Tuesday, March 25, 2014

How To Fix Income Inequality

  • Rising income inequality in the US is a result of a broken educational system, an open border with Central America, and Chinese mercantilism.

  • The price of unskilled labor has become globalized at a low level.

  • The American education system overproduces unskilled workers.

  • If the Left is sincere about raising the living standards of the working class, it will close the Mexican border and impose tariffs on Chinese manufactured goods.

"People who work hard deserve a living wage."
--President Obama

A major political issue on the Left is “rising income inequality”, pointing to the growing income disparity between the rich and the poor since 1970. This disparity is attributed to nefarious activities by “the rich”, and is blamed for all that is wrong with the US economy. A common refrain is that the current sluggish growth is attributed to income inequality, often using the “underconsumption” theory once espoused in the 1930s to explain the Depression. Obama again:
“When families have less to spend, that means businesses have fewer customers; meanwhile, concentrated wealth at the top is less likely to result in the kind of broadly based consumer spending that drives our economy.”

I could argue that income inequality is as old as society, and is an artifact of capitalism and competitive labor markets. But that does not address three inconvenient facts: income inequality is growing; real median household income has been declining since 2006; and real wages for unskilled labor are declining (as measured by the real minimum wage) . It would be one thing if income inequality were widening at the same time that income levels for the the lower cohorts were rising--a rising tide lifting all boats. But it is another thing when widening income disparity is accompanied by declining median income and declining living standards for the working class.

Personally, I don’t care about the GINI ratio, because it does not speak to the living standards of working Americans; American workers are not injured by the income levels of the rich. A society without rich people is very poor indeed, as any 16th (or 21st) century artisan will tell you. No rich, no Michelangelo or Shakespeare. A better measure of economic justice is real income by cohort, which paints a dispiriting picture today, particularly for the working class. So, to me, the problem is the real income of the working class, not the real income of the rich. Envy is a political problem, not an economic one. (Another important measure is the cross-national standard of living of the bottom rung, which is for another post.)

The Problem Of Declining Real Wages
The explanation for declining blue collar wages and living standards in the US in 2014 is that the combination of free trade with China and unrestricted immigration has globalized the price of unskilled labor.

The golden age for income equality in the US was the postwar era (1945 to 1980), when the American economy was closed, almost autarchic. The laboring classes faced little competition from cheap manufactured imports, and immigration only affected the price of agricultural labor. Today, three decades later, America’s blue collar workers must compete with less expensive immigrant labor, of which the supply is virtually unlimited, and with highly productive foreign workers making much lower wages, particularly in China which has an unlimited supply of cheap labor from the provinces. 

Today's unionized blue collar worker with a house, a family, two cars and a mortgage can’t compete with penniless Honduran immigrants living ten to a room, nor can he compete with Chinese teenagers living in a dormitories adjacent to their employer's factory. Unfortunately for President Obama and his aspirations, America has no monopoly on people who work hard (quite the contrary), and no control over what Chinese factories pay their non-unionized workers (a lot less than $10 an hour). And yes, China also has a nasty income inequality problem, with some of the poorest workers and richest elites in the world. China is a fascist plutocracy run by the 1%. The CCP is far to the right of the GOP: just try organizing a labor union or organizing a strike. China is America in 1895, minus the philanthropists.

Globalization has many positive attributes, such as cheap consumer goods which allows everyone to afford state-of-the-art TVs, but it is very damaging for the American worker. America is increasingly uncompetitive in manufacturing, resulting in the heart-breaking decline in manufacturing employment since 1980. Most of the job categories that are growing are in the service sector and either pay low wages or require post-secondary education. The spread between the minimum wage and the median income is growing, while the median income is declining. The employment and wage prospects for high school graduates (and dropouts) now is as bad as they were in the 1930s.

Unemployable Workers
America’s ridiculously wasteful educational system produces millions of young adults without the education necessary to be able to acquire marketable skills. This is our greatest social injustice. Illiterates cannot become skilled laborers. There is no reason to believe that anything the Department of Education can do will change the fact that American schools and colleges produce a surplus of unemployable workers. The defective American educational system won't change no matter how many billions the federal government spends on “education”. Illiterate teachers beget illiterate students. China is so far ahead of us in basic skills.

The Left believes that the problem of declining blue-collar living standards can be addressed by forcing hard-pressed employers in low-margin industries to pay workers higher wages (including subsidized health insurance). Such misguided policies raise the price of unskilled labor, which creates incentives to for manufacturers to manufacture offshore and for service industries to replace unskilled labor with capital goods. There is a belief on the Left that forcing McDonald’s to pay its workers $10 an hour will raise its workers' living standards. Their living standards would indeed rise--but only until McDonald’s automated its restaurants, which it is already doing in Europe. There is no job in a fast food restaurant or a warehouse that can’t be automated and, if trends continue, won’t be automated. Robots don’t need healthcare or pensions, and don't need a "living wage". The terms of trade for the American blue collar worker will continue to worsen unless something radical is done to correct this trend. And there are no radical policies coming from the Left.

What Can Be Done?
There are indeed radical policies which the federal government can implement to raise the real wages of blue collar workers. Most crucially, the working class would benefit by reduced competition from unskilled immigrant labor. The best way to impoverish the American working class and to maximize income inequality is to maintain an open border with the penniless peasants of Central America. That way, the bottom rung of society will always be replenished with millions of new uneducated poor people. Organized labor used to understand this, but no longer does due to pressure from immigrant members. Now the SEIU and other unions are actively encouraging Central American immigration, and an end to deportations of illegal immigrants. The SEIU is an enemy of the white working class, and the white working class knows it. This is the central conundrum of the Democratic party.

