A generational effort is required to restore growth in U.S. wages.
Despite the sincerity of their sentiments, Democrats will fall flat in efforts to provide a structural solution to wage stagnation in the United States until they undertake a generation-long effort at educating voters.
That effort should be framed around closing the international wage gap – i.e., the growing disparity between prevailing wages in the United States and its peer economies. Wages are a toxic topic for Republicans, but the opportunity is there for the taking by Democrats. It offers a partisan advantage. As a campaign issue, the international wage gap would dramatize a Democratic economic agenda that systemically links wages to economy-wide productivity growth. It would pose a compelling contrast to tired or even fallicious supply-wide Republican policies.
What is the international wage gap?
U.S. Bureau of Labor Statistics data document that manufacturing wages in 13 other rich democracies in 2012 exceeded U.S. wages, many by $10 an hour or more, adjusted for exchange rates. Here are the data (hourly employer compensation costs including wages, government fees):
United States: $35.67
This gap has arisen because a hefty portion of rising productivity in these peer nations is added to wages each year, producing steady if unspectacular income growth that exceeds inflation. That is not the U.S. system and these results display the consequence.
Closing or even stabilizing this wage gap will not be an easy policy position, to be sure. Such a move will meet fierce resistance by U.S. high earners receiving most of today’s gains from growth. Their allies among Republican lawmakers will also be opposed and will continue to use arcane U.S. Senate rules to block any major Democratic efforts, even if Democrats re-capture the chamber.
Moreover, the instrumental role of private money in U.S. politics ensures vigorous Republican opposition. And they may be joined by some number of Democrats even if that party adopts the position widely. That role is documented by U.S. policy outcomes that chronically reflect an income bias, as Martin Gilens and Benjamin Page recently concluded.
However, there could be support from surprising quarters, if Democrats carefully prepare legislation to narrow the international wage gap. For example, one strategy would be to promote and provide incentives for the Codetermination model of corporate governance as practiced in northern Europe. I have made this argument previously in The Globalist.
Such a strategy, actually imposed in West Germany by the U.S. and British occupation, features employee representatives on corporate boards and involving them more in decision-making. Not only has this been proven — not surprisingly — to lead to higher wages, but it has also paid off well for many German and other northern European firms, relative to their quarterly-profit-oriented U.S. peers.
Adding employees to corporate boards improves the performance of firms by featuring cooperation. And it is the key to boosting anemic U.S. R&D and woeful corporate under-investment to match firms in nations such as Germany. While activist shareholders andCEOs seeking immediate gain would object, a number of U.S. corporate shareholders might well accept Codetermination that enhances long-term enterprise growth.
Empowering employees with worksite reforms is a useful starting point, as Larry Summers and other experts have recently advocated on both sides of the Atlantic. However, ensuring that real U.S. wages rise steadily year after year will require more, especially linking wages and productivity growth. If a company does very well for itself, some percentage of those profits reasonably should be translated into higher wages for employees, rather than merely being as now plowed into stock buybacks, dividends and executive compensation packages.
A generational challenge
Making that case, however, will be a generational challenge for wage advocates, including Democratic lawmakers.
Why generational? The Reaganesque division of gains from growth since the 1980s has de facto been achieved by making war on wages. And that pattern has become institutionalized. American history has shown that once even a damaging economic arrangement has been established, it is extraordinarily difficult to uproot.
Examples include the U.S. Constitution’s embrace of the slave economy built during colonial times, the Jim Crow era lasting nearly a century after the Civil War, and the employer-centered health care system whose reform was first propose in the 1940s.
Indeed, history teaches that such entrenched arrangements are only uprooted by unique circumstances – including a Civil War or a rare filibuster-proof progressive majority in the Senate. Medicare, Head Start, Medicaid, Obamacare, ending Jim Crow and Franklin Roosevelt’s reforms like Social Security were fruits of such once-in-a-generation circumstance.
That history means the next legislative opportunity to adopt structural linkages between wages and productivity, which are common in other rich democracies, could well be many decades away in the United States. And wages will continue to stagnate in the interim except for temporary episodic boomlets that trickle down to higher wages.
Groundwork to realize this generational agenda
Even then, it is not merely enough to have a filibuster-proof margin in the Senate after a landslide election born of general crisis. If a sweeping set of reforms is desired, voters have to be educated, ready and waiting.
