Friday, February 1, 2013
This is disturbing. Productivity growth (red line) is supposed to be the elixir that improves our standard of living, and yet while it's been steadily increasing ever since we've been measuring it, workers' share of the income it has generated (blue line) has been declining over the last 10 years - really, last 30, excluding a brief respite in the late 1990's.
Why has this been happening and what does it mean? We are getting better at what we do, but the gains are accruing more to the owners of capital than to labor. My liberal bent has me thinking about how since the 1980's capital owners have seen better tax treatment relative to labor "owners" (i.e., capital gains taxes were lowered disproportionately more so than personal income taxes), so in cases where people could choose, they would opt to receive capital gains rather than wage income, and thus push "labor share" down. Still, how much of our economy is able to make such a choice?
The bottom line is that the benefits of innovation are not as broadly shared as they used to be. This could be because an information-based service economy is generally less dependent on labor than a manufacturing-based economy. How many more people did Henry Ford need to help him realize his vision than Mark Zuckerberg had to hire for his? This would explain why politicians are so focused on manufacturing jobs, even though manufacturing comprises only about 10% of our economy. However, manufacturing is no panacea - the Bureau of Labor Statistics has an analysis showing that labor's share of manufacturing output is declining even faster than it is in the rest of the economy! Still, one bright spot there is that the expected sustainability of the recent 80% drop in domestic natural gas prices should bring back a significant amount of the more energy-intensive types of manufacturing.
To the extent this phenomenon has been a result of tax policy, we can be pleased that Obama has taken action to make capital income somewhat less favored than labor income (for example, between Obamacare and the fiscal cliff deal, Mitt Romey's and Warren Buffett's capital gains tax rates have gone up more than 50% while their income tax rates went up about 10%). But to the extent is phenomenon is about something else - and I do believe there's much more to the story than my favorite perpetrator of Reagan-Bush supply-side economic theory run amok - understanding and correcting it should be a central concern for policy makers who have the vision to see beyond the immediate debates of the day. On that, can we be hopeful that the recent GOP move to preemptively -if only temporarily- release the debt ceiling hostage is a sign that they recognize the electorate expects more than infantile fights over imaginary issues (can you tell I resent never getting to write a "mint the coin" screed)?