America’s Economic Model Is Unsustainable. Empower The 4

America’s Economic Model Is Unsustainable. Empower The 4

You don’t have to be an economist to understand it, but as far as simple concepts go, it sure seems to elude quite a few folks.

When you provide financial assistance or otherwise institute policies aimed at bolstering the economic prospects of families that don’t have much money, those families tend to spend more of the incremental dollars they come across than their well-to-do counterparts.

Again, it’s not complicated. But I doubt the problem is rooted in complexity or in economists’ penchant for couching things in formalized language (e.g., “marginal propensity to consume”).

Rather, the problem is this: Money, influence, and power go together like the peanut butter and jelly that lower-income families too often have to eat for dinner. Policymakers, and especially those who influence them, generally aren’t poor. And people who have money naturally want to protect it, no matter what they might say publicly about the necessity of creating a more egalitarian society.

When you combine that with an especially unforgiving version of capitalism, you end up with America in the 21st century. Throw in a pandemic and a totally inept federal response to the public health crisis, and you get widespread societal discord, amplified by endemic racism and misogyny, both of which contribute to inequality of opportunity, which, in turn, ensures the system continues to perpetuate itself.

I bring this up because the world’s largest economy is arguably at a make or break moment. Ironically, the left-for-dead US manufacturing sector is exhibiting signs of resilience as the crisis rolls on, due to shifting consumption habits and the fact that factories aren’t generally considered “frontline” in the epidemic.

The problem is that the manufacturing sector simply doesn’t play a large role in explaining the variability in US GDP (or non-farm payrolls for that matter). Indeed, as Goldman wrote in July of 2019, “the contribution from manufacturing to GDP volatility has fallen from 60% in the early 70s to 20%.”

What accounts for that? Well, a trio of factors. For one thing, manufacturing output as a share of GDP has fallen off a cliff over the past seven decades.

Goldman

Additionally, better inventory management techniques have reduced volatility in the sector, while the non-manufacturing economy isn’t as correlated with factory activity as it was in the past.

It’s the services sector that matters, and the pandemic simply decimated that part of the economy. The figure (below) shows the unemployment rate for manufacturing versus the jobless rate for leisure and hospitality.

The unemployment rate in leisure and hospitality is still above 16%. The gap with the manufacturing sector has closed, but remains in excess of 11 percentage points (!).

That’s extraordinarily problematic for a variety of reasons that are self-referential and thus prone to feeding off one another. The wage disparity between manufacturing jobs and leisure and hospitality positions is huge.

Obviously, there are academics who have spent decades studying trends like these, and I don’t purport to have gone to any great lengths to analyze this data beyond the trends apparent when you simply plug it into a spreadsheet.

So, the point here isn’t to deliver any kind of definitive take. Rather it’s simply to say that the largest part of the US economy is still reeling, and the folks who work in the services sector are not compensated well, even when they have a job.

That latter point suggests services sector employees came into the pandemic in an especially precarious financial position. As noted here at the outset, people whose reality is generally defined by some form of economic precarity are also those with the highest marginal propensity to consume. Closing the loop, the US economy is a consumption-driven economy and what’s consumed are overwhelmingly services.

Hopefully you can see how that setup has the potential to create a self-fulfilling prophecy in the absence of intervention.

What kind of intervention? Well, the kind that would ameliorate all of the problems embedded in what I’ve outlined above. Yes, restoring American manufacturing would help, in that it would create a larger pool of relatively high-paying jobs. But that isn’t going to happen overnight, and it won’t happen at all if what you mean by “manufacturing” are old-economy, smokestack positions. Those jobs aren’t coming back to America. Period.

In the services sector, employers need to be compelled to pay higher wages. It’s just that simple. Or at least it is at the aggregate level.

I’m a reasonable person, so I understand that you can’t pay every low-skilled worker in the economy $30 per hour and I also understand (better, I’d argue, than anyone else writing daily for public consumption) that there’s plenty of nuance to be had, especially in food services, where bartenders and servers at upscale establishments are making quite a bit more than the official figures capture due to cash tips.