We cannot know when the next moment of great opportunity will strike, but the interim time can fruitfully be utilized to lay the groundwork. This means education, activism and incremental steps for linking wages to productivity. Economists and the various centers studying corporate governance should devise a base of research, data, and analyses of the various systems in other rich democracies linking wages to productivity. Task forces, forums, think tanks, academics, advocates and activists must engage to provide the kind of energy that has inspired and mobilized mass reform movements before, such as civil rights and the environment.
This process is underway to some degree. For instance, Democratic Party legislators in California and in Congress have proposed tax incentives for the private sector to link wages to productivity or to CEO pay.
A key role must be played by state and local government leaders, in line with the U.S. tradition of using states and cities as smaller “laboratories of democracy.” They can provide invaluable proof of concept – as they have done repeatedly in the past in setting the national pace for environmental reforms, minimum wages and the like.
In doing so, they will also expand the share of the workforce where wages are linked to national productivity performance, further easing the transition when the time comes for national legislation.
It will take a generation to thwart the war on wages. There is no more time to waist.
Stagnant wages have robbed the American middle class of opportunity. Since 1979, wages have barely kept up with inflation and for tens of millions of relatively unskilled Americans, earnings have actually declined.
This wage compression is why fewer Americans now believe they are middle class; remarkably, the share of Americans who self-identify as below-middle class has risen 60 percent since 2008 to near equivalence in size with those identifying as middle class. Horatio Alger has emigrated to Australia and northern Europe where wages and economic mobility are higher. The consequence is continuation of a trend that began in the 1980s where Americans need to pick their parents very, very carefully to have even reasonable odds of prospering as adults. Utilizing quintile income data, Julia Isaacs at Brookings and the Pew Mobility Project concluded that the only odds higher than a rich man’s son in the U.S. being rich himself three decades hence (40 percent) are the odds that a poor man’s son will be poor (42 percent).
President Obama's failure to offer substantive solutions will be his economic legacy.
The President’s minimalist response is a wage agenda featuring more education, minimum wage hikes and the like. Good ideas all, but meek. In truth, his prospects for broadly-based wage gains hinge entirely on hopes that labor markets will episodically tighten as they seem to be now – just more cyclical Republican trickle-down like in the late-1990s. That is why I have argued that historians regarding economics are certain to cast him as a James Buchanan figure rather than a Lincoln – a timid President kicking the wage issue down the road for a more visionary successor to solve.
A new agenda is needed that breaks the wage stagnation paradigm, a textured one that leans heavily on successful programs such as those in Australia and northern Europe. What is that agenda?
Democrats Need To Acknowledge Four Economic Realities
First, shareholder capitalism is responsible for deterioration in the composition of the American workforce. The uber free market ethos prevailing since Ronald Reagan has chilled hopes of using public policy to offset the wage compression effects of globalization, technology acceleration, financial sector liberalization, rent-senking by executive suites and the like. High value jobs are routinely exported, replaced by domestic ones paying less with paltry benefits, many featuring on-demand part-time or contract work.
Second, U.S. wage stagnation is an aberration among peer nations, with real wages in other rich democracies continuing to climb steadily. That is because U.S. wages are delinked from productivity growth. Not so abroad. The consequence, according to the U.S. Bureau of Labor Statistics, is that wages in more than a dozen other peer countries have leapfrogged American wages. Exchange-rate-adjusted American wages in manufacturing in 2012 were below $25/hour. That ranked 14th globally, well below Denmark, Switzerland, Australia, Germany and the like; these superior economies also feature quality, affordable university educations, health care plus retirement security. Moreover, unemployment in Germany is below the U.S. while labor force participation is higher. These data belie the argument that low American wages are the inevitable trade-off for handsome employment statistics.
Third, the U.S. corporate governance model incentivizes behaviors that Nobel laureate Edmund Phelps has labeled “short-termism,” with harmful consequences as explored by Harvard Business professors Clayton Christensen and Derek van Bever. Share prices and executive remuneration spike while R&D, investment, wages and labor force upskilling slump. Business equipment spending, for instance, since 2009 (5.2 percent of GDP) remains well below levels averaged since the 1960s (6.5 percent). And over a longer term, investment by nonfinancial firms in Australia and northern Europe has outpaced investment by American firms for nearly two decades. It is instructive that board oversight is far tighter at privately-held U.S. firms, forcing management to adopt longer time horizons: John Asker and Alexander Ljungqvist of NYU and Joan Farre-Mensa of Harvard found that publicly-held U.S. firms devote only 3.7 percent of assets to investment compared to 6.7 percent at privately-held firms.
