Class War!

by Will Wilkinson on July 10, 2008

Time interviews Barbara Ehrenreich:

Some argue that today’s basic standards of living surpass anything the nation has enjoyed historically. What’s your response to that?

Well, I certainly wouldn’t want to live in the 18th century myself, or the 19th either, for that matter. I am operating on a slightly smaller time frame here and thinking that there has been a real increase in inequality since the 1970s. In recent years we have seen stagnation in average people’s wages and salaries and a decline in the benefits they get from their employers. So in recent years I don’t think we have been fulfilling that kind of potential that historically we have always felt was America’s.

What do you think are the primary causes of that?

I think it’s class war coming from the wealthy, from the top really squeezing workers, trying to get more and more out of them.

Not from from international competition and globalization?

I think that’s been an easy excuse for a long time. Anything you don’t like about this economy — declining wages and speed-ups at work — it’s because we have to be competitive. Yet I look at the top and see that American CEOs, for example, are paid much more relative to the average worker than CEOs in other countries.

I fear she has no idea what she is talking about.

What does a real increase in inequality mean? A real increase in income inequality? Sure. An increase in real material inequality? Maybe not. The interesting question has to do with the composition of typical consumption baskets at the top and bottom of the distribution. And then the question is how gains in welfare from new products and the improvements in the quality of existing products have been distributed. It’s not clear at all that there is any increase in real consumption inequality.

Also, if there has been a stagnation in wages and a decline in benefits, then total compensation has declined. But surely Ehrenreich has Google:

So total compensation hasn’t been stagnating. But supposed it had been. Why?

CLASS WAR!!! That’s just crazy. What does she mean?

The reason compensation goes up at all is because productivity has gone up. Which is to say, because we are “squeezing more out of workers.” Here’s the relationship between average productivity and average real compensation:

Pretty close! There is a gap opening up between productivity and real compensation, though I suspect “class war” is not the correct explanation.

She’s right that CEO’s in the U.S. get paid more. And they may even get paid too much, for various reasons. (I am agnostic on this.) But say CEO pay is cut in half. Does she think that firms would allocate the savings to wages and benefits? If they did, would it be enough to even make a difference?

And for the purposes of this class war, who are the wealthy. The household income in the Howley-Wilkinson household puts us securely in the top 10 percent. Richer than 9 out of 10 households in a rich country–that’s wealthy, right? Where are my spoils from the class war!? I can tell you, we’re in no position to squeeze any workers. I guess Ehrenreich means the owners of capital who profit from labor. You know, like everyone with a mutual fund. Maybe some of these people should be ticked about the overpaid managers of the companies they own.

Special bonus (just substitute “class” for “race”):

Viewing 36 Comments

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    hmmm....confusing argument. I thought B.E was talking about income inequality, which is a measure of income distribution between workers, while you delivery your supposed smackdown with a chart showing compensation for all workers, which I imagine includes those rich CEOs. I'm not entirely sure what she said, too bad you didn't address it..
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    Unless you think CEOs are unionized, maybe you should take a closer look at that graph.
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    I'm not sure if they are included in the graph at all, but if they were, they would probably constitute the non-union line on that graph.
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    What do you think is the reason for that gap between compensation and productivity? Is it probably just the increase in benefit compensation (health insurance and all that?)
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    I'm not sure why that should be the case, since benefit compensation is included in total compensation. Personally, not knowing enough specifics to do anything but speculate, I would guess it is a correction for the recent period where compensation grew faster than productivity. There are a couple cycles where the lines swap in the graph. If compensation was growing too fast a few years back, it may just have slowed while productivity catches up.
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    great video
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    I think what she was saying was this:


    http://tinyurl.com/59bjzk
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    The strange fantasy world of the income-inequality denialists
    Posted by Justin Fox


    http://time-blog.com/curious_capitalist/2008/06...
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    Muirgeo, Nope. She's obviously talking about the compensation and welfare of of average workers. And she's wrong about it.

