Class Struggle

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In an earlier comment, Zimzo posted a link to a Jim Webb opinion piece in the Wall Street Journal, and said he would be interested to know what Joe thought of it. Sorry, Zimmy, you get me instead.

Webb has not strayed from his campaign rhetoric in this piece -- it's all problems and no solutions. I'll look at each paragraph individually and respond.

The most important--and unfortunately the least debated--issue in politics today is our society's steady drift toward a class-based system, the likes of which we have not seen since the 19th century. America's top tier has grown infinitely richer and more removed over the past 25 years. It is not unfair to say that they are literally living in a different country. Few among them send their children to public schools; fewer still send their loved ones to fight our wars. They own most of our stocks, making the stock market an unreliable indicator of the economic health of working people. The top 1% now takes in an astounding 16% of national income, up from 8% in 1980. The tax codes protect them, just as they protect corporate America, through a vast system of loopholes.

Why should people send their children to public schools when the public schools are in such bad shape? It is the liberals that oppose school vouchers and school choice. On this one, the right is proposing solutions, and the left is chanting, "Stay the course!"

Since the inception of 401(k)s and IRAs, the middle class has far more invested in the stock market than ever before, and that percentage is growing. That problem is already solved.

While the top 1% earns 16% of the national income, they pay 20% of the taxes. Sounds fair to me.

Incestuous corporate boards regularly approve compensation packages for chief executives and others that are out of logic's range. As this newspaper has reported, the average CEO of a sizeable corporation makes more than $10 million a year, while the minimum wage for workers amounts to about $10,000 a year, and has not been raised in nearly a decade. When I graduated from college in the 1960s, the average CEO made 20 times what the average worker made. Today, that CEO makes 400 times as much.

In order to have any comprehension of Economic Theory, one must read Adam Smith's The Wealth of Nations. It is simply not a valid comparison to look at a CEO's income vs. the minimum wage or even the average worker. The latter are paid based on their value to the company. If the average "sizeable" company now is making 20 times more than the average "sizeable" company of the 1960's (baselined to the average worker's salary), then the CEO is probably making what he is worth to the company.

In the age of globalization and outsourcing, and with a vast underground labor pool from illegal immigration, the average American worker is seeing a different life and a troubling future.

So their solution is Guest Workers and raising the Minimum Wage, so that they are more easily put out of work by illegal immigrants?

Trickle-down economics didn't happen. Despite the vaunted all-time highs of the stock market, wages and salaries are at all-time lows as a percentage of the national wealth.

Hilarious! Not "despite" the stock market highs, but because of them. Clearly, Webb is either ignorant of Economics, or thinks we are. The stock market is a major repository of our national wealth. As the stock market goes, so goes the national wealth.

At the same time, medical costs have risen 73% in the last six years alone. Half of that increase comes from wage-earners' pockets rather than from insurance, and 47 million Americans have no medical insurance at all.

Medical costs are going up, as medical care gets better. Webb is again showing his ignorance of economics. Half is paid for by insurance? Who's paying for the insurance? The workers! Perhaps not directly, but through payroll deductions, and through increased prices and lower salaries to cover the part paid by the employers.

Manufacturing jobs are disappearing. Many earned pension programs have collapsed in the wake of corporate "reorganization." And workers' ability to negotiate their futures has been eviscerated by the twin threats of modern corporate America: If they complain too loudly, their jobs might either be outsourced overseas or given to illegal immigrants.

All true, but what's his solution? Part of the problem with the pensions was the government itself. Companies that had a good year were not allowed to pad their pensions for the bad years, because pension contributions were tax-deductible, and the feds wanted the tax money. In the bad years, the companies could not afford to contribute. Is it any wonder that the pensions became underfunded?

This ever-widening divide is too often ignored or downplayed by its beneficiaries. A sense of entitlement has set in among elites, bordering on hubris. When I raised this issue with corporate leaders during the recent political campaign, I was met repeatedly with denials, and, from some, an overt lack of concern for those who are falling behind. A troubling arrogance is in the air among the nation's most fortunate. Some shrug off large-scale economic and social dislocations as the inevitable byproducts of the "rough road of capitalism." Others claim that it's the fault of the worker or the public education system, that the average American is simply not up to the international challenge, that our education system fails us, or that our workers have become spoiled by old notions of corporate paternalism.

Again, woe is us! This "rough road of capitalism" still beats the heck out of the "cowpath of communism." No solutions presented.

Still others have gone so far as to argue that these divisions are the natural results of a competitive society. Furthermore, an unspoken insinuation seems to be inundating our national debate: Certain immigrant groups have the "right genetics" and thus are natural entrants to the "overclass," while others, as well as those who come from stock that has been here for 200 years and have not made it to the top, simply don't possess the necessary attributes.

When all else fails, cry "racism!" If this is an "unspoken insinuation," why is "right genetics" in quotes? Whom is he quoting here? Utter BS, and not conducive to the debate on immigration.

