Worst Economic Prescription of the Week

I hate to pick on Kevin Drum twice in a row, but my God is this the worst economic prescription you have read of late:

The only sustainable source of consistent growth is rising median wages. The rich just don't spend enough all by themselves.

The flip side of this, of course, is that rich people are going to have to accept the fact that they don't get all the money anymore. Their incomes will still grow, but no faster than anyone else's.

How do we make this happen, though? I'm not sure. Stronger unions are a part of it. Maybe a higher minimum wage. Stronger immigration controls. More progressive taxation. National healthcare. Education reforms. Maybe it's just a gigantic cultural adjustment. Add your own favorite policy prescription here.

This isn't just a matter of social justice. It's a matter of facing reality. If we want a strong economy, we can only get it over the long term if we figure out a way for the benefits of economic growth to flow to everyone, not just the rich. This is, by far, Barack Obama's biggest economic challenge. Until median wages start rising steadily and consistently, we haven't gotten ourselves back on track.

This is so crazy, its is hard to know where to begin.  And since it is after midnight, I will keep it short.  But here are a few thoughts:

  • Note the embedded theory here of income and wealth, which is really startling.  For Drum and most of the left, income is this sort of fountain that spews forth on its own out in the desert somewhere.   Rich people are the piggy folks who crowd close to the fountain and take more than their fair share of what is flowing out.  There is absolutely no recognition that possibly wealth is correlated with individual initiative, work, intelligence, and behaviors.  More on zero-sum economic thinking here and here.
  • I am sick and tired of the "stagnant median income" meme.  How many times does this have to be debunked?  But the quick version is
  1. Median total compensation per individual is not stagnant, it has risen steadily.  The only way to show stagnant incomes is to look only at cash wages, and ignore the shift in compensation value to health care and other non-cash benefits.  Also, folks trying to push this meme typically look at household income rather than individual income, but since household sizes have been shrinking rapidly, it skews the data.
  2. Median income numbers are weighed down by strong (legal and illegal) immigration.  New immigrants entering at the bottom bring the median down.  If one were to look at apples and apples, ie the same people without immigrants ten years ago and today, one would see strong median income growth.  Just to drive the point home, if there have been 10 million new immigrants at the poor end of the economy, then one needs to count up the list of incomes 10 million spaces to get the true apples-to-apples median income comparison.
  3. Individuals matter, not medians.  Even with a stagnant median income, all individuals can and probably are doing better as incomes improve with age.
  4. A lot more here
  • I feel like I am living in some weird new incarnation of Brave New World or Midas World where the government sets its highest purpose as promoting ever-higher consumer spending.  The last such goal the government set for itself was increasing home ownership.  And that worked out really well.
  • This is back to the 70's time, something I have been predicting for a while.  How is it that educated people can believe that protectionism + strong restrictions on the free movement of people + higher taxes + government tilt of the labor management bargaining power further towards the unions + creation of a massive new government bureaucracy = increased prosperity?  I think of all the crap I catch from leftists that I am somehow anti-science and anti-reason for being a climate skeptic.  But economics is a science too, and willful ignorance of that science is far more destructive than other instances of scientific ignorance to which they point.
  • Isn't protectionism + strong unions + comprehensive 3rd party-paid health care + high government regulation exactly the approach the US auto industry has taken.  How's that working out?
  • http://www.thewaytobuildwealth.org Ethan Bloch

    I am as dumbfounded as you in regards to how people think 'protectionism + strong restrictions on the free movement of people + higher taxes + government tilt of the labor management bargaining power further towards the unions + creation of a massive new government bureaucracy = increased prosperity?'

    The bottom line is, let's just see what Mr. Obama really does once he's president. I can only hope he doesn't pursue most of the measure you've alluded too. Especially the greater taxes on capital part which during a liquidity crisis could drag us into a deeper recession and potential next great depression.

    Happy Holidays!

    Ethan

  • http://EmergentDisorder.com Jordan Amdahl

    The funny thing is the, when talking about the auto bailout, people are saying "we need this to save capitalism". You wonderfully point out that the auto industry has just about every anti-free market regulation imposed on it there is. The bailout isn't about saving capitalism, it's about saving unions, employer-based health care and all the other restrictions which have crippled capitalism.

