"The Labouring Classes Should Have a Taste for Comforts and Enjoyments"

McDonald's model budget for its minimum-wage employees -- along with the smug, fatuous, those-people-aren't-like-us-dear defenses of it -- has been the target of well-deserved scorn.

This kind of thing has been around forever (or at least as long as capitalism). Two hundred years ago, liberal reformers offered "Promoting Sobriety and Frugality, and an Abhorrence of Gaming"as the solution to the collapse of wages following the Napoleonic wars, and gave workers instruction on "the use of roasted wheat as a substitute for coffee." You could make an endless list of these helpful suggestions to the poor to better manage their poverty.

To be fair, liberals today do mostly see this stuff as, at best, an effort by low-wage employers to divert attention from their own compensation policies to the personal responsibility of their workers. And at worst, when the budget help includes assistance enrolling in Medicaid or the EITC, as a way of getting the public to subsidize low-wage employment.

But there's a nagging sense in these conversations that, disingenuous as McDonald's is here, still, at the end of the day, frugality, living within one's means, is a virtue; that the ability to prioritize expenses and make a budget is a useful skill to have. Against that view, here's Ricardo on wages:

It is not to be understood that the natural price of labour, estimated even in food and necessaries, is absolutely fixed and constant. ... It essentially depends on the habits and customs of the people. An English labourer would consider his wages under their natural rate, and too scanty to support a family, if they enabled him to purchase no other food than potatoes, and to live in no better habitation than a mud cabin; yet these moderate demands of nature are often deemed sufficient in countries where 'man's life is cheap', and his wants easily satisfied. Many of the conveniences now enjoyed in an English cottage, would have been thought luxuries at an earlier period of our history. 

The friends of humanity cannot but wish that in all countries the labouring classes should have a taste for comforts and enjoyments, and that they should be stimulated by all legal means in their exertions to procure them. ... In those countries, where the labouring classes have the fewest wants, and are contented with the cheapest food, the people are exposed to the greatest vicissitudes and miseries.

In a world where the price of labor power depends on its cost, there's no benefit to workers from budgeting responsibly, from learning to get by on less. The less people can live on, the lower wages will be. On the other hand, to the extent that former luxuries -- a decent car, some nice clothes, dinner out once in a while, whatever consumer electronics item the scolds are going on about now -- come to be seen as necessities, such that it's not worth putting up with the bullshit of a job if you still can't afford them, then wages will have to rise enough to cover that too.

For much of the 20th century, it seemed like we had left Ricardo's world behind. Among economists, it became a well-established stylized fact that it's the wage share, not the real wage that is relatively fixed. To even sympathetic critics of Marx, the failure of real wages to gravitate toward a (socially determined) subsistence level looked like a major departure of modern economies from the capitalism he described.

These days, though, the world is looking more Ricardian. For the majority of workers without credentials or other shelter from the logic of the labor market, real wages look less like a technologically-fixed share of output than the minimum necessary to keep people participating in wage labor at all. In the subsistence-wage world of industrializing Britain, workers' "frugality, discipline or acquisitive virtues brought profit to their masters rather than success to themselves."  Conversely, in that world, which may also be our world, profligacy, waste and irresponsibility could be a kind of solidarity.

I would never presume to tell someone surviving on a minimum-wage paycheck how to live their life. I know that being poor is incredibly hard work, in a way that those of us who haven't experienced it can hardly imagine.  But as a friend of humanity, I do worry that the biggest danger isn't that people can't live on the minimum wage, but that they can. In which case we're all better off if McDonald's employees throw the bosses' helpful budget advice away.

Where Do the Rich Get Their Money, Again?

This was an early topic at the Slack Wire, but worth revisiting.

There's this widespread idea that the rich today are no different from us. We no longer have the pseudo-aristocratic rentiers of Fitzgerald or Henry James, but hard-working (if perhaps overcompensated) superstars of the labor market. When a highbrow webzine does an "interview with a rich person," it turns out to be a successful graphic designer earning $140,000 a year.

Sorry, that is not a rich person.

The 1 percent cutoff for household income is around $350,000. The 0.1 percent, around $2 million. The 0.01 percent, around $10 million. Those are rich people, and they're not graphic designers, or even lawyers or bankers. They're owners.

