The systemic plight of labor

By Felix Salmon
May 1, 2013
Henry Blodget is celebrating -- if that's the right word -- with three charts, of which the most germane is the one above.

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It’s May Day, and Henry Blodget is celebrating — if that’s the right word — with three charts, of which the most germane is the one above. It shows total US wages as a proportion of total US GDP — a number which continues to hit all-time lows. Blodget also puts up the converse chart — corporate profits as a percentage of GDP. That line, you won’t be surprised to hear, is hitting new all-time highs. He’s clear about how destructive these trends are:

Low employee wages are one reason the economy is so weak: Those “wages” are represent spending power for consumers. And consumer spending is “revenue” for other companies. So the short-term corporate profit obsession is actually starving the rest of the economy of revenue growth.

In other words, we’re in a vicious cycle, where low incomes create low demand which in turn means that there’s no appetite to hire workers, who in turn become discouraged and drop out of the labor force. Blodget’s third chart is one we’re all familiar with: the employment-to-population ratio, which fell off a cliff during the Great Recession and which will probably never recover. The current “recovery” is not actually a recovery for the bottom 99%, for real people who need to live on paychecks. And today is exactly the right day to point that out.

Conversely, today is exactly the wrong day to declare that these broad and inexorable trends are not really big top-down trends at all, and in fact merely reflect the inability of individual workers to “access learning, retrain, engage in commerce, seek or advertise a job, invent, invest and crowd source”. And yet that’s Tom Friedman’s column this May Day:

If you are self-motivated, wow, this world is tailored for you. The boundaries are all gone. But if you’re not self-motivated, this world will be a challenge because the walls, ceilings and floors that protected people are also disappearing. That is what I mean when I say “it is a 401(k) world.”

This manages to be both incomprehensible and incredibly offensive at the same time. I have no idea what Friedman thinks he’s talking about when he blathers on about disappearing protective floors; I can only hope that he isn’t making a super-tasteless reference to the recent disaster in Bangladesh. But it’s simply wrong that today’s world is “tailored” for anybody who happens to be “self-motivated”. Both the self and the motivation are components of labor, not capital, and as such they’re on the losing side of the global economy, not the winning side.

Friedman is a billionaire* (by marriage) who — like all billionaires these days — is convinced that he achieved his current prominent position by merit alone, rather than through luck and through the diligent application of cultural and financial capital. His paean to self-motivation recalls nothing so much as Margaret Thatcher’s “there is no such thing as society” quote: “parenting, teaching or leadership that ‘inspires’ individuals to act on their own will be the most valued of all,” he writes, bizarrely choosing to wrap his scare quotes around the word “inspires” rather than around the word “leadership”, where they belong.

True leadership, in a society where the workers are failing to be paid even half the fruits of their labor, would involve attempting to turn the red line in Blodget’s chart around, and to spread the nation’s prosperity among all its citizens. Rather than telling everybody that they’re “on their own” and that if they’re not a success then hey, they’re probably just not “self-motivated” enough.

The ultimate Friedman kick in the balls, however, doesn’t come from his lazily meritocratic priors. Rather, it comes from his overarching metaphor: the idea that if you have a 401(k) plan, then you’re somehow in charge of your own destiny. Friedman might be right that we’re living in a 401(k) world, but if he is then he’s right for the wrong reason. In Friedman’s mind, a 401(k) plan is an icon of self-determination: you get out what you put in. “Your specific contribution,” he writes, italics and all, “will define your specific benefits.”

In reality, however, a 401(k) plan is an icon of futility and the way in which the owners of capital extract rents from the owners of labor. Yves Smith is good on this, as is Matt Yglesias, although the real expert is Helaine Olen: the 401(k) is a way for both your government and your employer to disown you, and to leave your life savings to be raided by the financial-services industry and its plethora of hidden and invidious fees. The well-kept secret about old-fashioned pension funds is that, for the most part, they’re actually very good at generating decent returns for their beneficiaries. They tend to have extremely long time horizons, and are run by professionals who know what they’re doing and who have a fair amount of negotiating leverage when they deal with Wall Street. Savers are always strengthened by being united: disaggregating them and forcing them to take matters into their own hands is tantamount to feeding them directly to the Wall Street sharks.

