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April 12, 2011

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U!
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A!

now if we can just undercut Vietnam and China, maybe NC can get its furniture industry back.

I for one am so proud that American managerial culture is so powerful that it can overwhelm the puny Swedes and their puny culture of 'treating workers with dignity'.

What don't you understand about the race to the bottom? It's a friggin' race! We just jumped ahead of a few eastern European countries, maybe even a couple in Latin America.

What do want - to lose?

Over-under on how long it will take for a significant faction of Canadians to start talking of fences along their southern border?

IIJM, or wasn't there a post about the IKEA Danville sweatshop here before?

Anyway, it's nice to know that the US still retains some attractions (other than merely as a market) in the field of international trade. The question, though, as I see it is:

Are we Sweden's Mexico?
Or its Malaysia?
Or its Bangladesh?



Someone in comments here linked to Balloon Juice's IKEA post, Jay.

I read a shocked reaction form an USian on that: They look on us like we look on Mexico.
As far as IKEA is concerned, before 1989 they produced most of their furniture for West Germany (BRD) in East Germany (GDR). When Germany got reunited, the factory got closed and moved further East. They can sell cheap because they produce cheap (although they are not considered to be especially exploitative).
So, in America I would have expected them to produce in Mexico for the US market and in the (cheaper parts of the) US for the Canadian market.

Interesting article. They actually pay $8 starting wages and average just over $15.

The pay is in line with the average salaries for NC in those job categories(I used NC as Danville is economically more NC than Virginia).

The working conditions seem pretty unacceptable, but more US like in general than European so I would expect that to change over time.

Overall, I would point out that there is the reality that US industry has been waiting for years for pay scales in other countries to catch up so we can be more competitive. So outside the working conditions, this story isn't all bad.

Ikea determined it couldn't build it's furniture in China, Malaysia, or even Mexico at payscales far enough below the standard payscale in NC to tack on shipping costs and still make it cheaper. This, of course, is a combination of payscale stagnation here and shipping cost inflation.

It is sort of what happened with car assembly over the last fifteen years as the Japanese, in particular, decided to assemble more cars here for the same reason. Over time other industries will find wage scales will drive down the advantages of offshoring as well, then the overall wages will start rising here as well.

I know thats a longer view but worth noting.

@ Hartmut:

Unless I'm mistaken, Mexico/US/Canada are pretty much all one market nowadays, thanks to NAFTA: there is still a significant wage differential between various sectors, of course. The transportation costs still exist; but on the scale of manufacturing that IKEA does (and the transport infrastructure in North America) it would probably be a regional, rather than a "national" factor.

But you're right: articles like this tend to hit Americans fairly negatively - exploitation of labor is all well and good when it is distant "Third-World" foreigners who are being exploited - though usually framed as "given job opportunities they not otherwise have"

When it's "our own"? Not so much....

Who knew the race to the bottom ran on a circuit?

It is sort of what happened with car assembly over the last fifteen years as the Japanese, in particular, decided to assemble more cars here for the same reason.

I think the main reason was to insulate themselves from protectionist outbursts as well as conform to domestic content laws rather than any belief in the movement of wages. Here is two pdf links about domestic content in Japanese cars
here and here

The latter one points out that if Japanese car companies merely wanted to squeak by and do the minimum, they would have much less domestic content than they actually have, so the author suggests that use of domestic content actually serves some economic purpose other than simply abiding by the law.

Here is a bit more strongly expressed essay on some of the differences between Japanese and American automakers.

'We're on our way down, folks.'

This is in line with our current anti-growth policies. We work hard to avoid creating jobs in the traditional energy resources sector so we can re-patriate these puny jobs, only to find out nobody wants these jobs.

GOB: This is in line with our current anti-growth policies.

Which policies are these and how do they compare with the policies (pro or anti-growth) of, say, Sweden or some other developed country?

And when you say "traditional energy resources sector" what do you mean? Which anti-growth policies are inhibiting job growth in this sector?

I'm sorry your complaint is...what, exactly? Would you rather that the US have government mandate 19$ per hour wages and 5 weeks vacation, so that the Swedes send those jobs somewhere else? There is nothing "wrong" with the situation in NC at all. Nor is it some sign of the apocalypse.

