Labor Unions And Inequality

In the wake of the Great Recession, economic inequality – the extent to which income and wealth are distributed unevenly across a population – has emerged as a major issue in the United States.

Since the late 1970s, there has been enormous change in the distribution of income and wealth in the U.S. The gap between the “haves” and the “have-nots” has widened, with a small portion of the population reaping an increasingly larger share of the country’s economic rewards. Warren Buffet got it right when he said, “There’s been class warfare going on for the last 20 years and my class has won.”

The average American has lost. Since the mid-1970s, wages have remained stagnant and middle-class earnings have lagged the cost of living.

There are a number of factors contributing to economic inequality, downward mobility among working-class Americans and the dangerous fissures it has caused American society. These include government tax and regulatory policies, the acceleration of finance capitalism, culture, immigration, globalization, and the rate of technological change.

Frequently overlooked is the declining strength of private-sector labor unions. In 1979, unions represented 24 percent of the private sector labor force; today only 6.5 percent of private-sector workers are unionized.

The effects of this decline are fiercely debated. Conservatives argue that labor unions decrease competitiveness and business profitability. Progressives say that in an era of globalization, companies threaten to ship jobs to factories offshore to extract concessions from unions with impunity. For sure, unions raise wages, but that doesn’t necessarily mean they reduce profitability or diminish competitiveness. Consider the success of unionized firms such as Southwest Airlines and UPS.

American manufacturing and wages suffered as U.S. companies engaged in extensive offshore outsourcing of decent-paying domestic jobs to China and other low-wage countries under the banner of free trade, prioritizing short-term profits over long-term investments and the public interest. For example, from 2000-2016, the U.S. shed five million manufacturing jobs, a fact that supporters of free trade and globalization rarely mention.

The loss of traditional manufacturing jobs has contributed to income inequality and declining union membership. According to a report by the Washington-based think tank the Economic Policy Institute, if unions had the same presence in the private sector today as in 1979, both union members and non-members would be making about $2,500 more each year.

Many companies have built their business models around offshoring manufacturing to reduce costs without passing the savings on to consumers. They view the wages and benefits that once underpinned a middle-class lifestyle as obscenely excessive. That’s why they support free trade and use their political power to garner the support of both major political parties, helping accelerate the demise of labor unions. Government turned a blind eye as corporations packed up good jobs and send them overseas, weakening private-sector unions.

The American public has repeatedly been told that policies that restrain foreign competition are a form of protectionism that subsidizes inefficient domestic industries and raises prices. The issue of job losses is ignored. The benefits of free trade allegedly exceed the costs of lost jobs, especially for those who work with their hands. Assumed consumer benefits should be considered when it comes to trade policy, but so should giving working-class people a fair shot at the American Dream. Americans need a more balanced way of thinking about free trade and the offshoring of American jobs.

Is it any wonder that President Trump’s campaign slogan – “Make America Great Again” – resonated with ordinary Americans? This rhetoric is reminiscent of 1988 Democratic Presidential candidate Rep. Richard Gephardt’s slogan “Let’s Make American First Again.”

Writing over 2400 years ago, the Greek philosopher Aristotle captured the importance of inequality when he wrote, “A polity with extremes of wealth and poverty is a city not of free persons but of slaves and masters, the ones consumed by envy, the others by contempt.”

Financial Sector Is Driving The Economy

The contemporary rise of finance, promoted by both Republican and Democratic administrations, has changed America from an economy focused on sustainable growth to one dominated by the financial sector itself – a broad range of industries that includes banks, investment firms, insurance companies, and real estate firms that provide financial services to commercial and retail customers.

Since the 1980s, the financial sector has expanded to take up an extremely large slice of the U.S. economy, a trend referred to as “financialization.” Financial institutions have significantly increased in scale and profitability relative to what most see as the “real” economy – businesses that produce tangible goods – which has left the United States increasingly reliant on the financial sector to generate economic growth.

The growth is apparent when measuring the size of the financial sector as a percentage of gross domestic product. Finance and insurance alone represent about 7 percent of the U.S. GDP. Profits tell a similar story. The sector now takes around a quarter of all corporate profits, yet creates only 4 percent of jobs, according to the Bureau of Economic Analysis. In short, the financial sector has captured a larger and larger piece of the national economic pie.

Many say this has contributed to widening income inequality between a small pool of high earners and the rest of society, giving the financial elite ample resources to sway government policy in their favor. This political influence is quite unlike the 99 percent, whose choices are increasingly limited to making ends meet. Several Democratic presidential candidates have criticized the United States’ reliance on the financial sector and lax government regulation. Sen. Bernie Sanders has made “breaking up the banks” a key plank in his presidential platform.

One factor that has contributed to financial sector growth is deregulation.