Yglesias says that in a 401(k) world, “you’ve got to save a lot of money for retirement. More than you think.” This is true for five big reasons. Firstly, because wages are shrinking, any given level of savings will constitute a steadily-increasing proportion of any given worker’s GDP-adjusted paycheck. Secondly, because the employment-to-population ratio is shrinking, all workers need to save to support not only themselves in retirement, but also a number of dependents which is also growing over time. Thirdly, because 401(k) plans have lower returns than traditional pension plans, you need to save more in order to make up the difference. Fourthly, life happens: while the money in your 401(k) is nominally there for your retirement, in practice there’s a good chance that you’re going to tap it, at some point, to pay some kind of large and unexpected bill, whether that comes from unemployment or divorce or ill health. And finally, 401(k) plans don’t have the clever cross-subsidy that traditional pension plans have, where people who die early cross-subsidize people who live for a long time. With a pension plan, you get income when you need it — when you’re alive — and you don’t get money when you’re dead, and don’t need it any more. With a 401(k), by contrast, you have to save more than you really need, because there’s always a chance that you’re going to live to 102.

Add them all together, and to a first approximation you arrive at our current world, where pretty much no one relying on their 401(k) is actually saving enough for retirement. If you’re rich today, you’ll probably be fine when you retire. But if you’re someone who (in contrast to Tom Friedman) actually lives on your paycheck, then there’s almost no chance that your retirement savings will be enough, when the time comes. That’s not your fault: the reasons are deeply systemic. And as a result, the solutions cannot possibly be the kind of bottom-up schemes that Friedman is extolling. They have to come from the top: from real leaders, rather than jumped-up “thought leaders“.

*Or was, anyway. Maybe he isn’t any more.

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26 comments so far

I’m not the world’s biggest fan of 401(k) plans, and even less a fan of many of the practices of the financial services industry that have grown around them, but a number of these complaints seem to be misguided. A change in the employment-population ratio alters the necessary savings rate in defined benefit plans just as it does in defined contribution plans. And on point five, you seem to be ignoring the existence of the annuity industry–it is certainly possible to convert a lump sum of money into a pension-like scheme which terminates upon your death or the death of your spouse.

By all means, criticize high fees, poor options, and things like that, but a number of pro-defined-benefit commentators seem to be arguing that we can go back to a world of low contribution requirements and long retirements. Unless population or productivity growth dramatically increases, that’s not going to happen no matter what funding system you use.

Posted by dsfan | Report as abusive

You’re cramming a lot into this post (wages, 401(k)s, personal attacks on someone’s marital choices) so it’s a bit hard to respond to. With respect to wages, doesn’t a fall in their share od GDP indicate higher productivity? If so, isn’t that good? On Friedman: marrying a billionaire is no small feat. I tried and failed. On 401(k)s – I mostly agree with your conclusions, though not with the tone of your comments.

Posted by amateurediteur | Report as abusive

Your second-to-last-paragraph has a terrible omission: it only applies to those who draw down 401k’s. If somebody puts that into a lump sum annuity, you get the same exact “cross-subsidization” for longevity risk.

For the bigger argument, I do not think wages/GDP is necessarily the best gauge of how much is going to workers vs. capital. The statistic assumes that the GDP is a zero-sum pie, but capital could be getting returns from adding to GDP.

To put it in silly barter terms, let’s say a country’s GDP solely exists of the population creating 100 guns. Everybody makes guns and is paid in guns. But some creep in the background is putting all the time into a butter-making machine without earning guns right away. Then the butter-making machine makes 100 sticks of butter a year, and the market rate is one gun to one stick of butter.

In this silly example, wage/GDP has gone from 100% to 50%, but the workers still enjoy the same utility equivalent. If the gunmakers end up taking home 50 guns and 50 sticks of butter, they do not see a worse standard of living than before.

In the real world, at least since the 80′s, real investment (if you include residential and non-residential) increased from 65% to 70% of GDP. That correlates somewhat with the decline in wage/GDP from 47% to 44%. The non-zero axis on the graph makes the decline seem more dramatic than it really is.

Basically, as income and wealth inequality increased starting in the 80′s, more money went into investment instead of consumption, which translated to more returns on investment. The returns on this higher investment lower wage/GDP, but there’s no reason to think that the investment income took out of wage income.

Meanwhile, private consumption was somewhat stagnant from the 50′s through the 70′s and early-80′s, staying around 65-67%. But this is when the majority of the drop in wage/GDP happened, likely due to declining unionization. Unions were particularly hit hard by the 70′s recessions, as COLA’s made their labor uncompetitive. A supply-side shock in oil increased their wages far more than their nominal productivity increased.