A 19$ hour wage over a year (40 hours a week, 52 weeks) is almost 40 thousand dollars. That's equal to what many college graduates make, like teachers. Why should a low-skilled high school graduate earn that much? Good insurance, safety training and medical care in the event of factory accidents? Yes. $40,000? No.


lj,

I wouldn't say that domestic content doesn't play a role, or even argue which is greater. I would point out that the second link is is using 1994 data, and ends with this:

Next, some studies, such as Klein and Rosengren (1994), claim that foreign investment outlays are not measurably altered by movements in relative wages. It may be true that foreign investment outlays do not respond to relative wage movements, but it would be incorrect to infer that no other real activities were affected. These results suggest that real wage movements may nonetheless have important consequences since multinationals can adjust their activities along other margins such as domestic versus foreign content. Further work is needed to provide an integrated understanding of the various margins along which multinational activity is conducted.

That's true, but I don't think that Japanese automakers were predicting that there would be such a difference between US and Japanese wages (though I don't know, maybe they had our number pegged back then) If they were, and were bucking the trend for outsourcing, that seems scary smart. I tend to think that moving production and content to the US saw more an outgrowth of the just-in-time model of production. Though I'm sure there wasn't one overriding reason for doing what they did.

Perhaps this will be enlightening for those who get exercised about the wages paid overseas by American firms. Consider that the IKEA workers in Virginia are probably glad to have the jobs there in Dnaville (as opposed to being unemployed, which is what they would face if IKEA pulled out). Local wages are what people will take, because they prefer them to the alternatives -- whether it's in Sweden, Virginia, or Vietnam.

Companies put jobs where they do because the location has the best combination of cost and the necessary expertise (however high or low that may be). Wages are part of that cost, but only part. If you hate the way companies "exploit" labor outside the US, consider lobbying for higher transportation costs -- if you get the cost of shipping high enough, lots of manufacturing jobs will come back closer to the customers. Of course, the customers will have to pay more as a result. And the workers elsewhere who used to have jobs will have to go back to something worse (likely much worse). But hey, even moral outrage is not free.

The pay is in line with the average salaries for NC in those job categories(I used NC as Danville is economically more NC than Virginia).

That is more or less my point.

The working conditions seem pretty unacceptable, but more US like in general than European so I would expect that to change over time.

Which "that" would you expect to change? US working conditions or Euro?

Overall, I would point out that there is the reality that US industry has been waiting for years for pay scales in other countries to catch up so we can be more competitive. So outside the working conditions, this story isn't all bad.

If the net result is that we achieve wage parity at $8/hour, the story is all bad.

Here is a bit more strongly expressed essay on some of the differences between Japanese and American automakers.

Here is my two-bit analysis of the difference between US and Japanese auto manufacturers. I promise it's worth every penny.

Japanese auto manufacturers view labor as an essential factor of production, as a valued stakeholder in the enterprise, and as a partner.

American auto manufacturers view labor as a necessary evil, a regrettable cost center, as a fungible and not particularly clever human commodity, and generally as a PITA.

That's my analysis.

We work hard to avoid creating jobs in the traditional energy resources sector

The problem with the traditional energy resources sector is that (a) all of the low-hanging fruit has been plucked, so future development will be that much more expensive, risky, and environmentally harmful, and (b) we can drill until our faces turn blue and we will not have sufficient domestic resources to meet demand.

Reality bites.

There is nothing "wrong" with the situation in NC at all.

OK, no worries then.

I'm sorry your complaint is...what, exactly?

The actual complaint seems to be that people in Sweden are shocked that a major Swedish institution like Ikea has adopted labor practices that are not in keeping with Swedish values or Ikea's own policies in other countries. Now, you might think that Swedes are stupid or wrong to worry about such things or that Ikea need not concern itself with the beliefs of many of its workers and stockholders in Sweden. But their complaint hardly seems absurd.

Would you rather that the US have government mandate...

Precisely no one has advocated the US government mandating anything here.

Consider that the IKEA workers in Virginia are probably glad to have the jobs there in Dnaville

Based on the article I've cited, I'd say they are actually not that excited about it.

CCDG: It is sort of what happened with car assembly over the last fifteen years as the Japanese, in particular, decided to assemble more cars here for the same reason.

LJ: I think the main reason was to insulate themselves from protectionist outbursts as well as conform to domestic content laws rather than any belief in the movement of wages.

Another reason for the Japanese car companies to manufacture in the US is as a hedge against currency movement. If you sell a lot of cars for dollars, you'd like a lot of your expenses to be in dollars as well. That could be a motivation for IKEA as well. The dollar has been in a decline against the Swedish krona, as well as the euro, for some time.

Based on the article I've cited, I'd say they are actually not that excited about it.

I'd bet they'd be a great deal less excited not to have those jobs. In general, I mean.

I'd bet they'd be a great deal less excited not to have those jobs. In general, I mean.

In general a job is better than no job.

Specifically, the experience of folks who have been hired at Ikea in Danville has apparently been mostly negative.

