Vast Open Spaces and Tense Little Monopolies

Monk by the Sea, Caspar David Friedrich ca. 1809 via Wikimedia.

Seems Yuval Levin has written a David Brooks column for the Times this week ("How Did Americans Lose Faith in Everything?")

When we think about our problems, we tend to imagine our society as a vast open space filled with individuals who are having trouble linking hands. And so we talk about breaking down walls, building bridges, leveling playing fields or casting unifying narratives.

But what we are missing is not simply greater connectedness but a structure of social life: a way to give shape, purpose, concrete meaning and identity to the things we do together. If American life is a big open space, it is not a space filled with individuals. It is a space filled with these structures of social life — with institutions. And if we are too often failing to foster belonging, legitimacy and trust, what we are confronting is a failure of institutions.

Well, don't you tend to imagine our society as a vast open space filled with individuals attempting and failing to hold hands with each other? I mean, when you're thinking about our problems? I guess when I think about our problems I tend to think about our problems, like rising inequality, failure to provide huge numbers with what they need to live satisfying lives, and headlong rush to the destruction of possible human habitats. When I think about what's a creative-sounding analogy for society, I don't regard myself as thinking about our problems at all. I guess that must mean I'm a liberal. Though I have nothing against analogies in principle. Rest assured.

But if American life is a big open space (suddenly it's not American society any more), then it's not a big open space, but a space that is not open at all. This is a point where you might be better advised to move to a different analogy, or give up on reading the thing altogether, which was my choice.

Meanwhile, as if in revenge, Brooks has written a kind of Yuval Levin piece ("The Bernie Sanders Fallacy"), to adduce the economic proofs that there is no such thing as class struggle in the United States, along with possibly attempting to prove on the basis of irrefragable logic that there is no "culture war" either, though he forgets all about that after the initial bothsiderizing in paragraph 4:

This is a golden age for “Theyism.” This is the belief that there is some malevolent, elite “they” out there and “they” are destroying life for the rest of us....

The G.O.P. has been swallowed by Trump’s culture war, and many Democrats seem to be rushing to join Sanders’s class war.

It's a shame, too, because explaining how the GOP hasn't been swallowed by Trump's culture war would probably be more interesting than refuting his dramatic proof of why Sanders is wrong on economics:

Sanders starts with a truth: Workers need more bargaining power as they negotiate wages with their employers. But then he blows this up into an all-explaining ideology: Capitalism is a system of exploitation in which capitalist power completely dominates worker power. This ideology crashes against the facts.

It would be nice if he would cite sources. I don't believe Sanders says that capitalist power must, as an intrinsic feature of the system, crush worker power, because in that case his case for collective bargaining would be senseless. Workers would be bound to lose no matter what, so why bother? When Sanders proposes to

• deny federal contracts to companies that pay their executives 150 times more than their employees or offer wages lower than $15 an hour
• allow all federal workers the right to strike
• end so-called right-to-work laws
• double union membership during his first term
• allow unions to negotiate rules and standards with entire industries
• use the president's executive power to impose a moratorium on new pension cuts tied to the Multiemployer Pension Reform Act of 2014
• require that companies honor existing union contracts even after major overhauls in management

he shows a heartening confidence that worker power can do quite a bit for itself without cutting all the capitalists' heads off and establishing soviets to rule all the factories and government departments. He's just disappointed that these things haven't been accomplished yet, and decrying the "rigging" that's prevented them, not through an economic process but a political one, the corruption of government that has succeeded in reversing the gains labor made in the Progressive era and New Deal.

Whereas the strawman Sanders Brooks is constructing is shocked-shocked to learn that capitalism doesn't reduce inequality all by itself, whereupon Brooks triumphantly shows "the facts" according to which no, it does!

In the first place, over the past few years wages for workers toward the bottom of the income stream have been rising faster than wages for those toward the top. If the bosses have the workers by the throat, how can this be happening?

