## Saturday, June 25, 2016

### The Euphemism We Call Globalization and the Real though Non-Proximate Causes of Weak Wages

When folks of my generation were kids we played a variety of board games, especially in the winter or when it was raining outside.  The best of these was probably Monopoly, though it took a long time to play till conclusion.  Another good one was Risk.  There were other games as well that we played for variety, though they were not as good.  For Monopoly and Risk I can recall quite a lot of detail of how the game was to be played.  For most of the others, beyond the name of the game I'm mainly drawing a blank now.  The one exception is Life.  It had several idiosyncratic features.  The one that comes to mind now is the Share the Wealth Card.  I'm going to use that as a metaphor in what follows.

* * * * *

Yesterday, for no apparent reason, I did a bit of arithmetic to determine per capita wealth in the U.S.  There is a lot written about income and income distribution, but much less written about wealth.  I'm not sure why that is, but I think we should pay more attention to it.  These are my type of calculations - quick and dirty - the source of the numbers (Wikipedia) may not be impeccable and given the slide in the markets yesterday may be somewhat off for that reason.  With those caveats, let's begin.

Do a Google search on U.S. population.  A graph will appear with the current number 318.9 million people, then with the qualifier that this is from 2014.  You can scroll down to find a more recent number for 2016, but I will use the 2014 number and explain why in a second.  Next do a search on total wealth in the U.S.  The second hit is to a page on National Wealth across countries arrayed by the richest (the U.S.) on down.  The number is \$85,901 trillion.  This is for 2015.   If I could find a population number and a wealth number from the same year, whether 2014, 2015, or 2016 I would have used that.  So when I do the per capita calculation, let's keep that year mismatch in mind.

If you divide \$85,901 trillion by 318.9 million people you get \$269,366.57/person.  For ease in manipulation of the numbers I'm going to round that down to \$250K/person.  It's not precise, but it is in the ballpark.  Even with the rounding down, that is an impressive number to me.  A family of 4 that was right at the average would have a million dollars of wealth.  The average household actually has 2.6 people (I know this from other Census look ups and will not provide the link to support that number here) so that average household wealth in the U.S. is around \$650K.

Somebody with a billion dollars is then 4,000 times richer than average.  Mark Zuckerberg, who is purported to be worth around \$40 billion, is 160,000 times richer than average.  The uber rich live on a different planet than the rest of us.

Of course the wealth distribution is highly skewed, much more so than the income distribution.  There is a median household wealth number reported, \$81.4K.  (That number is from 2013, but I suspect it hasn't changed much since.)   Note that is about one eighth of the average.  That is a huge difference.  It is calculations like these that make you wonder why people at or near the median don't collectively play their share the wealth cards.

I want to give one caveat to this before moving on.  Household wealth should grow over the life cycle till retirement and then decline after that.  That is the normal pattern.  While working you save some of your earnings.  Those savings accumulate.  So that older households have more wealth than younger ones is to be expected and what you'd actually want.  The variation in wealth due to differences in age should be accommodated.  It is the variation in wealth do to unequal earning power that we need to focus on.

* * * * *

The news about Brexit has again brought into focus the anger of those who have been dispossessed economically and who are utterly disgusted with the elites in government and in business.  Trickle down was a con job.  Austerity as a response to the financial crisis was a wrong headed government policy.  The elites, who should have known better, appear so clueless.  One question is: why?

Two pieces this week highlight that the underlying issues are fundamentally economic.  The first, by Steven Rattner, is about our broken retirement system.  Too many people have not adequately funded their retirement.  After a few years, they will become destitute.  The 401(k) model hasn't worked.  People simply aren't saving enough.  The most obvious reason why is that they aren't earning enough so they defer the saving decision to keep up current consumption.  Further, they are not experts at managing their portfolios, but the model expects them to be.  So they can be hoodwinked by financial advisers.  Indeed, in the current setup that appears to be the expectation.

The second was this Shields and Brooks segment about voter disenchantment across the globe.  Mark Shields sounded like a broken record in this clip, ticking off one economic issue after another, each contributing to the malaise at the root of the anger.  Particularly prominent was debt from college student loans, which in aggregate seems to be breaking one record after another for the magnitude of such debt.  This is happening while the job market for many new grads remains in a torpor.  Despair over the situation then festers.

David Brooks for his part argued that there was a cultural aspect to this as well as the economic one.  How else can one explain the rise of nativism and anti-immigration sentiment?  Shields, however, was unyielding on the point that the cause was economic dislocation and hardship.  Nobody denies the nativism, but in Shield's view it is more venting than a perceived cure to the problems.  I would argue this is the consequence when those taking the economic hits don't feel that they have a share the wealth card to play.  Complaining is all they have left.

And yet all that anger is truly frightening.  The history lesson of the 1930s is very instructive.  Demagoguery is clearly on the rise now.  Read Amy Davidson's piece, Brexit Should Be a Warning About Donald Trump.  Indeed, it should.  If you are somebody of means now and you are frightened about Trump, what are you thinking?  So another question is: have these people of means reached the point where they are willing to give out some share the wealth cards, even if it means they will end up taking a hit financially, just to get everyone else to calm down?