  • JLS

    For more than 50% of American men wages are stagnant or lower since 1973.
    http://www.epi.org/datazone/06/wagecuts_men.pdf

  • Don Lloyd

    Warren,

    Another example of bad economic advice -

    http://www.economicprincipals.com/issues/2008.12.14/350.html

    "The vast sums to be spent by the Federal government in the next two years – as much as $500 billion in both 2009 and 2010 – should be framed mainly in terms of financing the transition to a new set of long-range national goals rather than as short-term Keynesian stimulus.

    That would mean smaller cars, tighter windows, better furnaces, new housing and plenty of improvements of the public infrastructure as well, starting with health care – a couple of years of intense preparation for the change. It would mean, too, an immediate major commitment to higher education, on the order of the 1958 National Defense Education Act, and a great deal of energy-related R&D leading, conceivably, to a latter-day Apollo Project...."

    We obviously need far more college graduates, at least some of whom may be able to read and make change. And an energy program whose only long term accomplishment will be the world's largest windmill, located outside Kansas City, making local airline and bicycle travel impossible.

    Regards, Don

    Regards, Don

  • Noumenon

    Last time you posted about Kevin Drum I stuck up for him as my favorite liberal blogger, but you're totally right about this. It seems like his perspective on the private spending is the same as on government spending -- spending, not producing, is what keeps the economy going.

  • http://elambend.com ElamBend

    What's really scary about it is the "blood in the water" let's get the 'rich people' tone of Drum and the whole idea of "let's start tinkering with the economy".
    I don't have great hope, but I'm hoping that Obama's contact with the likes of Volker put a break on some of his more leftist instincts.

  • admin

    JLS-

    Please see #1 in the text. The numbers you link are not total compensation, and do not include non-cash compensation, which has been the largest component of growth in earnings.

  • http://amateureconblog.blogspot.com/ Speedmaster

    Still having trouble w/ the feed. I still get 'Wow, Obama Has Inverted the Supply Curve' as the latest article. ;-(

  • Fay

    I'd imagine that this meme is largely rooted in the outlandish executive compensation that continues to rise in many sectors. Particularly egregious are the set-for-life bonuses that many executives have received as a reward for FAILURE. No CEO who gets paid enough to LEAVE a company that he never has to work again... hell, that his grandchildren never have to work!... has any incentive to do anything that helps the economy. Nor does he have any right to tell the rest of us that it's all about hard work and initiative.

    I'd also imagine that it has roots in health insurance, and its contiually rising costs, much of which are passed on to employees. Those non-cash benefits don't mean so much when they don't WORK, and when one's take-home pay stays the same or gets smaller. CEOs keeping all the profits and getting huge bonuses, while their employees' health insurance premiums increase, is a recipe for collectivism and anger.

    In other words, you can bring Bill Gates into a room and try to tell me that we're all millionaires, or you can look at reality. Declining wages and benefits are a reality for many people. I am not advocating protectionism or anything else; but that meme is not entirely a myth, and just because you don't think it's a problem, doesn't mean it isn't a problem.

  • http://ridgepartners.com/wordpress Business analyst

    I'll go above and beyond the outrageous and say unions have no place in this nation any longer. Unions were formed when labor practices were dangerous and borderline criminal. When big business dumped all of its chemicals in the Hudson River and locked the doors until 8pm when they let their seamstresses out to go home for the night. Labor unions today have completely lost touch with reality. An employer can not be held hostage by its employees just as an employee should never have been held hostage by their employer. The pendulum has swung too far and labor unions were allowed to grab far too much economic sway.

  • http://ridgepartners.com Build my Business

    It is such a shame that these people on wall street just get a slap on the wrist. All their assets should be seized like drug dealers! After all they also got their money commiting crimes.

  • the asset

    why the fixation on this kevin drum?

    so the guy is a frickin' idiot; lefter than lenin; dumb as a post, and all that. according to your hyperlink, he writes for 'mother jones'. so *by definition*, he's a statist liberal retard. when he proceeds to pump out profoundly idiotic liberal nonsense, what'd you expect?

    calling attention to them merely *encourages* them.