There’s a few ways of looking at the decline of unions. Basically, the strongest unions had a monopoly on labor while the firms did not have a monopoly on their industry. This was not a zero-sum game, since a union workforce maximizes their personal profits by not allowing any new entrants and getting as much of the return to capital as possible. The limits to new entrants depressed non-union wages and, if non-union work was not available, led to increases in unemployment. The transfer from capital to wages decreased the returns the capital and thus distorted people to invest less and consume more. The unions were lucky in the 50′s and 60′s that, for whatever reason, American appetite for saving was very high and interest rates very low, keeping investment/GDP around 65%.

Take that FWIW. Basically, there’s a lot more going on here than labor and capital fighting over a fixed pot of GDP and capital winning.

Posted by mwwaters | Report as abusive

I do not understand your outrage.

This is the same column that Friedman writes every time: “I’m rich, American airports look shabby, you ave to choose to marry a billionaire.”

Posted by Matthew_Saroff | Report as abusive

Felix, thanks for reading Friedman so we don’t have to.

Posted by Frwip | Report as abusive

“And on point five, you seem to be ignoring the existence of the annuity industry”

As best I can tell, annuity payouts are calculated on a zero real return. A properly run pension plan can offer a much better deal.

Posted by TFF | Report as abusive

That guy is married?

Posted by maynardGkeynes | Report as abusive

While I like most of what you say, and your jokes are getting funnier, I think you’re reading too far into the 401(k) metaphor. I thought all he meant was that just as the 401(k) replaced pensions, and put the burden to provide for retirement on the individual, the current economy is essentially requiring everyone to make their own way. I didn’t get the idea he meant 401(k)’s were good. It’s not the best way to make his point, but he certainly is condescending and insulting with that bit about “If you are self-motivated, wow, this world is tailored for you. The boundaries are all gone.”. Only someone who hasn’t tried to navigate the current economy without a benefactor would believe that the “boundaries are all gone”. As if hard work is all you need to make it in this world.

Posted by KenG_CA | Report as abusive

Felix “if you’re someone who lives on your paycheck, then there’s almost no chance that your retirement savings will be enough, when the time comes. That’s not your fault:”

Fitting you wrote that on May day as it’s probably the redest things you’ve ever written.

401k’s fail because people are weak, spend too much, save too little, retire too early, invest their money to timidly, pull money out to send their kids to college… and on and on. We all know that.

When Friedman wrote that it’s a 401k world he used it only as a metaphor. Lifetime employment with steady raises, is gone forever in the private sector and will never return. Bad for the middle.

His main point was that their are GOOD changes along with the bad. The barriers of entry into the global marketplace for a good idea or good service have fallen almost to Zero. That’s good for all of us.

Also the personal attack on a new york times writer that shares 90% of your social and political views is a bit out of character for you isn’t it?

Posted by y2kurtus | Report as abusive

“If you are self-motivated, wow, this world is tailored for you. The boundaries are all gone. But if you’re not self-motivated, this world will be a challenge because the walls, ceilings and floors that protected people are also disappearing.”

Astounding. We have a cradle to grave welfare system for idiotic, fraudster bankers, who know one thing, and one thing only – how to get government (bribe congress, have the treasury run by Goldman Sachs, and a naive head up their as* FED) to cover their losses.
No one fired, no on prosecuted, no one convicted. Financial crises are like hurricaines, no one can pridict them (subprime is contained)coming….NOT.

Posted by fresnodanhome | Report as abusive

To dsfan: Yes, there is an annuity industry so you can get benefits for life. But in a pension plan, if the annuitant dies early, the “benefit” of early death goes back into the plan and supports other beneficiaries of the plan. In a single-owner annuity, guess who wins? The issuer of the annuity.

Posted by johnglover | Report as abusive

“Savers are always strengthened by being united: disaggregating them and forcing them to take matters into their own hands is tantamount to feeding them directly to the Wall Street sharks.”

Savers/investors are already aggregated via mutual funds. How many levels of aggregation would be ideal? If all savers everywhere were aggregated together, that would be a lot of power concentrated whomever it was that made the investment decisions for them. It also would mean if they made a serious mistake, we’d have another instant financial crisis.

Posted by perfctlyGoodInk | Report as abusive

the accountability . reliability of the entire system is the shadiest part , the hogwash @ people spending too much makes 4o1ks loose value .. greed & theft & fees are bigger problem .. point blank // Investor should be happy to have the crumbs left for the honor of being raped .

