Firing or cutting the pay of government workers is part of a Republican plan to depress wages. It’s not a conspiracy theory. Their staff commentary said so. (More)
With no guest writer today, Morning Feature takes a nutshell look at plutonomy: an economy that relies on the investment and spending of the wealthy.
Back in March, GOP staff of the Joint Economic Committee published a report titled Spend Less, Owe Less, Grow the Economy. It offers academic support for the GOP’s Cut-and-Grow economic policy, which focuses exclusively on spending and regulatory cuts and rejects infrastructure investment or tax increases to boost our economy. It’s worth reading in its entirety, along with critiques by Derek Thompson at The Atlantic, Andy Kroll at Mother Jones, and former Federal Reserve vice chair Alan Blinder in the Wall Street Journal.
A key paragraph in the report comes on page 7, in a discussion of “non-Keynsian” (i.e.: supply-side) factors that purportedly boost economic growth:
1. Decreasing the number and compensation of government workers. Generally, government workers are well-educated and have significant skills. A smaller government workforce increases the available supply of educated, skilled workers for private firms, thus lowering labor costs.
In other words, our economy will grow when businesses can pay workers less. This plan won’t increase the number of total jobs for specific education and skill sets. It’s just that fewer of them will work for government and more will work for private businesses … and earn less. But Robert Reich and Laura Tyson argue that our current unemployment owes to weak demand: too few Americans can afford to spend. How will cutting the pay of “well-educated” workers with “significant skills” boost demand?
It won’t, unless you agree that the U.S. has become a plutonomy: an economy driven by the investment and spending of the wealthy. Ajay Kapur at Citigroup coined that term in 2005, and offers three defining features:
1. They are all created by “disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants…the rule of law and patenting inventions. Often these wealth waves involve great complexity exploited best by the rich and educated of the time.”
2. There is no “average” consumer in Plutonomies. There is only the rich “and everyone else.” The rich account for a disproportionate chunk of the economy, while the non-rich account for “surprisingly small bites of the national pie.” Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.
3. Plutonomies are likely to grow in the future, fed by capitalist-friendly governments, more technology-driven productivity and globalization.
Last August, the Wall Street Journal‘s Robert Frank wrote that the U.S. is increasingly a plutonomy. The top 5% of Americans – household income over $166,000 – take in 21.7% of national income and account for 37% of consumer spending. They spend almost as much as the bottom 80% combined (39.5% of consumer spending).
That’s not too surprising, as only high-income Americans can afford to spend right now. But it is disturbing, as it bolsters the conservative claim that the earnings and spending of individuals in the bottom 80% are almost irrelevant. Tyler Cowen and Jayme Lemke wrote in Foreign Policy that we may be looking at 10% unemployment for a long time:
In essence, we have seen the rise of a large class of “zero marginal product workers,” to coin a term. Their productivity may not be literally zero, but it is lower than the cost of training, employing, and insuring them. That is why labor is hurting but capital is doing fine; dumping these employees is tough for the workers themselves – and arguably bad for society at large – but it simply doesn’t damage profits much. It’s a cold, hard reality, and one that we will have to deal with, one way or another.
But as Frank warned:
Plutonomies are far less stable than economies built on more evenly distributed income and mass consumption. “I don’t think it’s healthy for the economy to be so dependent on the top 2% of the income distribution,” [Moody Analytics chief economist Mark] Zandi said. He added that, “In the near term it highlights the fragility of the recovery.”
Paul Gilding would call “fragile” an understatement. As we’ll see later this week, he thinks we’re in for a very rocky ride.