The fourth reality is that the danger posed by secular stagnation has captured the imagination of economists worldwide. While the U.S. recovery is proceeding, economists such as Gauti Eggertsson and Neil Mehrotra in a study for the National Bureau of Economic Research document the longer term dangers to America of low growth from inadequate demand and production. Weak public and private investment is one problem. And other explanations include the effects of eroding wage shares and widening income disparities as argued in a briefing paper prepared by Sherpas for the November Brisbane G-20 meeting.
Eroding wage shares and widening income disparities are a particular problem because most rich democracies are wage-driven rather than profit driven in the terms utilized by Marc Lavoie and Engelbert Stockhammer in a study for the International Labour Office. They concluded that a 1 percentage point decline in the wage share of U.S. GDP reduces aggregate demand by .808 percentage points, the most severe marginal reaction of any rich democracy to rising disparities.
A Visionary Agenda To Raise Real Wages
These realities offer a target-rich environment for President Obama if eager to leave a visionary rather than a vacuous economic legacy. Moreover, they are promising foils for reforms capable of capturing middle class imaginations and votes, especially those of working class Americans. Two structural changes are needed to create an economy like those in Australia or northern Europe where wages are linked to productivity – changes that would enable most Americans to share in the gains from growth.
First, reform corporate governance. Short-termism is enabled by low-quality American board rooms. That means upgrading U.S. corporate governance as hinted by economists such as Robert Solow of M.I.T. must be a central plank of any wage agenda. Indeed, that reform is imperative in light of the centrality of public corporations as a state-sanctioned device to generate and sustain broadly-based prosperity. Corporate America is failing to widely broadcast the gains from productivity growth – and weak internal oversight coupled with a Randian rent-seeking syndrome among CEOs are the reasons. Governance remediation featuring Codetermination can draw on successful practices abroad, especially from Germany, the highest functioning capitalist economy on the globe.
Strengthening corporate governance hinges on a recomposition of boards of directors of U.S. enterprises. Compelling evidence of the potential offered by such recomposition is provided by the potent performance of German enterprises such as VW or Daimler whose supervisory boards are split between shareholder and employee representatives. Indeed, the weight of analytical evidence is that shareholders would benefit from a strengthening of American supervisory boards in mimicry of German-style Codetermination, as documented by Larry Fauver and Michael Fuerst.
An immediate option involves pension funds whose trustees could play a pivotal role in strengthening governance. Funds such as Calpers could incentivize board recomposition through investment policies. And the Obama administration could facilitate that strategy by clarifying that board recomposition is a furtherance of trustees’ duty to invest solely in the interest of participants and beneficiaries.
Government can do more. It has a host of options involving penalties or incentives to induce board recomposition. And there are no legal impediments to establishing recomposition standards for firms licensed by states or even those incorporated elsewhere which nonetheless conduct considerable economic activity within a specific state. Thus, progressive state governments could and should become laboratories to explore a variety of those options. Indeed, states like California already have provided proof of concept: they have set the pace for some safety and environmental practices by the private sector subsequently adopted nationwide. And progressives in Congress could mimic German law by incentivizing all public corporations with more than 2,000 employees to recompose supervisory boards, with members drawn equally from shareholders and employees.
Second, institutionalize annual real wage increases. Governance reforms will help restore the link between productivity and wages. But Australia and the northern European economies have gone further by institutionalizing that linkage. Industry, region or national wage agreements struck by labor unions and employer organizations – monitored by the public sector – provide national templates for annual real wage increases. Encouragingly, tentative approaches are being explored in the U.S. to restore that linkage. The Democratic caucus in the House of Representatives, for instance, endorsed legislation in 2014 to raises taxes on CEO compensation unless firms raised wages. The proposal permitted firms to keep taxes low by increasing wages by the sum of inflation and nationwide productivity growth. Democrats in California have been similarly innovative. American CEOs earn well more than 300 times the median wage of employees. That is an unwarranted windfall because the ratio is far lower in every other democracy. For instance, it’s 64 times in Australia. Democrats in the California State Senate set out to reduce that ratio by rewarding firms with tax cuts who cap at 100-fold higher.
