Thursday, March 07, 2013

Inequality and the Decline of Labor

Inequality has many sources, but political and technological dynamics are key factors.


You may have seen this video on Wealth Inequality in America, which has gone viral. I have shown the same data for years in charts and discussed it at great length: Made in U.S.A.: Wealth Inequality (July 15, 2011).

The bottom 80% of American households held a mere 7% of these financial assets, while the top 1% held 42.7%, the top 5% holds 72% and the top 10% held fully 83%.


Here is a snapshot of total assets by category:


"Other assets" include Treasury and corporate bonds, favored holdings of pension funds and the wealthy due to their relative safety and guaranteed yield.

Here is a snapshot of stock ownership:


No surprise there: the top 1% owns roughly 40% of all stocks, and the top 10% own 81%.
Wealth comes from earned and unearned (rent, dividends, etc.) income and capital appreciation, so it's no surprise that the income of the wealthiest segment has also far outpaced the lower 95%:


I have long held that the greatest source of wealth inequality is political: those with great wealth have captured the for-sale machinery of governance, and "persuaded" the Central State to carve out quasi-monopolies and cartels that enable artificially high premiums. They also buy subsidies, exceptions and tax breaks for their income streams.

This is the result of a dominant Central State and an electoral process that lives and breathes cash and lobbying.

In other words, the primary source of wealth inequality is political corruption and an overly powerful centralized State that can grant monopolies and enforce cartels. For example, Attorney General Holder admits megabanks are ‘too big to jail’.

Setting aside the fact that the financial and political Elites are two sides of the same Aristocratic coin, we find an erosion of middle class jobs and wages.

Many observers (including myself) have noted that robotics and networked software are replacing both unskilled and skilled labor at a faster clip than technology is creating jobs. Some believe the rise of robots and software pose little threat to human labor, for example: The robot menace:
As technology improves, Mr Autor writes, a pattern emerges. Machines take over routine tasks like repeated number-crunching or the welding of car parts. Such jobs can be programmed into machines using detailed, specific instructions. Displaced human workers are then reassigned to do more improvisational or intuitive work. At airline check-in counters, say, computers are displacing employees from mundane tasks like printing boarding passes. That makes it easier for the humans to respond to unexpected problems like cancelled flights or changed itineraries. A faster pace of "jobsolescence" could create a huge number of niches like that: human workers needed to facilitate the automation taking over many routine tasks.
This sort of article never gets around to acknowledging the obvious reality: that the number of airline employees "doing improvisational work" is considerably lower than the total number of employees that once did both improvisational work and the duties that have been replaced by networked machines and software.

In the lived-in world these analysts apparently avoid, costly human interactions in many settings are increasingly rare, and this elimination of waiting to interact with an employee is a great boon: print your boarding pass at home, no waiting.

In airports, the only human interaction required in most cases is Homeland Security. In retail settings, self-checkout eliminates the need for all but a thin slice of "improvisational work."
Developing economies often have a great many people available for improvisational work, but their pay is very low, as improvisational work does not carry much of a premium when labor is in surplus.

Few commentators dare wonder if the entire model of distributing output via wages is broken. The implicit assumption is that there will always be an unmet demand for labor of all skill levels.

This assumption has two ideological flavors:

1. This demand for labor only comes alive when the price of labor is free-floating, i.e. price adjusts for supply and demand. In other words, if I won't pay $15 an hour for someone to mow my lawn, I might hire someone to do the work for $5 an hour. This is the free-market perspective.

2. Education is the key, as the higher the skills and knowledge base of workers, the more they are worth to potential employers. This is the progressive perspective.

To the degree these are ideological, they are unhelpful, as "believers" are blinded by their respective convictions to any concepts outside their circle of faith.

While it is true that the market will distribute labor and wages, a huge imbalance i.e. massive labor surplus, opens the door to exploitation by those with scarce cash to pay for labor.

As for education, I have often pointed out the fallacy in this assumption: training 100,000 people to become PhDs does not automatically create 100,000 jobs for them. Granting 100,000 advanced degrees in chemistry does not create jobs for these 100,000 newly minted chemists. The demand must be organic, i.e. employers see some way to generate $200,000 of value in the marketplace from paying one of these graduates $100,000. (Recall that the pay scales for advanced degrees are high, so the bar of value creation is also higher.)

