from Follow the Money

Let me turn the Labor day microphone over to those (closet) radicals at PIMCO

September 4, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Corporate profits as a share of GDP are at a half-century high, while real wages are struggling to stay above the zero line. Make no mistake, …  this recovery has been a boom for capital, not for labor!

The EPI?   No.   Paul McCulley of Pimco.   I would be surprised, though, if the latest edition of “The State of Working America” paints a different picture …   

McCulley continues:

In fact, that was the dirty little secret at Jackson Hole that nobody seemed to want to talk about candidly. Yes, it came up, with my pal Bill Dudley actually putting it on the table in one of the formal sessions, to be met by the sound of one hand clapping. There was no serious discussion of the matter of the return to capital versus the return to labor, because, I think, it is too painful for many central bankers to talk about; income distribution issues ain’t their job, they fervently argue. 

And in a narrow sense, I agree. In a broader sense, however, I disagree, because I believe the Fed’s cyclical reaction function should be consistent with a secularly equitable distribution of the fruits of productivity gains.  …  I urge you to read an excellent article 2 by Steven Greenhouse and David Leonhardt on the front page of today’s New York Times, which details just how much capital is reaping the fruits of productivity relative to labor in this cycle.

Historically, capital and labor have shared in the fruits of productivity, with capital leading the way, giving way to labor as the cycle matures and unemployment drops to its putative full-employment level. 

If Nouriel is right, the US economy may slow well before labor gets its share of recent productivity growth.   That is a problem, at least in my book.

Ben Bernanke highlighted the need to do a better job of sharing the gains from globalization at Jackson Hole, but he was rather thin on specifics.   Maybe that is OK.    It isn’t the Fed’s job to devise redistributive policies. 

Sebastian Mallaby argues that the right policy response to concerns about rising inequality would be to end a set a of tax policies that disproportionately benefit upper income tax payers (largely because any tax deduction is worth more if you are in a higher tax bracket).   The resulting revenues could be used to finance an expansion of the earned income tax credit … and a cut in the regressive payroll tax.

I worry a bit about the payroll tax cut.  It opens the door to charges the programs financed by the payroll tax cut – notably Social Security -- are financial unsound, and therefore benefits also need to be cut. 

I think would be a mistake.   Social Security’s benefits are reasonably progressive. And Social Security offers a fairly effective form of retirement wage insurance.    If your wage income from say 50 to 65 is less than expected because of technological change – or new competition from China and India – Social Security helps keep lower than expected wage income in the years before retirement from leading to far lower than expected retirement income.    

We don’t have an effective system of wage insurance in the US, but we do have a decent system of retirement wage insurance.  And with more job churn and more 55 year olds left in the cold by economic change, we need that system more than before.

That said, I liked the fact that Mallaby lays out what is for – Walmart, fewer farm subsidies (from past columns), fewer tax deductions and various tax policy changes that would increase the after tax income of those at the bottom of the income distribution – not just what is he is against.

Mallaby’s agenda is a bit too narrow for me.   In addition to tilting the tax system toward those who aren’t doing well (Mallaby is certainly right that eliminating some existing deductions that favor those doing well would help), I suspect that government policies are needed to help individuals pool certain risks.    Welfare capitalism is dying.   That means more risk is being shifted onto individuals – at a time when wages are not rising for many and overall compensation isn’t rising as fast as overall productivity. 

I consequently am interesting in seeing what Jacob Hacker proposes in his new book … 

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