These and similar efforts to relink wages to productivity also hold promise for easing the longer term risks of secular stagnation. Economists ranging from Paul Krugman to Lawrence Summers argue for more fiscal stimulus and public infrastructure investment as one means of boosting wages and output. And Adair Turner in the pages of the Financial Times recently even argued for such stimulus to be supported by helicopter (printing) money. The problem is that such approaches will raise wages only indirectly. Surely a more efficient approach is to focus on reforms that directly raise real wages and to do so in a structured setting that also incentivizes investment, R&D and productivity. Other rich democracies have figured out how to blend these goals and America can benefit from their experience.
A Visionary Obama Economic Agenda Will Reframe the Wage Debate
The wage issue bears on the great philosophical question of how broadly should prosperity be enjoyed in a democracy. Capitalism can provide for widely enjoyed prosperity, a position advocated by the President. Today’s Republicans disagree, evidenced by resistance to ballot and legislative initiatives and to union efforts in spots such as Tennessee to raise real wages. And they may also resist upgrading corporate governance. The President has not been intimidated by partisan criticism in the past and should not be deterred from offering a visionary and expansive wage agenda. An additional concern is that the Democratic Party like the Republicans are reliant on campaign donations from large dollar donors, as noted recently by former labor secretary Robert Reich. That argues for a wage agenda which features incentives rather than coercion. The agenda outlined here are practical, proven steps to relink wages and productivity.
President Obama should use his bully pulpit to reframe the wage debate around this agenda and thereby establish a visionary legacy.
Weak American investment and weak wages are the consequence of weak corporate governance, with solutions to be found in Australia and northern Europe. Here are the facts:
First, real U.S. wages have gone flat since 1980 despite continued productivity gains, while in Australia and northern Europe they’ve mostly kept pace with productivity. Today, wages and comprehensive employer costs for labor are about $10/hour higher in Australia and northern Europe than in the United States. In manufacturing, German wages are $20/hour higher according to Bureau of Labor Statistics data from 2012 (latest year).
Second, investment by nonfinancial firms in Australia and northern Europe has outrun investment by American firms for decades, as documented by Eurostat economists Denis Leythienne and Tatjana Smokova in 2009.
Third, U.S. managers apply unreasonably high discount rates when evaluating future investments, truncating their investment time horizons compared to managers in these other rich democracies. James Poterba at MIT (and President of NBER) and Lawrence Summers, as early as 1995, documented that German managers devote a considerably higher share of R&D budgets to the long term than U.S. managers. Moreover, the Americans would forego “a very positive net present value project” merely to smooth out earnings per share data, as reported later in an NBER study by John R. Graham, Campbell R. Harvey and Shiva Rajgopal.
Fourth, Australia and every nation in northern Europe now has more skilled labor forces than the United States. As recently as 1998, it wasn’t that way, but skill levels in nations like Austria, Denmark and France have since leapfrogged the U.S. level, where firms eschew human capital investments. Employee loyalty now comes in two-week segments until the next paycheck, with longer term upskilling and the concept of employee commitment to the firm hollowed out. Firm management in these other rich democracies have done a superior job of investing anew, changing product mixes, upskilling workforces and offshoring few domestic jobs.
What are we to make of this?
Globalization is fingered as the culprit by many who’ve written on U.S. wage stagnation, but it’s a rather baffling explanation in light of the considerably greater integration of these higher wage nations like Austria, Denmark or Germany in cross-border trade. A few, including former labor secretary Robert Reich and James Galbraith are closer to the mark, pinpointing a variety of structural factors, like offshoring, Randian executive suites, weaker labor unions and deregulation.They and others such as Nobel laureate Edmund Phelps, call this agency problem “short-termism.” It’s a focus by stock-optioned American management on near-term performance, being parsimonious with corporate outlays for R&D, wages, investment and the like in order to spike quarterly earnings.
