The Feehery Theory

Some Thoughts on Income Stagnation

Posted on November 20, 2014

There are currently two schools of thought on how to deal with America’s income disparity problem.

One school of thought is a government program to raise the minimum wage paid to workers.

The second is to restrict the labor supply by shutting down our borders and kicking illegal immigrants out of the country.

The President and his allies are huge proponents of the first approach.  Senator Jeff Sessions, a Republican from Alabama, promotes the second approach.

Both a minimum wage increase and a crackdown on illegal immigration have popular support, but neither is a sufficient response to a continuing problem that has dogged the American economy for the last two decades.

Raising the minimum wage kills entry-level jobs.   Cutting off all immigration kills economic growth.

We need to think creatively about how to create an environment where wages increase.

Wages have been stagnant since the late 1990’s.   And those stagnant wages have been eaten up by higher health care costs, higher education costs, higher taxes at the local level, and steady if unspectacular inflation in the price of some food products (meat and dairy being prime examples).

The official unemployment rate is settling back down to 5.8 percent or so, but the labor participation rate is as low as it has been since the Carter years, mostly but not completely due to baby boomers retiring.

Wages aren’t going to go up when employers have plenty of potential employees to choose from, and at 5.8 percent, coupled with the high number of folks who have completely stopped looking for work, there is more potential employees than jobs.

In some sectors, it’s not hard to employ undocumented immigrants, who tend to be more than happy to work at wages far below what American citizens will work for.

And that tends to drive down wages.

At the upper end of the spectrum, there is no penalty (tax or otherwise) for CEO’s who make salaries that are excessive.  In fact, corporate boards tend to inflate salaries in a never-ending competition to attract top talent no matter what the cost.

Corporate boards also tend to reward those CEO’s who are most fixated on bringing greater efficiencies to the process, wringing more out of employees for less money, cutting costs and padding the bottom lines.

That’s how the system works.   CEO’s don’t get rewarded for making great products or employing the most people.  They get rewarded for bringing the highest value to shareholders.

The stock market reacts favorably to healthy bottom lines.   It tends to ignore boiling society issues like income stagnation, income inequality, and the long term political instability.

Most rich people don’t worry too much about income stagnation.    What they worry about is getting richer.

Michael Lewis wrote in the New Republic, in a review of Darrell West’s book, “Billionaires: Reflections on the Upper Crust”, a fascinating insight into the physiological changes that occur when somebody becomes extraordinarily wealthy.  It turns out the F. Scott Fitzgerald was right when he said that the very rich are different from you and me.

The problem is caused by the inequality itself: it triggers a chemical reaction in the privileged few. It tilts their brains. It causes them to be less likely to care about anyone but themselves or to experience the moral sentiments needed to be a decent citizen.

Or even a happy one. Not long ago an enterprising professor at the Harvard Business School named Mike Norton persuaded a big investment bank to let him survey the bank’s rich clients. (The poor people in the survey were millionaires.) In a forthcoming paper, Norton and his colleagues track the effects of getting money on the happiness of people who already have a lot of it: a rich person getting even richer experiences zero gain in happiness. That’s not all that surprising; it’s what Norton asked next that led to an interesting insight. He asked these rich people how happy they were at any given moment. Then he asked them how much money they would need to be even happier. “All of them said they needed two to three times more than they had to feel happier,” says Norton. The evidence overwhelmingly suggests that money, above a certain modest sum, does not have the power to buy happiness, and yet even very rich people continue to believe that it does: the happiness will come from the money they don’t yet have. To the general rule that money, above a certain low level, cannot buy happiness there is one exception. “While spending money upon oneself does nothing for one’s happiness,” says Norton, “spending it on others increases happiness.

The point here is don’t expect the rich to come up with a solution on income inequality, because it is highly unlikely that they will find one that meets their needs, which is primarily a desire to make a lot more money for themselves.

Jack Kennedy once said that a rising tide lifts all boats, and I suppose that is true.

But over the last fifteen years, the tide that has lifted the upper class has tended to swamp the lower and middle classes.

Republicans need an effective and credible response, one that will be politically attractive, that will grow its base, that will grow the economy and that will work to increase wages.

I don’t think shutting down the labor supply by deporting 11 million undocumented immigrants works politically nor will it help to grow the economy.  But we can’t continue to have unsecure borders nor can we have that many undocumented lingering around the country, waiting to be exploited by unscrupulous employers.

To me, that argues for a pro-growth immigration bill that immediately gives legal status to the undocumented, deports those who have criminal backgrounds, secures the borders to sharply reduce the flow of additional workers unless they fill a specific need to grow our economy, and make it harder for employers to hire those who are undocumented.

Second, we need to create an ownership society, where workers  get a percentage of the profits of the companies they work in first, before the shareholders.

This can be done through an air-tight tax incentive program that sharply lowers taxes for companies that give dividends to their employees first.

I am sure there are other ideas that are out there.  Whatever they are, Republicans need to engage in this debate to create pro-growth policies that benefit all Americans, not just the top of the heap.