The Wedge

As Workers’ Pensions Wither, Those for Executives Flourish; Companies Run Up Big IOUs, Mostly Obscured, to Grant Bosses a Lucrative Benefit; The Billion-Dollar Liability.” The June 23 Wall Street Journal headline tells the story: GM and other big corporations cut pensions for the rank-and-file–complaining all the while of “legacy costs”–while they pad executive packages.

Meanwhile, the Economic Policy Institute reported last week that executive compensation in 2005 has risen to 821 times that of lowest paid workers-up from 649 times in 1999, and 51 times in 1965.

Louis Uchitelle’s new book, The Disposable American: Layoffs and Their Consequences, details the human cost. Corporations can’t easily cut pay; instead, they lay off thousands of workers at a time. If need be, they hire replacements at much lower pay. The laid-off workers, even those with high education and skills, rarely find jobs at anything close to former rates. Suffering from depression and loss of confidence, they struggle to hang onto homes and family.

Uchitelle and others blame international trade for skewing the wage structure. After all how can American workers compete with low-wage Indian or Chinese or Mexican workers? Trade, free trade at least, produces gains on both sides. (I distinguish free trade from theft, as when multinationals rip off the natural resources of third world countries.) Even if textile and electronics workers lose jobs to China, American workers overall should gain from lower prices of imports–freeing them to spend more on new goods and services–and creating new jobs. Why should gains from trade mostly benefit the Waltons?

I think the focus on trade diverts attention from structure, structure determined by history and policy. Individual states and regions differ markedly in both the level and trends in inequality. Southern states, which began with slave plantations, have remained less equal than Northern states, which began with small farms. While overall US wage inequality has increased during the last thirty years, several states have grown more equal. Clearly international trade can’t explain such anomalies.

Here’s my hypothesis: US inequality last peaked in 1929, at levels we are now again approaching. Then the Depression shrank robber baron fortunes. It collapsed land values, so small farmers could afford land again. In 1935, it brought Social Security. We fought World War II with marginal income tax rates of 94%, and technical training for millions of men and women otherwise lacking the opportunity. VA mortgages and health care followed the war, as did disability insurance, and in 1965, Medicare and Medicaid. The Depression and WW II also inspired the ethos that we were all in this together.

In the 1970’s US inequality reached a historic low, and began to reverse. The Federal Income tax became less and less progressive; loopholes ate away income taxes for major corporations. At the state level, property taxes–which are essentially wealth taxes–gave way to sales and income taxes. Spending on prisons grew at the expense of schools and health care. Labor unions declined. A briefly egalitarian society morphed back into one rigged for a wealthy elite.

In the 1870’s, Henry George observed growing wealth and poverty in New York City: “It is as though an immense wedge were being forced, not underneath society, but through society. Those who are above the point of separation are elevated, but those who are below are crushed down.” (Progress and Poverty, 1879). Today as then, our own policy drives the wedge, not outsiders bearing cheap tee shirts and screwdrivers.

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