Foolish mergers are another element of the syndrome as examined by Jeffrey Harrison at the University of Richmond and Derek Olin of Texas Tech. This syndrome partly explains why net investment by U.S. firms is 4 percent of GDP now while profits account for 12 percent of GDP, when they both equaled about 9 percent in the late 1980s. That’s also why John Asker and Alexander Ljungqvist of NYU and Joan Farre-Mensa of Harvard found that publicly held U.S. firms devote only 3.7 percent of assets to investment compared to 6.7 percent at privately owned firms. And it’s why productivity per hour worked in northern Europe has grown one-third faster than in the United States since 1979 to the point that equivalence exists on the factory floor now in the United States, France and the Low Countries. These nations are as productive as the United States and pay notably higher wages.
The culprit is quarterly capitalism. What kind of managers would run U.S. companies like that, crimping longer term prospects? Well, managers like those eighteenth century expat East India Company officials lamented by Adam Smith in The Wealth of Nations. Then as now, changing their management incentive structure is the answer. And that means drawing on corporate governance techniques of firms in those peer democracies who figured out how to avoid short-termism. The architecture of American corporate governance should learn from the successful codetermination structure of northern Europe, which is, to a large extent, responsible for Germany being the world’s highest performing economy. Shareholders will applaud codetermination because it means greater returns, as Larry Fauver at the University of Tennessee and Michael Fuerst at th University of Miami concluded in 2006. And a healthy byproduct of codetermination is greater investment and higher wages, with firms supporting the Australian wage determination structure linking wages to rising productivity.
There are several reasons to look askance at northern Europe, struggling to generate growth and reform the architecture of its monetary union. But those valid macro-economic concerns should not deflect from the long-term success of their sturdy internal processes in broadcasting rising real incomes widely year after year.
What a contrast to the grim outcomes and prognosis for U.S. family economics, featuring further income disparities, stagnant wages and weak productivity, GDP and job growth as far as the eye can see.
It is time for Americans to do what they do very well: draw on the best and brightest from across the globe for a solution to its poorly crafted corporate governance structure.
From Salon Tuesday, Mar 18, 2014 08:15 AM EDT George R. Tyler
What America can learn from Europe about income inequality
Our GDP growth is currently outpacing Europe's, but their future still looks brighter. Here's why.
This article originally appeared on The Globalist.
The fact that GDP growth in the United States currently outpaces European growth by a large margin might lead one to believe that America’s economic future is brighter than Europe’s. Nothing could be farther from the truth.
Despite all the reflexive triumphalism, the U.S. economy has produced poor investment and wage outcomes for a generation. Meanwhile, northern European economies have achieved something that increasingly eludes the United States – a growing middle class.
Remember the famous line “I’ll have what she’s having” from the movie “When Harry Met Sally”? It is apt in our context: Americans need what northern Europeans have.
There are those who argue that making this point amounts to heresy. After all, the European Union is struggling to reorder its flawed architecture, stabilize public debt and, most important, regain a decent pace of economic growth.
Yet beneath those daunting challenges, the seasoned and potent internal institutions, crafted in the postwar years in northern Europe to broadcast prosperity widely, continue to function smoothly.
U.S. obsession with quarterly capitalism
Unfamiliar to Americans, these corporate governance and wage systems have succeeded precisely because they reject the American executive incentive structure. Europeans have studiously not embraced what Nobel Laureate Edmund Phelps has called “short-termism.”
At the core is the continuing U.S. obsession with quarterly capitalism. This is an unnatural focus for any business that can be explained only by the fact that a stock-optioned management is focused on near-term performance.
But its real life effects are truly problematic: For example, if that means being parsimonious with corporate outlays for R&D, wages, investment and the like in order to spike quarterly earnings, so be it.
In the U.S. model, what matters is not the long-term success of the company, but one’s own ability to extract maximum personal benefits while one is along for the ride. That is a most rudimentary form of capitalism, one that may compete with Manchester capitalism for the trophy in wrong-mindedness.
Europe does well
Let’s look at specifics and begin with productivity, the most important economic indicator of economic prowess. Since 1979, annual productivity per hour worked in northern Europe has grown one-third faster than in the United States year in and year out. Equivalence now exists on the factory floor in the United States, France and the Low Countries.
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Weak U.S. investment is the most conspicuous reason. In a big change from the postwar years, investment by non-financial firms in Australia and northern Europe has outrun investment by U.S. firms in recent decades, as documented by Eurostat economists in 2009.
U.S. net investment is less than one-half the level it was in the late 1980s. Studies document that U.S. managers apply excessive discount rates when evaluating future investments. They do so by screening out worthwhile options, due to inappropriately short investment time-horizons compared to managers in these other rich countries.