From the IRS Statistics of Income for 2010:

		Wages and Salaries	Pensions, Social Security, UI	Interests, Dividends, Inheritance	Business Income	Capital Gains	Total Capital Income
	Total	64.5%	18.5%	6.1%	7.2%	3.8%	17.1%
	Median Household	72.7%	21.5%	2.4%	2.4%	0.0%	4.8%
	The 0.01%	14.6%	0.7%	23.1%	19.0%	40.6%	82.7%

As we can see, for households at the very top of the distribution, income overwhelmingly comes from property ownership. Total property income at the far right, the sum of preceding three columns. (The numbers don't add to quite 100% because I've left out a few small, hard-to-classify categories like alimony and gambling winnings.) The top 0.01 percent's 15 percent of labor income is not much more than the same stratum got from wages and salaries in 1929. No doubt many of these people spend time at an office of some kind, but the idea of "the working rich" is a myth.

Here's the same breakdown across the income distribution. The X-axis is adjusted gross income.

So across a broad part of the income distribution, wages make up a stable 70-75 percent of income, with public and private social insurance providing most of the rest. Capital income catches up with labor income around $500,000, making the one percent line a good qualitative as well as quantitative cutoff. It's interesting to see how business income peaks in the $1 to $2 million range, the signature of the old middle class or petite bourgeoisie. And at the top, again, capital income is absolutely dominant.

It's an interesting question why this isn't more widely recognized. Mainstream discussions of rising inequality take it for granted that “those at the top were more likely to earn than inherit their riches," with the clear understanding that "earn" means a paycheck. Even very smart Marxists like Gerard Dumenil and Dominique Levy concede that "a large fraction of the income of the wealthiest segments of the population is made of wages," giving a figure of 48.8 percent for the wage share of the top 0.1 percent. Yet the IRS figures show that the wage share for this stratum is not nearly half, but less than a third. What gives?

I think at least some of the confusion is the fault of Piketty and Saez. Their income distribution work is state of the art, they've done as much as anyone to bring the concentration of income at the top into public discussion; I'd be a fool to criticize their work on the substance. They do, however, make a somewhat peculiar choice about presentation. In the headline numbers in much of their work, they give not the top 0.01, 0.1, 1, etc. percent by income, but rather the top percentiles by income excluding capital gains. [*] This is clearly stated in their papers but it is almost never noted, as far as I can tell, by people who cite them.

There are various good reasons, in principle, for distinguishing capital gains from other income. But in an era when capital gains are the largest single source of income at the top, defining top income fractiles  excluding capital gains seriously distorts your picture of the very top. For instance, you may miss people like this guy: In both 2010 and 2011, the majority of Mitt Romney's income took the form of capital gains.

"They have taken untold millions that they never toiled to earn," or if you prefer, "Save your money": same like yesterday.

[*] The fractiles are defined this way even when capital gains income is reported. You have to dig around a bit in their data to find the composition of income by raw income fractiles, equivalent to my table above.

Pain Is the Agenda: The Method in the ECB's Madness

Krugman is puzzled by the European Central Bank:

I’ve been hearing various attempts to explain the ECB’s utterly bizarre refusal to cut interest rates... The most popular story seems to be that the ECB wants to “hold politicians’ feet to the fire”, letting them know that they won’t get relief unless they do what’s necessary (whatever that is). This really doesn’t make any sense. If we’re talking about enforcing austerity and wage cuts in the periphery, how much more incentive do these economies need?

He is certainly right that if the goal is resolving the crisis, or even price stability, then refusing further rate cuts is mighty strange. But who says those are the goals? His final question is meant to be rhetorical, but it really isn't. Because the more austerity you want, the more enforcement you need.

I met someone the other day with a fairly senior position at the Greek tax authority; her salary had just been cut by 40 percent. When, outside of an apocalyptic crisis, do you see pay cuts like that? Which, for you or me or Paul Krugman, is an argument to End This Depression Now. But if you are someone who sees pay cuts as the goal, then it could be an argument for not quite yet.