But at a common sense level, it is ludicrous to suggest, for example, that companies like Starbucks, Walmart, and Amazon can’t pay employees more than they do without somehow being derelict in their obligations to shareholders. I’m a shareholder in all three of those companies and never once (not one time) have I worried that the long-term investment case would be materially impacted were management to announce an initiative to raise wages substantially.

I’m not suggesting those companies haven’t made efforts to raise wages (they obviously have, and they’re keen to let everyone know about it when they do). But it’s not enough. There has to be a tipping point beyond which corporate America either decides, or is compelled by the government, to pay the average employee an amount that, inclusive of any benefits offered, is consistent with employees having the economic wherewithal to have a modest house and raise a family with some modicum of dignity.

I imagine most well-to-do Americans would think it crazy if the average Starbucks barista made $30 per hour. And maybe it is — crazy, I mean. But pause for a second and do the math. $30 per hour, eight hours per day, five days per week, works out to $4,800 per month. That’s less than $58,000 annually, before taxes. Long-time readers know I don’t have any children, but I think I’m correct to suggest that raising two kids on $58,000 per year would be exceptionally challenging, if not downright scary (from an economic perspective, I mean). In a two-income household where both parents were making nearly $60,000 per year, the situation would be much more tenable, likely even comfortable, depending on where you lived.

But here’s the thing: That’s a hypothetical. Nobody that I’m aware of makes $60,000 per year serving lattes at Starbucks or pointing people to the right aisle in Walmart. And yet, a disproportionate amount of economic activity is accounted for by consumption that takes place at restaurants and retail stores. The people doing the eating and the shopping are, by and large, not making much more than the people serving the food and stocking the shelves, precisely because they are the same people (in an economic sense).

How is that sustainable? It’s circular to the point of absurdity. The people providing the services for meager wages are in most cases the same people consuming them when they’re not providing them.

And speaking of circular, that brings us full circle to where we began nearly 1,200 words ago. This is why supply-side economics doesn’t work. Handing out tax breaks to the rich can’t possibly make an impact because the rich aren’t generally participating in this not-at-all virtuous loop, unless it’s to pay nearly as much for one Starbucks drink as the barista “crafting” it makes in an hour.

If you think any of that is going to change just because America (narrowly) decided to cancel “Celebrity Apprentice: White House Edition,” you’re wrong. The next four years will witness a return to sanity and, hopefully, a restoration of civility, but for everyday people, the economic reality will be the same as it ever was, if not worse depending on how efficient the COVID-19 vaccine rollout goes.

I’d be remiss not to note that there are a few lawmakers in the House that would change this overnight if they had the support of their party’s leadership. But they don’t. Because, again: Money, influence, and power go together like peanut butter and jelly. And the real, would-be difference makers on Capitol Hill are short on all three, especially relative to their more senior, centrist colleagues.

Empower the 4.


 

21 thoughts on “America’s Economic Model Is Unsustainable. Empower The 4

  1. As a society, we are now dependent on “cheap” because of the phenomenal decline in the relative price of “goods”, vs labor, due to advanced manufacturing technology. Somehow this seems to be another self perpetuation doom loop. Service now occupies a gigantic slice of the economy and is dominated by labor, without the same potential for relative cost reduction gains as manufacturing. We need a creative solution.

  2. I am pretty sure that I will, at some point, regret responding to this- but here goes:
    The problem that I have with the squad is that there is a tone in their communications that they want to take something away from people who have accumulated wealth to provide for those who do not have wealth. Whether you think the rules historically have been fair or not, assuming such wealth was legally accumulated, those were the rules and it does not seem right to effectively retroactively change the rules.

    Going forward, if you ignore the small groups on the far right and the far left and reset social services in a way that I believe the vast majority of Americans want, you end up with the following (imho)-
    Critical and preventative healthcare for all, including abortion up to a certain date. If someone wants to spend their own hard earned money on a new knee/hip or they are a hypochondriac-spend away. If they do not want to wait 6 months for a medical service through public healthcare, they should be able to spend their money and not have to wait, as long.