An error to blame globalization
Quarterly capitalism arose in the United States from the incentive structure created by inept attempts in the 1970s and 1980s to address the age-old “agency problem.” According to that, management prioritizes returns by what it means for executive suites rather than for shareholders.
The unintended consequence of the solution manifests itself today in the weak corporate boards of publicly held U.S. enterprises.
In a short-term world, higher wage bills also affect corporate bottom lines, just like higher investment and R&D outlays. Unlike European counterparts, U.S. enterprises have made it their cause to compress wages. They have done so by weakening unions and by offshoring. (I have detailed this delinking of wages from rising productivity in my book “What Went Wrong.”)
That decoupling has not occurred in Australia or northern Europe. Indeed, comprehensive employer labor costs and wages have grown roughly apace with productivity there. They now average $10 per hour more in purchasing power parity terms than in the United States.
This would also mean adopting the successful German codetermination governance model in which employees sit on corporate boards (ironically, an innovation imposed by British and American officials in the early post-WWII era).
Viewed over the longer haul, as opposed to isolated annual quarters, corporate owners and shareholders will benefit from higher returns that result from higher investment, including in the workforce.
A healthy byproduct of codetermination has been higher wages, as nations across northern Europe have adopted local variations of the Australian wage determination mechanism, which links wages to rising productivity year after year.
Americans are fortunate to have well-tested models abroad to rectify the deficiencies of their own quarterly capitalism. The question is whether the American genius for adapting new technologies extends to practices from across the globe.
Doing so requires acknowledging that other countries’ models have something to offer and then overcoming resistance from those who benefit most from the current allocation of gains from growth.
Game on, American people.
The Best News Democrats Will Hear This Summer: Evidence Confirms That Open Primaries Dilute Tea Party Extremism
Experimenting with Fully Open Primaries
Since 2010, conservative Republicans have gridlocked government, creating the most toxic political environment since the antebellum era. Critical to that tactic has been pay-to-play, enabling staunchly conservative donors to empower party activists including tea partiers holding views outside the mainstream. These activists fight well above their weight because they unduly influence party primaries, selecting candidates in their own image. Recent research suggests that the overrepresentation of right-wing extremists in candidate selection can be muted by making primaries nonpartisan.
With median voters more centrists on most issues than party partisans, expanding the primary electorate has an intuitive appeal as a remedy, but supporting evidence has been sparse - until now. California instituted a full-blown nonpartisan primary system in time for the 2012 elections in which the top two vote recipients regardless of party move on to compete head-to-head in November. The evidence is in from the first session of the 113th Congress and NOTT (Nonpartisan Top Two) had a dramatic impact in moderating votes of the California Republican delegation in 2013.
Held constitutional by the Supreme Court in 2008 (Washington State Grange v. Washington State Republican Party, et. al.), NOTT primaries are utilized only in Louisiana, Washington and California. The enormous size and political diversity of the California delegation offered a perfect control groups to test the open primary hypotheses. As it turned out, while Congress has become increasingly polarized, the Republican Congressional delegation from California in 2013 resisted that trend. Statistics compiled by the author from National Journal ratings reveal that the California Republican delegation in 2013 shifted notably toward the center compared to the voting record of all other members of Congress and compared to their own votes during the previous 111th (2009/2010) and 112th Congresses (2011/2012). Redistricting reduced California’s Republican delegation in 2013, but eleven of the remaining party members have served in Congress since at least 2009. And the reaction of these seasoned lawmakers to the new NOTT primary system in the 2012 election caused their very conservative voting records compiled in prior years to morph into moderation.
Congressional Republicans Moved Sharply Toward The Center
Most of the shifts were quite sizable. Specifically, the median California Congressional Republican National Journal ranking moved from the quite conservative 85th percentile in 2009/2010 to the 60th percentile in 2013. Put another way, the voting behavior of these political veterans moved from a median position analogous to the 369th most conservative member of the House in 2009/2010 (and 329th in 2011/2012) to one comparable to the 263d most conservative in 2013. The NOTT system saw these career politicians rather dramatically recentering their actual voting behavior by 25 percentage points. Most Congressional Republicans from the central valley and northern and southern California are now voting like moderates representing New England.
