Blog Archives

Here’s Why Wages Have Stagnated–and Will Continue to Stagnate

Mainstream economists are mystified why wages/salaries are still stagnant after 7+ years of growth / “recovery.” The conventional view is that wages should be rising as the labor market tightens (i.e. the unemployment rate is low) and demand for workers increases in an expanding economy.

But wages are only rising significantly for the top 5%, while workers between the bottom 81% who have seen their household incomes decline and the top 5% are experiencing stagnant earnings.

We can see how the top 5% have pulled away from the bottom 95% by examining household budgets: spending by the top 5% has soared compared to the stagnant spending of the bottom 95%.

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If You Want More Jobs and More Job Stability, Disrupt More, Not Less

Two recent studies reflect the ongoing rapid transformation of the U.S. economy: The New Map of Economic Growth and Recovery (eig.org)

The U.S. Labor Market Is Far More Stable Than People Think (itif.org)

I’ve addressed the dynamic mix of technical and entrepreneurial skills, social and financial capital and infrastructure of opportunities required to successfully navigate this transformation in my books Get a Job, Build a Real Career and Defy a Bewildering Economy and The Nearly Free University and the Emerging Economy: The Revolution in Higher Education.

Here’s the problem in a nutshell: job growth, new businesses and wage gains are becoming increasingly concentrated in a small number of geographic regions and a narrow class of workers / entrepreneurs while the overall economy struggles to maintain productivity gains, which are ultimately the only sustainable source of prosperity.

the productivity growth rate has been slumping since 2005.

Longer term, productivity gains have flowed to the top 5%–those workers and entrepreneurs with higher levels of education, ownership of assets and access to cheap credit:

This chart shows the concentration of income in the top tier: the top 5% have garnered the gains while the incomes of the bottom 95% have stagnated.

The overall employment picture has changed for the worse: the percentage of the populace that’s employed has fallen from peak periods.

The number of workers with full-time jobs has stagnated in the 2000s, breaking a 50-year trendline of steady growth of full-time jobs.

The growth of new businesses (annual change in the number of firms) has also cratered: business creation never recovered in the “recovery.”

The number of new businesses in the US is falling off a cliff

Growth in jobs and new business has become increasingly concentrated in a handful of high-population metropolitan counties. In the high-growth early 1990s, half of all new businesses sprouted in 125 counties nationwide. In 2002-2006, the number of counties that were home to half of all new enterprises fell to 64. In the “recovery” years of 2010-2014, half of all new firms arose in a mere 20 counties nationally–an astonishing concentration.

The point of The U.S. Labor Market Is Far More Stable Than People Think is that disruption generates more stability in the job market, not less. The obvious stagnation of employment and wages for the majority of workers has created a feeding-frenzy of potential explanations and causes, and this has led to all sorts of proposed policy tweaks.

The point here is: if you want growth and stability, disrupt more, not less. The vast majority of policy tweaks are ultimately aimed at protecting privileged classes from disruption and reducing disruption of the status quo–in government, higher education, healthcare, defense, etc.

Reducing disruption to protect the privileged status quo is akin to poisoning the patient to “protect them from harm.” The only way to successfully navigate a rapidly transforming economy is to embrace disruption by making it easier and cheaper to disrupt the protected status quo.

In my book The Nearly Free University and the Emerging Economy: The Revolution in Higher Education, I lay out a blueprint for reducing the cost of college by 90% while greatly improving the value of that education.

It’s Time to Ditch 4 Years of Costly College for Directed Apprenticeships (June 2, 2016)

One reason why jobs and entrepreneurial are increasingly concentrated in counties with high densities of population and capital is these locales possess the infrastructure of opportunity I describe in my book Get a Job, Build a Real Career and Defy a Bewildering Economy– the traits author Eric Weiner explored in his book The Geography of Genius: A Search for the World’s Most Creative Places from Ancient Athens to Silicon Valley.

I have often discussed the cultural capital and decentralized, dynamic models this great transformation favors, for example: Flexible Labor Is the Future (June 1, 2016)

In essence, we have a choice: 1) try to freeze history in its tracks, so those who are currently privileged remain privileged. This will slowly strangle the economy and increasingly concentrated gains in the hands of the few. Or 2) embrace disruption of the status quo as the only path to widespread prosperity and stability.