    Free college for all who want it, on line. Can we refocus on the 3 RRR’s and critical thinking in K-12 and keep competency testing in place? Private schools should be allowed and for those who want to pay for living the college campus (partying) life- sure!

    With respect to existing college debt- give everyone up to a certain age a “credit” that can be used to pay off college debt or reduce future income taxes. Do we have to punish those who worked 2 jobs during school or ate ramen to minimize their need for college debt?

    Living wage should be a given. Not sure how you get there, the real problem seems that we have too many unskilled workers and we need a growth industry that requires human skilled workers and not robotic workers (incentivize capital investment to help solve). Ideally, industries that have some long term economic advantages for USA or we work on some environmental cleanup (i.e. forest fires are getting out of control). Starbucks barista jobs, McDonalds, etc. were never meant to be a career where you could support a family, more like earn some money for a temporary period of time. If the cost of healthcare is shifted from employers to the government- it seems that wages could rise.

    Can we reinstitute assistance for the homeless (primarily mentally ill and/or substance abuse problems)?
    Paid for through a combination of taxes, debt (not held by Fed) and money printing, keeping in mind we would like to leave a country worth inheriting to future generations. Probably too much to hope for that the people we elect and pay to figure this out, which requires compromise, actually do their job.

    1. It’s not just in their communication.

      The programs you describe are uber-expensive and will require very high levels (by recent comparison) of taxation on the rich and the not-so rich as well, in all likelihood.

      I happen to support all of these (basically, close to the European set-up) but don’t kid yourself. Taxes will be 40-50% of GDP.

      No way around it.

      Now, for the rich, this system can still be made palatable with the following observation : A strong middle class and a vibrant economy tend to grow the pie faster than otherwise i.e. they will have a smaller fraction of a bigger pie. Relatively, they’re losing a bit but, on an absolute basis, they might be better off or no worse off. Second, and that’s a hunch, not a proven but, IMO, a vibrant economy, powered by middle class consumption, is more likely to generate innovations. Innovations like life extension or age reversal. Stuff that the rich will generally be the first ones to benefit from. So, for them, paying higher taxes is kinda like an investment. They get business opportunities and more rapid technological progress out of it. Everybody else gets to live their lives with a modicum of decency.

      1. Oh, no. Please don’t do this. The US government does not “need” your tax money to “pay for” anything.

        Taxes serve a variety of purposes, but funding the US government isn’t one of them. Think about what you’re saying when you say that. You’re suggesting that the sole, legal issuer of USD on the planet (i.e., the entity with a monopoly on issuing USD) needs you to provide USD. That is nonsense.

        Again: Taxes serve a purpose. Many purposes. But funding government expenditures isn’t one of them.

        So, when you say “no way around it,” not only is that not true (at all), it’s perpetuating a myth about government financing. If the US government “needs” some new tanks, and it needs them tomorrow, it’s not going to wait on April 15 to buy them. It will just buy them now.

        And don’t say anything about “borrowing,” because that’s not true either. US Treasurys are NOT “debt.” They are interest-bearing dollars. That’s all. You can’t “owe” a sum denominated in a currency you issue. That is a philosophical impossibility.

        There is nothing (nothing at all) that says higher spending must be accompanied by higher taxes or borrowing in a country with sufficient monetary sovereignty.

        The restraint on spending is inflation, and inflation is not the result of “money printing.” If it was, then the entire developed world would be experiencing hyperinflation by now after 10 years of non-stop “money printing.” Instead, the entire developed word is struggling with either DISinflation or deflation.

        1. To be pedantic, 45% of all public expenditures in the United States come from state and local governments that do not issue their own currency – so taxes in America still do serve the purpose of funding government.

          Also, to this old Socialist, wages will never be the solution. Lower- and middle-class wages will never take a person from A to B – or to be more precise – if they do, you will be dead within ten years anyway. The end goal should be an economic system where people are not dependent on wages at all, and the path towards that is increasing the equity stake for workers. Through a combination of contributions, capital gains, and maybe dividend income, people can attain real wealth that can be passed down generations. Giving people a direct stake in the company can only be good for morale and productivity as well.