To return to generalities, if we have arrived at the place where a significant portion of the American workforce needs to see the prospect of an $8/hour job with crap working conditions as something to be grateful for, we are well and truly rogered.

And that's my point.

It could always be worse! (...yay)

The outrage isn't just about the money; it's also about the fact that workers are expected to be on-call every day. Lincoln freed the slaves almost 150 years ago, as the cliche goes.

BY,

Good point. At wage parity, or reasonably so, things like shipping costs and exchange rates start to play in the calculation.

russell,

You can ignore the difference between $8 entry level wage, $15 average and $28 manager wages all day, it doesn't make your point right.

$9 dollars is the average entry level wage for these jobs in NC. That surely sounds awful to you, being from MA, even the Boston area as I recall. But note in the story that one of the folks left IKEA for a lower paying retail position because of working conditions.

In rural NC those average wages aren't as bad as you perceive them to be. 35k a year isn't rich but a two earner family making 70k can probably buy a four bedroom house in Danville with about 2500 sq ft.

So maybe you need a little more than $15 an hour, but not a lot.

'(a) all of the low-hanging fruit has been plucked, so future development will be that much more expensive, risky, and environmentally harmful, and (b) we can drill until our faces turn blue and we will not have sufficient domestic resources to meet demand.'

I agree with both (a) and (b), but my comment holds. End user prices(costs) will be higher due to (a) and lower due to (b).

it's also about the fact that workers are expected to be on-call every day. Lincoln freed the slaves almost 150 years ago, as the cliche goes.

Slavery inherently involves two or more parties; expectations only one.

Other than that, though, I know what to tell my wife next time she expects me to do something: quit enslaving me!

End user prices(costs) will be higher due to (a) and lower due to (b).

That's not necessarily true because energy extraction has to balance energetically as well as financially. If you have to expend more energy to extract a barrel of oil from the ground than you can get by burning that barrel of oil, you probably won't do it no matter how high the market price of oil is.

If you have to expend more energy to extract a barrel of oil from the ground than you can get by burning that barrel of oil, you probably won't do it no matter how high the market price of oil is.

That's crazy talk!

'That's not necessarily true because energy extraction has to balance energetically as well as financially.'

Put in place what is necessary to protect the environment (this is something that should have always been in place to protect the earth as its natural resources are exploited since such cannot really be private property in the same sense as the fruits of one's labor is private property, e.g. earned income) and let the financial numbers do the rest.

CCDG: $9 dollars is the average entry level wage for these jobs in NC....

But note in the story that one of the folks left IKEA for a lower paying retail position because of working conditions....

russell: ...the prospect of an $8/hour job with crap working conditions as something to be grateful for...

Marty, I think that the $9/hr starting wage as being normal is part of the problem, if I understand russell. That and the crappy working conditions, which you have, yourself, demonstrated in the quote above.

Put in place what is necessary to protect the environment and let the financial numbers do the rest.

Isn't that what we have now? Maybe I'm confused: do you think we have too much or too little environmental regulation for energy extraction industries right now?

You can ignore the difference between $8 entry level wage, $15 average and $28 manager wages all day, it doesn't make your point right.

$15 is median, not average, which makes the $8 even suckier. And that's not median at Ikea, it's median for the region, which makes Ikea even suckier. And Ikea just dropped entry level wage from $9 and change to $8, which makes it all even suckier.

And up to now a third of the workers are coming from a temp pool, and are paid even less, and get no benefits at all. None.

I take your point about differences in costs of housing etc. Even if the reality of a 2500 sf house for $70K makes my cry just a little. But let's do a back-of-envelope analysis.

Two earners at $10/hour is $40K a year gross. After taxes, health insurance premiums and co-pays, blah blah blah call it $30K spendable.

Monthly nut on a 30 year fixed note for a $60K mortgage at current rates is about $330/month (that's the part where I cry just a little). Add in property taxes etc call it $4500/year.

So our two-earner family is living on about $2K/month.

Car payment, gas, utilities, groceries, clothes, etc etc etc. You can get by OK on $2K a month but you are not building any personal wealth, your kids are not going to college unless they get a full scholarship or take out big loans, and you are probably going to retire on SS and Medicare and not much else. Assuming those still exist by the time you get there.

If you're like many folks at that income level, you are spending your working life trying to keep up with your debt load.

In terms of the robustness of public life, you are not bringing much to the tax base either.

You're doing sort of OK, as long as nothing bad happens. If something bad happens, you are probably toast.

All of that aside, my actual point was that it sucks that European countries are now seeing the US as a viable low-cost labor pool, due to our relatively low wage base and standard of living.

I think that sucks. That's my point.