  • hkc

    "health insurance, and its contiually rising costs,"

    more apples to oranges. people today are choosing to spend on more expensive, more advanced medical technology than what existed in the 50's (or 70's or whenever you claim income has stagnated). wanting to live longer =/ stagnant wages.

  • Methinks

    It is such a shame that these people on wall street just get a slap on the wrist. All their assets should be seized like drug dealers! After all they also got their money commiting crimes.

    Build, I have always been against the bailout of failed Wall Street firms. Having said that, none of the "bailoutees" have committed any crimes and have actually been completely compliant with regulations. I can't tell if you're horribly misinformed, blowing off steam or just trolling.

  • Rick C

    "Those non-cash benefits don’t mean so much when they don’t WORK, and when one’s take-home pay stays the same or gets smaller."

    Until and unless you are sick, at which point you realize their value.

  • Responding to Idiots

    Why in the world would you feel compelled to "answer" this Kevin Drum guy? Which criteria do you use to choose which nutjobs you'll "respond" to on your blog, and which ones you (correctly) ignore?

  • Methinks

    The only sustainable source of consistent growth is rising median wages. The rich just don’t spend enough all by themselves.

    Mangled Keynesian economics. As if the unmangled version is not bad enough.

    Fay,

    has any incentive to do anything that helps the economy. Nor does he have any right to tell the rest of us that it’s all about hard work and initiative.

    Nor do you have any right to dictate how much a CEO is paid unless you are an investor in that company. You are deeply confused about what a CEO's job is. It is NOT to "do anything that helps the economy", rather it is to run his particular company for the investors in that company. Doing so efficiently ultimately helps the economy, but the help to the economy is a bi-product of doing his job well, not the primary focus and the only way to create that benefit to the economy as a whole is not to concentrate on the economy but to concentrate on his business. Not all CEOs are very good. Some are terrible and some are excellent. If you want to have a say over a particular CEO's compensation, become an activist investor in the company of which he is CEO and take it up with the other investors. As a side note, why do people become so apoplectic over CEO compensation and have nothing to say about talentless actors being paid more than most CEOs to churn out crap movies in Hollywood.

    I’d also imagine that it has roots in health insurance, and its contiually rising costs, much of which are passed on to employees.

    Your health insurance costs are rising because people in America are enormously fat and expect Hail Mary medicine when they get sick. Obesity adds something like $250 billion to health care costs annually. Also, insurance is regulated by the state. An important thing to remember about regulation is that regulators are always working in the interest of the regulated industry and always against the interests of the customer. Thus, regulators very effectively increase barriers to entry, which reduces competition and increases costs for you while decreasing services. Mandates add to the cost of insurance premiums so that insurance becomes so expensive and so all-encompassing that people who just want to be covered in case they have an accident aren't able to get insurance at all. But, the most telling part of your statement is the part where you objected to increased cost of health care being passed along to you. You don't really want insurance. You just want to force somebody else to pay for as much health care as you want to consume. In Europe they have this system. To keep costs down, they limit access to all health care and you will be waiting 6-8 months to receive your first chemo treatment for breast cancer. You may be dead by then, but look on the bright side - you got somebody else to pay for it.

  • Fay

    Methinks,

    I didn't prescribe anything. Nor did I say I had a right to dictate anything. I answered the post's question about why the meme he quoted, persists. There's figures on a spreadsheet, and lovely economic theories, and then there's reality. And what I said about health insurance costs has nothing to do with your reply; people's bottom-line take-home paychecks are THEIR reality, and if any raise is negated or outpaced by a rising premium, then they're not really making more money, no matter how much you may like to think so. And if that indignity is coupled with an incompetent CEO who gets paid millions of dollars to run the company into the ground and go home, there's your perception.

    But you need to tell yourself that I'm some kind of communist for saying CEOs make too much money and health insurance/care costs are too high. That's fine.

  • Methinks

    Fay,

    and if any raise is negated or outpaced by a rising premium, then they’re not really making more money, no matter how much you may like to think so.

