Our dysfunctional economy

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Our dysfunctional economy

There is something fundamentally broken about the United States economy and no one is doing anything about it.

Unemployment is low. GDP growth is strong. But official government data released on Friday show that real wages for American workers have gone down over the last year.

Nominal wages, the dollar amount workers see in their paychecks, have slowly crept up, increasing 2.7% between July 2017 and July 2018. But that has not kept up with inflation, which rose 2.9% over the same period.

The economy is growing. Workers, however, are falling further behind.

What gives?

The $4,000 promise

In late 2017, Trump claimed he had the answer to stagnant wage growth. He said that a massive tax cut, aimed squarely at corporations and the wealthy, would spur substantial increases for most Americans.

The tax cuts will spur “an immediate jump in wage growth,” Kevin Haslett, the chair of Trump’s Council of Economic Advisers predicted in October 2017. Haslett claimed that corporate income tax alone would increase wages in the average household “by $4,000 to $9,000 a year.” In a speech that month, Trump touted that, as a result of certain corporate tax cuts, “The median U.S. household would get a $4,000 real income raise.”

After Trump signed the tax cuts into law on December 22, 2017, the administration seized on anecdotal reports of individual businesses offering $1,000 bonuses or raising hourly pay. These announcements turned out to be a distraction from the broader trend of stagnant or declining wages since the passage of the Trump tax cuts.

If wages aren’t increasing, just pretend

Declining wages have not prompted Trump or his advisers to rethink their economic policies. Instead, Trump has ignored the actual economic data and pretended that workers’ paychecks are increasing.

On Sunday, Trump tweeted that “[y]our paycheck is bigger,” adding that “our country is booming like never before.”

Donald J. Trump@realDonaldTrump

.@GovMikeHuckabee “Your paycheck is bigger, your pension is stronger.” @foxandfriends Unemployment numbers are better than they have been in 50 years, & perhaps ever. Our country is booming like never before - and it will get even better! Many companies moving back to the U.S.A.

August 12, 2018
Trump didn’t solve the wage problem, but he also didn’t create it

Trump’s tax cuts have not created wage increases for American workers. His promises were empty.

But the problem of stagnant and declining wages did not start with Trump. Real wages have been effectively stagnant for decades. This is a bipartisan problem that administrations of both parties have been unable to solve.

Purchasing power for Americans is about the same today as it was 40 years ago.

Why do so many Americans think the deck is stacked against them? Because it is. America is getting richer. Profits are rising. But the benefits are flowing to fewer and fewer people.

The key to solving the problem is figuring out why it's happening. It’s a complicated problem, and there are a variety of theories.

An unhealthy system

One culprit for stagnant and declining wages: employer-provided health care.

Health care costs have skyrocketed over the last few decades, and most American workers get their health insurance through their employers. Dramatically increasing health costs in an employer-based insurance system create a couple of dynamics that depress wages.

First, employers may be hesitant to increase wages, knowing that they made need to absorb unknown increases in health costs in the future. Second, employees may be more reluctant to move jobs, fearing that it will impact their health coverage and costs. Less mobile employees have less bargaining power because employers know that low wages are unlikely to result in their departure.

Health care costs are also driving income inequality because they don’t impact all workers in the same way. This is because “[h]ealth costs are a bigger share of total compensation for lower-wage workers, and so rising health costs hit their salaries the most.”

The powerless American worker

Since the late 1970s, labor unions in America have been decimated. In the 1950s, 1 in 3 workers belonged to a union. Today, it’s 1 in 20. This decreases bargaining power for workers and wages for non-union workers.

A 2016 study by the Economic Policy Institute found the decline in unionization “has contributed to substantial wage losses among workers who do not belong to a union.” If, for example, unionization in 2013 had been the same as in 1979, men who are not union members would have earned an average of $2703 more in annual salary.

Unions “set pay and benefits standards that nonunion employers follow.” When union membership is robust, “nonunion firms lift wages to prevent their employees from leaving for higher, union wages.”

Chasing the ghost of productivity

In the long run, wages are supposed to increase when workers become more productive. Firms will pay workers more when their labor helps them make more money. But, despite rapid technological advancement, productivity growth is anemic.

Why?

One theory is that investment is either too low or lagging. Companies just aren’t making the significant investments in training or equipment that will enable workers to be more productive. Corporations are sitting on lots of cash, but instead of making investments they are using it to juice their stock prices through dividends or stock buybacks.

This could be a result of decreased competition or “business dynamism.” Competition between businesses can spur investment to gain an edge. Since the early 2000s, there has been less competition between companies and fewer new businesses, reducing the need for investment.