The reaction among Democratic politicians to these two reforms was more muted. Those veteran Democrats in office from 2009-2013 moved toward the center in 2013 as well. But their shift was small, from a median position at the 11th percentile (quite liberal) in 2009/2010 to the 14th percentile in 2013.
Breaking the Grip of Tea Partiers on Republican Primaries
NOTT shifted conservative Republicans significantly toward the center, arguably reducing polarization just as political scientists such as Norm Ornstein have long speculated. But questions remain. Even though the results are from California with the largest state Congressional delegation, any one state cannot be dispositive. The sample size is small, drawn from just one year (2013) following one election (2012), and only time will tell is this shift is sustained. Moreover, California also installed a nonpartisan redistricting system in 2011 which may have lowered partisanship in the new Congressional districts. Recentering may hinge on both reforms rather than NOTT alone.
Republicans are held accountable by political scientists for much of the polarization afflicting government now. But at least among the California Republican Congressional delegation, the NOTT system appears to neutralize centrifugal forces that have been pushing them away from the center. NOTT may be a surprisingly powerful tool for reducing polarization and should be at or near the top of any reform agenda designed to ease the grip of powerful donors on candidate behavior and gridlock.
Obama is Leaving Economic Inequality for his Successors to Fix
President Obama is emulating former President James Buchanan. His economic agenda is to kick the can down the road, leaving his successors an America of widening economic inequality without prospect of remediation.
The Obama Presidency is facing the most toxic, polarized environment since the antebellum era. Yet, legislative gridlock is no excuse for its lack of economic vision in addressing Gilded Age-income disparities promising to extend in perpetuity.
Abraham Lincoln faced a similar challenge on the issue of slavery in 1860, likely to endure indefinitely. He is America’s greatest President because he rejected that future. Lincoln ignored the admonitions of former Presidents including his immediate predecessor James Buchanan to permit the horror of slavery to encompass all the territory (north as well as south) from the Mississippi to the Pacific. That would have avoided war, but at the calamitous cost of empowering slavery for generations to come.
Obama faces a similarly daunting economic environment without easy answers: weak private (and public) investment, job offshoring, weak unions, secular stagnation, stagnant wages and political opponents demonizing his economic performance. His remedies include higher minimum wages, more education, better training – all important but incapable of redressing the systemic roots of widening income disparities.
Oh sure, recovery will eventually tighten labor markets sufficiently for real wages to rise a bit as they did during the 1990s boom. But the seminal reality will persist: Americans have worked harder and smarter since 1980, labor productivity rising about 75 percent. Yet, inflation-adjusted wages in the U.S. have stagnated, most of the gains from higher productivity going to the famous 1 percent. That is what the widening income disparity is all about.
Real wages will continue stagnating in the decades to come, income disparities widening further. Indeed, the U.S. has settled into the default setting for most nations throughout history explored by Daron Acemoglu and James Robinson (Why Nations Fail) where political inequality begets chronic economic inequality.
Wages Have Continued Rising in Australia and Northern Europe, Unlike America
In contrast, real wages in purchase power terms are $10 an hour higher now in Australia and northern Europe, with investment higher as well. The past decades have been different for the middle class in these nations, with real wages and living standards rising steadily year in and year out to now surpass the U.S. And their future will be different as well. Families there will continue to receive a hefty share of productivity gains. And the reason is that those nations, beginning in the 1940s began importing the Australian wage system, a century-old refinement of capitalism used to widely broadcast the gains from rising productivity. It has proven to be a tremendous success.
Between 1999 and 2008, productivity rose 13 percent in the European Union, with 60 percent of the gains going into real wages, up 8 percent. Productivity growth has slowed since, but about 60 percent has nevertheless continued to flow into real wage gains year after year – gains that have averaged nearly 1 percent annually in Germany and France. And real wage gains have averaged .86 percent annually in Australia since 2002 as well. Not so in America.
With real incomes and living standards for most workers in these rich democracies rising 50 percent over a career, they have avoided the American destiny of a shrinking middle class. They offer a stark lesson should Obama be inclined to emulate Lincoln and recraft the future. The remedy this time around is more than 40 acres and a mule. He must take two steps to become a transformational President: 1) bring U.S. corporate governance into the twenty-first century, and 2) link wages nationwide to productivity growth as the American labor movement accomplished until weakened after 1980.