    I don't deny rising income inequality. I deny the relevance of it as a proxy for inequality in welfare, and I deny the relevance of an increasingly skewed distribution in the absence of evidence that its underlying causes are objectionable.

    The explanation of the Piketty and Saez chart is largely some combination of changes in the structure of capital markets, superstar markets, and executive salaries. No one knows the proportion of these factors. I think there's probably something fishy going on in executive compensation, but the effect of that on the national distribution couldn't be less morally relevant. It's the effect on stockholders that matters.

    Maybe someday we'll talk about consumption-equality denialists when we get better at qualitative measurement.
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    For some light about the top decile, see Figure 1 and Figure 2 from this work:

    http://elsa.berkeley.edu/~saez/saez-UStopincome...
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    "I deny the relevance of an increasingly skewed distribution in the absence of evidence that its underlying causes are objectionable." WW


    The underlying causes are people with money and power writing laws to make themselves more powerful and wealthy. In the process they buy off our democracy, stifle true competition and steal from the tax payer. I find that very objectionable. But people of supposed strong libertarian beliefs seem quite ready to deny both growing income inequality and that such events happen in our government. Or, I'm guessing, some must assume that "free market" includes being successful at raiding the public treasury. Anyone who is wealthy must have earned it. I simply don't believe it because I've seen people from Enron get wealthy manipulating my states electricity market, then I've seen financial wizardry work it's magic in the housing finance sector and now I think speculators are making a killing pushing oil papers in dark places while people starve round the world and loose their homes here in America.

    I read , but don't have the reference, that Wall Street in the 70's accounted for 10% of all corporate profits and now its about 40%. My guess is there are a lot of paper pushers pulling out huge hunks of the productivity pie with out helping to bake it.
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    Muirgo,

    The underlying causes are people with money and power writing laws to make themselves more powerful and wealthy


    You mean laws like Sarbanes-Oxley, sold to naive people like you as a way to regulate the future Enrons but which just increase the barriers to entry for small businesses and price them out of the market?

    I simply don't believe it because I've seen people from Enron get wealthy manipulating my states electricity market</blockquote?

    Which, we all recall, was a direct result of Enron taking advantage of poorly designed government regulations. Proposed solution: more regulations! Brilliant!

    If these nefarious businessmen are so good at using the levers of government against you, it might be time to reconsider your plan of using the levers of government against them. You're playing a losing man's game, and shouldn't be surprised that you inevitably end up as victim.
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    "I don't deny rising income inequality. I deny the relevance of it as a proxy for inequality in welfare."

    So you'd have no problem with a more redistributive system, then, right? If income has no meaningful relationship with welfare, then giving up some income to others should be no burden at all for those at the top...
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    Jen,

    So, how is my income rising at a faster rate than yours making you worse off?
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    Will, this study might be interesting to you--it is especially interesting because it uses a discontinuity design (more sound than your usual regressions):

    http://ideas.repec.org/a/tpr/qjecon/v119y2004i4...
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    Let me offer a qualitative argument on why higher productivity could eventually lead to serious income inequality: Any given industry will shed workers if productivity increases faster than demand can increase. The remaining workers will be better compensated and will likely have a wider range of compensations, since measurable differences in each worker's productivity are more valuable if there are fewer workers.

    When a wave of productivity increases has swept through an industry, you're then left with two groups: 1) a group of previously skilled workers who are newly unskilled (and who need retraining) and 2) a group of workers whose average skill level is higher than before.

    Now repeat this process a few times.

    So here's my unsupportable intuitive leap: If all industries cull workers through successive waves of productivity increases, I think your income distribution stops looking like a normal distribution and starts looking more and more like a power-law distribution. One piece of evidence that would support this hypothesis is if you were to find that the right-hand tail of the curve (the highest decile, say) had a power-law superposed on it.