Still, slow productivity growth is only a piece of the puzzle because, over the past few decades, wages have increased more slowly than productivity.

No one is working to fix the problem

These are hard problems, but there are potential solutions.

If health care costs and the employer-based system are keeping wages low, the government could help rein in costs and make insurance less dependent on an individual’s current job. Obamacare began this process, but the Trump administration has been weakening it. We could go further -- everything from a public option to Medicare-for-all.

As worker power declines, the government could make it easier to create new unions by passing laws to allow card check or increase worker power through sectoral bargaining.

If businesses don’t invest to make their workers more productive, the government could make major investments in better infrastructure -- roads, bridges, basic research and development -- that could make all workers more productive.

Most of the policies of the current administration are heading in the opposite direction. Trump’s policies are increasing health costs and weakening unions. He claimed to be interested in infrastructure investment but hasn’t followed through.

Politicians of all stripes speak incessantly about supporting the American worker. But until they tackle the wage crisis head-on, it’s hard to take them seriously.


The rise of the anti-corporate Democrat

Corporations, flush with cash, aren’t investing in workers. Instead, they are using the money to juice stock prices and enrich corporate executives. Democrats, however, are completely out of power. What can they do, at this point, to show Americans they are on their side?

One approach is to reject money from corporate political action committees (PACs). As the 2018 midterms approach, the AP reports “more than 170 federal candidates have said they’re not accepting corporate PAC donations.”

Among those rejecting corporate PAC money are potential 2020 presidential candidates Senators Kamala Harris (CA), Cory Booker (NJ), Kirsten Gillibrand (NY), Elizabeth Warren (MA) and Bernie Sanders (VT).  

Corporate PACs are limited to spending $5,000 per candidate per cycle. For most candidates, these donations aren’t a huge part of their fundraising. The increase in small-dollar donations after making such a pledge can more than compensate those corporate dollars.

Beto O’Rourke, who is challenging Senator Ted Cruz in Texas, has rejected corporate PAC money. O’Rourke still managed to raise $10.4 million in the second quarter of 2018, more than doubling Cruz’s haul. (Cruz accepts corporate PAC money.)

So pledging to reject corporate PAC money is, in one sense, a mostly symbolic measure. But it’s something.


The hush money president

Donald Trump named Omarosa Manigault Newman, a reality TV star known simply as Omarosa, as a top White House adviser, paid her a $180,000 salary and gave her regular access to the White House. As the Assistant to the President and Director of Communications for the Office of Public Liaison it was unclear exactly what Omarosa did during her tenure, but she was the only high-ranking African-American in the West Wing.

Then things went south.

Chief of Staff John Kelly fired Omarosa in a tense conversation in the White House Situation Room, which she secretly recorded.

But Team Trump was worried about what she might say when she left. So they offered her a $15,000 per month job with the Trump campaign contingent on her signing a nondisclosure agreement.

The agreement would prevent her from saying anything negative about Trump, Vice President Pence, any company owned by Trump, any member of the Trump family, any member of the Pence family, and any company owned by a member of the Trump or Pence family in perpetuity.

Omarosa declined.

Instead, she wrote a book and embarked on a publicity tour, describing Trump as a racist who uses the n-word and is in a state of “mental decline.”

The $15,000 solution

Another aide who left the White House, longtime bodyguard Keith Schiller, did quickly take a job with the Republican Party after departing.

His compensation? $15,000 per month.

Trump may have good reasons to keep Schiller quiet. He accompanied Trump on his infamous trip to Moscow in 2013 and said that one of the Russian hosts offered to send Trump prostitutes. (According to Schiller, Trump declined. “We don't do that type of stuff,” he reportedly told the House Intelligence Committee.)

Another aide close to Trump, John McEntee, was quickly hired by the Trump campaign after being escorted from the White House for unknown reasons. McEntee, according to reports, was a “constant presence at Trump’s side.”

Days before the 2016 election, Trump also paid Stormy Daniels $130,000 to keep quiet about their alleged affair. Another woman who says she had an affair with Trump, former Playboy Playmate Karen McDougal, was paid hush money by the parent company of the National Enquirer. McDougal alleges the deal was secretly orchestrated by longtime Trump “fixer” Michael Cohen. Trump was recorded by Cohen discussing the arrangement.

The legal questions

The payments to Daniels and McDougal before the 2016 election may have violated campaign finance law because they were effectively unreported contributions to the campaign. In the case of McDougal, the payments may have been an illegal corporate contribution.

The offers to Omorasa, Schiller, and others raise a different kind of legal question. The issue is “whether the Trump campaign is being used as slush funds to keep disgruntled former employees from sharing their stories.”


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