Reform corporate governance
Limited liability corporations are the devices capitalist societies have evolved to create wealth, overseen by boards of directors. American boards suffer from an important deficiency that allows executive suites to practice short-termism. That syndrome is extensively lamented by economists, most recently by Clayton Christensen and Derek van Bever in the June 2014 Harvard Business Review, and in my own book What Went Wrong. Management and share speculators benefit financially from short-termism, also called managerial or quarterly capitalism. But their behavior disadvantages everyone else, with U.S. firms – in contrast to those in northern Europe – compressing wages, offshoring valuable jobs, eschewing worker upskilling, shortchanging investment and rejecting profitable longer term R&D in order to spike quarterly profits.
That explains why investment by nonfinancial firms in Australia and northern Europe has outpaced investment by American firms for decades. U.S. publicly-held firms even invest far less than privately-held U.S. firms: John Asker and Alexander Ljungqvist of NYU and Joan Farre-Mensa of Harvard found that publicly-held U.S. firms devote only 3.7 percent of assets to investment compared to 6.7 percent at privately owned firms. Foolish mergers are another element of the syndrome as examined by Jeffrey Harrison of Richmond and Derek Olin of Texas Tech. And so is under-investment in employees. That is why Australia and every nation in northern Europe now have more skilled labor forces than the United States. As recently as 1998, it wasn’t that way, but skill levels in nations like Austria, Denmark and France have since leapfrogged the U.S. level.
Firms in Germany and other northern Europe nations have avoided short-termism by adopting a system called codetermination. It puts adults with a long-term perspective in charge of corporations by stocking corporate boards of directors with employees. Employees hold one-half of the board seats of every single German nameplate firm, VW and Daimler, for instance. And shareholders will applaud codetermination because it means greater returns, as American economists Larry Fauver and Michael Fuerst concluded in 2006.
Link Wages to Productivity Growth
Under the Australian wage-determination mechanism, used there and in northern Europe, nationwide wage-setting is linked to productivity growth, ensuring that the gains from growth accrue to most rather than a few. It is how they have surpassed American living standards. And it’s a reform that America must adopt in order to begin rebuilding the middle class. A complementary approach is to reinvigorate the U.S. trade union movement, whose similar policies endorsed by both Republican and Democratic presidents built the great American middle class.
Any proposal to redirect economic flows will induce fierce opposition, these reforms especially so because they have a successful record of broadly spreading the gains from productivity growth. Once implemented, they will become a permanent feature of American capitalism just as they have become pillars of German capitalism. Their implementation will take years. But Obama’s legacy of accepting widening income disparities in perpetuity can be salvaged by a decision to place the reforms on the public agenda.
Obama Is Emulating James Buchanan When He Should Look to Lincoln
As Obama mulls that legacy, the President might consider another historical analogy. The founders crafted a Constitution with a Senate, an Electoral College and checks and balances intentionally designed to thwart abolitionists and the popular will. Historians term it the status quo bias against reform and it’s at the heart of dysfunctional Washington today. The founders sided with Edmund Burke who fretted about unanticipated consequences, rather than Thomas Paine who fretted about squandered opportunities.
In pondering his options, a cautious President Obama might erroneously believe he faces that same dilemma and continue to choose Burke. He would be wrong. The Australians and Germans have done the heavy lifting in crafting a refined capitalism of proven and seasoned performance, the outcomes knowable.
Obama’s actual choice for his economic legacy is between Lincoln and Buchanan.
This chart shows that the share of corporate R&D investment in long-term projects by Germany CEOs is three times higher than by US CEOs. It’s called short-termism, hurts investment and productivity, and results from weak, undemanding U.S. boards who pay without demanding performance. U.S. CEOs sell the future short because they (and their stock options) will be gone by then.
This chart shows that U.S. CEOs suppress “worthwhile” investment in new “very valuable” projects, using the savings to boost quarterly earnings and spike stock prices.
This chart based on US Government data that shows productivity growth slowed by one-third, to less than 2 % after 1979. The reason? CEOs switched focus to spiking earnings by cutting R&D, cutting investment, and compressing wages. Investment fell and so did productivity growth.
This chart shows that the pace of U.S. technology progress has dropped by one-third since 1982. Why? U.S. CEOs reduce R&D, harming productivity, and use the savings to spike profits over the next quarter or year to reap stock options. They sell the future short.