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Home Publications Blogs Beat the Press Income Is Definitely Being Redistributed Upward, but Why Do We Think It's Technology?

Income Is Definitely Being Redistributed Upward, but Why Do We Think It's Technology?

Monday, 09 July 2012 04:16

Thomas Edsall devoted his blogpost today to several economists who claim that the upward redistribution we have seen over the last three decades is a result of revolutions in technology and that it will be difficult to reverse this development. In fact, much of this economic analysis is quite sloppy and it is easy to show that many of the factors leading to upward redistribution had nothing to do with technology. 

For example, the post features a graph that shows for the first time a sustained decline in the employment-to-population ratio (EPOP) even as output has continued to rise. While the graph is accurate, it is wrong to imply that this demonstrates any new impact of technology.

In prior decades the employment-to-population ratio was consistently rising because women were entering the labor force and because the baby boom cohorts were entering the labor market. At this point, the vast majority of working age women are already working. And, the baby boom cohorts are beginning to retire. These developments mean that the EPOP is likely to be largely stagnant or falling going forward regardless of what happens with technology. (The recent drop is due to the weak economy.)

Much of the rest of the analysis is similarly confused. For example, the piece refers to the millions of manufacturing jobs that the United States lost over the last decade. The biggest factor behind the job loss was not technology; productivity growth in manufacturing was not markedly faster in the 2000s than in prior decades. The main factor leading to job loss was the growing U.S. trade deficit.

This, in turn, was the result of a conscious policy decision by Robert Rubin to have an over-valued dollar. Robert Rubin's high dollar policy was put into practice with the muscle of the I.M.F. as it engineered the bailout from the East Asian financial crisis in 1997. As a result of the harsh terms of the bailout, developing countries decided to acquire massive amounts of reserves, which meant deliberately keeping down the value of their currencies against the dollar so as to run trade surpluses.

The predicted result of an over-valued dollar is the loss of jobs and lower wages in the sectors of the economy that are exposed to international competition. However, the availability of low-cost imports raises the living standards of those who are protected from international competition.

The latter group would include highly paid professionals, like doctors and lawyers. Note that it is not technology that protects these professionals from seeing their wages depressed by competition from their low-paid counterparts in the developing world, it is deliberate policy. While it has been the explicit goal of trade policy to put manufacturing workers in direct competition with workers in the developing world, the barriers that make it difficult for qualified doctors, dentists, and lawyers in the developing world to work in the United States have been left in place or strengthened.

The economic reality has closely followed the predictions of theory. We have lost millions of manufacturing jobs due to trade, this has led to downward pressure on the wages of middle income workers more generally. If the dollar were to fall enough to bring trade into balance, it would give us close to 5 million new manufacturing jobs. That would provide a huge boost to the wages of large segments of the workforce.

The high pay received by people at the top also has little to do with technology. Many of the top incomes are in the financial sector. Those earning these incomes are able to pocket tens of millions or hundreds of millions a year largely due to their political power. The government provides tens of billions in subsidies each year to major banks in the form of implicit "too big to fail insurance."

It also largely turns a blind eye to massive corruption in the industry such as the mortgage fraud that took place in the housing bubble years and the LIBOR scandal now being exposed in the U.K. It is unlikely that anyone will go to jail in the latter even though hundreds of millions of dollars, perhaps billions, were stolen through this fraud.

The high pay going to top executives in the United States also has little to do with technology. Top executives of successful companies in Europe and Asia rarely pocket the tens or hundreds of millions of dollars that are standard in the United States. This is also due to institutional structures. While corporate boards put a check on abuses by top management elsewhere, here corporate boards are essentially paid off to allow CEO's to take what they want and not say anything. 

In short, it is easy to trace the vast majority of the upward redistribution over the last three decades to deliberate policy choices, as I argue in The End of Loser Liberalism: Making Markets Progressive (free download available). It is seriously misleading to imply that this upward redistribution was just the result of technology.

Comments (10)Add Comment
Tax policy big reason rich getting richer
written by Robert Salzberg, July 09, 2012 6:33
Taxes in America used to provide a countervailing force against the giant sucking machine of unfettered free market capitalism but over the past couple of decades, taxes have become less progressive in America.

