Don’t Be Sure that Powerful People Want the Economy to Return to Normal

Tyler Cowen warns readers in his Upshot piece that we may be entering a new era in which growth is weak and the bulk of the workforce, including those with college degrees, see stagnant or declining wages. The warning is well taken, but what’s missing is a serious discussion of the policies that are driving this outcome.

Cowen begins his story by pointing out that universities are replacing tenured faculty with low-paid adjuncts. He points out that major manufacturers are doing something similar by paying new hires much less than their incumbent workforce. He could also point to the large number of people who end up working in low paying sectors like retail and restaurants, including many with college degrees.

This is clearly bad news, but all evidence of a weak labor market. We could make the labor market stronger, for example by having the government spend more money on infrastructure, education, and other good things. We could also make the labor market stronger by getting down the value of the dollar to bring our trade deficit closer to balance. If we had balanced trade, it would generate somewhere in the neighborhood of 5-6 million jobs. That would quickly absorb the slack in the labor market and give workers the bargaining power to demand higher wages and turn down low paying jobs.

We don’t see this happening because our political leaders don’t want to spend more money, preferring higher unemployment. They also have little interest in addressing the trade deficit, hence the decision by the Obama administration not to include currency rules in the Trans-Pacific Partnership (TPP). In fact, the folks in policy positions are prepared to act to ensure that the labor market does not tighten; that would be the purpose of an interest rate hike by the Fed. Higher interest rates slow growth and reduce the pace of job creation.

In addition to the policy measures that weaken the power of ordinary workers, we should also look at all the measures that are being taken to ensure that money keeps going to those at the top. One of the main purposes of the TPP is to strengthen and lengthen patent and copyright protection. This means that we will pay more for everything from drugs to movies and video games. (These higher prices, nor the resulting distortions, are not factored into estimates of the economic gains from TPP.) There are not many low income people at the receiving end of patent licensing fees and royalties from copyrights.

In the same vein we can point to the tax loopholes, which not only directly benefit the rich and large corporations, but also create a lucrative industry of designing tax avoidance schemes. To a large extent this is the story of the great fortunes of PE managers like Mitt Romney.

And, since Cowen started with the story of universities, let’s end with it. Why should taxpayers subsidize the high six figure and seven figure salaries of top executives at major universities and other non-profit organizations. By allowing contributions to these organizations to be tax exempt, taxpayers are effectively paying 40 percent of the salaries of these people. It would seem reasonable to limit the pay for employees at organizations getting tax exempt status to what the president earns, $400,000 a year. After all, if a university can’t find a competent person to work for them at this pay, then it probably is not the sort of institution that deserves the taxpayer’s support.

So Cowen is largely right, we may be seeing a new normal in which all the money goes to those at the top. What he leaves out of this picture is that it is a normal that has been designed by the rich, for the rich. It could end up being normal, but there is nothing natural about it.