Well, I'll tell you part of how it can be happening, using the iron laws of arithmetic:

• if you're making $7.50 an hour and get a 10% raise, that's 75¢
• and if I'm making $300 an hour and get a 1% raise, that's $3
• then your wage rose ten times faster than mine
• but my raise is four times bigger
• and we just became more unequal

That's how. By not diminishing inequality at all. Goosing the income of the lowest-paid is a good idea (though I don't see Brooksy pushing minimum wage hikes) in its own right, but it starts at a point too low to effect big structural change. To alter the course of inequality you're really going to have to take something away from the wealthy. Sorry, but the alternative just doesn't do that.

Second, wages are still generally determined by skills and productivity. For example, Edward Lazear of Stanford University finds that between 1989 and 2017, productivity in mostly high-skill industries rose by roughly 34 percent [over a 28-year period; these are not big numbers, and I don't think Brooks notices that] and wages in those industries rose by 26 percent. Productivity in industries with mostly less-skilled workers rose by 20 percent while wages grew by 24 percent.

As Michael Strain of the American Enterprise Institute puts it, capitalism is doing what it’s supposed to do. It’s rewarding productivity with pay, and some people and companies are more productive. If you improve worker bargaining power, that may help a bit, but over the long run people can’t earn what they don’t produce.

Dr. K?

Consider just one piece of data: CEO pay. Do we really thing CEOs have gotten hugely better since the 1960s, while workers haven't? 2/ pic.twitter.com/3oGkd0g9Bj

— Paul Krugman (@paulkrugman) January 17, 2020

Ah, I see.

Actually, I don't see. This material from Strain (quoting Lazear) seems to be about an entirely different subject or even a different world than the one Dr. K. and I are interested in and the one I thought Brooks was talking about: this is about the different wages in different industries, where Strain (once cited at Rectification Central for the remarkably chilly headline, "End Obamacare, and people could die. That’s okay") is claiming that an industry overall pays higher wages to CEOs and janitors alike if it's more productive, and lower if it's less, which seems possible, and traditional. Except why is it that in the examples cited from Lazear the wage growth was virtually the same in the high-productivity and the low-productivity (26% vs. 24%) industries? Productivity doesn't seem to have been a factor in pay increases at all!

In other words [Strain writes], pay increased faster than productivity in industries with lesser-skilled workers, and slower than productivity in industries with higher-skilled workers. Another striking implication of this finding is that “productivity inequality” — the gap in productivity between workers — may have grown faster than wage inequality over this period. While wage differences have increased over time, differences in productivity between groups of workers have increased even more.

Or, the more productivity-increasing skills you have (which would correspond to worker bargaining power in a world where worker bargaining power was a relevant variable), the more they fail to help you push up your wages. This doesn't look like rewarding productivity with pay, or capitalism doing what it's supposed to do, in any way! I can't understand where Strain is attempting to argue that it does, but as he winds it down you can practically see it dribbling down his chin:

Such research [suggesting that "technological change disproportionately benefits the highly skilled," the "shift to a services economy has reduced the productivity of goods-producing, lesser-skilled workers," and "colleges may have improved more than high schools in their ability to impart skills," for none of which he's offered any evidence] doesn’t settle the debate, of course. Yet it does strengthen my view that wages are heavily influenced by market forces, even if they are not entirely determined by them. While productivity sets the baseline for wages, deviations from that baseline occur. So contrary to what Biden, Warren and (many) others say, market forces, not power dynamics, are the principal driver of inequality.

These untested hypotheses to explain why productivity doesn't determine pay "strengthen" Strain's previously held "view" that productivity does determine pay, sometimes, sort of, except when it doesn't, which proves that Biden and Warren are wrong?

Or don't the data simply demonstrate that the owners of capital do their best to treat labor as a fixed cost and take all the income they can as profit regardless of how productive workers are?

There's a real issue in this discussion, but it's hidden, like a word spelled backwards in a word-finder puzzle, by the disorientation of the conservative argument. Because it's very well known to normal-minded economists (who are often conservative without leaving the reality-based community altogether) that capitalism hasn't been working the way it's supposed to in precisely these ways over the past 40 years in the US: with the slowing of productivity growth and the slowing of wage growth —which seems to have begun reversing in August 2018 (or what Brooks refers to as "the past few years"), in response to the tightening labor market, an obvious case of worker power to demand more money from companies competing for their services, though it took an agonizingly long time to get going after the 2008-10 recession (you can make me say that's probably the fault of the inadequate Obama stimulus if you want, but that's not the thing I want to talk about).