It's a tenet of liberalism -- and a premise of the conversation Krugman is part of -- that there are conflicting opinions, but not conflicting interests. But sometimes, when people seem to keep doing things with the wrong outcome, it's because that's the outcome they actually want. Paranoid? Conspiracy theory? Maybe. On the other hand, here's Deutsches Bundsbank president Jens Weidmann:

Relieving stress in the sovereign bond markets eases imminent funding pain but blurs the signal to sovereigns about the precarious state of public finances and the urgent need to act. Macroeconomic imbalances and unsustainable public and private debt in some member states lie at the heart of the sovereign debt crisis. It may appeal to politicians to abstain from unpopular decisions and try to solve problems through monetary accommodation. However, it is up to monetary policymakers to fend off these pressures.

That seems pretty clear. From the perspective of the central banker, resolving the crisis too painlessly would be bad, because that would allow governments to "avoid unpopular decisions." And it's true: If there's something you really want governments to do, but you don't think they will make the necessary decisions except in a crisis, then it is perfectly rational to prolong the crisis until you see the right decisions being made.

So, what kind of decision are we talking about, exactly? Krugman professes bafflement -- "whatever that is" -- but it's not really such a mystery. Here's an editorial in the FT on the occasion of last summer's ECB intervention to support the market for Italy's public debt:

Structural reform is the quid pro quo for the European Central Bank’s purchases last week of Italian government bonds, an action that bought Italy breathing space by driving down yields. ... As the government belatedly recognises, boosting Italy’s growth prospects requires a liberalisation of rigid labour markets and a bracing dose of competition in the economy’s sheltered service sectors. This is where the unions and professional bodies must play their part. Susanna Camusso, leader of the CGIL, Italy’s biggest trade union, is threatening to call a general strike to block the proposed labour law reforms. She would be better advised to co-operate with the government and employers... The government’s austerity measures are sure to curtail economic growth in the short run. Only if long overdue structural reforms take root will the pain be worthwhile.

A couple of things worth noting here. First the explicit language of the quid pro quo -- the ECB was not just doing what was needed to stabilize the Italian bond market, but offering stabilization as a bargaining chip in order to achieve its other goals. If ECB was selling expansionary policy last year, why be surprised they're not giving it away for free today? Note also the suggestion that a sacrifice of short-term output is potentially worthwhile -- this isn't some flimflam about expansionary austerity, but an acknowledgement that expansion is being give up to achieve some other goal. And third, that other goal: Everything mentioned is labor market reform, it's all about concessions by labor (including professionals). No mention of more efficient public services, better regulation of the financial system, or anything like that.

The FT editorialist is accurately presenting the ECB's view. My old teacher Jerry Epstein has a good summary at TripleCrisis of the conditions for intervention; among other things, the ECB demanded "full liberalisation of local public services…. particularly… the provision of local services through large scale privatizations”; "reform [of] the collective wage bargaining system ... to tailor wages and working conditions to firms’ specific needs...”;  "thorough review of the rules regulating the hiring and dismissal of employees”; and cuts to private as well as public pensions, "making more stringent the eligibility criteria for seniority pensions" and raising the retirement age of women in the private sector. Privatization, weaker unions, more employer control over hiring and firing, skimpier pensions. This is well beyond what we normally think of as the remit of a central bank.

So what Krugman presents as a vague, speculative story about the ECB's motives -- that they want to hold politicians' feet to the fire -- is, on the contrary, exactly what they say they are doing.

It's true that the conditions imposed by the ECB on Italy and Greece were in the context of programs relating specifically to those countries' public debt, while here we are talking about a rate cut. But there's no fundamental difference -- cutting rates and buying bonds are two ways of describing the same basic policy. If there's conditions for one, we should expect conditions for the other, and in fact we find the same "quid pro quo" language is being used now as then.

Here's a banker in the FT:

The future of Europe will therefore be determined by the interests of the ECB. Self-preservation suggests that it will prevent complete collapse. If necessary, it will overrule Germany to do this, as the longer-term refinancing operations and government bond purchase programme suggest. But self-preservation and preventing collapse do not amount to genuine cyclical relief and policy stimulus. Indeed, the ECB appears to believe that in addition to price stability it has a mandate to impose structural reform. To this extent, cyclical pain is part of its agenda.

Again, there's nothing irrational about this. If you really believe that structural reform is vital, and that democratic governments won't carry it out except under the pressure of a crisis, then what would be irrational would be to relieve the crisis before the reforms are carried out. In this context, an "irrational" moralism can be an advantage. While one can take a hard line in negotiations and still be ready to blink if the costs of non-agreement get too high, it's best if the other side believes that you'll blow it all up if you don't get what you want.  Fiat justitia et pereat mundus, says Martin Wolf, is a dangerous motto. Yes; but it's a strong negotiating position.

