From 1820 to around 1970, workers’ average productivity rose every decade. Their hourly output of commodities rose because they were ever better trained, had ever more and better machines to work with, were ever more closely supervised, and worked ever faster. Over those same years, their real wages (what earned income actually afforded them to buy) also rose every decade.
However, after the mid 1970s, while worker productivity continued to increase, real wages tapered off in America and then actually began to slowly decline. This growing gap between stagnating wages and growing amounts of product value per hour worked, meant a huge and growing increase in the prots of American business owners.
So why did real wages (adjusted for inflation) in America stop growing while continuing to increase in various European countries?
It was because U.S. corporations did the following things, some of which the European countries either did not do, or did not do to nearly the same extent.
(a) moved operations abroad so as to pay lower wages and make bigger prots,
(b) replaced workers with machines (especially computers), and
(c) hired ever more women and immigrants, at lower wages than men received.
For these reasons, real wages in the mid 1970s, in America, exceeded real wages today even though today’s workers produce vastly more in the course of an hour’s work.
As employers’ prots exploded, those entitled to portions of the prots also benefitted handsomely, those being the managers the employers hire, the shareholders who get dividends, and so on — but also the specialists who handled or managed each employer’s mushrooming prot, namely the nance industry that invested it, lent and borrowed it, managed it, etc.– they, too, got growing portions of the rising prots.
So what happened to a working class that measured individual success by rising consumption when it no longer had rising wages to pay for such consumption?
Even if individuals’ real wages per hour stagnate, total earnings can rise if each household does more hours of paid labor. And so it was that millions of American housewives entered the paid labor force over the last 30 years while their husbands took second jobs and both teenagers and retirees found paid work too. Today, as a result, we Americans work on average 20% more hours per year than workers in France, Germany and Italy. In the 1970s, 40% of adult women were in the paid labor force. Today it is twice that.
However, with more household members out working, new costs and problems beset American families. Women wage-earners needed new clothes, a second car, and services like daycare, prepared food, psychotherapy, and drugs to handle new pressures and demands. These extra costs soaked up women’s extra income, and not enough remained to fund rising household consumption. The net income gained from extra work thereby disappeared and disappointed, and so it was that US families were provided with opportunities to borrow money like no working class in history. And, as we shall see momentarily, this soaring household indebtedness became part of the groundwork of today’s crisis.
The US business community had seen, and grasped, a fantastic double opportunity. First, as already described, it reaped huge prots from the combination of at wages and rising productivity. Secondly, however, it realized that it could lend a portion of those prots back to a working class traumatized by stagnant wages, so as to enable it to continue consuming more. Therefore, instead of paying their workers rising wages (as in the 1820-1970 period), employers (directly or through the banks) ooded very profitable loans onto desperate but also often nancially naive workers. For employers generally, and especially for nancial corporations, this seemed like the golden age of capitalism.
Underneath the magic, however, workers were increasingly exhausted, their families disintegrating, and their anxieties deepened by unsustainable levels of debt. At the same time, banks, insurance companies and other nancial enterprises proted by taking ever greater risks and designing and selling ever more exotic and questionable securities to systematically misinformed investors. In these heady times, non-nancial industries also took bigger risks, believing that "the new economy" touted by Alan Greenspan could only keep expanding. Before long, however, as housing values stopped rising, and then began to fall, workers by the millions would begin to default on their debts, and were soon joined by defaulting corporations. This credit-based house of cards then collapsed, housing prices tanked, and recession descended upon us.
Since mid-2008, the crisis has deprived unprecedented millions of their jobs, income, homes, and wealth, with the total value of the losses amounting to thousands of billions of dollars. A desperate population demanded explanations and solutions; they wanted changes that would x this economic disaster. So we dumped the Republicans and hoped for an economic revival from Obama, who talked a very good game during his campaign.
Once in office, however, Obama followed Bush’s sorry example, and for political reasons (future campaign contributions and the hope of avoiding massive, and very well funded attack ads on TV) his administration continued pouring trillions of dollars into the nance industry (thereby guaranteeing the debts of, and at the same time investing in, the nation’s biggest banks and insurance companies). These steps were supposed to "kick-start the economy" and "get the economy moving again" and "x the credit markets," so as to allow us, we all hoped, to resume the happy, high-consumption pleasures of the economy before the crisis hit in 2008.
The problem is, this strategy was and is absurd. Why? Because if such a resumption were to succeed (far from certain in the first place), it could only return the economy to the same web of problems that produced the crisis in the first place.
Workers in the US are now holding back on expenditures as they hunker down for what they correctly sense will be a long period of unemployment, lost pensions, decimated retirement accounts, and insecure jobs and incomes. And, as they spend less, economic recovery is thereby undermined. Obama and his minions futilely hope that consumers will somehow resume borrowing and spending, but that cannot happen. Why not? Because consumers are tapped out — that’s why they defaulted on all those loans that set off the crisis. And even if they were by some miracle made capable of resuming their borrowing and spending — aliens dropping billions of dollars from UFOs? — they would (given their systematically lowered wages) sooner or later have to default once again, and we would once again be back to where we are now.
In short, an exhausted, anxious, and over-indebted working class cannot sustain the following:
1) a corporate sector facing permanently reduced consumer spending, struggling with its own excessive debts and unable to get credit as in the past,
2) a government now adding trillions to its national debt which will require more taxes from, and/or less provision of government services to, that same working class.