A Radically Beneficial World: Automation, Technology and Creating Jobs for All is now available as an Audible audio book.

My new book is #5 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website.

 

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Japan: A Future of Stagnation

One of our longtime friends in Japan just sold the family business. The writing was on the wall, and had been for the past decade: fewer customers, with less money, and no end of competition for the shrinking pool of customers and spending.

Our friend is planning to move to another more vibrant economy in Asia. She didn’t want to spend the rest of her life struggling to keep the business afloat. She wanted to have a family and a business with a future. It was the right decision, not only for her but for her family: get out while there’s still some value in the business to sell.

I have written a number of entries on Japan’s economic downward-spiral and its largely hidden social depression over the past decade, most recently: Global Bellwether: Japan’s Social Depression (September 25, 2014)

Lessons from Japan: Decades of Decay, Unavoidable Collapse (April 26, 2016)

The Keynesian Fantasy is that encouraging people to borrow money to replace what they no longer earn is a policy designed to fail, and fail it has. Borrowing money incurs interest payments, which even at low rates of interest eventually crimps disposable earnings.

Banks must loan this money at a profit, so interest rates paid by borrowers can’t fall to zero. If they do, banks can’t earn enough to pay their operating costs, and they will close their doors.

If banks reach for higher income, that requires loaning money to poor credit risks and placing risky bets in financial markets. Once you load them up with enough debt, even businesses and wage earners who were initially good credit risks become poor credit risks.

Uncreditworthy borrowers default, costing the banks not just whatever was earned on the risky loans but the banks’ capital.

The banking system is designed to fail, and fail it does. Japan has played thepretend-and-extend game for decades by extending defaulting borrowers enough new debt to make minimal interest payments, so the non-performing loan can be listed in the “performing” category.

Central banks play the game by lowering interest rates so debtors can borrow more. This works like monetary cocaine for a while, boosting spending and giving the economy a false glow of health, but then the interest payments start sapping earnings, and once the borrowed money has been spent/squandered, what’s left is the interest payments stretching into the future.

Central banks played another game: buying assets to inflate asset bubbles, bubbles that were supposed to spark the wealth effect: once businesses and households see their net worth rise as assets bubble higher, they will be psychologically induced to borrow against that new wealth and spend, spend, spend.

The Bank of Japan has played this game to little effect. The BOJ now owns a significant chunk of Japan’s stock market, but the real economy continues its long descent into stagnation.

Demographics matter. As the populace ages, older people spend less and sell assets to raise cash for their non-earning retirement years. As young families have fewer children, consumption declines accordingly.

Take a declining population with declining rates of productivity growth and load it up with debt, and you get a triple-whammy recipe for permanent stagnation.There are Degrowth strategies that make sense because they’re designed to be sustainable, but first the systems that have been designed to fail–Keynesian stimulus policies and the banking system–must be allowed to fail.

A Radically Beneficial World: Automation, Technology and Creating Jobs for All is now available as an Audible audio book.

My new book is #5 on Kindle short reads -> politics and social science: Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle ebook, $8.95 print edition)For more, please visit the book’s website.

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Work Won’t Be Scarce–It’s Paid Work That Will Be Scarce

All the media chatter about work disappearing due to automation fails to draw the critical distinction between useful but unpaid work and profitable work.Since value (and profits/wages) flow to what’s scarce, what matters is not the decline of useful work–there’s plenty of that even in a society that has automated production–but the supply of paid work–work that is profitable and hence worthy of wages.

Mark Jeftovic and I discuss work, profit and new models of paying for useful work(44:47) in a free-ranging podcast on my book A Radically Beneficial World.

The great fantasy that many are depending on to solve the decline of paid work is taxing the robots and software that ate all the jobs. These taxes are supposed to pay for the Universal Basic Income that everyone will enjoy once work is automated and jobs become scarce.

The problem with the fantasy is that profits only flow to what’s scarce, and as the tools of automation are commoditized, they will no longer be scarce. Once anyone can buy the same robots/software you own, where is your competitive advantage? If anyone on the planet with some capital can buy the same robots and software, where is the pricing power that is essential to reaping big profits?

