September 20, 2011

Why no increase in living standards?

In the excerpt below, economic historian Martin Hutchinson sets out clearly that real incomes for almost all Americans have not increased for a long time. Even the entry of many more women into the workforce has not helped. In the light of past income gains and all the technological progress over recent decades, this is pretty astounding. So why?

Congress, is the simple answer, sometimes with the assistance of the President. Their ever-increasing and amazingly stupid meddling in the economy has choked off growth. The half a billion dollars that Mr Obama recently wasted on a failed "green jobs" company (Solyndra) is merely the latest example of that.

As Hutchinson points out in detail, the blizzard of regulation does fairly closely coincide with the economic pause. He then goes on to blame a second factor for the pause: The expansion of international trade. But that is mightily eccentric. From ancient Athens onward, trading nations have always been beacons of prosperity -- so I think we can regard Hutchinson's excursion in that direction as either a descent into populism or a desire to provoke, probably the latter.

But there IS a second cause of the economic hiatus. The blizzard of regulation has produced both direct and indirect harms. Hutchinson concentrates on the indirect harms: The innumerable costly barriers that business now has to surmount before they can produce anything.

Quite amazingly, however, Hutchinson overlooks the direct harm of ever-increasing regulation: The vast expansion of a largely useless bureaucracy. It is the bureaucrats who are eating the worker's lunch. Why does America need Federal departnents of health, education and the environment, for instance? The States all have departments dealing with those matters. Abolishing all the Federal departments that overlap with State functions would slash the bureaucracy hugely and free up the penpushers to do something useful.

Making a useful citizen out of a penpusher would not happen overnight but with retraining it could happen over time. And doing something useful -- something people will voluntarily pay for -- is what wealth consists of. The national wealth consists of goods and services, not bits of greenbacked paper. The wealth is what the money will buy, not the money itself.

So if Obama had something more than a vacuum between his ears he would be blaming bureaucratic over-reach, not "The rich" for America's present doldrums

The Census Bureau’s study of American incomes, poverty and health coverage issued last week was most interesting when considered, not as a metric of this recession, but as a long-term picture of where American living standards are going. If median incomes are back to 1996 levels in real terms, then the stagnation which followed the 1973 living standards peak has intensified and the prognostication for the future must be thoroughly unpleasant. It’s thus worth examining how much of the decline is only a medium-term problem, due to mistaken policies that can be reversed, and how much is an inevitable and permanent decline from what may have been a fleeting middle class Nirvana in 1950-73.

Real U.S. median household income of $49,445 in 2010 was 6.4% below its level in 2007 and 7.3% below its peak in 1999. Given the performance of the economy it’s likely that this position has worsened in 2011. More alarmingly, median household income is only 0.9% above its value in 1989 and 6.3% above its level of 1973. For most households, an entire working life of 38 years has elapsed with no significant increase in living standards. As is well known, the dispersion of income has also sharply increased; in 1973 only 1.2% of households had an income above $200,000 in 2010 dollars, whereas in 2010 3.9% of households exceeded that level. The middle middle class, with incomes of $35,000 to $74,999 has shrunk from 40% of the population to 31%.

Even this grim tale does not give a full picture of the decline, because household income has been sustained compared to 1973 by a much higher proportion of women in the workforce. Real median male earnings have declined by 4% since 1973, whether you consider all men or only those with full-time, year-round jobs. However the picture is brighter for women, whose workforce participation rate was around 70% of men’s in 1973 if you consider all jobs, or a mere 43% of men’s participation if you consider only full-time, year-round jobs. Today female workforce participation is 90% of male whichever way you look at it. Furthermore women’s earnings have done much better than men’s, up by 85% for all workers or 33% when only full-time workers are considered. Still the bottom line is that for traditional families, real incomes have only increased since 1973 at the cost of the wife going out to work and childcare being hired (if necessary.)

Unsurprisingly, the U.S. workforce is thoroughly disgruntled, with attitudes to public institutions, politicians, churches the media etc. having declined catastrophically since the 1970s. This is in no way a sign of deteriorating national character, but simply of stagnating and in many cases declining national fortunes.

There appear to be two culprits for stagnating or declining living standards, apart from technological change, which may also have played a complex role. The first was a blizzard of regulation beginning in the 1960s and intensifying after 1970, with a second burst in 1989-94 and a third since 2009. In the 1970s, living standards’ fall from their 1973 peak coincided with (i) more U.S. income going into environmental cleanup (probably mostly beneficial, even if not directly included in GDP) (ii) into intensified safety and workplace welfare legislation (a bonanza for trial lawyers but probably little benefit to others, and certainly tending to reduce wages and increase healthcare costs) and (iii) such nonsenses as the Corporate Average Fuel Economy standards, which added a huge drag to the U.S. economy, wiped out well over a million high-paid jobs in the U.S. automobile industry and achieved far less fuel saving than would have been achieved by a 50 cent tax on gasoline. Second and third bursts of regulatory hyperactivity, in 1989-94 and since 2009, have coincided with further erosions of U.S. living standards; this is most unlikely to be a coincidence.

The other major culprit, which kicked in around 1995 or so, is globalization, caused by the immense technological change of the Internet and modern cellphones, which have made multinational logistical sourcing chains infinitely more efficient and cheaper. This is not simply a one-off effect; outsourcing a product or service to India, China or Vietnam not only makes it cheaper, but also increases the capabilities of the local Indian, Chinese or Vietnamese workforce, raising its capability still further and making it competitive in more sophisticated products and services. In this respect David Ricardo’s Doctrine of Comparative Advantage, which essentially said that outsourcing was beneficial to both the rich outsourcer economy and the poor outsourcee economy, has been proved to be completely wrong. Ricardo failed to take account of the improved capabilities in the outsourcee that would result from the outsourcing, and the ability of newly empowered impoverished outsourcee workforces to learn the business, clamber up the value chain and eat the outsourcer’s lunch.

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