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Home > Politics
Big Disconnect by Paul Krugman + comment
by Bob Powell, 9/1/06
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Just after midnight on 9/1/06, I sent the following column by Paul Krugman to my distribution with the added comments at the end. I got the appended anti-populist response, that I address at the link below it.

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September 1, 2006
Op-Ed Columnist
The Big Disconnect By PAUL KRUGMAN

There are still some pundits out there lecturing people about how great the economy is. But most analysts seem to finally realize that Americans have good reasons to be unhappy with the state of the economy: although G.D.P. growth has been pretty good for the last few years, most workers have seen their wages lag behind inflation and their benefits deteriorate.

The disconnect between overall economic growth and the growing squeeze on many working Americans will probably play a big role this November, partly because President Bush seems so out of touch: the more he insists that it's a great economy, the angrier voters seem to get. But the disconnect didn't begin with Mr. Bush, and it won't end with him, unless we have a major change in policies.

The stagnation of real wages - wages adjusted for inflation - actually goes back more than 30 years. The real wage of nonsupervisory workers reached a peak in the early 1970's, at the end of the postwar boom. Since then workers have sometimes gained ground, sometimes lost it, but they have never earned as much per hour as they did in 1973.

Meanwhile, the decline of employer benefits began in the Reagan years, although there was a temporary improvement during the Clinton-era boom. The most crucial benefit, employment-based health insurance, has been in rapid decline since 2000.

Ordinary American workers seem to understand the long-term disconnect between economic growth and their own fortunes better than most political analysts. Consider, for example, the results of a new poll of American workers by the Pew Research Center.

The center finds that workers perceive a long-term downward trend in their economic status. A majority say that it's harder to earn a decent living than it was 20 or 30 years ago, and a plurality say that job benefits are worse too.

Are workers simply viewing the past through rose-colored glasses? The report seems to imply that they are: a section pointing out that workers surveyed in 1997 also said that it had gotten harder to make a decent living is titled, "As usual, people say things were better in the good old days."

But as we've seen, real wages have been declining since the 1970's, so it makes sense that workers have consistently said that it's harder to make a living today than it was a generation ago.

On the other side, workers' concern about worsening benefits is new. In 1997, a plurality of workers said that employment benefits were better than they used to be. That made sense: in 1997, the health care crisis, which had been a big political issue a few years earlier, seemed to have gone into remission. Medical costs were relatively stable, and in a tight labor market, employers were competing to offer improved benefits. Workers felt, rightly, that benefits were pretty good by historical standards.

But now the health care crisis is back, both because medical costs are rising rapidly and because we're living in an increasingly Wal-Martized economy, in which even big, highly profitable employers offer minimal benefits. Employment-based insurance began a steep decline with the 2001 recession, and the decline has continued in spite of economic recovery.

The latest Census report on incomes, poverty and health insurance, released this week, shows that in 2005, four years into the economic expansion, the percentage of Americans with private insurance of any kind reached its lowest level since 1987. And Americans feel, again correctly, that benefits are worse than they used to be.

Why have workers done so badly in a rich nation that keeps getting richer? That's a matter of dispute, although I believe there's a large political component: what we see today is the result of a quarter-century of policies that have systematically reduced workers' bargaining power.

The important question now, however, is whether we?re finally going to try to do something about the big disconnect. Wages may be difficult to raise, but we won't know until we try. And as for declining benefits - well, every other advanced country manages to provide everyone with health insurance, while spending less on health care than we do.

The big disconnect, in other words, provides as good an argument as you could possibly want for a smart, bold populism. All we need now are some smart, bold populist politicians.


It's not a coincidence that 1973 was the peak of the Long Wave when the economy went into an overcapacity to supply of goods and services. The origin of the "long wave" from a system dynamics perspective is described in the paper by John Sterman of MIT on the Long Wave Decline and the Politics of Depression (pdf, 21.1Mb). Find excerpts in A Systems Thinking Perspective on Manufacturing & Trade Policy.

As to the reason for "systematically reduced workers' bargaining power" ... it's the, consistent, managed and abundant oversupply of labor relative to demand: There's no 'free market' for Labor explains. Even at an "official" U-3 unemployment of 4%, it's really more like 10% or more, which devastates "workers' bargaining power." Anyone who believes even marginally in the economics of supply and demand knows that such an excess drives down wages. This is especially true at the bottom; so it can be no surprise that the minimum wage now falls somewhere between zero and subsistence level. Game theory explains why the effect is much more severe than typical well-behaved textbook supply-demand curves.


Anti-populist response:

Subject: RE: The Big Disconnect By PAUL KRUGMAN
Date: Fri, 1 Sep 2006 08:44:10 -0600
To: "Bob Powell" <scuba@usa.net>


This is spoken like a true liberal.  PAUL KRUGMAN is clearly a bias toward unions and government mandated wages levels and benefits.  Everything needed to establish Socialism and contrary to the market economy that has made America the envy of the world and the place for real opportunity.  The author only need look at France as the best example of this failure and the unbelievable unemployment rate and social unrest associated with this policy of populist thinking.  It may be missed by the writer but it should be no surprise that it was the 70's when the woman entered the job market in force, thus supply and demand kicked in and a employer could pay someone less if there were more applicants for the job than available jobs.  Then we went into the global economy and worldwide the number of people that were willing to get paid less to do the less skilled jobs increased.  Rather than letting go of those jobs that can be done cheaper overseas and increasing one's skills to be more valuable to the new generation of employers, the unions have tried to hang on.  Like a leach with no real concern for their host, this behavior has killed many of the (union) companies by demanding more for their work than what it was worth on the global marketplace.  This subsequently resulted in the employers pricing themselves out of business in the competitive global marketplace.

The sooner that our unions accept their fate, which by the way is clear in their continual membership decline and the fact that the largest unions now are government supported, teachers and government, the sooner our workers will let go of the past and prepare themselves for the coming baby boom driven worker shortage.  Employees must look to improve their value and take care of themselves, that is not the role of the unions (anymore) or the government (other than through public education - because of the unions - which is another subject).   Those that will let go of the past and learn or retrain to provide real value (talent and skills) to employers will be rewarded with higher wages because the supply is less than demand.  Really just economics 101.

Just some random thoughts :-)


I respond to this "conservative" diatribe here.

URL: http://www.exponentialimprovement.com/cms/bigdisc.shtml

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