Building an Economy that Works for Everyone

Cutting Workers’ Pay and Benefits Doesn’t Help Economic Recovery

By Stan Sorscher, from the Huffington Post:

Stan Sorscher, EOI Board member

Public attitudes toward workers send a weird mixed message lately. We are busy ripping out support for wages and benefits, while simultaneously asking why the recovery is going badly. Diane Ravitch’s bitter joke captures the spirit of this contradiction: “It reminds me of an old Soviet joke where a peasant says, ‘My neighbor has a cow and I have none, I want his cow to die.'”

Economic growth is a chicken-and-egg story. Workers will have jobs when businesses hire them. Businesses will hire when they have prosperous customers.

This leads to two important realizations. First, workers are also consumers. Second, the real obstacle to hiring is lack of customers.

Our economy has money to invest. Businesses are sitting on trillions in profits, and banks have trillions in excess reserves. Similarly, the obstacle to hiring is not high taxes. GE and a large fraction of all US businesses paid no federal income taxes last year. Businesses pay a shrinking share of federal taxes — only 6.6% in 2009 — while households pay in increasing share.

What’s happened to family income? Wages have been stagnant for 30 years, while productivity more than doubled in the same period. As business and government shift costs to households, we have less to spend on other things. Health care costs are shifting steadily to families as employers and governments reduce their social commitments. Families pick up a greater share of education costs. Pensions have transformed from a social and legal contract, to an inconvenience that can be cast aside. Job security is so last century. In the global economy, no worker can count on a long stable career.

Pundits tell us that the new generation of young workers are fine with contingent work, or as it’s known in Europe — precarious employment. I recently heard a futurist tell employers, “you get what you want (no social contract with employees) and young workers get what they want (precarious employment).” That made sense to him, in a futurist kind of way, although he conceded that America had a “social safety net problem” that he could not solve.

Here’s the catch: in the long run, consumption cannot increase faster than income. It has now been the long run. The Soviet villager’s self-limiting sentiment will lead us to a diminished future — a Lesser America, where a privileged few achieve success at the expense of most of us.

I heard the opposite sentiment in a radio interview with Eric Liu who said, “We’re all better off, if we’re all better off.”

We are told we can’t afford social investments. Sure we can. To me, social investment often out-performs what I could do as an individual.

Consider this simple example: I choose to buy insurance on my car and home. That’s much better than self-insuring — paying out of pocket when something bad happens. Insurance, as conceived by the pre-capitalist philosopher, Benjamin Franklin, is an efficient and business-like way to “socialize” costs, so everyone pays a small predictable amount. When an insured individual experiences a loss, insurance makes the policy-holder whole.

If I decide to self-insure, I would want to save enough to cover a big loss — maybe at the 90th percentile, because I never know how big a loss I might suffer. Furthermore, my savings would need to be prompt. If I suffer a loss before I’ve saved enough, I am wiped out.

Similarly, a family saving for their children’s education should over-save, well in advance. Same for health care, and same for retirement. The optimal individual strategy is to over-save, or save “preemptively” as it’s called, to build up a buffer.

We can go it alone, self-insuring our health care, education and retirement or we can treat these as social investments, at least at the basic level.

In the last 30 years, we’ve chosen to not have our cake and not eat it, too. While we cut social investments, household savings actually dropped from about 10% of disposable income to nearly zero before bouncing off the floor in the last few years.

If potential expenses are properly socialized, then gains and losses average out in the large risk pool, and the total savings required is much less. Our money would be better spent, fewer neighbors would be wiped out, we would be more prosperous as a group, and businesses in our community would have more reason to grow. That’s good business sense and it’s good for business.

In our current cow-envying mood, we will continue seeing more home foreclosures, medically forced bankruptcies, plant closures and layoffs, crushing student loan debt and very poor job security. Small wonder why we have weak job growth.

An irony, here, is too glaring to pass. Taking money from the top 1% in the form of taxes is unthinkable — they need a tax cut! However, it’s OK to cut wages and benefits for 90% of American families, squeeze them out of political activity, and permanently shift economic and political power to those who already have plenty of both. We are watching a huge transfer of wealth from the bottom 90% to the top 1% of the population.

We have worked hard to make business succeed. We mistakenly pulled a piece out of our economic puzzle and it needs to go back in — prosperous customers with good jobs.

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