Robots Don’t Buy Stuff

With the fiscal cliff now swallowing the entirety of Washington and media corps, the rest of us can sit back and get on with life. We can also start to discuss the real issues that have eroded the economy. Some folks have just noticed that the balance between profits and wages is awry. A lot awry. Like so unbalanced that our future depends on plotting a way to get back to a better balance.

This is a point I have made several times over the last few years. Let me summarize:

For a long time after World War II, up through the late 1970’s at least, there was an unwritten but clear ‘social contract’ operating in the US. Originally this was driven by the benevolence felt towards those returning GI’s from WWII, but then it became generally accepted. The deal was that big business was free to innovate and make profits as long as workers shared fully in the productivity surge that innovation would create. So even as technology threatened some jobs the overall workforce benefitted from rising wages and those who became unemployed were protected by things like unemployment assistance and the other aspects of the New Deal, and could find their way back into the workforce quickly because the economy was relatively dynamic.

This dynamism was not a function of the devastation of America’s competitors – they were also our markets – but was more a function of a positive feedback loop within the economy. Rising wages fed demand, which fed profits, which created opportunities for business, new jobs and boosted demand. The economy rumbled forward on a self-sustaining path as long as neither wages nor profits crowded out the other.

This was neither a worker’s paradise nor a capitalist’s dream. It was a compromise.

A compromise that led to two consequences.

One was a rising complacency within the newly empowered and enriched middle class. The other was a repressed anger within the business community that it was being prevented from ‘maximizing’ profits.

The brilliance of the Reagan makeover of the Republican party was that he exploited the one in order to deal with the other.

During the years of stagnation and high inflation at the end of the 1970’s Reagan was able to articulate an antigovernment platform that spoke to the middle classes’s frustration. The happy days of the 1950’s and 1960’s had given way to rising doubt. The middle class, by now used to rising wages, was facing a period of economic uncertainty out of kilter with the supposed American dream. There was a need to lay blame. Reagan found the perfect cause of the problem: big government. His adoption of supply side policies – deregulation coupled with lower taxation – was meant to sidestep the stagnation by getting government out of the way and releasing the pawer of market magic.

His efforts were backed by an army of right wing think tanks and lobbyists heavily financed by big business. Both major parties in Congress fell for the deregulatory bug.

The intellectual heft within this shift to the right was supplied by orthodox economists who argued, in accordance with the long standing classical tradition, that free markets are always preferable to government intervention. The snug fit between orthodox economics and resurgent Republicanism was so powerful that it drove all alternatives from the field. The Democrats were cowed into submission by Reagan’s astonishing popularity and happy message. There was no effective opposition to the rightward shift. The media complied also. The upshot being that America was dominated by market magic policy making for four straight decades, including the Clinton era.

A further element in this shift to the right was the rapid adoption within business of highly destructive management technologies that can be clustered within the rubric of ‘shareholder value’. These technologies gave legitimacy to a series of management practices and still pervade today. The most important consequence of these practices was the elevation of ever growing profit as the moral motivation of business. Nothing else mattered. And profit was to increase whatever the environment. When faced with flat revenues, management was thus expected to cut costs to maintain profit growth. No matter what the social cost. No matter what the impact was on the wider economy. One of these technologies – agency theory – even gave legitimacy to the notion that managers ought to share in the profits they produce. This was supposed to align management and shareholder goals. It gave rise to our bonus culture. It, arguably, undermined shareholder value by allowing managers to allocate more profit to themselves than they would otherwise be able to. This panoply of modern management techniques was far less efficient than its orthodox economic roots suggested. Nonetheless it dominated a newly empowered and deregulated business community.

This story is well known. It is so well known that, apparently, some of the consequences of Reaganism have been ignored or are being greeted with surprise.

For us the biggest consequence was the undoing of that post-war social contract. One of the anchors of that contract had been the ability of unions to organize and push back against big business. That was dealt with by anti-union legislation – a process that continues to today as represented by the vote in Michigan just this week. So the workforce lost its ability to bargain and business steadily gained the upper hand in all matters within the economy.

It can be no surprise therefore to learn that profits have overwhelmed wages as a share of our wealth. Profits have surged. Wages have languished.

People making a living through selling their labor are at a major disadvantage. Not only is the increment of a growing economy allocated to such rewards being stifled, but it is being taxed at a higher rate. Those living off of capital are privileged beyond anything seen for decades. They are taxed preferentially, given all sorts of privileged breaks, and their share of GDP is rising rapidly.

The balance is truly gone.

Massive shifts in income inequality is a direct result of this.

Workers are no longer benefitting from the increase in their productivity. Capitalists are.

This by any other name is a class conflict. Except here in America no one who calls it by that name gets very far.

Yet our recent presidential election was a stark reminder that the conflict is gathering steam. The entire process was riven through by accusations of class driven behavior. The Republican shock at their loss was almost entirely couched in such accusations. Obama’s win was, they have suggested, based upon an uprising of moochers – the weak, the poor, the young, and the elderly, all of whom have a stake in preserving the big government that the Republicans are still trying to deconstruct. A battle has been joined. But our elite is heavily invested in the denial of such a possibility. It prefers to believe, still, in the mythical America created by Reagan’s panglossian drippy viewpoint.

They deny that capitalism and democracy are perpetually in conflict.

They deny that the social contract has been violated.

They deny that our democracy has been corrupted.

They deny that our rising inequality is a threat to our social stability.

They deny that our economy depends upon that virtuous feedback driving demand higher on the back of rising wages.

They deny that all the accumulated privileges and tax breaks thrown to big business have failed to provide a return to society.

They deny, in other words, to countenance their intellectual and moral failure.

But there is a ray of light amidst all this gloom. Robots don’t buy stuff. People do. And they need wages to be able to do so.

Just as the Republicans have waged war on big government by attempting to ‘starve the beast’, thus robbing government of the funds to address social issues. So too has business starved another beast: the middle class. By hammering wages and by squeezing employment in order to boost profit the business community has eroded the very machine upon  which it thrives. It has robbed the workforce of the funds needed to propel business forward. It has dampened demand. It has starved itself.

To get back on track we need to return to that post-war social contract. We need to abandon Reaganism. We need to put business back into a box.

What’s that saying?

Power to the people?