But this invites a question: Why does the ECB regard labor market liberalization (aka structural reform) as part of its mandate? Or perhaps more precisely, when the ECB negotiates with national governments, on whose behalf is it negotiating?

The answer the ECB itself might give is, society as a whole. After all, this is the consensus view of central banks' role. Elected governments are subject to time inconsistency, or are captured by rent seekers, or just don't work, so an "independent" body is needed to take the long view. It's never been clear why this should apply only to monetary policy, and in fact there's a well-established liberal view that the independent central bank model should be extended to other areas of policy. Alan Blinder:

We have drawn the line in the wrong place, leaving too many policy decisions in the realm of politics and too few in the realm of technocracy. ... the argument for the Fed's independence applies just as forcefully to many other areas of government policy. Many policy decisions require complex technical judgments and have consequences that stretch into the distant future. Think of decisions on health policy (should we spend more on cancer or aids research?), tax policy (should we reduce taxes on capital gains?), or environmental policy (how should we cope with damage to the ozone layer?). Yet in such cases, elected politicians make the key decisions. Why should monetary policy be different? ... The justification for central bank independence is valid. Perhaps the model should be extended to other arenas. ... The tax system would surely be simpler, fairer, and more efficient if ... left to an independent technical body like the Federal Reserve rather than to congressional committees.

I'm sure there are plenty of people at the ECB who think along the same lines as the former Fed Vice-Chair. Indeed, that central banks want what's best for everyone is practically an axiom of modern economics. Still, it's funny, isn't it, that "structural reform" so consistently turns out to mean lower wages?

Martin Wolf's stuff on the European crisis has been essential. But it has one blind spot: The only conflicts he sees are between nations. What perplexes him is "the riddle of German self-interest." But maybe the answer to the riddle is that national interests are not the only ones in play.

It's hard not to think here of Perry Anderson's thesis, developed (alongside other themes) in The New Old World, that the EU project is fundamentally a response by European elites to their inability to roll back social democracy at the national level. The new supra-national institutions of the EU have allowed them to bypass political cultures that remain stubbornly (if incompletely) egalitarian and solidaristic. In Alain Supiot's summary:

In Anderson’s view, the European project has engendered neither a federation nor an intergovernmental organization; rather it is the most fully realized form of Hayek’s ultraliberal ‘catallaxy’. ... Like a secular version of faith in divine providence, belief in the spontaneous order of the markets entails a desire to protect it from the untimely interventions of people seeking ‘a just distribution’ which, according to Hayek, is nothing more than ‘an atavism, based on primordial emotions’. Hence the need to ‘dethrone the political’ by means of constitutional steps which create ‘a functioning market in which nobody can conclusively determine how well-off particular groups or individuals will be’. In other words, it is necessary to put the division of labour and the distribution of its fruits beyond the reach of the electorate. This is the dream that the European institutions have turned into a reality. Beneath the chaste veil of what is conventionally known as the EU’s ‘democratic deficit’ lies a denial of democracy.

Jerry Epstein puts it more bluntly. The ECB's insistence on structural reform "represents a cynical raw power calculus to destroy worker and citizen protections  without any real belief in the underlying neo-liberal economics they use to justify it." (If you prefer your political economy in audiovisual form, he has a video talking about this stuff.)

This kind of language makes people uncomfortable. Rather than acknowledge that the behavior of people in power could represent a particular interest -- let alone that of the top against the bottom, or capital against labor -- much better to throw your hands up and profess bafflement: their choices are "bizarre," a "riddle." This isn't, let's be clear, a personal failing. If you or I occupied the same kind of positions as Krugman or Wolf, we'd be subject to the same constraints. And I anyway don't want to find myself talking to no one but a handful of grumpy old Marxists.