Commoditization and globalization push profits down to near-zero. In a world of ever-cheaper, ever more abundant commoditized tools and software, it becomes much more difficult to generate increases in productivity and profits.

Those who dream of the the end of work forget that robots will only be purchased to perform profitable tasks. Much of human life is not profitable. For example, maintaining dedicated bikeways is useful work that serves the health and transportation needs of the community and economy.

There is no way to make this work profitable unless you charge bicyclists for using the bikeways, which defeats the purpose of the bikeways.

The typical response is that governments will pay for robots to maintain bikeways.But that leads right back to the decline of profits and paid labor: since government depends on profits and paid work for its revenues, as those decline, where will government get the revenue to make good all its vast promises for pensions, services, healthcare etc., and buy and maintain robots to do unprofitable but useful work such as maintain bikeways?

Take a look at these charts of productivity and income. Ultimately, increases in jobs, wages and profits flow from increases in productivity, which typically rises as a result of investments in better tools, training and processes.

Productivity struggles when investment stagnates, external costs (such as paying to remediate industrial pollution) reduce the available pool of capital/profits to invest, and new technologies are either limited in scope or do not scale well.

All these factors played a role in the 15-year stagnation of productivity from 1966 to 1980.

As computer/digital technologies improved and dropped in price (i.e. scaled up to impact the entire economy) and financialization (i.e. abundant credit and leverage, and the commoditization of financial assets) provided new sources of profits, productivity increased from 1981 to 2005.

Since then, growth of productivity has been in a freefall: financialization has reached diminishing returns, the technologies of automation have been commoditized, and globalization has opened up a vast new labor force and new places to invest capital.

In sum: what was once scarce is now abundant, and thus it no longer generates value or profits.

When new productivity tools were scarce (unique to American factories and workplaces) and required a growing labor force, productivity growth translated into higher wages. But when productivity growth relied on financial capital and processes and higher-level technical/managerial skills, the gains flowed only to those who owned these processes and skills: generally speaking, the wealthy owners of productive capital and the highly educated technocrat/managerial class (the top 5% and to a lesser degree, the top 20%.)

All of which is to say the model of paying wages for profitable work (or collecting taxes from profits and profitable work to pay government workers) is broken: not slightly broken, but fundamentally broken.

We need a new economic model that recognizes the value of useful work that isn’t necessarily profitable, an economic system that creates money to pay those doing useful work at the bottom of the pyramid rather that creating money only for banks, corporations and financiers at the very top of the pyramid.

There is plenty of work that is useful but not profitable. Work won’t disappear; it’s paid work and profits that will become increasingly scarce. We need a new system that enables an abundance of paid work. This is the topic of my book, which Mark Jeftovic and I Discuss in this podcast (44:47).

A Radically Beneficial World: Automation, Technology and Creating Jobs for All is now available as an Audible audio book.

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What Killed the Middle Class?

Everyone knows the middle class is fading fast. I’ve covered this issue in depth for years, for example: Honey, I Shrunk the Middle Class: Perhaps 1/3 of Households Qualify (December 28, 2015) and What Does It Take To Be Middle Class? (December 5, 2013)

This raises an obvious question: what killed the middle class? While many commentators try to identify one killer cause (for example, the U.S. going off the gold standard in 1971), the die-off of the middle class is more akin to the die-off in honey bees, which is the result of the interaction of multiple causes (factors that increase the toxic load dumped on bees and other pollinators by modern agriculture).

Longtime collaborator Gordon T. Long and I discuss the decline of the middle class and other key topics in a new 29-minute video How did that work out for you?

So where do we begin this detective story? With the engine of all real prosperity, productivity. This chart reveals that wages stopped rising with productivity around 1980.

Here’s another look at the same phenomenon:

Productivity has been slipping since around 2003: Alan Greenspan:”Productivity is Dead”

Cause #1: declining productivity, which means the pie of real wealth is no longer expanding.

Exhibit #2: middle class wage earners have not received any of the gains.Wages as a percentage of GDP have been falling for decades, with occasional blips up in tech/housing bubbles:

Inflation-adjusted household income has dropped back to levels first reached in the 1980s:

More recently, wages have actually declined, regardless of educational attainment:

Income gains have all flowed to the top 10%, with most of the gains being concentrated in the top 5% and top 1%:

If the middle class didn’t receive any of the gains, who did? Corporate profits have soared to unprecedented levels:

Cause #2: all the gains in the economy have flowed to corporations and the top 10% of financiers, managers and technocrats.