          1. As the leader of a rather large division of a publicly traded company, I can tell you that the system does indeed need to change. The shareholder first mentality drives the same cycle over and over again that rarely puts employees in their deserved place of value in the business ecosystem. Capitalism is not broken, but the delivery system sure is… The good news is that we already have tax friendly solutions to allow for employee participation in the process, like ESOPs. Does this make me a socialist? I hope not… but it just makes business sense for the whole ecosystem to benefit from a winning business that they participate in. People matter, even if you dumb business down and try to pretend that they do not.

          2. Yes, I agree.

            TBH, I was just making an observation as to the political difficulties of selling European style “socialism” (whatever) to a nation clearly used/trained to selfishness.

            And, to go one step further, eventually, UBI will be a necessity.

        2. H, you are correct and I expressed myself badly, in classical terms rather than the proper ones. Let me rephrase :

          These programs will consume a fair bit of the productive capacity of your country. If Europe is anything to go by, about 40-50%.

          At the end of the day, though, it’s kind of the same thing. If The People are to have decent healthcare, middling rich guys won’t have jet skis and beach houses and uber rich won’t have super-yachts and mansions. They’ll have to start choosing amongst their status symbols.

      2. There are ways to be efficient, if politicians would allow.

        Outsource a standardized, on line, college curriculum to a “Khan Academy” type organization. I am willing to bet the education would be better and cheaper.
        Reel in medicare costs- the expense of that program is out of control because doctors who have patients on medicare abuse that system. Calling in patients for unnecessary visits and procedures so they can bill the government. I have a front row seat watching this.

        1. I’m pretty sure Europe has tried its best being efficient in the delivery of Education and Health Care to its masses. And if they cannot do better, then I suspect that doing better will be non-obvious (not impossible, just requiring lots of excellent execution/managerial talent).

          Yet the portion of GDP I mentioned are the ones they end up with. All European countries are somewhat different in their systems so I’m being quite blunt but you get the point.

  3. It is articles like this that make me glad I’m a subscriber! It is truly sad that this is impossible in today’s political climate. It is unfortunate that the people in Congress don’t want the system to change because it benefits them. The middle class was created by the tax system that existed between the 50’s and 70’s. It is truly sad that the people most impacted negatively by this can’t see it.

  4. 100%. Blessed by the world’s best geography, America grew up in mercantilist fashion to become the most broadly prosperous country in the world. Only to voluntarily give that inherent resiliency away, along with the future it underwrites, in a massive hollowing out of the economy. All sacrificed on the alter of ‘political-economic ideologies’ dressed up as hard ‘economic science’. The reductivism of the ‘shareholder theory of the firm’ might have worked had the country been a social democracy with a very robust social safety net. The end of Bretton Woods might have worked had there been a reasonable plan to replace it with. Instead, the tether to sanity was cut and a debt-inflation process was set in motion that has led the world into negative interest rates for the first time in history, sucking all future asset appreciation and economic growth into its black hole.

    Unlike Japan before it, and Germany now, the US enters this territory with no manufacturing base to serve as the locomotive of the machine. Their zombie firms may likewise be insolvent, but they at least still make good products and have somewhat reliable cash flows. Ours are more like Frankenstein monsters of outsourcing and unstable financial engineering. Here, everything hinges on the collectively insolvent consumer, formerly referred to as the middle class.

    As long as the reckoning is forever forestalled by the FED, nothing short of a new New Deal, a Fourth Republic, is going to change this situation and break the doom spiral. By my count, there are only around ten Congresspeople who see the necessity of going there. The country may very well collapse in on itself before change worthy of this moment in history happens.

    1. I have a suspicion we are already collapsing, we just don’t want to admit it to ourselves. The US system of governance was meant to be adaptive, but a bunch of originalists have done everything they can to prove it isn’t so. The way to pull back from the point of no return is to dramatically raise the level of education and critical thinking. Unfortunately there is a significant portion of the ruling elite who prefer large numbers of undereducated worker bees who will work 2 underpaid jobs, complain little and consume the crap that keeps diesel in the elites’ private yachts.