But on the other hand, as Doug Henwood likes to quote our late friend Bob Fitch, "vulgar Marxism explains 90 percent of what happens in the world." And then, I keep looking back through FT articles on the crisis, and finding stuff like this:

The central bank has long called for eurozone economies to press ahead with structural reforms. That the ‘E’ in EMU, or Economic and Monetary Union, has not occurred is a complaint often voiced by ECB officials. On this score, the central bank has managed to win an important concession in forcing Italy to sign up to liberalising its economy. Some may see this as a pyrrhic victory for the damage that the bond purchases have done to the central bank’s independence. But there was a significant threat to stability if the central bank did not act. ...That Mr Trichet, always among the more politically savvy of central bankers, managed to get some concessions on structural reform was all that could be hoped for.

One has to wonder: What does it mean for the ECB to "win an important concession" from an elected government? Who is it winning the concession for? And if the problem with the ECB is just an ideological fixation on its inflation-fighting credibility, why would it be willing to sacrifice some of that credibility to advance this other goal?

It's hard to suppress a lingering suppression that central bankers are, after all, bankers. And then you think, isn't there an important sense in which finance embodies the interests of the capitalist class as a whole? (In an anodyne way, this is even sort of what its conventional capital-allocation function means) You wonder if the only reason Karl Marx called "the modern executive is a committee for managing the common affairs of the whole bourgeoisie," is that central banks didn't yet exist.

Imagine you're a European capitalist, or business owner if you prefer the sound of that. You look at the United States and see the promised land. Employment at will -- imagine, no laws limiting your ability to fire whoever you want. Private pensions, gone. Unions almost gone, strikes a thing of the past. Meanwhile, in 2002, 95 out of every 1,000 workers in the Euro area -- nearly ten percent -- was on strike at some point during the year. (In Spain, it was 270 out of every 1,000. In Italy, over 300.) And of course there's the vastly greater share of income going to your American peers. Look at it from their point of view: Why wouldn't they want what their American cousins have?

It seems to me that what would really be bizarre, would be if European capitalists did not see the crisis as a once-in-a-lifetime opportunity. They'd be crazy -- they'd be betraying their own interests -- if, given the ECB's suddenly increased power vis-a-vis national governments, they didn't insist that it extract all the concessions it can.

Isn't that what they're doing? Moreover, isn't it what they say they're doing? When the "Global Head of Market Economics" at the world's biggest bank says that the ECB should only cut rates "as part of a quid pro quo with governments agreeing to more far-reaching structural reform," what do you think he means?

Disgorge the Cash!

It's well known that some basic parameters of the economy changed around 1980, in a mutation that's often called neoliberalism or financialization. Here's one piece of that shift that doesn't get talked about much, but might be relevant to our current predicament.

Source: Flow of Funds

The blue line shows the after-tax profits of nonfinancial corporations. The dotted red line shows dividend payments by those same corporations, and the solid red line shows total payout to shareholders, that is dividends plus net share repurchases. All three are expressed as a share of trend GDP. The thing to look at it is the relationship between the blue line and the solid red one.

In the pre-neoliberal era, up until 1980 or so, nonfinancial businesses paid out about 40 percent of their profits to shareholders. But in most of the years since 1980, they've paid out more than all of them. In 2006, for example, nonfinancial corporations had after-tax earnings of $800 billion, and paid out $365 billion in dividends and $565 in net stock repurchases. In 2007, earnings were $750 billion, dividends were $480 billion, and net stock repurchases were $790 billion. (Yes, net stock repurchases exceeded after-tax profits.) In 2008 it was $600, $470, and $340 billion. And so on. [1]

It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancings to pay for extra consumption. What nobody mentioned was that the rentier class had been doing this longer, and on a much larger scale, to the country's productive enterprises. At the top of every boom in the neoliberal era, there's been a massive round of stock buybacks, which you could think of as shareholders cashing out their bubble wealth. It's a bit like the homeowners "using their houses as ATMs" during the 2000s. The difference, of course, is that if you took too much equity out of your house in the bubble, you're the one stuck with the mortgage payments today. Whereas when shareholders use businesses as ATMs, those businesses' workers and customers get to share the pain.