I've been looking at an interesting paper by Jason Furman and Peter Orszag (speaking of the inadequate Obama stimulus) examining whether there's a relationship between the slowdown in productivity growth and the rise in inequality since 1980 or so: did the productivity slowdown cause the inequality, as the traditional view we've been looking at through Michael Strain's funhouse mirror would have suggested (if Strain could admit that capitalism was doing anything bad)? Or did the inequality somehow cause the productivity slowdown, as a naive adherent of the Piketty school (hey, I resemble that remark!) might imagine? Or are both driven by some third factor?

I'm not going to go on and on about this, but what's interesting is the third factor Furman and Orszag choose:

A third possibility, the one explored in the remainder of this paper, is that the slowdown of productivity growth and the rise of inequality have a common cause, namely that reduced competition and reduced dynamism—in part caused by specific policy changes—have contributed to both issues.

One of the helpful things they clarify is what kind of inequality we're talking about, from the standpoint of workers:

The most important fact about inequality is that it has increased. But again, for the purpose of this paper there are several important subfacts. The first is that the increase in inequality is largely within labor income, although a reduction in the share of income going to labor and an increase in inequality within capital income have also played a role. Specifically, Table 1 decomposes the fraction of the increase in different forms of inequality that are due to increased dispersion of labor earnings (e.g., managers being paid more than line workers), increasing dispersion of capital income (e.g., some getting more of the dividends relative to others), and a reduction in the labor share (corresponding to an increase in the capital share, which is more unequally distributed). Further up the income scale the relative importance of increased inequality within capital income grows and increased inequality within labor income falls but the change in the labor share remains a relatively less important factor. 

Where the biggest source of inequality, as you've heard by now, isn't in the disparity between wage income and capital income but different kinds of wage income, CEOs vs. janitors, as Dr. Krugman and I were saying. (CEO wage income gets massively transformed into tax-privileged capital, of course, through every technique from the IRA to the stock option, and CEOs become capitalists over the not-too-long run, because they're so crazy overpaid, but it happens through their paychecks.)

Anyway, in a normal time there'd be a normal explanation of the ongoing processes of market concentration and loss of firm dynamism, that they're functions of increasing productivity/efficiency, but those won't wash in our own period when productivity is slowing.

What can explain it is a reduction in antitrust enforcement and other anti-competitive developments:'

More evidence that this increase in concentration is not the “natural” result of efficiency, but instead reflects deliberate policy choices, comes from the fact that while concentration has risen in the United States, it has fallen in the Eurozone and some European Union members, like the United Kingdom (Döttling, Gutiérrez, and Philippon 2017). Döttling, Gutiérrez, and Philippon suggest that divergent paths in antitrust efforts, which have weakened in the United States and become stronger in Europe, may be one factor contributing to the observed trends in competition. 

Other policy developments impacting this dynamic have been the increased importance of intellectual property protections, which create a legal form of monopoly, and those, such as the expansion of occupational licensing and land use restrictions, which hamper geographic mobility.

Or, as old Karl Marx could have told you (and did!), if you give free rein to the tendency of capital to seek total control over its particular domain, it will, and the economy as a whole will suffer, as far as the ordinary person trying to get ahead is concerned. The major moment in history when this problem was overcome was in the Progressive movement and its sequels after the 1929 crash and the 1939 war, when antitrust legislation (and here and there a state monopoly) were used to stop it, and historically unparalleled prosperity over the largest cross-section of societies was a result.

Because as old Karl Marx couldn't have told you, but capitalist-to-her-bones Senator Warren tells us every day, the solution to our economic problems entails breaking them up; dividing the banks and the media companies and the aerospace manufacturers and the insurers into more manageable units, and not allowing them to take over. And David Brooks is wrong (but I guess you knew that already).