Sunday, October 10, 2010

The Peoples' Slice Of The Pie

Economists are forever trying to come up with theories to explain unemployment and wages.  It is always a "hot" topic, and the Bureau of Labor Statistics (BLS) monthly release on the employment situation is arguably the one statistic which can - and does - move markets most.

I won't go into the various economic theories on how wages, unemployment and inflation all come together to shape (or "clear"), the labor market.  I have a more fundamental question, instead:  How important are wages in today's economy, overall?  Or, to put it more precisely, how come we have allowed gainful employment and earned income to become so unimportant?

The following chart shows that wages and salaries as a percentage of GDP have been dropping steadily for 40 years, from a high of 54% of GDP in 1970 to a low of 43.5% this year (see chart below).  Including other forms of compensation like pension and medical benefits does not alter the picture appreciably: total compensation of employees went from 60% of GDP in 1970 to 54% this year.

Simply put, then, working people are getting a smaller slice of the economic pie.

Yeah, The Pie Is Bigger But Your Slice Is Smaller

This is as major of a transformation of the economy as it gets but it is almost never discussed by academic economists, who are forever trying to figure out how to model unemployment, or interest rates, or whatever econometric datum strikes their fancy.  It's like pondering the price of candle oil while Rome burns.  And they get Nobels for it, too!

(A small aside about the Nobel Prize for economics: it was not part of Alfred Nobel's will in 1895.  It was instituted and funded much later, in 1969, by Sweden's central bank;  it is formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.  Considering its provenance in the depths of Money Central, it's highly unlikely that a more "radical" economist is ever going to be awarded one. )

Anyway, who's been eating the Peoples' Slice Of The Pie (TM) then?

Is it proprietors of small businesses or farms?  Hardly.  Their income as a share of GDP was 8% in 1970 and it's still around 7% today.

For a clue, look at the following chart of net dividends as a percentage of GDP: they have steadily climbed over the years and literally soared after 2003 to nearly triple what they were in the 70's.

If stock ownership was even somewhat evenly distributed amongst Americans I would have no real problem with this picture.  But, it isn't - not by miles and miles. The richest 10% families owned in 2007 a mean $700,000 worth of stocks, while the next 15% owned a mere $53,000.  The rest, i.e. 75% of the people, owned next to nothing at all (see chart and table below). 

The United States, indeed the entire West, has in recent times been transformed from a society defined by the constructively paired work-income relationship, to one oriented towards an asset-debt pair.  Even worse, most assets are now owned, controlled and exploited by an ever-shrinking minority of super-rich, forcing the vast majority of the people into virtual debt slaves.  That's what Virulent Capitalism is all about, in my opinion.

But does anyone really give a hoot?  Are important economists really screaming bloody murder?  Are politicians really taking notice? The short answer is no.

Notice my main recommendation on the right: Animal Spirits is an excellent book authored by George Akerloff and Robert Shiller, two economists who hardly fit the classical model.  For example, they make mincemeat of the deeply-ensconced theory that humans are constantly acting in their so-called "rational" self interest when they make economic decisions.  Akerloff ans Shiller are willing - and scientifically able - to tear down the entire foundation upon which classical economics has been resting for centuries.

And yet...

Whilst they correctly identify the causes of the current crisis and properly point accusingly to all the proper directions, what is it that they recommend as a solution?  That the Fed should target credit expansion, i.e. make as much credit available to the economy as possible.  Not a word about the huge deficit in earned income, not a peep about the enormous asset ownership gap.  Instead, more credit, more debt for the masses.   

Sorry guys, that's plain insane.

Don't get me wrong.  Animal Spirits is an otherwise excellent book, well worth reading for its spirited departure from classical metrics-based economic theory.  Buy it, read it, profit from it.  But, my point here is that even such forward-thinking economists atavistically fall back to old remedies when faced with financial crises.  It's like a modern day doctor correctly diagnosing TB and then prescribing a long stay in a Swiss mountain sanatorium as a cure.  Well, good luck with that...

(Maybe it's because Akerloff's wife is none other than Janet Yellen.  Yup, maybe he's being very rational, after all.  From a personal peace-in-the-family standpoint, of course.  Eh...)