      1. Agreed. The system seems unable to renew itself without an acute catalyst. The collective Stockholm syndrome is proving hard to break, amidst the ubiquitous gaslighting, and pacifying influences of mainstream entertainment.

      2. I quite agree. Better education is clearly the answer, yet we’ve watched the current administration dismantle what was left of our system of public education as quickly as possible. Higher education (commonly confused with job training) has increasingly gone out of reach for the majority and aside from a few “radical” voices, no one offers a solution. Indeed, those who most clearly see what is wrong and can offer solutions are among the most vilified of our citizens. Meanwhile, the middle of the road keeps winding off to the right.

        Clearly the rules of a society tend to be laid down by those in power to keep them in power. This has brought us to a point where the stultifying stupidity of the majority of our senators gives one little hope that the Republic can be saved. Even here, H seems to be the only one who fully grasps the underlying economic reality.

        Empower the 4! Hallelujah!

  5. I started to post this once before but deleted it. Now seems appropriate.

    “And the great owners, who must lose their land in an upheaval, the great owners with access to history, with eyes to read history and to know the great fact: when property accumulates in too few hands it is taken away. And that companion fact: when a majority of the people are hungry and cold they will take by force what they need. And the little screaming fact that sounds through all history: repression works only to strengthen and knit the repressed. The great owners ignored the three cries of history. The land fell into fewer hands, the number of the dispossessed increased, and every effort of the great owners was directed at repression. The money was spent for arms, for gas to protect the great holdings, and spies were sent to catch the murmuring of revolt so that it might be stamped out. The changing economy was ignored, plans for the change ignored; and only means to destroy revolt were considered, while the causes of revolt went on.”

    ― John Steinbeck, The Grapes of Wrath

    1. I expect no epiphanies among GOP Senators. Since McConnell presides over the Senate and prohibits votes on any bill that might embarass GOP Senators, there is no occasion for them to have epiphanies.

      Although.

      There is the interesting scenario where VP Harris spends her time in the Senate as its Presiding Officer, which is the Constitutional role of the VP. She would not have a vote, but could dictate what the Senate votes on. Maybe being forced to publicly vote against relief to the working class and so on would cause a little embarassment to the GOP senators.

  6. H

    Thank you, thank you, thank you! So well said. There was a time when “trickle down” actually worked for a while. During the Great Depression it was common for white collar folks of even fairly modest means to share with individuals who had less. My maternal grandfather had three children and worked as a successful salesman for a relatively small manufacturer of commercial and industrial lighting. His household still managed to employ a housekeeper and later a nurse. The household was proud of the large white X on the fence post in the alley behind the house, a sign left by tramps and hobos that said a hot meal could be had in this home. My paternal grandfather was basically an illegal French-Canadian alien who came to the US early in the 20th century and set about to provide food to the poor mill workers of Massachusetts by opening restaurants to provide affordable food. With the profits he provided tenement housing to those same folks. He fed and cared for four children, his wife, and her father. He also provided housing to the family of one of his brothers. He really didn’t have time to learn English but he did have time to be a “mensch.” Incidentally, except for one piece of property he died leaving essentially nothing. Myself, I have always seen it as part of life to share with others who have needs. I provide partial support for two folks who provide me with modest efforts I cannot provide for myself. Why is this so damn hard now? Apparently selfishness does not require all that much training at all although while rampant, thankfully it is not universal. There are super-spreaders in this field, however.

  7. In another irony of American reality a large segment of the population that would benefit the most from an empowering of the 4 voted in large enough numbers to ensure the 4 (or even the centrists) remain powerless to make a difference. In fact, I would bet that if given the choice, those same voters are more likely to support efforts to imprison the 4. So sadly I don’t see any meaningful empowering happening any time soon, but perhaps we could take some steps towards a denting the imbalances detailed by this post. $30 an hour for a barista might be a utopian goal in our America but free affordable healthcare for everyone should be possible, even in our fragmented society, and a student debt jubilee, while a hard sell, could super charge marginal consumption.

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