Great Graphic: The Most Important Chart to Understand the Political Economy

This Great Graphic was on the Washington Post's Wonkblog.  It shows the three key sources of income for the middle 20% of American households.  

Cash wages have fared the worst and are actually lower now in real terms (adjusted for inflation) than in 1979.  

Fringe benefits, the red line, most notably include health insurance and deferred compensation.  As you can see, the shift to defined contributions from defined benefits has seen the value of fringe benefits rise gradually until around 2004.  Since then they have drifted slightly lower.  All told, for the median quintile, the value of the fringe benefits rose about $3.1k since 1979.

The purple line tracks the value of transfer payments from the government.  Some transfer payments, like Social Security and unemployment compensation, are in cash.  Some, such as food stamps, are paid in vouchers.  Still other transfer payments, like Medicare and Medicaid, are paid in kind.  Transfer payments, not wages or benefits, has been fastest growing part of income.  They have risen by about $5.1k since 1979 in real terms. 

Many anarchists libertarians will see in the rise of transfer payments the intruding hand of the nanny state that fosters dependency and distorts the incentive structure.    Some fiscal hawks see these transfer payments absorbing an increasing amount of the tax revenues the federal government collects.  They worry that the world's largest economy cannot afford these transfer payments any longer.  These are the arguments that seem to dominate the traditional and social media space.  

Yet there is another narrative at work.  It starts a bit earlier than the chart here does.  Some time in the late 1960s or early 1970s, depending the time series one uses, the post-WWII social contract broke down.  In exchange for accepting business authority to control the work process, men's wages tracked productivity and inflation.  As businesses began feeling profit margins squeezed by increasing international competition (from Europe and Japan) and rising commodity prices, they quickly responded in the one area in which they had the upper hand:  labor relations.  

After all, business could not control the foreign competition, the price of capital or commodity prices.  They could and did unilaterally defect from what some economists refer to as Fordism.  This was in reference to Henry Ford's insight that if he paid his workers more, he could sell more cars.   The American household responded by dramatically increasing women participation in the workforce.  This too proved insufficient to procure the American dream (a car, a house and higher education for one's children).  Young people began to work again, but alas, this was not enough.  

Two other sources have filled the gap:  debt and the government.   Debt was terminable solution in that there is a limit to the indebtedness of households, even if it is not known a priori.  Moreover, the end of the credit cycle has blocked this path, though recent data suggest the household de-leveraging may be ending.  

Simply put, the transfer payments came from the government because people were unable to get concessions from their employers.   Wages are not a reflection of the marginal value of output, but are a reflection of the power relationship between employers and employees.  The largely unorganized employees could not extract concessions from business and the government filled the gap.

Consider a non-government analogy.  In the United States, considerably more so than in other countries, one is expected to tip service provider, waitresses, bartenders, barbers, deliveries, and increasingly fast food shops.  Tipping is not simply an expression of gratitude.  Surely, patrons are just as grateful in Japan as they are in the US, but tipping is seen as crass.  Tipping is a socially acceptable way consumers in the US, subsidize the wage bill for such businesses.   Businesses can and do pay workers who get tips less.  

There are various ways in which productivity gains can be distributed between employers and employees.  In some countries, the employers provide other services such transportation, a meal,  and/or an on-site physician.  It is not out of altruism, but a different sense of self-interest.  Perhaps it is also partly an expression of traditional paternalism in some countries.  Perhaps, it is what the French call noblesse oblige. 

In any event, the point is the way social product is shared is not simply a function of the cash nexus, but a reflection of politics (as in power relationships), the institutional framework and traditional rights and responsibilities.  What US employees have not been able to win from employers, they have been able to get as concessions from the government.   

It may not be very satisfying, but it satisfices (think a combination of satisfy and suffice).  Employers have shifted and socialized some of the costs of production, which include the reproduction of its work force, and all that that entails.  Employees have a little more social security.  The government bureaucracy grows in numbers and influence.  

Reading the papers and blogs, and listening to the debates, one would think that the state was foisted on business, but historically and ontologically the growth of the state was in the interests of business.  

If this analysis is correct, the attempt to roll back the state and re-calculate the basket of goods one gets as a citizen, it will antagonize the employer and employee relations.  This is consistent with a new book of previously unpublished work by Hyman Minsky that argues in favor of addressing poverty through job creation rather than welfare.  

At the same time, it is possible that the increased application of science and technology to the production of goods and services has been so extended that a modern economy simply cannot create sufficient jobs for its population.  The US is producing around 7% more than it did at the last cyclical peak with about 3 million few workers.  Our grandparents fought (not a metaphor) for a 5-day 40-hour work week.  Conceding that some traits skip generations, shouldn't we be thinking how to extend their success?