The American worker of today is competing with millions of undocumented Central American immigrants who are driving the price of unskilled labor to Central American levels. Until the wages of American workers are driven down to Guatemalan levels, the supply of eager Guatemalan workers will continue unabated. The US simply cannot have income equality and an open border.

Does the hard-core Left understand the contradiction between its pro-labor posturing and its anti-labor immigration policies? I think it does because the hard-core Left is not interested in working class living standards. What the Left desires is a large and impoverished state-dependent proletariat that votes Democrat. The combination of impoverished immigrants and impoverished native workers creates a natural dependent constituency for the Democratic party (or so they believe). A large, prosperous and non-dependent middle class is an enemy of the Left, which Marx and Mao understood. (Hence, the marxist need to liquidate rich peasants and the petit bourgeoisie.)

When Thomas Frank, Joan Walsh, Paul Krugman and others argue that the white working class "votes against its economic interests", they reveal their misunderstanding of the working class's actual economic interests. The white working class lives on the front line of leftist immigration and racial-preference policies, and understands its economic interests much better than its friends in Manhattan and Cambridge. 

The reason that the white working class has become conservative is not because they are stupid; they have become conservative in reaction to unrestricted immigration, the aristocracy of federally protected ethnic groups, and the growth of state-dependent classes who don't pay taxes. The difference between the Democratic coalition and the working class is that the working class actually works for a living in the private sector. White blue collar workers now vote Republican, something that Harry Truman would have real trouble understanding.

The Left has no understanding of how labor markets actually work, and what that means in the lives of actual working Americans. The Volvo community are still playing Pete Seeger records and watching Oscar-winning movies about Nelson Mandela and Cesar Chavez. They don't understand that it wasn't the capitalist class which voted for George Wallace, and it wasn't the working class who voted for George McGovern. The working class always and everywhere hates enforced "equality". Just ask the Poles, the Estonians, the Cubans, the Slovenians, or the Ukrainians. No workers want state-imposed "equality".

Globalization Of Manufacturing
Another policy change that would materially help the American worker would be to give up on "free trade" with China and impose tariffs and other trade barriers on its manufactured goods until it ends its mercantilist currency policy and allows the bilateral trade account to balance. The US needs to do to China what it did to Japan in 1971 and 1984--force it to appreciate its undervalued currency. China's one billion potential workers pose a mortal threat to every person working in manufacturing in the industrialized world. China has hundreds of millions of penniless peasants who are not yet employed in manufacturing, but who will be soon enough. The productive capacity of these potential workers has the potential to wipe out millions of jobs in the West.

In an earlier post about the Chinese threat, I wrote:
China’s manufacturing potential is so huge that within a few decades its output could exceed that of the the rest of the world combined. The world's central problem is that China is simply too big to be neatly inserted into global trading system. When countries like Guatemala or Bangladesh seek to grow exports, they can do so without affecting markets or hurting competitors. By contrast, China at its full potential is a Panzer tank at Tiffany’s. For China to succeed in implementing its development plan, it will have to destroy the world. China’s national development strategy compels it to wreck everyone else’s manufacturing economy. This is economic warfare, with Chinese characteristics.

I will note that, despite its promises to revalue the yuan, China’s latest currency "reform" has depreciated the yuan, which cheapens further its already cheap exports. So much for its empty promises to appreciate the yuan. It has been well reported that China exerts political influence in the US by funneling money to friendly politicians in both parties. This helps to explain why Congress has helped China to destroy America’s manufacturing industry. (Just imagine how things would be if Ambassador Huntsman had been elected president!)

If President Obama wants to do something to improve living standards for the working class, he will follow Mitt Romney’s advice, declare China to be a currency-manipulator, and ask Congress to impose countervailing tariffs. It should be just as easy for Chinese companies to export their manufactures to the US as it is for American companies to export manufactures to China--i.e., impossible. Ask Apple how many Macs it has sold in China.

There are elements on the Left, particularly the manufacturing trades, who understand the corrosive effects of one-way free trade with China. Many politicians in both parties will freely admit that China flouts its treaty obligations under WTO. Some courageous senators (Chuck Schumer and Lindsey Graham) have gone so far as to actually introduce punitive tariff legislation, but their bill was killed by the Bush administration*. Such a bill should be revived and enacted and should be labelled "The American Working Class Recovery Act".
*AP, 9/28/06: "Two U.S. senators said Thursday that they will abandon legislation that would have punished Chinese goods with steep tariffs. The lawmakers promised, however, to renew efforts next year meant to spur Beijing to change currency policies they say cost millions of American jobs. Sen. Lindsey Graham, a Republican, said President George W. Bush met with the lawmakers Thursday, asking them to scrap this week's vote on a bill that would have imposed a 27.5 percent tariff on Chinese products coming into the United States unless China went further to revalue its currency. Bush, Graham said, wanted lawmakers to give new Treasury Secretary Henry Paulson more time to persuade China to take steps to allow the yuan to strengthen against the dollar. Critics say China's currency is undervalued by up to 40 percent, making Chinese goods cheaper for American consumers and U.S. products more expensive in China. Chinese leaders have said they plan eventually to let the yuan trade freely on world markets, but that doing so immediately would cause financial turmoil and damage the Chinese economy. The senators have expressed hope that Paulson's personal connections in China can resolve a three-year-old impasse that his predecessors at the Treasury Department could not fix. Paulson made some 70 trips to China while at Goldman Sachs to drum up business for the investment firm."

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