    Any raise that is eaten away by the rising cost of food, clothing or any other necessity. However, modern medicine is getting better and better and we are able to save more and more lives and improve the quality of lives of patients who were written off as hopeless 15 and 20 years ago. That costs and it costs a lot. So, while the cost is rising, so is the value of the service provided. Since the amount of money you make can also be expressed by the amount and quality of goods and services you can purchase with it, they are in fact making more money. Although, the price or health insurance is rising needlessly higher because of government interventions which prohibit competition and favour insurance companies - and because health insurance is not really insurance, it's insulation. There's a fair amount to be upset about in the current health care system. But, as usual, people who don't understand the first thing about it lash out at what they ignorantly perceive to be the problem - usually to their own detriment.

    And if that indignity is coupled with an incompetent CEO who gets paid millions of dollars to run the company into the ground and go home, there’s your perception.

    The CEO is irrelevant to health care costs, he doesn't control them. The competence or lack of competence of the CEO is a matter completely unrelated to health insurance premiums. He's not even involved in choosing the health insurance for the company unless the company is tiny - and you're not talking about those CEOs. Moreover, the incompetent CEO is also none of their business. He's the investors' problem.

    But you need to tell yourself that I’m some kind of communist for saying CEOs make too much money and health insurance/care costs are too high. That’s fine.

    No, I don't think you're a communist. I think you have no idea if CEOs make too much money and I think you don't know if health care costs are too high or not. I don't think you know what the compensation of any CEO should be and the people whom it concerns directly - the investors - don't care what you think about it because they are the ones paying him, not you. It's pretty clear from your posts you don't know much about either health care or how CEO's are compensated. Therefore, I think your definitive proclamations are irrational and if they lead you to insist on changing things you don't understand, they are dangerous.

    Unfortunately, theories that allow people who are not directly paying any employee to dictate the compensation of that employee and those that seek to hold down the price of health care (the price is under our control, the cost is not), will lead us all to very much uglier reality than the one you describe.

  • Fay

    Once again: not trying to dictate anything. Just trying to explain the perception the post complained about.

    I know rather a lot about both subjects actually. And I AM an investor, through my 401k, although of course that gives me no direct input.

    How anyone can look at a Bob Nardelli (paid $200M to leave Home Depot) or a Carly Fiorina (paid $25M to leave HP) and not think something's wrong, is beyond me. But you're right, I have no rights and no say in either matter. Nor did any of the employees who were the real victims of their incompetence.

  • Methinks

    Actually, the real victims of their incompetence where the shareholders. I don't think you're getting that point. Unless the employees were not paid for work they did, they were not victims. I don't know much about the Nardelli & Fiorina issue, but I'm not aware that employees were not paid. Also, incompetent employees are paid to leave all the time. That's not reserved for CEOs. I'm assuming you're equally outraged by pay-offs for their incompetence. You should have voting rights for the companies you own in your 401k, though, if you own them directly. If you own them via shares of a mutual fund, you directly own the mutual fund, not the companies it's invested in so you wouldn't get to vote. What I mean is that you don't have a say unless you are a shareholder of the company. You may be able to say that a specific CEO is overpaid and any specific health care service costs to much, but you can't say that CEOs in general are paid too much and health care in general is more expensive than it should be and retain any credibility, Fay.

    Lots of people have lots of feelings about a great many things. The problem starts when they seek a legislative solution to their feelings. I'm not accusing you of advocating that but plenty of these people with these feeling are.

  • Franco

    At least Drum understands the relationship between immigration and median wage although in the narrowest sense possible. If he can figure that out then he should also be able to figure out I'll stop working long before his grandiose scheme to go vampire on the productive members of society is implemented. Also, here is a new paradigm for median income - when immigrants come here their median income skyrockets. This actually narrows the gap if you were to look at median wages in say the NAFTA group of countries.

  • Mike

    "The only sustainable source of consistent growth is rising median wages."

    I think Kevin is conflating ends and means. Say it three times: "Labor is a cost."

  • http://smilerz91.blogspot.com Chris

    This just fails basic math.

    If you take money from the wealthy and give it to everyone else you get - the same amount of spending.

    But of course that is just in a perfect world, once you add the cost of transfer you get less spending. But this isn't about economic recovery - its all about punishing the successful.