One way of thinking about this increase in the share of profits flowing out of the firm, is in terms of changing relations between managers and the owning class. The managerial capitalism of Galbraith or Berle and Means, with firms pursuing a variety of objectives and "owners" just one constituency among many, really existed, but only in the decades after World War II. That, anyway, is the argument of Dumenil and Levy's Crisis of Neoliberalism. In the postwar period,

corporations were managed with concerns, such as investment and technical change, significantly distinct from the creation of "shareholder value." Managers enjoyed relative freedom to act vis-a-vis owners, with a considerable share of profits retained within the firm for the purpose of investment. ... Neoliberalism put an end to this autonomy because it implied a containment of capitalist interests, and established a new compromise at the top of the social hierarchies... during the 1980s, the disciplinary aspect of the new relationship between the capitalist and the managerial classes was dominant... after 2000, managers had become a pillar of Finance. 

When I've heard Dumenil talk about this development, he calls the new configuration at the top a "loving marriage"; the book says, less evocatively, that today

income patterns suggest that a process of "hybridization" or merger is underway. ... The boundary between high-ranking managers and the capitalist classes is blurred.

The key thing is that at one point, large businesses really were run by people who, while autocratic within the firm and often vicious in defense of their privileges, really did identify with the particular businesses they managed and focused their energy on their survival and growth, and even on the sheer disinterested desire to do their kind of business well. You can find a few businesses that are still run like this -- I've been meaning to write a post on Steve Jobs -- but by far the dominant ethos among managers today is that a business exists only to enrich its shareholders, including, of course, senior managers themselves. Which they have done very successfully, as the graph above (or a look at the world outside) shows.

In terms of the specific process by which this cam about, the best guide is chapter 6 of Doug Henwood's Wall Street (available for free download here.) [2] As Doug makes clear, the increased payouts to shareholders didn't just happen. They're the result of a conscious, deliberate effort by owners of financial assets to reassert their claims on corporate income, using the carrot of high pay and stock for mangers and the stick of hostile takeovers for those who didn't come through. Here's Michael Jensen spelling out the problem from finance's point of view:

Conflicts of interest between shareholders and managers over payout policies are especially severe when the organization generates substantial cashflow. The problem is how to motivate managers to disgorge the cash rather than investing it at below the cost of capital or wasting it on organization inefficiencies [by which Jensen seems to have mostly meant high wages].

Peter Rona, also quoted in Wall Street, expresses the same thought but in a decidedly less finance-friendly way: Shareholders "take pretty much the same view of the corporation as a praying mantis does of her mate."

You don't see the overt Jensen-type arguments as much now that management at most firms is happy to disgorge all of its cash and then some. But they're not gone. A while back I saw a column in the business press -- wish I could remember where -- expressing outrage at Apple's huge cash reserves. Because they should be investing that in new technology, or expanding production and hiring people? Of course not. It's outrageous because that's the shareholders' money, and why isn't Apple handing it over immediately. More than that, why doesn't Apple issue a bunch of bonds, as much as the market will take, and pay the proceeds out to the shareholders too? From the point of view of the creatures on Wall Street, a company that prioritizes its long-term growth and survival is stealing from them.

UPDATE: Ah, here's the piece I was thinking of: Forget iPad, it's time for iGetsomemoneyback. From right before the iPad launch, it's a gem of the rentier mindset, complete with mockery of Apple for investing in this silly tablet thing instead of just handing all its money to Wall Street.

Why is Apple hoarding its cash? A company spokesman explains: "We have maintained our cash and strong balance sheet to preserve the flexibility to make strategic investments and/or acquisitions." ... Steve Jobs really doesn't need an acquisitions warchest of around $30 billion ... He should start handing back this money to stockholders through dividends. ... The money belongs to stockholders: Give. Indeed Jobs should go further. Apple should -- gasp -- start borrowing, and hand that money back, too.

Disgorge the cash!


SECOND UPDATE: Welcome to visitors from Dealbreaker, Felix Salmon and Powerline. If you like this, other posts here you might like include Selfish Masters, Selfless Servants; The Financial Crisis and the Recession; What Do Bosses Want?; and in sort of a different vein, Satisfaction.

[1] There's something very odd going on in the fourth quarter of 2005: According to the Flow of Funds, dividend payments by nonfinancial firms dropped to essentially zero. The shortfall was made up in the preceding and following quarters. I suspect there must be some tax change involved. Does anybody (Bruce Wilder, maybe) have any idea what it is?

[2] John Smithin's Macroeconomic Policy and the Future of Capitalism is also very good on this; it's subtitle ("the revenge of the rentiers") gives a better flavor of the argument than the bland title.