There are saturation points to all high-skill labor categories. At some point, there is no need for more physicists, attorneys, etc. because there simply isn't enough demand for their skills.
So education is not some sort of blanket panacea to a systemic surplus of labor.

There are many forms of labor that have so little value or the value is diffused to the point that no one will pay to have the work done.

Consider building a free bikeway. Since there is no income stream generated by the bikeway, no enterprise will pay for the bikeway. The city labor contracts require paying workers $75,000 each (or more, once all benefits and pension costs are included), and the diffused benefits to the city often do not justify this major expense.

As a result, the bikeway never gets built. The same applies to picking up litter throughout town; it isn't cost-effective to pay people $75,000 to pick up litter, but since there is no incomes stream, then private enterprise can't do it, either. So nobody does it, other than prisoners (community service) or random unpaid volunteers.

In other words, there is a lot of work that could be done or needs to get done that is not cost-effective for either the public or private sector.

The ideal scenario in a State-dominated consumerist economy is the complete commoditization of labor, meaning people are wealthy enough to pay others to do everything for them. The ideal consumerist household earns about $200,000 a year (bare minimum) and pays others to: walk their dog, bathe their dog, clean their house, watch their kids, take their elderly parents down to the Seniors Center, teach their kids martial arts, piano, dancing, etc., tutor the kids when needed, maintain their house and prepare their meals.

In this scenario, there is always plenty of demand for a variety of skilled labor because the wage earners make so much money doing some high-skill job that they can afford to hire a veritable army of helpers and assistants to manage everyday living.

This is the fantasy scenario of all State-dominated consumerist economies because the high-earning household distributes virtually all its disposable income to downstream labor: the State gets to tax every wage and every transaction, and everyone earning a wage has money to spend on goods and services, keeping money velocity and tax revenues high.

There are two problems with this: one, only 5% of households make enough money to support the commodification of labor on this scale (The top 5% of households, three-quarters of whom had two income earners, had incomes of $166,200 or more: Affluence in the United States), and two, many Americans don't want jobs as domestics, dog-walkers, etc. Their expectations are far higher than what the labor market has to offer.

In other words, everyone wants to be in the top 5%, but the number of positions paying these wages is limited. Training 50% of the populace to perform the top 5% of jobs does not mean 50% of the populace will magically earn top 5% wages.

As a thought experiment, suppose we trained 50% of the workforce to be doctors, attorneys and PhDs in STEM (science, technology, engineering, math). Would the economy magically create jobs for 75 million doctors, lawyers and PhDs? Unfortunately, no. The number of positions requiring this level of training is limited by the demand, the money floating around to pay for these skills and the value created.

Let's return to the starting observation: Few commentators dare wonder if the entire model of distributing output via wages is broken. Those few who do dare wonder if there simply won't be enough paid work to go around have a conventional solution: the Central State should tax the remaining wage earners (and everyone's unearned income) and pay everyone without a job a guaranteed annual income.

In the State-dominated consumerist economy, this is the only possible conceptual solution, because it gives the State more power and distributes enough income to keep the consumer-based economy well-greased.

Is there no other model? I believe there is: an economy based on the forgotten decentralized, networked foundation of society, the community. In my recent books Why Things Are Falling Apart and What We Can Do About It and Resistance, Revolution, Liberation: A Model for Positive Change, I identify the three fundamental components of society: the State (government), the marketplace and the community, i.e. the non-State, non-marketplace functions of family, neighborhood, church, community group, fraternal organization, etc.

An economy in which surplus is distributed to decentralized communities rather than being concentrated in the Central State and its financial Elites, where the spoils are divided up according to bought-and-paid-for political favoritism, is perhaps the most efficient, practical, sustainable and fair distribution system possible in an era of structural labor surplus.

Most people have difficulty even conceptualizing this framework because they have internalized the dominance of the State. Community has withered to the point it has lost experiential meaning; it has ceased to exist in an economy where 50% of the populace receives a payment from the State. Community has been reduced to a myth that receives lip-service from politicos and others in the State's food chain.

When the current system of State-enforced inequality collapses, we will collectively have to re-establish the framework and meaning of community, one piece at a time.


Subscribers and major contributors will hear more about these topics in the weekly Musings Reports.


Part II Roundtable discussion with CHS, Gordon T. Long and Bill Laggner-- Central Banks: Perception of Omnipotence (27 Minutes, 43 Slides)




Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy

Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).

We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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