Posted by knotso | Report as abusive

Point of information: Didn’t General Growth Properties go belly up in the real estate downturn? Isn’t Friedman’s wife no longer close to being a billionaire? He is, of course, still a one-percenter, who works because he’s well-respected (in some circles) and not because he needs money.

Posted by dkelland | Report as abusive

“If you’re someone who lives on your paycheck, then there’s almost no chance that your retirement savings will be enough, when the time comes. That’s not your fault.”

Really? Whose fault is it? Those evil employers, who won’t pay more than market rate for your skills and experience? Those greedy money managers, who want compensation for managing the portfolios in which your account is invested?

How anyone can believe that his financial security in retirement is anyone’s responsibility but his own, is beyond me. Your proletarian screed notwithstanding, if you don’t have enough money for retirement and want to identify the culprit, look in a mirror. The fault is your own.

Posted by MikeDonatello | Report as abusive

Friedman is a plutocratic horse’s ass. As are the Republican commentors here defending him.

Posted by rover27 | Report as abusive

“401k’s fail because people are weak, spend too much, save too little, retire too early, invest their money to timidly, pull money out to send their kids to college… and on and on. We all know that.”

No, we don’t all know that. 401ks fail because most people do not make enough money over the course of their careers to put enough money into defined-contribution plans to fund a full retirement, while also meeting other expenses. People don’t save too little or pull money out of their 401ks because they are weak. They do it because things like health care, education and real estate have become extremely expensive while real wages for the middle-class have been flat-to-down.

Problems with fees (which are real) aside, there is no way that the 401k, or any other defined-contribution plan, can work if most people do not earn enough money to contribute meaningfully to it. The problem with 401ks isn’t weakness, it’s stagnant incomes.

Posted by vjvalk | Report as abusive

Didn’t GGP (the company Friedman’s wife’s family owned) declare bankruptcy a few years back and lose nearly all its value? Poor guy is probably only a multimillionaire now.

Posted by Deranger10 | Report as abusive

“I can only hope that he isn’t making a super-tasteless reference to the recent disaster in Bangladesh.” Surely realize that’s not remotely intended. The tastelessness, alas, is yours.

Posted by dcarris | Report as abusive

To paraphrase Obama from his first campaign: “Ownership society? This should really be called the You’re On Your Own Society.”

Posted by dtc | Report as abusive

Well, the only thing Friedman got right was the part about the disappearing floors, ceiling and walls. Guess those Bangladeshi workers weren’t motivated enough on their 35 cents an hour. Guess this world wasn’t “tailored” for the garment industry slave laborers, just their corporate exploiters. What a tonedeaf analogy to use a week after the deadliest garment factory accident in history. Does Friedman have any idea that he sounds like a clueless, pompous a..? I mean seriously. Someone needs to sit him down and have a little chat at his next tony dinner party.

Posted by suzanner | Report as abusive

In reply to mwwaters above and the graph he/she linked to:

There is no way we spend 65% to 70% of our GDP on investment. Investment is plotted against the right-hand axis in your graph, and so it rises from 10% to 14%.

And it doesn’t make sense to wrap in residential investment, since that doesn’t make workers more productive.

More generally, it seems like a somewhat ad hoc argument. If you go back to 1929 and look at: total investment; non-residential fixed investment; and compensation of employees, three things show up:

1. There isn’t the rise in investment that shows up in the dshort chart you linked to.

2. Compensation as a share of GDP actually rose from 1930 to 1980 before starting to fall.

3. 1980 was actually about the peak of investment as well. ph/?id=A006RE1A156NBEA,A4002E1A156NBEA,A 008RE1A156NBEA,

http://www.thedanceofthehippo.blogspot.c om

Posted by SeeleyK | Report as abusive

“Low employee wages are one reason the economy is so weak”

HMMMM… You don’t think 10 million illegal aliens working at below-market rates aren’t contributing to this problem?

Posted by jimmy37 | Report as abusive

Friedman’s in laws are no longer even close to being billionaires.

Posted by Ts2 | Report as abusive

What vjvalk wrote above is spot-on, and the comment above it gets to what a 401(k) society is really all about: INCREASING vulnerability and risk for those not in a great position to handle it (most of the working class in this country is a single missed paycheck away from financial disaster), and then allowing the overclass to blame the victims for a plight forced upon them by marketplace conditions created by said overclass.

Posted by Strych09 | Report as abusive
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