I do not understand the thinking of the very wealthy, particularly the apparent need to continue earning a great deal during the working life, only to become a philanthropist thereafter and give away the wealth.  The logic of that pattern eludes me.  Why not share the wealth with employees, contractors, and customers during the working life instead?  I understand that earnings are one way to keep score in a game that Thorstein Veblen taught us about 100 years ago in his study of the robber barons.  But why hasn't that game been superseded by something else that is more socially beneficial and that should ultimately be more satisfying to those playing it?  This desire for hoarding beyond any reasonable bound might be justified if trickle down worked.  The evidence is plain that it does not.  It is probably in the province of the wealthy to decide whether, mainly out of obstinacy, we end up going down the path of demagoguery, uttering libertarian platitudes while Trump as President wrecks the country, or to prevent that outcome by lessening their claims on the pie.   I wish I had a better feel for how this choice will play out.

* * * * *

In this final section I want to took about the "logic of globalization" as it pertains to what workers get paid and then to consider other causes that influenced worker pay historically.  As I used to teach intermediate microeconomics, I will take that sort of approach in giving my explanation.

Globalization here means there is an internationally determined perfectly elastic labor supply curve.  Wages are set by that.   A domestic employer can't pay more than that wage, even if it were able to.  Were this employer concerned for the welfare of the employees and hence willing to pay wages in excess of market, that would violate the fiduciary responsibility that the employer has to shareholders.  Further, if this were done in a significant way, it would open the firm up to a hostile takeover threat, as the new management could pay employees only at market, make more profit that way, and justify the acquisition of the company accordingly.

This, I think, is mostly bunk, though it sounds a reasonable argument.  First, the idea to treat employees and other input suppliers as a cost rather than as a contributor to company value encourages a mindset that costs should be minimized and thus employees should be paid the bare minimum.  If employees were, instead, viewed as partners and co-producers, then sharing profits with them would be a natural thing to do.  Second, for large established firms there is an ample supply of retained earnings.   These are not being reinvested.  The retained earnings are just sitting there.  The magnitude is on the order of \$2 trillion in aggregate.  This is with large entrenched firms that have no threat of takeover, while in contrast companies in the 1980s that held lots of idle cash were candidates for hostile takeover.  Now, a good fraction of those retained earnings could be paid to employees.

Third, in these large companies the CEO and his/her cronies are major shareholders, if not an outright majority.  The expression fiduciary responsibility is itself a euphemism for selfishness and not to worry about the welfare of others.  This selfishness makes much more sense in a small, owner-operator organization.  As I've tried to argue above, it is hard to understand the utility in the selfishness of the uber rich.  It's more a vestigial organ.  If the CEO didn't inherit the wealth the selfishness may have been a driver early on  (though I bet for many who really liked the work it was more by-product than main product).  For example, consider the history of Larry Ellison, who until recently was the CEO of Oracle.

When I teach intermediate microeconomics I ask the students: when the firm earns economic profit (revenue in excess of payment to each factor of production at its opportunity cost) who gets the economic profit?  Sometimes this elicits a response - profit goes to shareholders.  In turn I respond to the students - shareholders are suppliers of a factor of production - financial capital.  They must earn their opportunity cost or they will take their supply elsewhere.  They need not earn beyond this.  This puzzles the students.  So they get quiet after that and ask me, who gets the economic profit?  My answer - it can go to any factor of production and might go to other stakeholders as well.

This has them puzzling.  How then does the economic profit get distributed?  My reply is that it is determined as the solution to a bargaining problem.  There are a variety of factors that impacted the outcome of that bargaining problem.
1. The rise of predatory finance.  You can think of the movie Wall Street and various Gordon Geckos out there.  Or you can think of the more recent movie The Big Short.  In the old (now quaint) view of finance, it is there to provide liquidity to companies that don't have enough of it and to help the companies manage their financial risk.    Predatory finance does neither of those.  Instead it steers economic profit to the predator and away from other factors of production.
2. The decline in financial regulation and antitrust.  Economic profit persists when companies have market power.  Competition should cut into that.  But competition can be blocked for a variety of reasons, in which case an alternative is for the government to regulate.  It has been increasingly reluctant or unable to do so.
3. The decline in unions.  Labor is now very weak.  I'm not sure that I would recommend reading Only One Thing Can Save Us, but it does make the point that a strong labor movement is consistent with high value industrial product and holds up Germany as the shining example for us to emulate.
4. Greater and greater myopia regarding corporate earnings.  Payments to factors of production in excess of opportunity cost breeds loyalty and may produce down the road returns as a consequence.  A company that takes the long view treats its employees well.  A company that focuses only on the bottom line today pays dirt wages.
I am not saying the globalization doesn't matter at all.  But it should not be understood as implying there are no degrees of freedom in setting the earnings of the have-nots.  There is a choice to be made.  Share the wealth cards might be issued.  Not doing so and hiding behind the label of globalization is myopic.  Isn't it time now to wake up and see the consequences of that?