I’m thankful to my brother-in-law Tom for passing along an interesting article about stagnant income growth titled Wage Woes. It took me a while to work through it all, and I’m glad I did. I too have been worried about the growing income and wealth gap, and it’s good to see some solid analysis. I generally agree with the thrust of this article, and I learned plenty from it as well. I especially agree with the idea that longer-term structural issues are what really matter versus business cycle variation.

As an aside, it is, always good to see someone else rail about the negative effect of the uncertainty caused by our Congress of the past few years, and to even put some data around that!

The one thing in the paper that I question is the correlation between income growth and transfer payments. The next few paragraphs outline my response.

As I wrote in a blog before the election, I believe that historically high wage and wealth inequality is a threat to our nation. Nonetheless, I’m not usually a proponent of non-market interventions like the minimum wage. So it was rather interesting this morning to read McDonald’s Can Afford to Pay More, which seems to have data that show little price elasticity and likely neutral revenue impact. However, the real flaw in the argument for using the minimum wage proposal as a way to address the income inequality gap is right in the same article: “but only 5 percent of restaurant workers earn the federal minimum wage”. So, the impact will be modest at best.

As the Wage Woes article points out, the impact of cheaper overseas labor is the prime culprit. However, it’s interesting to see even that as part of a very long cycle. Already, workers in China are seeing competition from even poorer countries. And, there is some small amount of higher-tech manufacturing starting to be brought back to America as the wage advantage dissipates and other costs of doing business overseas become relatively more significant. In a sense, on a 50- or 80-year basis, I can envision a leveling of the wages worldwide for exactly the same reason that we’ve endured such downward wage pressure over the past 30 years: much work can be transferred globally, and will naturally flow to the lowest priced labor.

If I believe that wages will eventually level out worldwide, then it could be argued that the immediate impact on a generation of workers is also part of a cycle, albeit much longer than typical business cycles. Seen in that light, maybe it is really an emergency-level crisis affecting most of our population, i.e., those earning below the median level. If so, it seems it may deserve the type of governmental assistance we normally provide for disasters like tornadoes and hurricanes. Although we are not used to dealing with disasters that last a generation or longer, I’m not sure that isn’t the case here. (As an aside, climate change has similarly long-term impacts that could grow to disastrous levels, so we need to get better at this.)

This makes me wonder about the paper’s comments about transfer payments. Are they a cause or an effect? If NAFTA has been good for the economy as a whole, but has terribly disadvantaged a particular class of workers who are negatively impacted by something outside of their control, don’t we need to deal with that as a society? We need all the productive labor we can get in order to compete globally, so it stands to reason that we would be willing to pour resources into education and retraining.

Globalization’s impact on the USA has generally been to swing a greater share of income and wealth toward capital at the expense of labor. The big winners from NAFTA are the businesses that have been able to shift work to lower cost locales, thus the spoils go to the shareholders and upper-level managers as they reduce labor costs by cutting their domestic workforce. How does a 45-year old machinist and his family recover within his productive lifetime when a law like NAFTA summarily moves jobs out of the country totally outside of his control?

As much as I hate to look for non-market solutions, this is a case where I don’t see market-based recovery happening fast enough to compensate the generation of workers caught in the crossfire. Hence, some increase in transfer payments seems justified.

I don’t mean to sound negative about NAFTA, which I think is valuable overall in the sense that North America has to effectively compete with Asia and other regions. I’m simply using it as a visible mechanism of a broader, inevitable globalization phenomenon.

At the end of the day, I still believe that education and R&D are the most important elements to our long-term strategic future in a globally competitive world. I also believe that we need to massively reduce spending on defense and health care and redirect the resources toward education, R&D and infrastructure. Seen in this larger picture, the transfer payments mentioned in the paper are relatively small, and probably a rather just compensation to the people negatively impacted by things like NAFTA that are totally out of their control, and which did indeed bring significant spoils to the winners.

Sorry for the long-winded response to an article with which many of us probably agree, but the concepts are pretty complex. I’d be interested in discussing it further!