Labor Day & Adam Smith

"All for ourselves, and none for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind." - Adam Smith, 1776

Three recent opinion pieces in the New York Times prompted this post, two are by Paul Krugman and the third by Robert Reich. All three essentially argue that our economic woes will not be fixed without a more significant inducement of government money and a wholesale realignment of our economic structure. I am inclined to agree with their analysis for the following reasons.

First, at the center of our trouble is accumulation by dispossession.

For more than thirty years, economic growth has gone to the top in a winner-take-all system that has dispossessed average citizens in most countries of their wealth. This happened on various lines. For example, the privatization of retirement savings by shifting to 401k plans away from pensions. This foolish move allowed corporations to decrease contributions to retirement plans by claiming that 401k plans had greater value - which is true when markets are rising, but what about now? In 1980 contributions to pension plans were 2-3 percent higher than today, and 66% of US corporations paid for retiree health coverage - that number is now 29% and decreasing.

Another way that the top accumulated wealth by dispossessing others of their property was through debt. Debt levels have been steadily rising among the consumer-ship, but not simply for reasons of over-consumption, but because of increases in the cost of necessities. Going back to the 1960s, private debt levels in the United States were about 50% of GDP and climbing. At the highest point most recently, private debt levels in the United States reached 300% of GDP - in Ireland and Iceland the number was more like 1,000% of GDP. These numbers are not only unsustainable, but they represent a tremendous lack of resources amongst the majority going into a debt cycle to feed the rich. It is always true that people should not borrow money they cannot repay, but we ought to ask what they were borrowing for and remember that those who loaned the money may share the blame . . .

In fact, over-consumption is largely a myth when we control for the poor progress in wages and major increases in housing and health care costs. The average family of four spends 21 percent less on clothing than in the early 1970s, and 22% less on food today. It's true that they eat out more, but they save more by buying things in bulk at big box retailers like Walmart and Costco. The average family spends 44% less on household appliances. These reductions are hardly proof that families are in debt because of over-consumption. It's true that families spend more on home entertainment, but these increases are more than off-set by the savings in the earlier categories mentioned.

So, what explains increases in debt? Many families are in terrible financial trouble - even before the crisis of 2008 and beyond. What explains it? Bad growth in wages, increases in housing and health care costs, and two-income families.

Compensation has been poor for three decades for the reasons mentioned above and because while wages have not increased, families have compensated by both parents working outside the home - in most cases to buy the necessities of life. And it's not just the fact that houses are bigger - McMansion style. The vast majority of American families are living in older houses (both houses I have purchased in my adult life were built in the 1950s). Health care costs are spiraling out of control - health care costs being the number one reason that families declare bankruptcy. And the move to two-income families has actually hurt the American family financially - not just because they have come to rely on both incomes at just the moment that jobs became less secure, but also because the associated costs -second cars and child care - have left families in the 21st century with less money than their counterparts a generation ago.

These are largely structural problems in our economy that cannot be fixed without significant re-prioritizing. It is late and I am tired, but I will suggest before signing off that it would be well to Adam Smith's warning that a society with a vast disparity in wealth between the rich and poor will not long remain free, and that it is the tendency of certain classes to want all for themselves and none for the great bulk of us. We are fools to forget this . . . and Labor Day should be about remembering it.

(Some of the statistics for this post were drawn from Warren & Tyagi, The Two-Income Trap.)