Most Americans reject such notions. But the true challenge is for everyone to understand that the current economic divisions in society are harmful to our future. It should be the first order of business for the new Congress to begin addressing these divisions, and to work to bring true fairness back to economic life. Workers already understand this, as they see stagnant wages and disappearing jobs.

First, we must define "fair." Fair to me is earning what your work is worth, and getting what you pay for.

America's elites need to understand this reality in terms of their own self-interest. A recent survey in the Economist warned that globalization was affecting the U.S. differently than other "First World" nations, and that white-collar jobs were in as much danger as the blue-collar positions which have thus far been ravaged by outsourcing and illegal immigration. That survey then warned that "unless a solution is found to sluggish real wages and rising inequality, there is a serious risk of a protectionist backlash" in America that would take us away from what they view to be the "biggest economic stimulus in world history."

The "protectionist backlash" will come from the like of Webb -- those who do not understand Economic Theory. The globalization genie cannot be put back into the bottle. To compete with China and other nations, the ratio of worker productivity to worker cost must beat the ratio of other countries. So the productivity has to go up, or the wages have to go down. The only other option is unemployment.

More troubling is this: If it remains unchecked, this bifurcation of opportunities and advantages along class lines has the potential to bring a period of political unrest.

The bifurcation is not so clear to me. The poor in this country have tremendous opportunities that do not exist elsewhere. That's why people flock to this country. There are two main paths of opportunity in the U.S. -- college education, and starting a business. Both paths are open to all. Even those who did not do well in high school are eligible to go to community college and essentially start over. With good grades in a junior college such as NVCC, one can get into a 4-year college and earn a professional degree. We have many good trade schools, that can put one of the path to apprenticeship in plumbing, auto repair, electronics, etc. That is a great path to starting a company. This truly is the land of opportunity.

Up to now, most American workers have simply been worried about their job prospects. Once they understand that there are (and were) clear alternatives to the policies that have dislocated careers and altered futures, they will demand more accountability from the leaders who have failed to protect their interests.

What alternatives? Webb hasn't presented any here.

The "Wal-Marting" of cheap consumer products brought in from places like China, and the easy money from low-interest home mortgage refinancing, have softened the blows in recent years. But the balance point is tipping in both cases, away from the consumer and away from our national interest.

Oddly enough, we are doing it to ourselves. Everyone complains of the trade deficit. But what is the cause of that deficit? Our personal willingness to go into debt. Let's follow the money. If we make $1000 in goods, we have added $1000 to the nations wealth. If we then buy $1100 worth of stuff, the extra $100 of stuff MUST come from outside the country. Furthermore, since we earned $1000, and spent $1100, where did we get the extra $100 to spend? Debt.

The politics of the Karl Rove era were designed to distract and divide the very people who would ordinarily be rebelling against the deterioration of their way of life. Working Americans have been repeatedly seduced at the polls by emotional issues such as the predictable mantra of "God, guns, gays, abortion and the flag" while their way of life shifted ineluctably beneath their feet.

Now we move on to the "Blame Game." "God, guns, gays, abortion and the flag" are issues that define our way of life; they do not distract us from it.

But this election cycle showed an electorate that intends to hold government leaders accountable for allowing every American a fair opportunity to succeed.

All Americans have the opportunity to succeed. Some certainly have it easier than others, either by being born with superior abilities, or by being born into a wealth family. Neither is a guarantee of success, nor is the lack of them a guarantee of failure.

With this new Congress, and heading into an important presidential election in 2008, American workers have a chance to be heard in ways that have eluded them for more than a decade. Nothing is more important for the health of our society than to grant them the validity of their concerns. And our government leaders have no greater duty than to confront the growing unfairness in this age of globalization.

The problem is not growing "unfairness in this age of globalization," but growing fairness. Our workers will have to compete fairly with those in China, Mexico, and India. It may suck, but it is not unfair.

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10 Comments

Janie said:

Webb is getting more scary by the minute. He is totally ignorant of how basic econ works. He has NO clue what makes the economy thrive or what helps poor people to rise above poverty. His grasp on capitalism is equally faulty. It's horrific to think that this man will represent us in the Senate. The Washington Post was correct when they termed his thinking 'fuzzy'. Webb has become a liberal fruitcake.

Charles said:

I'll say more over at my blog about this, but democrats are the epitome of the class warfare they talk about.

For example, today had a story from John Edwards where his staff tried to get him a Playstation 3 from Walmart while John was denouncing Walmart.

But the best part of the story was John talking about how his 6-year-old son was able to chastise a fellow 6-year-old for having shoes purchased at Walmart.

See, John Edwards is a wealthy lawsuit lawyer who can buy his kid a playstation 3, and the most expensive shoes from the fanciest store.

And he's taught his kid to look down on the poor unfortunates who have to shop at places like Walmart which sell $4 prescription drugs and inexpensive but functional shoes.

Much like Ebenezer Scrooge wondering why the poor can't be more like him, Edwards and Webb and others in the democrat party have so much money that they have the luxury to denounce Walmart and the people who work and shop there.

Stay Puft Marshmallow Man said:

"Why should people send their children to public schools when the public schools are in such bad shape? "

because not everyone is a fat cat?

but I agree with you on globalization.