It's nice that the managers are making $28/hour, I'm sure you can live very nicely in Danville on that income.

I think that the $9/hr starting wage as being normal is part of the problem, if I understand russell.

Yes, you understand russell.

"I think that sucks."

I totally agree with russell.

russell, well I won't belabor the whole lack of age and years of experience analysis in your example. (Lots of people starting out in that singular type of work represented by those statistics wouldn't expect to be above the median or own a home based on their experience level.)

So I'll just say that a couple who have been working for a few years and have worked hard and gotten some raises probably can afford a home for their family working for IKEA, and they don't seem to be the best employer around.

Or they can make $10 an hour two years out of high school and live like you describe, as I recall I did.

"All of that aside, my actual point was that it sucks that European countries are now seeing the US as a viable low-cost labor pool, due to our relatively low wage base and standard of living.

I think that sucks. That's my point."

And this is just American exceptionalism of some sort. If they have good jobs at wages that people can earn a good living and want to open a factory here, thats great. It's called globalization.

You need to get out of New England more.

"Or they can make $10 an hour two years out of high school and live like you describe, as I recall I did."

And with all those years of experience, maybe they'll make a bit more money, until they're 50 or so, and then they'll be laid off because they're being paid more than their skills and energy level warrant. They then won't be able to find a job for more than entry level wage. But they'll have to work until they're [67? or what?] because Social Security was too extravagant. But since "Obamacare" will have been repealed, and also Medicare will have become a private voucher plan, they'll probably get sick and die since they won't be able to afford medical care.

So much for the Cialis lifestyle that we were all so looking forward to.

"And with all those years of experience, maybe they'll make a bit more money, until they're 50 or so, and then they'll be laid off because they're being paid more than their skills and energy level warrant."

Pick a problem to discuss, this a different one.

'Isn't that what we have now? Maybe I'm confused: do you think we have too much or too little environmental regulation for energy extraction industries right now?'

To answer your first question, I don't know. On the second question, IMO bans and moratoriums are not appropriate forms of regulation in this instance, but provisions for reclamation and/or avoidance of pollution and provisions for other risks are. On the other hand, there is a constant drumbeat about corporations in the traditional energy sector enjoying excessive profits and benefiting from undeserved tax breaks so there must be room to protect the environment and extract resources profitably. If not, I guess I'm more confused than you. BTW, it's the personal earned income tax that I heartily dislike, not taxes on those who profit from the extraction of common natural resources and the use of land for profitable production.

So much for the Cialis lifestyle that we were all so looking forward to.

Wait...you expect that working in a factory on an assembly line, you're going to be able to live some idealized lifestyle that you see in a commercial designed to sell you a drug to remedy erectile dysfunction?

I don't even know where to start with that.

I have to ask, if the folks in Danville, VA are mostly negative about working at IKEA, why do they do it? Could it be that, while they would prefer to get paid more (as who among us would not?), they prefer to have that job rather than the alternatives? Since, if they actually find the job worse than the alternative, why stay?

Obviously I'm missing something here. But I'm not sure what.

Excitement?

Then we have these people right where Dagny Taggert wants them.

The Joad family was excited for the first part of the trip, too.

Seems an incitement to lower wages even further, cut out remaining benefits, and perhaps gut child labor laws and lower the excitement level to the tepid enthusiasm level of say, $4.85.

Then we're into "bracing" territory.

Dangle it for awhile over their heads and make them jump for it to up the excitement levels for, I don't know, Donald Trump and the other f*ckwads entertainment.

Still gotta eat, as the tepidly excited exceptionalists will tell you.

So, if this is excitement, what do these people do for excitement?

Probably attend Tea Party rallies and rant about how teachers making 40 grand and living in plush cribs is way too much excitement for real Americans to handle.

What a load of horsesh*t.

They can sell cheap because they produce cheap (although they are not considered to be especially exploitative).

Yes, labor costs drive end costs. Raise everyone to 20/hr and the cost of goods and services will go up at least proportionately and no one is any better off. Entry level jobs, by definition, pay entry level wages. A variety of factors go into why some people seem to spend their lives at entry level while most work their way passed it.

And this is just American exceptionalism of some sort. If they have good jobs at wages that people can earn a good living and want to open a factory here, thats great.

No, it's not American exceptionalism. And I agree, if companies based in other countries want to open up shop, do business, and hire people here, I think that's tremendous.

The problem is the "if" part of your statement - the "good jobs at wages that people can earn a good living" part. That's not Ikea in Danville.

Toyota in Tupelo MS, wonderful. Ikea in Danville VA, not so wonderful. No matter what a house costs there.

It *is not a good thing* for working people in this country for companies in Europe, or anywhere else for that matter, to view them as a good option for cheap offshore labor.

