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Commentary & Opinion

Michael Meeropol: The Data On The Economy Hides An Important Failure For Wage Earners

I didn’t watch the State of the Union.    I am glad I didn’t.   I cannot imagine the frustration of Democrats who sat there (some couldn’t take it and walked out --- a few decided to boycott it) listening to lie after lie after lie.

I could spend a lot of time cataloguing some of those lies but I found the following interesting short pieces on the ALTERNET website.   The first is by Nancy J. Altman entitled “Trump is a brazen liar about Social Security.” 

(By the way, Altman is president of Social Security Works and chair of the Strengthen Social Security coalition. Her latest book is The Truth About Social Security. She is also the author of The Battle for Social Security and co-author of Social Security Works!   In other words, she knows what she’s talking about!)

 Surprise, surprise, Trump has always talked out of both sides of his mouth about Social Security.  Back in 2011 he actually dismissed it as a “Ponzi scheme” – a well known criticism by the right wing which hates the fact that a universal government program redistributes income but remains too popular to destroy.  In the campaign of 2016 and in the State of the Union, of course, Trump promised to protect Social Security, Medicare and Medicaid --- even though he told some fat cats in Davos very recently that “entitlements are on the table.”   Ever since I started teaching economics, there have been right wing ideologues who argue that Social Security is unsustainable. Unwilling to attack it head on as “socialism” (that was tried but it failed in the 1930s) because of its popularity, they conjure up alleged crises that require it be “fixed.”  (Such as when President George W. Bush proposed a partial privatization of it back in 2005.)

(Anyone interested in the general subject of the attacks on Social Security should check out the excellent book Social Security, The Phony Crisis by Dean Baker and Mark Weisbrot.)

For a more general critique of the State of the Union, I found this useful:   “Here’s the terrifying truth about Trump’s hysterical Nuremberg style state of the union,” by Michael Winship. 

Okay, one more example!   One of the most dramatic lies Trump told was immediately countered by many of the Democrats in the hall --- he said, we would be willing to sign a bill to reduce prescription drug prices.   The Democrats reminded him and the rest of us that there was such a bill that had already passed the House, H.R. 3 – and so they raised three fingers and chanted those words.   (Why isn’t the bill on his desk?  Because Senator Mitch McConnell refuses to let the Senate even debate it!  --- there are over 100 such bills passed by the House of Representatives --- many with bi-partisan vote totals --- that McConnell refuses to even let his Senate colleagues debate!)

Back to the State of the Union speech.  Of course Trump talked about what a “wonderful economy” he has created when anyone who can read knows that this economy is a continuation of the (unfortunately uneven and painfully slow-growing) recovery engineered by President Obama.    This brings me to the focus of this commentary.   I want to highlight a major economic failure of  BOTH the Trump and Obama Administrations  --- the fact that over the course of the recovery since 2009, workers have been unable to regain their share of the economic pie – even after ten plus years of recovery from the Great Recession.

[Just to remind people, our economy never grows steadily – it grows in surges during periods of recovery from a recession and the prosperous period as the depths of the previous recession recede into distant memory.  Every recession interrupts that pattern of growth leading to a period of rising unemployment and falling profits, until it hits bottom and a recovery begins again.]

The usual pattern of shifting shares of workers’ income (which includes not just wages but also benefits such as health insurance) as a percentage of corporate income is that as the economy nears the peak of prosperity before the onset of a recession, workers’ share rises because with low unemployment, workers are in a good position to bargain for good wage increases.  Meanwhile, businesses are flush with profits as the period of prosperity extends and feel that they will not be sacrificing much by granting increases in wages. 

This is important in the non-unionized sectors of the labor force where periods of low unemployment produce higher turnover and thus potential shortages of workers  --- particularly in low wage occupations.   Why should I continue working at McDonalds when there is an opportunity for a job as a mechanic’s assistant at a local auto repair shop?

In periods of recession, both workers and employers lose incomes --- but profits are more volatile and they fall more in recessions than do wages.   Thus, in every recession the ratio of wages to profits actually rises.  Once recovery sets in, it’s a very different story.   Wages remain depressed because the high unemployment that occurred during the just ended recession takes time to be absorbed.  Meanwhile, profits start rising.   So the ratio of wages to total corporate income falls in the early years of recovery  --- until we get to the more prosperous phase of the recovery when the share of wages starts to rise again.

[What follows is based on data released by the Economic Policy Institute the day of the State of the Union.   See “Primer – The State of the Union for Working People.” While all of the information is useful, what follows is drawn from a section called the “Nominal Wage Tracker."   Scroll down to the figure entitled “Workers’ share of corporate income hasn’t recovered.”  You can view this information on the graph or click on the button to get a number for every quarter going back to 1979.  The number --- some of which are identified in what follows – is the PERCENTAGE of total corporate income that accrued to wages and benefits of workers.  In other words it tracks the changes in the shares of incomes going to workers generated in the private sector.]

The general pattern of the changes in percentage share going to workers over the typical business cycle was more or less followed in the three business cycles before the Great Recession. First, we have the 1983-1989 Reagan years.  Then we have the long recovery from 1991-2000 under Bush I and Clinton.  Finally, we have the recovery from 2002-2007 -- Bush II years.   The Reagan period saw a minimum share of 78% and a maximum of 84% during the following recession.  The next period saw a minimum of 79% and a maximum of 84% during the recession of 2001.   Finally under Bush II, the rise was from 74% to 84% -- the latter number is from 2008 before the Great Recession really hit with full force as a result of the financial crisis.

Under first Obama and now Trump, workers have not gotten their share back yet. 

[For details of how the Obama Administration’s recovery policies were woefully inadequate to counter the effects of the Great Recession with its financial crisis and very high unemployment, see Sherman, Meeropol and Sherman, Principles of Macroeconomics, Activist vs. Austerity Policies, Second Edition (NY and London:  Routledge, 2019): chapter 18]

The pattern of falling workers’ share from the previous three recessions continued.  The ratio of employee compensation to total corporate income fell to 74% in 2012.  However, even after a more than ten year recovery period (the Great Recession “officially” ended in 2009) during which overall unemployment fell to below 4 percent,  the rise in workers’ share has been both slow and insufficient.   As of July of 2019 that ratio (which had reached well above 80% in the previous three recoveries dating all the way back to the 1980s) stood at 78%.  

This is actually a surprising result for those of us who always felt that low unemployment would always be accompanied by significant wage increases.  (It’s almost a truism in basic economics, when a product or resource [like petroleum or wage workers] is in short supply, the price starts to rise.)   Yet somehow, in the past few years, the low levels of unemployment have NOT produced any wage acceleration.

There are a number of possible reasons why.   One that I have recently been made aware of is that the types of jobs that are being created over the past decade are weighted heavily towards part time work, low paid irregular work (the so-called “gig” economy).   With the decline of unionization in the private sector (it stands at below 7% today) and the failure of the minimum wage to keep pace with productivity growth, it is not surprising that low unemployment has not broken the basic stagnation in wage growth.

[For details, check out “Notes from the Editors” on the inside front cover of the February 2020 Monthly Review (Vol. 71, No. 9).  They refer to a Private Sector Job Quality Index recently created by Cornell University Law School, The University of Missouri-Kansas City, the Coalition for a Prosperous America and the Global Institute for Sustainable Prosperity.  You can see the index itself going back to 1990 at www.jobqualityindex.com/]

Once again Trump lies --- the economy is great for the top one percent.  Not so much for the rest of us --- especially for wage earners.

Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies.

The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.

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