But wait a minute–hasn’t the rising stock market enriched the middle class?Short answer: no. Middle class household wealth has absolutely cratered since the top of the housing bubble in 2007, and hasn’t recovered.

Why? Middle class wealth is based not in stocks but in the family home. The middle class does not own enough financial assets to have participated in the latest stock market bubble, while the majority did not recover the wealth lost in the housing bubble bust. This is the cost of allowing the financial sector to financialize housing and mortgages in the 2000s.

Cause #3: the middle class doesn’t own the “right” assets to benefit from systemic financialization and financial speculation.

How about rising costs? The federal agencies tasked with measuring inflation assure us inflation is near-zero. But these measures underweight big-ticket costs like healthcare and higher education, where costs have exploded higher, greatly increasing the burden on the middle class:

Cause #4: soaring costs of big-ticket expenses such as higher education and healthcare. Saving $10 on cheap jeans imported from Asia does not make up for 135% jumps in tuition and college fees, and $100 decline in the cost of a laptop computer does not make up for healthcare insurance and out-of-pocket expenses in the tens of thousands of dollars per household.

Correspondent Kevin K. submitted this article and accompanying note: Colleges with the biggest tuition hikes (my ala mater University of Hawaii-Manoa clocked in with an increase of 137% since 2004.)

“It looks like the article linked above didn’t do much research since:
University of California Davis
2004 in-state tuition $5,684
2015 in state tuition $13,951
Percentage increase 145.44 percent”

There is no way middle class households with declining real incomes can pay soaring costs imposed by state-enforced cartels and gain ground financially. If the four structural trends highlighted above don’t reverse, the middle class is heading for extinction, the victim of financialization, the glorification of financial speculation via central bank-central state policies, the decline of productivity and rising costs imposed by state-enforced cartels.


We need a new system, one we control from the ground up:
A Radically Beneficial World: Automation, Technology and Creating Jobs
for All
. The Kindle edition is $8.95 and the print edition is $20.82.

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Why Has the Labor Participation Rate Plunged?

Why has the percentage of the population that’s in the work force declined so dramatically? It’s a question many have asked, and Gordon T. Long and I attempt to answer in our most recent video program The Participation Rate Mystery–Solved.

Why does the Participation Rate matter? Intuitively, we all understand that the lower the participation rate (i.e. the percentage of the population with a job or actively looking for a job), the greater the tax burden on the remaining workers.

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The “American Dream” is Over–and Voters Know It

Despite a ceaseless propaganda campaign declaring all is well with the U.S. economy, the Status Quo is fragile–and voters know it. Not only do they know the economy–and their financial security–is one crisis away from meltdown, they’re also fed up with all the official gerrymandering of data to make the economy appear healthy.

The Economy Is Better — Why Don’t Voters Believe It?

The American Dream–characterized by plentiful jobs offering living wages, security and opportunities to get ahead–is over, and voters know this, too.People are realizing the U.S. economy has changed qualitatively in the past 20 years, and claims that it’s stronger then ever ring hollow to people outside Washington D.C., academic ivory-towers and ideologically driven think-tanks.

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The Changing World of Work 2: Financialization = Insecurity

Promises of wealth and security are far more contingent than is being advertised.

The Millennial Generation, if we’re to believe various polls, aspires to either make boatloads of money on Wall Street, or secure a can’t-be-fired job in the government. Given the dominance of finance and an economic backdrop of rising insecurity, these are rational choices.

But all those Millennials hoping to work for Goldman Sachs does raise a question:when did playing financial games become so much more profitable than producing goods and services?

And that raises another question: is the dominance of the FIRE sectors (finance, insurance, real estate) permanent or cyclical?

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How the Middle Class Lifestyle Became Unaffordable

There are four structural drivers behind the soaring costs of the middle class lifestyle.

Why have the costs of a middle class lifestyle soared while income has stagnated?Though it is tempting to finger one ideologically convenient cause or another, there are four structural causes to this long-term trend:

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