Jack said:

An excellent point, Puffy, which is why I favor school vouchers.

JP said:

Jack, interesting piece.

It's been a little while since reading Wealth of Nations, but I don't recall any passages in the book relating to CEO compensation packages, or the minimum wage, or labor rights laws (if I recall Smith is silent on the issue of whether or not 8 year olds should be employed for 18 hour days, 6 days a week, in sweat shops. Those questions didn't really enter the picture until the rise of the industrial revolution in the 19th century).

The labor rights laws are especially important when talking about "fair trade" versus "free trade". Are U.S. companies taking manufacturing jobs overseas to evade environmental and labor protections here at home?

These are valid questions.

I don't believe Smith talks about currency manipulation either, which is something that you have to come to terms with when talking about U.S. v. China trade relations.

Btw, closing corporate loopholes, something that Webb has advocated, is something that most economists--especially "free-market" types--would advocate (i.e. you're removing an indirect subsidy, which serves a purpose similar to anti-competitive system of tariffs).

Additionally, one of the interesting questions of the past decade has been the disconnect between productivity increases and real wages. You note a connection between the too--which traditional has been the case (wages track with productivity gains)--but in recent years this hasn't been the case, which means the increased margins aren't going into the pockets of workers. Interesting dilemma.

Jack said:

He did speak of minimum wage, but not in the way we think of it. Basically, he said that trying to raise the lowest workers wages would only result in the unemployed coming in to take the jobs at lower wages.

Labor rights laws are a very diffcult dilemma. Should we only trade with nations who have such laws? Would that not hurt those economies, causing more harm to the people we are trying to help? I don't think there are any good choices here.

Smith put everything in terms of "corn," which is the grain most eaten in a particular country. (Rice in China, wheat in England, etc.) Basically, currency manipulation is fruitless, because no matter what, the workers must be fed. If China manipulates it's currency to get the workers to semm to be working a less-than-subsistence wages, it must make up for it in other ways. (No free lunch.)

The "free-market" economists would favor getting rid of loopholes by entirely removing the taxes on corporations, since those taxes do nothing but drive up the cost of the goods produced.

In recent years, what has been the driver of productivity gains? I daresay it is not the workers' improved productivity, but mechanization and computers. These are put in place by the investor, not the workers. As such, the investors reap the benefits. The worker, in fact, is often LESS useful than he was.

JP said:

Good points Jack.

In reference to currency manipulations these are essentially negative tariffs. You deflate the value of your currency which allows you to undercut the international competition (in this case the U.S.).

In the short-run we get cheap goods, but in the meantime U.S. business can't compete with China because of the massive subsidies that they are giving their industries.

Once the international competition is gone, China can start floating it's currency (in theory U.S. business could start up again if Chinese prices were too high--although there would almost certainly be some pretty steep bars to entry in larger industries).

As far as labor rights laws go, from my point of view the issue is clear cut. There must be some regulation--and these should be requirements in our trade agreements. From my point of view this is a moral issue. This is about the way that people are treated. I don't think U.S. industries, or foreign companies should be rewarded for driving up profits in exchange for driving ordinary workers into their graves at the age of 40. There obviously needs to be some balance here.

As far as productivity goes, investments in technology are definitely part of the formula. The government also provides indirect subsidies to industries through the HB-1 Visa program which helps to reduce wage pressures.

If you take a knee cap to labor it's also easier to hire and fire employees which plays a role too (I understand that there are some positive benefits to having a flexible labor market--it cuts both ways).

I disagree with you that the "investor" just somehow magically finds money to throw into companies. A smarter work force also tends to be a more productive work force. A lot of gains can simply be made through better management practices. A great example of this is United Airlines repair facilities. United transitioned from an inefficient top-down approach, to a more bottoms-up approach, which resulted in the reduction of redundancies and other inefficienies. United was able to decrease turnaround times for jet repairs, and reduce costs, while increasing the size of the business.

Jack said:

China is actually losing money by subsidizing its products. Smith spent a lot of ink on that subject.
But what is China producing now that has high barriers to entry?

"A smarter work force also tends to be a more productive work force."

That's why people with more education tend to get paid more.

"A lot of gains can simply be made through better management practices."

Quite true, and as such, it is management that reaps the rewards, especially the CEOs.

JP said:

China's economy grew something like 20% last year, so the currency manipulation seems to be serving China's interest pretty well. At least for now.

I still have a hard time understanding the CEO racket. A wage 400 times the average employee? Seriously.

If you look at the airline industry these guys get in, run the business into the ground, and then end up getting multi-million golden parachutes as a reward. Something isn't right about that.

Jack said:

The China scheme can be kept up for a while, but not indefinitely.

Our industrial productivity has increased tremendously, while that of the individual worker has not. Why should the individual be rewarded when he has done nothing to earn it?

The simple solution to high CEO salaries, if indeed it is a problem, and not just jealosy, is to require a shareholder vote on executive salaries every year at the shareholders meeting. The shareholders are, after all, the employers.

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