Monday, January 08, 2007

The War on Wages

Representative Barney Frank (D-MA) gave a talk last week wherein he talked about the challenges for the working class. A few choice clips from his speech:

What I do want to talk about today is the economy, and it's a problem that we have in America, and it's a problem that is worldwide. It is the increasing separation of the well-being of the average citizen from overall economic growth.


The rising tide lifts all boats has always been a problem. If you think about that analogy, the rising tide is a very good idea if you have a boat. But if you are too poor to afford a boat and you are standing tiptoe in the water, the rising tide goes up your nose.


That debate appears to be over. We've given out a handout. One of the things that struck me yesterday when we were putting that together was we got some quotes from various people from the left, from the right, from the center about inequality in America and it struck us as we looked at them that we couldn't tell who said what. That's why you were given them as a kind of a matching test. There is now a consensus. The income of 80 percent to 90 percent of Americans has substantially lagged economic growth. That fight about whether or not it happened is over. The questions, though, are now: One, should we be worried about it; two, if we are worried about it, can we do anything about it; and, three, what?

Well, there were some, particularly conservatives, who said, "Oh, don't worry about inequality. Inequality, that's just a matter of jealousy. As long as everybody's got something, that's OK."

FRANK: Well, of course, part of the problem with that is that the definition of what is adequate is not a fixed point. What you believe to be adequate, what your kids believe to be adequate, what you need to live a decent life, is an evolving concept.

It's also the case that when a handful of people have a lot of money, they may be driving up prices for others. There are people, I guess, who don't care about inequality as a moral issue. I do.

But there is a broader point here about why it matters, and that's the political factor. One of the consequences of this separation between economic growth and the well-being of the great majority of citizens is that an increasing number of citizens don't care about economic growth. Not surprising. Not only do they not benefit, but in many cases they get the short-term disruptive effects.

I mean, there was a great concept from Joseph Schumpeter of creative destruction in which, as the old economic order is destroyed, resources are freed up for the new order.

Well, increasingly, we have people who see the destruction in their own lives, but don't see that they're going to be part of the new creation.

And so, for those who don't care about inequality as a moral issue or don't care that there are people who are hurting, think about what it does politically. We are now in a situation in which many of the people in the business community are very frustrated because they cannot get adopted at the national level policies that they think are important for growth.


Let me give you an example of what I think is the disingenuousness of those who say we should do trade without any regard for the environmental and labor practices of our partners.

George Bush says that one of the main reasons we cannot do the Kyoto Treaty is that it will not cover India and China, and that will put Americans at a competitive disadvantage because we will be bound by it and they won't be.

Many of us say: Yes, you know, you're right; there is a competitive advantage by not following environmental laws when we are. Let's then require of India and China that, if they want access to this great market that's the United States, that they have to do something about the environment. And we're told: Oh, no, you can't do that; that's introducing something that doesn't belong in a trade bill.

Similarly, with wages, the World Economic Forum, headquartered in Davos, just put out their CEO survey in which they noted that the Asian exporters -- the most active Asian exporters -- and the Baltic states pay wages well below what competition would suggest and what productivity would suggest -- therefore, according to the Davos report, giving them a competitive advantage in getting people to do business there.

In other words, my conservative friends understand that mistreating your workers and ignoring the environment give you a competitive advantage. They just don't want us to do anything about it.

Historically, I think they haven't wanted us to do anything about it because a lack of those things in those countries becomes a reason not to do them here.

At any rate, we are now stalled. We can't get any progress on trade, on foreign direct investment, on immigration, to some extent on the implementation of productivity.

That's why the business community ought to care. Even if inequality doesn't bother them, even if Mr. Nardelli getting $210 million for being fired when other people make $7 an hour for working very hard, even people untroubled by that -- and I envy them the ease of their consciences; they must get a lot more sleep than a lot of us do -- if they don't care on those grounds, they ought to recognize that we are in gridlock;

Editorial comment: There are people who argue that sociopaths are often more successful in business precisely because of their mental illness.

And I understand -- people say to me, "Well, look -- look at what Wal-Mart does. I mean, look what it does for the consumer."

Well, if you can't afford health care for your kid, a cheap T- shirt is not much of a consolation.

And this anti-union policy that we have has been a serious problem. The health care situation in America. We should be -- and this is in business's own interest. It costs more to make a car in Michigan than in Ontario -- by a significant amount -- solely because of our health care system.

If we were to have a universal single-payer health care system, which took health care out of the wage system -- stop depressing wages -- we encourage people to join unions, and we did other things, including in the tax system, we would begin to reverse the inequality.

And there's one very important piece to this, and that's the role of government. Government plays a very important role in achieving the quality of our life and in reducing inequality.

That didn't used to be controversial. A guy named Roosevelt got elected four times on that issue. That was the New Deal: use our collective capacity to work together not to interfere with the free enterprise system, but to work alongside it so you reduce inequality.

Corporate profits as a percentage of the national economy have gone way up in the past five years. God didn't do that. The economy did it and the government helped and -- although to some of these people God and the government are the same thing, but I obviously don't agree with that.

We have now got the beginning, I hope, of an uptick in real wages. But you know what's happening? Many of these same business community leaders and others who complain about they can't get support for trade and they can't get support for immigration and they can't get support for foreign direct investment, they're now worrying about wages going up. Read the financial pages of the papers. There is only one concern about inflation: wages may go up.

Wages have significantly lagged growth. They have significantly lagged productivity. And if they even begin, as they have now, to start going up, respected opinion tut-tuts and says, "Oh, that's a terrible idea; we can't allow that to happen."

Ben Bernanke, to his credit, has said, "Well, if wages go up to the level of productivity, it's not inflationary."

The fact is, we have a catch-up period for wages and people are now saying, "Well, you know what? Productivity may be slowing down, things may be getting worse. We'll have to clamp down." Yes, well, you know what? Everybody else has had a pretty good dinner except the people working for wages. Everybody else ain't a lot of people.

But telling the people who work for wages, "Oh, sorry, just as you were about to eat we're closing the restaurant" -- do it if you think it's right, but don't be surprised when their reaction is this negative one you get.

It has always been my philosophy that no one should be deprived of food, water, shelter, medical care or the means to provide for themselves. Obviously, keeping wages so low and not having some societal provision for health care conflicts with that philosophy.

John Edwards, who just announced that he is running for President of the United States, has stated that "poverty is the great moral issue of our time." I agree. Of course, we are both lawyers, so it is not surprising that we think alike.

I am a capitalist, so I think it is important to maximize profits. But I am also a lawyer, so I also understand the importance of "doing justice." It is also part of my philosophy to balance maximizing profits with the importance having social justice. Right now, our country is out of balance. We have a system that is maximizing profits, but it is not doing social justice.


Teri said...

I am really concerned by his idea that we should have government mucking about in the market. I realize that it does and has been for some time. Central planning really does not work, nor does price controls.

I do not see how we are going to be able to compete with folks who can do the same work for considerably less than we can.

OkieLawyer said...


Here is the problem with that argument: you cannot have justice without government. Furthermore, we have tried to let the market solve the wage issue. The problem is that the assumption has always been that two parties to a contract have equal bargaining power. The reality is that large corporate employers and individual employees do not have equal bargaining power. That is why either unions or governmental interference is necessary.

People or entities that have more power relative to the opposing power in contractual negotiations will use it to exploit that power discrepancy to the detriment of the other party -- and justice.

That is why governmental action is necessary.