If you'd like to take the opposite side on that question, feel free, but I'm not sure why you would.

You need to get out of New England more.

First, you have no idea how much time I spend in NE or elsewhere, or how much contact I have with people in other parts of the country or the world.

Second, where I live has f***-all to do with the merit of what I say here.

Winters are long, though.

I have to ask, if the folks in Danville, VA are mostly negative about working at IKEA, why do they do it?

Maybe they won't.

Since, if they actually find the job worse than the alternative, why stay?

Maybe they won't.

If they do, it'll be because they don't have any other better options.

And if you're living in a situation where your best option is a job paying $8/hour and crap working conditions, you're not in a good place.

Do you disagree?

Obviously I'm missing something here.

What I think you're missing is the fact that somebody in corporate in Sweden thinks it's reasonable to pay American workers a low wage because of the difference in "the standard of living and general conditions in the different countries".

We have to pay our Swedish workers a living wage. Our US workers, not so much. Because the standard of living and general conditions are better here in Sweden, and command a higher labor rate.

Also sprach Swedwood's Steen.

If that doesn't get your attention, then yes, I think you're missing something. If it does and you just don't think it's significant, I think you're missing something.

Do you disagree?

I mostly agree. That bit about making just a fraction more than minimum wage is not a fun place to be. It's one of many reasons why that stint at McDonald's was always as short as I could possibly make it.

That, and the lack of upward pay mobility, other than hopping on the McManagement bandwagon. And a few dozen other things.

If people have a choice and don't want to work at Ikea, they will quit. If they don't, they will have a job where they otherwise would have none. That's the nature of markets. And if Ikea cannot find enough people to staff its plant, they're going to have to raise their offered wages. That, too, is the nature of markets.

Now, if they're in violation of US labor laws, they're in some hot water. If not, I'm not sure what there is to do.

Sometimes desperation can look like excitement from the expensive seats.


'And if you're living in a situation where your best option is a job paying $8/hour and crap working conditions, you're not in a good place.

Do you disagree?'

I don't disagree. And the solution for someone with the talent and ambition to do better is to get to a better place. And I'll take my customary hits for suggesting that people, if they are unhappy, should actually do something to improve their situation and stop whining.

"It *is not a good thing* for working people in this country for companies in Europe, or anywhere else for that matter, to view them as a good option for cheap offshore labor.

If you'd like to take the opposite side on that question, feel free, but I'm not sure why you would."

First, because, if nothing else, then our companies might start finding Eastern Europe, India, China and others not quite so attractive to ship jobs off to so the 15% of our people without jobs might get a shot at them.

Second, I ran a company in Sweden, it was dam hard to make money in any labor intensive business with that workforce. I am not the least bit surprised that they would see most anyplace as cheap labor. Not so much in salaries as $19 in Sweden isn't making anyone rich but with the vacations, taxes and other benefits total comp can be overwhelming. BTW, mandatory vacation is both ways, the employee is also required to take it.

Third, their workforce is 4.3 million people, I wouldn't begin to compare it with the US. Move your factory from Alexandria to Danville and you've accomplished the same thing, happens all the time, or it used to when we had factories. So, I think you are reacting to the insult of it all.

Last, the getting out of NE thing was a joke, should have put a smiley face on it.

"That's the nature of markets. And if Ikea cannot find enough people to staff its plant, they're going to have to raise their offered wages. That, too, is the nature of markets."

I don't think anyone disputes "the nature of markets". What might be in dispute is whether we should allow global markets to be the sole determinant of people's standard of living. (Not that it really is anyway - the laws of the market don't apply to the wealthy, many of whom inherit.)

And I'll take my customary hits for suggesting that people, if they are unhappy, should actually do something to improve their situation and stop whining.

Happy to oblige. Look, rich people don't have to whine. They throw their influence around and voila! we have special tax treatment for their income (capital gains); thier inheritance (lower estate taxes); guarantees re being 'too big to fail', and their tax bite (all kinds of special tax treatments-see David Cay Johnson for some eye openers on that one). In addition, if there are some rich folks who actually work for a living, they are generally not exposed to having their job taken away by some teen age girl in Cambodia, or somebody who crossed our southern border last night.

The list goes on....lawyers, doctors, accountants, drug companies, defense contractors...they have all carved out economic rents under our current corrupt system. And having done so, they now have the economic and political clout to keep it that way, "free markets" (quotes are deliberate) be dammned.

This is socialism for the rich.

Then folks like you hurl your moral indignation at the poor, the workers, and the lower middle class and tell them to "do something" or "get over it" or impugne their moral fiber....thus condemning them since, in some f*cking twisted sick sense, they "deserve" their fate in life.