The following link provides perspective and analysis:

written by bmz, July 09, 2012 7:41
If Only Innovation Would Slow Down, Then We Could Catch Up With It
written by Last Mover, July 09, 2012 8:27
“The problem is not tech stagnation,” as some have argued, “but the opposite,” Brynjolfsson contends. “Technology is rushing ahead faster than humans can adapt.” The difficulty of human adaptation is, in turn, likely to get worse, he added, because technological innovation — as in Moore’s Law (predicting a doubling of computer capacity roughly every two years) — grows exponentially in scope. The total number of non-farm jobs in the country is now 5 million less than in January, 2008. The 3.7 million jobs added to the economy have not been enough to make up for the 8.7 million jobs lost in 2008-9.

The quote above is from the Edsall blogpost. This is what happens when an oversimplified root cause effect is created and ascribed to income distribution and implicitly, macroeconomics, such as a range between "technology stagnation" and "inability to adapt to technology because it's evolving too fast". Also discussed is the notion of technology displacing jobs in a death spiral fashion.

Once upon a time when markets worked whatever was too fast or too slow had a price on it to govern its speed accordingly. Just because technology has resulted in some things having a zero price at the margin and others a very high price doesn't necessarily mean an economic tragedy is in the making.

It can mean as well that the market has been undermined and captured by those who despise the very free markets they advocate - for others of course as they are the exceptions.
and don't forget the 4% inflation for 40 years., Low-rated comment [Show]
George Romney selling GM cars?
written by FoonTheElder, July 09, 2012 10:39
George Romney was the CEO of American Motors, not GM.

His original job was a Washington lobbyist who befriended the head of Nash-Kelvinator (predecessor of American Motors). Romney was hired to 'look around' all of the operations for the CEO, who unexpectedly died, leaving Romney as the new head of the company.
written by PeonInChief, July 09, 2012 10:42
Moving jobs overseas has little to do with technology. In fact, jobs are often moved overseas so that corporations don't have to install, for instance, anti-pollution devices.
GM AMC who cares all the cars were junk compared to Toyota Datsun and VW
written by pete, July 09, 2012 11:02
sorry for my confusion...i guess it was a Gremlin? geesh at least not an exploding vega.
Karl Marx, Daniel Webster and Free Trade
written by TheProtectionist, July 11, 2012 4:18
Automation only creates wage distribution errors in an open economy, not a closed economy (e.g. plantation owners were able to prosper without the need of purchasing power from their slaves due to exports). An automated factory can live off its exports, while laying off workers. This is impossible in a closed economy. This endless intellectual confusion is the result of the fact that there has never been a sound theory of economics (i.e. one that can make sense of protectionism at a micro/macro level). Well, that is about to change. Take a chance and think outside the classroom and ponder a new school of economics in the making: rescuingeconomics.wordpress.com.
Karl Marx, Daniel Webster Continued
written by TheProtectionist, July 11, 2012 4:22
Karl Marx suggested free trade as the fastest means to destroying capitalism, while Daniel Webster claimed the primary reason we have our US Constitution was to stop the economic chaos unleashed by free trade with Britain under the Articles of Confederation. Yet, astonishingly we have three political parties which have adopted unwittingly Karl Marx's advice, while the Chinese have adopted Webster’s advice. The Tea Party seems to be oblivious to Webster’s claim, and the average Republican has no idea that Lincoln was a protectionist, and that his party remained protectionist until the 1960s when it became an economic mirror image of the Democrats who have historically been free traders. Interesting to note the Chinese have rejected academia's propositions and prospered in the process. When will we wake up?
Low dollar cuts savings, pensions and 401Ks in half...
written by Mike B), July 12, 2012 9:28
I saved for retirement when the USD was buying an ounce of gold for $300. Nowadays the it takes over $1,500 to buy that same ounce of gold. I retired when the Australian dollar (AUD) was worth .58 cents USD. Nowadays, the AUD trades at parity with the USD, sometimes reaching levels of $1.08.

A lower dollar may help exporting capitalists and the U.S. tourist industry out. It does nothing for the punters. Social Security is not indexed to reflect the decline in the USD. Full faith and credit, indeed...

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.