gains or inflation adjusted gains. Given the dip in 2009, I think these are real gains and represent real growing prospertity for workers. Maybe a 1000% increase isnt enough but the chart clearly shows workers income is rising.
There are not alot of TVs, computers and cell phones being assembled in the US but this is a good thing. Cheap foreign labour for all Amercians to have these goods. If flat screen TVs were assembled by UAW workers in the US TVs would cost $2000 and far fewer people would have them.
Having a million in cash on desert island is useless. You'd rather have a clean drinking water rather than small pieces of green paper - it doesnt even burn very well. Money isnt valuable in its self, money is valued for the stuff it can buy. Prosperity isnt just how much money you make, it's how much stuff you can purchase. $10/hr in the US is a struggle, $10/hr in India is quite comfortable.
Maybe 1000% increase in labour income isnt enough but cheap foreign labour and global trade have amplified that increase. Advances in technology and product quality have benefited the middle class more than the rich. The rich could always afford quality and latest gizmos. Now nearly every one can afford them."
Actually if you graph real per capita labour income, it's decreasing. Labour income as a whole is only increasing because of inflation and population inflation.
wouldn't have caught that.
Perfect example of that old saying...
"There are lies, damn lies... and then there are statistics."
What you see is an economy replete with goods and services, but by and large one in which the people getting rich neither make, consume, nor develop the technology to make those goods. It takes a special sort to see all the gains in wealth go to the investor and manager class and argue that this is the proper order of things.
Yes, thank you. Irritates me to hear people pontificate about the importance of "incentives" in the system, with the only real concern of economists being the overall increase in production and wealth. It's as if the distribution of wealth is of no concern whatsoever to economists and business people.
I don't think anyone sees it as the proper order of things. For one thing, only central planners even think in those terms. For another, there is no obvious policy that will have a better overall result in a large country like the US -- remember, every policy has unintended consequences and doesn't always turn out like you plan.
US Real GDP
Dec 31, 2012 13.67 trillion (43,600 per person)
Dec 31, 1972 4.75 trillion (23,750 per person)
PS: The problem with looking at the stock market value is it responds to far more than just the expected future dividends. When bonds are paying 1% a dividend stock returning 3$ a share is worth a lot more than that same stock when bonds are paying 4%. Dividends are a much more useful when doing economic analysis.
"It's not noted if these are nominal gains or inflation adjusted gains. Given the dip in 2009, I think these are real gains"
Seriously? Seeing a tenfold gain in labour income in the graph, taking it to be in real terms is the more plausible option?
Here's an inflation-adjusted graph, albeit not (I think) of quite the same data:
https://en.wikipedia.org/wiki/File:United_States_Income_Dist...
PS: Millions of 'Disabled' workers benefit from social security which is far more a social program than a retirement program.
That is not true. People often trade out of need, and a lot of time, desperation. It is not mutually beneficial. That notion is so wrong I am not sure how to begin refuting it.
I don't care if there are people with 100's of millions of dollars but when I know their wealth is increasing at very fast rate it makes me think they'll be okay if we 'level' the playing field
As a thought experiment, imagine you had a million dollars and wanted to use it to make more money. Then imagine you have a thousand. Isn't it much easier to make money, when you already have money? Things like diversification, favored rates on investment and economies of scale/scope only appear at the upper end of investment. While we may be able to tweak things, the fact remains that gains may just be easier to come by at the upper end of the spectrum.
I'm genuinely curious about this point. Every dollar in pay I cut from my worker's salary is a dollar more in my company's pocket, isn't it?
The carpenter keeps all the wealth he creates for the first six hours of work - all $160 worth. The last two hours he keeps none of the wealth he creates - it goes to the woodshop owner who rents the woodshop, owns the mechanical saws etc.
This is how business works. It is obvious. Of course there are caveats, which Marx spends thousands of pages covering - only a fool would reply to this saying my summation of thousands of pages in a short HN comment missed one of those caveats.
It is also obvious how in a system like this, the owners are making money while the workers are stagnant or doing worse. And the method owners have of doing this is obvious - either have the worker work more hours for free per day, or try to somehow increase the amount of wealth that is created every hour. Obviously both methods are used.