You know what I say? Be careful of what you ask for. After all, the rich have demonstrated beyond all shadow of a doubt that socialism works.


"I'm not sure what there is to do."

There have historically been no shortages of political decisions taken to assist the already comfortable. Since the late 1970's they have proved to be successful beyond all imagination and income has been steadily shifted upward....not because "that's the way markets work", but due to powerful interests using the government to get their way.

"The rich have demonstrated beyond all shadow of a doubt that socialism works."

Their whining works too.

"Obviously I'm missing something here.

Agree. Open up any standard microeconomic textbook and carefully read the assumptions one has to make to get a market to behave the way most people think so we reach the magic nirvana where MC=MR and all the markets it takes to make "a market" clear in equilibrium.

The connection of those assumptions to actual reality is, well....calling it tenuous is being generous.


Then take a cold hard look at reality.

It could be an eyeopener.

Their whining works too.

Oh. You saw that Cato study, too?

"it was dam(sic) hard to make money in any labor intensive business with that workforce"

And here I thought that to be the point. It's supposed to be hard. In fact, under conditions of pure competition it's virtually impossible...in the theory that most free marketeers hold so dear.

slarti,

If people have a choice and don't want to work at Ikea, they will quit. If they don't, they will have a job where they otherwise would have none. That's the nature of markets. And if Ikea cannot find enough people to staff its plant, they're going to have to raise their offered wages. That, too, is the nature of markets.

Yes, but markets, especially labor markets, don't exist in isolation. They are shaped by their social, economic, political, and legal context. That's what determines the bargaining strength of market participants. So you need to look at that context to understand what's going on.

In all probability there is a gap between, "lowest wage Danville IKEA can pay and get enough workers," and "highest wage Danville IKEA can pay and still be profitable ." I obviously lack access to the data, so that's a surmise, but unless they are right on the brink, it's a pretty good presumption.

The negotiation is over who gets how much of that difference, and the situation is such that IKEA has the power to claim most of it. Union organizing is hard, slow, and expensive. Unemployment in the area is around 10%. Our safety net is not particularly strong, so being jobless is tough. There's one large employer, or maybe just a few, and many workers.

All that leads to the obvious result that market forces work for IKEA.

What's to be done? Make organizing easier. Improve the safety net so workers can hold out for a better deal. Recognize that, especially in circumstances such as today's, unemployment is not a moral failing. (Indeed, if there is a moral responsibility, it resta far from Danville). Get serious about improving the economy instead of freaking out about the short-term deficit (Yes, Obama, I'm looking at you too.) Do other things that might improve opportunity.

Maybe you disagree with some of these suggestions. Regardless, I thik it's a mistake to look at the situation only in terms of "that's how markets are." It's way too narrow a view.

A variety of factors go into why some people seem to spend their lives at entry level while most work their way passed it.

I'd like a cite on "most," please. Thanks!

What's to be done? Make organizing easier. Improve the safety net so workers can hold out for a better deal.

Oh, unless you clicked through to the full article, you missed that the lead got buried!

Some of the Virginia plant's 335 workers are trying to form a union. The International Assn. of Machinists and Aerospace Workers said a majority of eligible employees had signed cards expressing interest.

In response, the factory — part of Ikea's manufacturing subsidiary, Swedwood — hired the law firm Jackson Lewis, which has made its reputation keeping unions out of companies. Workers said Swedwood officials required employees to attend meetings at which management discouraged union membership.


So, because the feckless Democratic party wouldn't take a stand on card check, no union for you! But you're still required by local management -- required! in 2011!!!! -- to attend anti-union meetings.

It is pretty sad when there are people who are apparently unable to conceive of any labor markets other than ones in which employers have almost all the market power.

In competitive markets, if an employer dropped wages as IKEA has done recently it would find itself unable to hire workers. Some people are apparently unable to see such a concept as a market.

In some markets, both the employers, through monopsony power, and the employees, through unions, have market power. This is a form of market common enough to have an economic term describing it - a bilateral monopoly. But again, apparently some people are unable to conceive of this as a market.

No, for some people today, to say "markets" means "situations where the employer has an extremely large amount of monopsony power", any other use of the term is inconceivable...

In other news, the trend towards lower economic mobility in the United States compared to other developed countries continues, although no one seems to be able to determine why should a thing might happen....

I said nearly thirty years ago that Reagan had a jobs plan. He was going to move all the jobs to the third world, then turn the US into a third world country, then catch the jobs coming around the backside.

I said nearly thirty years ago that Reagan had a jobs plan.