    Since the mode of a power-law distribution is always the lowest-valued sample, this wouldn't bode well for a sustainable society. At the very least, we'd have to ensure that minimum living standards were pretty good. Even then, human nature being what it is, I'm pretty sure that you would have all the necessary elements for a real class war.
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    Radicalmoderate-
    The heart of your qualitative argument:
    Any given industry will shed workers if productivity increases faster than demand can increase.

    sounds like a description of human history. 99% of us used to spend all of our time providing food. That became more efficient, so some of the people previously providing food found new jobs. Now, only a few percent of the country can provide more food than we could ever use. Over most of the same period we managed to provide for each others' minimum standards of living privately through charity, without weighing down or distorting our commercial interaction. Why would instead using government redistribution and regulation which a) crowds out public charity b) distorts labor markets and c) slows growth, be a better way to address the core issue; namely moving the people no longer needed in an efficiency gaining sector to other sectors? It seems as though policies which encourage growth of existing markets, encourage entry into new markets, and promote labor market flexibility are all more conductive to the ultimate goal, finding a productive position for the displaced workers.

    As a side not, I find the focus of Ehrenreich and her ilk on our country alone pretty sickening. The people who are now having to readjust, if they didn't loose their job to a robot, lost it to a foreigner who is almost certainly many orders of magnitude poorer than they are. I don't shed a tear for the American textile worker who probably had a relatively strong education given to him when I buy my t-shirts from a kid in east Asia who used to have to dig through garbage piles for a living.
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    The difference between now and the rest of human history is that the number of ways you can make a decent living with unskilled labor is shrinking dramatically, partly to offshoring, but also to automation. So the real gap is not so much between the rich and the poor as it is the skilled and the unskilled, or even between the less-skilled and the more-skilled. That's going to produce a radically different income distribution worldwide.

    I don't have a prescription for how to fix this, or even an opinion about whether it's desirable to try to fix it. I certainly didn't mean to imply that I thought redistribution was a good idea. I merely point out that the income gap may be a harbinger of something truly different, and something worth thinking about.
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    "Proposed solution: more regulations! Brilliant!

    If these nefarious businessmen are so good at using the levers of government against you, it might be time to reconsider your plan of using the levers of government against them. You're playing a losing man's game, and shouldn't be surprised that you inevitably end up as victim."



    No my proposed solution is more democracy and better regulation.

    But lets say we follow your advice to decrease regulation. How do we get there? Please be specific. Who should I vote for? I think you are wrong because history shows us that unregulated markets are a roller-coster ride of ineffeciency, boom and bust econiomies of corruption and ultimatly result in concentrations of wealth and power that bring us back to the reasons we fought a revolution for a republic and the reasons so many of our founding fathers recognized the dangers of wealth inequity/ accumulations of vast wealth.
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    No my proposed solution is more democracy and better regulation.


    Right, and as I just said, and you responded to with this comment, you have been losing the democracy game and the regulations have been protecting the powerful against competition from the weak. Asking for more of the same is... progress?

    But lets say we follow your advice to decrease regulation. How do we get there? Please be specific. Who should I vote for?


    Don't vote for anyone. Voting is how we got into this mess in the first place. I don't know how you get there from here, but it certainly isn't going to be by voting for the same politicians over and over again.

    I think you are wrong because history shows us that unregulated markets are a roller-coster ride of ineffeciency, boom and bust econiomies of corruption and ultimatly result in concentrations of wealth and power


    But isn't this exactly what we see in the heavily regulated markets of today? Where are these unregulated markets you speak of?
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    Jen,

    "So, how is my income rising at a faster rate than yours making you worse off?
    reply record video comment "


    Said the landlord to the tenant. Said the weapons contractor to the politician. Said the oil man to the army grunt. Said the Wall Street financier to the public works laborer. Said the sweat shop owner to the 10 year old laborer. Said Paris Hilton to the special education teacher. Said the Master to his slave. Said the Lord to his serf....Said King George to the Colonist.
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