Before the Great Depression, the status and influence of financiers was so great that when President Theodore Roosevelt filed the first major antitrust lawsuit against J. P. Morgan’s Northern Pacific Railroad, Morgan, the fabled Wall Street titan, at a February 1902 White House meeting, told the President, “If we have done anything wrong, send your man to my man, and they can fix it up.”

Four years after the stock market crash of1929, the United States passed the Glass-Steagall Act in 1933 and other legislation to rigorously regulate the financial sector and make it more stable and transparent. Glass-Steagall legislation separated investment banking from commercial banking forcing banks to choose one or the other. Little by little ever the last several decades, those laws that served America so well were rolled back starting in the 1980s onward.

The financialization of the economy was jacked up in the 1980s, fueled by Reagan-era laissez-faire policies. For example, the 1982 tax reform lowered the capital gains tax. Deregulation from the 1980s onward encouraged banks to move away from their traditional role of supporting businesses and individuals and providing the liquidity and credit needed to lubricate the economy.

For instance, the repeal of the Glass-Steagall Act in 1999, a seismic moment in the story of financialization, triggered high-risk deals and trading by financial institutions by enabling them to use deposits collected through their commercial banking arms. Lusting for quick, short-term profits that kept the money within the financial sector rather than investing it in the real economy, banks began to focus on high-risk “financial engineering” like sub-prime loans, collateralized debt obligations, structured investment vehicles, and derivatives, which Warren Buffet famously called “financial weapons of mass destruction.”

Such activities are remote from the production of tangible goods and services. Finance has become a business unto itself, all about making money from money rather than making things and being a facilitator for real business. Populists from the left and the right say Wall Street has done better than Main Street – and that may be the truth of it.

Putting Modern Monetary Theory To The Test

An unconventional approach called Modern Monetary Theory (MMT) that suggests governments don’t have to worry about debt is gaining traction. Its basic starting point is that a government that can borrow in its own currency can take on much more debt than orthodox economics says is prudent. If you want to spend more on government programs, just print more money with a few key strokes on the Federal Reserve computer.

Governments can manage their economies though spending and taxes instead of relying on a quasi-independent central bank to do it via interest rates. If spending much more than it collects in tax revenue creates inflation, the government can deal with inflation by raising taxes.

MMT is the economic rationale coming from potential Democratic candidates for president and rising political stars like Rep. Alexandria Ocasio-Cortez (D-N.Y.), who argue that the nation can afford large-scale social projects such as the recently proposed Green New Deal, Medicare for All, free college tuition, massive public infrastructure projects, and a job guarantee program with the federal government becoming the employer of last resort.

The MMT enthusiasts acknowledge that ballooning deficits risk triggering inflation, but claim the low inflation of the past decade leaves plenty of room to increase the budget deficit. Advocates of MMT suggest using taxes to pull money out of the economy before it overheats.

Voters punish politicians for tax hikes. Do you really trust them to raise taxes to pull money out of the economy? The theory says government should stop trying to balance the budget because policies aimed at doing it hurt the economy, which forces cuts to social programs. They believe a budget surplus should be avoided at all costs.

This perspective is contrary to the conventional economic thinking that when government spends more than it collects, it either has to borrow or raise taxes. Critics such as Warren Buffet say “We don’t need to get into danger zones and we don’t know precisely where they are.” Other detractors jokingly refer to MMT as magical monetary thinking. They believe you cannot borrow endlessly without risking real economic harm, especially if the return on government investments is below the interest rate on borrowing.

And such policies may undermine the United States’ standing as the world’s reserve currency. When countries reject the dollar as a world currency and foreign buyers such as China do not want to buy U.S. debt, increased government borrowing could eventually cause interest rates to rise as investors demand a better return on treasury bonds. MMT advocates respond that U.S. borrowing costs and inflation have remained low despite our being waist deep in deficits and debt.

Yes, the federal government could print more dollars to pay off the debt if it ever came to that, but is the dollar in danger of no longer being the world’s primary reserve currency and enjoying the lower interest rates and ability to fund budget deficits in perpetuity that goes along with it? Will rising debt and deficits cause foreign investors such as foreign central banks, sovereign wealth funds, and institutional investors to turn away from the dollar because they see increased risks from holding dollars as the government ratchets up borrowing to unprecedented levels?

The real world is much more complicated than ideological simplifications and abstractions. True to form, progressive politicians reveal good intentions, outsize ambitions, and a deficit of humility. Good intentions and grand ideas are frequently blind to the bothersome trivia of execution and to unintended consequences.

Whether you agree with MMT or not, it represents an important heterodox challenge to mainstream economic orthodoxy. Hedge fund king Ray Dalio has said the United States will adopt this economic philosophy to finance big government spending for more widespread growth.

After all, economic growth is the religion of the modern world.