You wrote this post for me thirty years ago, dude.

Actually, someone else wrote over 230 years ago about the asymmetry of power that distorts the so-called 'labor market':

"What are the common wages of labour, depends everywhere upon the contract
usually made between those two parties, whose interests are by no means the
same. The workmen desire to get as much, the masters to give as little, as
possible. The former are disposed to combine in order to raise, the latter
in order to lower, the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon
all ordinary occasions, have the advantage in the dispute, and force the
other into a compliance with their terms. The masters, being fewer in
number, can combine much more easily: and the law, besides, authorises, or
at least does not prohibit, their combinations, while it prohibits those of
the workmen. We have no acts of parliament against combining to lower the
price of work, but many against combining to raise it. In all such disputes,
the masters can hold out much longer. A landlord, a farmer, a master
manufacturer, or merchant, though they did not employ a single workman,
could generally live a year or two upon the stocks, which they have already
acquired. Many workmen could not subsist a week, few could subsist a month,
and scarce any a year, without employment. In the long run, the workman may
be as necessary to his master as his master is to him ; but the necessity is
not so immediate.

We rarely hear, it has been said, of the combinations of masters, though
frequently of those of workmen. But whoever imagines, upon this account,
that masters rarely combine, is as ignorant of the world as of the subject.
Masters are always and everywhere in a sort of tacit, but constant and
uniform, combination, not to raise the wages of labour above their actual
rate. To violate this combination is everywhere a most unpopular action, and
a sort of reproach to a master among his neighbours and equals. We seldom,
indeed, hear of this combination, because it is the usual, and, one may say,
the natural state of things, which nobody ever hears of. Masters, too,
sometimes enter into particular combinations to sink the wages of labour
even below this rate. These are always conducted with the utmost silence and
secrecy till the moment of execution; and when the workmen yield, as they
sometimes do without resistance, though severely felt by them, they are
never heard of by other people. Such combinations, however, are frequently
resisted by a contrary defensive combination of the workmen, who sometimes,
too, without any provocation of this kind, combine, of their own accord, to
raise tile price of their labour. Their usual pretences are, sometimes the
high price of provisions, sometimes the great profit which their masters
make by their work. But whether their combinations be offensive or
defensive, they are always abundantly heard of. In order to bring the point
to a speedy decision, they have always recourse to the loudest clamour, and
sometimes to the most shocking violence and outrage. They are desperate, and
act with the folly and extravagance of desperate men, who must either
starve, or frighten their masters into an immediate compliance with their
demands. The masters, upon these occasions, are just as clamorous upon the
other side, and never cease to call aloud for the assistance of the civil
magistrate, and the rigorous execution of those laws which have been enacted
with so much severity against the combination of servants, labourers, and
journeymen. The workmen, accordingly, very seldom derive any advantage from
the violence of those tumultuous combinations, which, partly from the
interposition of the civil magistrate, partly from the superior steadiness
of the masters, partly from the necessity which the greater part of the
workmen are under of submitting for the sake of present subsistence,
generally end in nothing but the punishment or ruin of the ringleaders."

Lewis Carroll, many thanks for that.

The position I'm coming to, which is not where I started in life, is that capitalism per se is kind of played out.

Nice idea at the time, great alternative to mercantilism and state corporatism, but the juice has gone out of it.

We need something better.

Instead of a dynamic environment where folks do their best and the best ideas, best products, and best people succeed and thrive, we have a world where every freaking market is gamed and the ideal is get yours and screw everybody else.

It's broken.

As long as labor is treated as a commodity to be purchased on a market model, people who work for a living are going to get screwed. For all of the reasons that good old Adam Smith laid out so clearly, over 200 years ago.

Seriously, it's all right there.

Labor is one of the fundamental factors of production, and deserves a share in the wealth created by an economy as fully as capital does.

In other words, people who work for their income should get a bigger slice of the pie.

Why? Because they baked it.

We need to reset our understanding of how this stuff is supposed to work. Cause what we're doing now ain't working.

What might be in dispute is whether we should allow global markets to be the sole determinant of people's standard of living.

sapient, who is this "we" you are referring to? And what specific constraints/regulations should "we" be putting on the global markets (as if there is any "we" in the world that has the power to do that, globally), in your estimation?

Or barring a specific set of constraints, a general one would do for the purposes of discussion. I'm guessing that what you have is more in the way of an idea than a plan, so it's probably not fair for me to ask you for a high level of detail.

All that leads to the obvious result that market forces work for IKEA.

Bernard, I don't disagree with this and what preceded it, but as long as Ikea adheres to US labor laws (such as time and a half for overtime), I don't see much that can be done by the government.