P.S.  This post was written during the weekend, so I should seriously consider testing myself for ESP because the Nobel committee just announced its choices for the aforementioned Economics prize - and guess what?  They gave it to three economists for their work on unemployment, job vacancies and wages.  Same old, same old unfortunately. 


  1. Holing up in sanatoriums for TB ?
    Why not ? At least LOTS OF PEOPLE got to breathe fresh air in the mountains (well, those with money. The poor rotted in the slums and died in squalid conditions.).
    I like what you have written about transforming salaries, etc into assets/debts.
    But think about it...
    The idea of WORK, and salary indicates a certain DYNAMIC, and more complex social relationships. These ideas are much less REDUCTIONIST that the ideas of assets/debts which correspond perfectly to the BINARY accounting sheets. JUST NUMBERS.
    We have been busy making our world look like the computers we have constructed. We have been busy making our language sound like computer speak.
    We are reaping what we have sown.
    I should remind you that SALARIED work is relatively recent in human history. And hourly paid salaried work is REALLY RECENT.
    I keep saying that this crisis is truly about work.
    What IS it ?
    What's it.. FOR ?
    How much is it.. WORTH to us ?
    How are we going to decide how much, and what something/work is WORTH ?
    Big, big questions.
    We have been busy sticking a new aristocracy in place. One with NO ideological obligations. One whose idol is money.
    Bad deal.

  2. People generally save for retirement.

    $700,000 isn't that much in retirement-world in terms of assets, particularly when your assets are returning 0%, which is actually above the 10-year annualized return for the S&P 500.

    And dividends are what, 2%?

    Everything is yielding 2% these days and all retirees are spending down their assets.

    Pensions are about to go bust.

    I think this "problem" is an artifact and will resolve itself (badly) in the future.

  3. Debra says:

    "We have been busy sticking a new aristocracy in place. One with NO ideological obligations. One whose idol is money."

    That's a solid metaphysic for you.

    I have more money than everyone else, therefore I am.

  4. Spending YOURSELF into existence ?
    That's called... idolatry of money.
    OUR old testament prophets warned US about the dangers of trying to spend ourselves into existence...
    Every three or four generations, Israel (or the U.S.) finds God. The next two or three generations are spent losing God in buying and selling.
    The bottom falls out.
    WE the people find God again, and SWEAR THIS WILL NEVER HAPPEN AGAIN.
    Then we the people go back to buying and selling, etc etc, and the whole shebang starts up again..
    See why I say that the ducks are smarter than we are ?
    Some pretty tough ideological choices coming up here. IN MY OPINION, this is all about retirement, anyway...
    What kind of a society do you want to live in ?
    One where.. people stow their stash under the mattress and wait seventy years in order to be able to spend it (metaphorically speaking, of course..) under the mistaken impression that everyone CAN and MUST take care of number 1, and ONLY number 1, or
    One where people are exchanging, sharing skills, money, commodities, and HAVE FAITH that they can count on a HUMANE social body to ensure that they not be thrown to the dogs (or gassed...) when they can no longer WORK to put meat and potatoes on the table.
    Society number one has decided that NO FAITH is necessary to get anything accomplished in it. It is constantly lobbying for independance, competition, a dog eat dog relation between its members.
    Society number two recognizes that we depend on our neighbor, and that we need to be able to have faith in others in order to survive.
    (Number 1 is falling apart pretty quickly right now, from my perspective...)

  5. smaller pie and inflated away per mouse click... criminal!

  6. I just put up a post on my blog: Machiavellian Economics (my first post of substance since 2008).

  7. Hot off the presses..
    Eight out of ten refineries are now on strike in France.
    Gas should start getting scarce early next week.
    Anybody... CARE TO JOIN US ??
    WE're... fighting for the future of WORK.
    And YOU ??
    When are YOU going to start fighting ?
    (My apologies to those who are already fighting...)

  8. could that to some extent answer your question:

  9. I have to agree with you that people working are getting smaller slice of the economic pie. Worse, with the economic crisis going on, many are starting to lose their work resulting to massive unemployment. It is not surprising that many have incurred debts. This is not surprising especially if they know not how to manage their debt problems.

  10. This is a wonderful post. The things given are unanimous and needs to be appreciated by everyone.
    Debt Relief