We are, therefore, faced with a crisis that requires basic structural change
The simple fact is that no supercial, back-to-business-as-usual program of throwing trillions at big banks, big insurers, and large auto companies — to boost the stock market, get everyone happy and spending again — will work. Short-term upswings just like this were repeatedly followed by crashes during the FDR years in the 1930s. Painfully, people then learned just how deep and serious that depression was. Will we need to rerun that tragic scenario and pay its heavy price in extended suffering again, today? Most likely we will, since people seldom learn from the lessons of the past.
We can no longer postpone the traumatic impact of the end of rising wages in the ’70s by still more work and more indebtedness. Those options have been exhausted. Workers can’t work more. They physically can’t handle it. Families are stressed beyond words, largely because women abandoned the households where they had been holding the emotional life of the family together. And families literally cannot carry any more indebtedness. Debt limits have been reached. This is implosion time.
So why again did real wages stop rising in America but not in Europe?
Five reasons, in somewhat more detail this time.
First came the 1970s technological revolution, associated mostly with the computer. Humans were increasingly replaced by computer-aided machines–30 to 40 people tracking inventory in a supermarket were replaced by a scanning system and one person watching a computer. This substitution happened everywhere, in every almost every industry and service, and the number of jobs was thereby greatly reduced.
Secondly, jobs were cut by the worldwide revolution in telecommunications and the Internet, which made it ever more feasible to move production to low-wage countries, outside of the US. There, US-based corporations increasingly chose to take advantage of cheaper workers, less stringent environmental regulations, lower taxes, and officials who were much more open to taking a bribe.
Third, President Reagan saw to it that the tariffs on goods produced by American companies operating abroad, for import into the US, were essentially eliminated, making it terribly profitable to manufacture inexpensively abroad almost everything that was sold at home.
Then, two things produced ever more workers looking for the reduced number of jobs that resulted from the three things just mentioned.
1) the massive movement of American women into the paid labor market and
2) waves of immigration–people from around the world who wanted to participate in the 150-year rising real wages in America.
This confluence of factors produced labor market conditions that had US employers, for the first time, in the enviable situation of no longer being required to raise wages to acquire or keep employees. And so, quite naturally, they stopped raising wages.
Thus we had an explosion of profitability and a wild ride in the stock market in the ’80s and ’90s, because the corporations–America’s primary employers–were profiting more than they had ever dreamed in their wildest fantasies as MBA students–getting ever more out of employees without having to pay them any more. As a result, large corporations began giving out huge bonuses and severance packages to top executives.
What are the "real" costs to the larger society and economy of these huge money grabs?
In Europe, a good portion of productivity gains are used to reward the society and populace as a whole: ever-more-productive workers are paid rising wages, thereby allowing them to share in the growing wealth that rising productivity makes possible. But not only that: With more evenly distributed productivity gains, college education, health care and child care can more easily be made available to one and all.
However, in the U.S. and U.K., there is an assumption that wages should stop rising whenever possible so that the wealth emerging out of growing productivity can be concentrated in the hands of a tiny number of people, the financial elite, who thereby receive stratospheric incomes and wealth holdings. The problem with this arrangement is that society can no longer produce for a mass market because the mass market isn’t growing in parallel with the growing productivity. And this is what is happening today in America. Sales of domestically produced products are steadily dwindling as consumer and government indebtedness reaches crisis proportions. Corporate owners are getting obscenely rich from all this, but with well-paid jobs, college, and good health care increasingly out of reach for ever more people, the society and economy beneath them is crumbling.
When Reagan became president, the highest income tax rate, paid by top earners on all income in excess of $3 million (in today’s dollars), was in the 70 to 80% range. Reagan dropped that rate to approximately 35% — an unbelievable gift to the richest among us, who thereby became his greatest boosters and campaign financiers for the remainder of his political career. The rest of us are still laboring longer and harder as a result of that much-reduced tax rate for the rich, to make up for the loss of the larger share they used to pay.
Corporate income tax, which used to provide a much larger share of our total income tax revenue, now only brings in about 10 or 15% of it. Over the past 100 years, rich people moved the tax burden off themselves and onto everyone else. And corporations moved much–but not quite all–of their burden onto the individual. The result has been a double shift from the corporate to the individual, and from the richest individuals to everyone else, with the exception of the very poor on the bottom who were already too poor to be taxed.
When the average American gets upset by taxes going up, they are making an error. The taxes aren’t going up so much as they are being shifted. The tax may have gone up on you, but it has gone down on others. However, because it’s less dangerous politically, Republican politicians prefer to talk about taxes as if the issue is high or low, rather than who pays at a high rate and who doesn’t.
Reagan provided us with the perfect example and it was wonderfully clever politics on his part. He gave a big tax break to corporations and a huge tax cut to the richest among us. But he was smart enough to know that if that’s all you do you’re going to get crucified politically. So he added a mass tax cut for everyman. However, this tax cut for the average citizen was not only very small, but came by way of a little trick. While the Reagan Administration lowered the income tax rates on the average person a little, it raised the amount of their income that the Social Security tax applied to. So the government got to put back into Social Security most of what it gave to the mass of Americans in the lowering of the tax rate–which is why the size of people’s paychecks didn’t change much. The mass of Americans were so thrilled by their "tax cut’ that this bad news got lost in the shuffle. Not only was the cut given to the richest and the corporations much more substantial, but the masses were being hit with a rising Social Security cost.