The company cannot prevent organization by the workforce, though, if the people are inclined to do that, even if they have really good lawyers. They can prohibit organizational activities on premises, I'd guess, and they might decline collective bargaining. What I don't understand, here, is why they're opting for mandatory overtime on a regular basis. It's not as if there's much in the way of employee overhead that makes this cheaper than (for instance) hiring additional people who can do the same thing at straight time. I can see how there would be a certain amount of OT that might make up for the minor amount of per-employee overhead presented by payroll and unemployment insurance.

What's also mysterious is that there aren't quite a few people who want to work overtime. In my pre-professional life as an hourly worker (as well as the first couple of years of my professional life when we actually got paid time and a half for OT), there were always people who were actively queueing up for overtime activities. I was always one of those, because I needed the money. In the union shop it was more like watching who got asked and in what order in case a grievance could be filed.

And, sure, there were always people who didn't want to work overtime, and regularly declined it. Whether that could ever be a legitimate firing offense, I don't know.

We need to reset our understanding of how this stuff is supposed to work. Cause what we're doing now ain't working.

Do you have a workable alternative envisioned?

You say that what we're doing now ain't working. The problem, russell, is that it is working. It's just not doing what you want it to. The reason it perpetuates is that it isn't broken, or (equivalently, I suggest) it's not regarded as broken by a whole lot of people, on both sides of the employer/employee interface.

Do you have a workable alternative envisioned?

Do I have to have a full set of legal and social institutions all laid out and ready to roll before I'm free to say it's time for an alternative?

Are there no other nations on the planet, today, that do a better job of distributing the wealth that their economies create?

The problem, russell, is that it is working. It's just not doing what you want it to.

Conversely, I can say it *is* broken, but it's working for you, so you're cool with it.

If we want to make it a matter of personal, subjective preference.

The reason it perpetuates is that it isn't broken, or (equivalently, I suggest) it's not regarded as broken by a whole lot of people, on both sides of the employer/employee interface.

The fact that it perpetuates is not a particularly good argument for saying that it works. Many institutions perpetuate, for generations or hundreds of years, which don't work well, or only work well for some folks.

I'm not actually asking anyone to agree with me about this, or anything else for that matter.

I'm stating that, as far as I'm concerned, capitalism as we practice it in this country has become detrimental to the broad public good. It's more harmful than not.

And it's not like there is anything magic, or special, or sacred, or correct, or constitutionally mandated about it. It's just a way to organize economic life. We can choose to do that any way we like.

Seriously, as far as I'm concerned it's no longer worth the candle. IMO our efforts should be put toward exploring alternatives.

'And it's not like there is anything magic, or special, or sacred, or correct, or constitutionally mandated about it. It's just a way to organize economic life. We can choose to do that any way we like.'

I lean more towards Slarti's view, but I do acknowledge that what we see in the US and call 'capitalism' is a corrupted form and so has many pieces that don't work as they would if that corruption were eliminated. Much of what caused our recent financial system problems (auto manufacturing mismanagement which included labor organization mismanagement, Wall Street generally, AIG, FNMA and FHLMC, Citi, B of A, GE, etc.) has little to do with my concept of 'capitalism' but instead of allowing the miscreants to be eliminated from participation, we had the taxpaying public bail them out so they can start again. And we did this because we concluded they were too big to allow to fail. And how did they get to this position? Well, in one instance, we allowed perfectly OK commercial banks to merge, ad infinitum, without any demonstration that, under their charters, the mergers delivered an improved version of service to the public. All these mergers did was eliminate the competition which gives us a neat form of capitalism, huh? We really need just a few things from government to make things work better and I think that should include not allowing mergers that accomplish nothing except the elimination of effective competition and not allow major system sectors like financials to have components that are too big to fail.

Conversely, I can say it *is* broken, but it's working for you, so you're cool with it.

I'm not sure what to say to that. You must be using some different definition of "working" than I am. My definition does not have a Cialis commercial in it.

If we want to make it a matter of personal, subjective preference.

I'm not; I'm just noting that things continue to function. That's the nature of "working". I have a "working" 1995 Honda Accord; its windows stick and it's in need of new brakes and the air conditioning is shot and it needs a new timing belt and tensioner and it's a bit overdue for an oil change. But it gets me to work and back, so: working. I would prefer to have something better, or even a better version of that specific car, but there are some matters in which my preference doesn't rule.

The fact that it perpetuates is not a particularly good argument for saying that it works.

I'm using working in the sense of functioning or operating. It sounds as if you're using a different sense of the word, and I am wondering what that sense is. If you've got some kind of other attached values like in a fulfilling way or in a way that makes everyone happy or some such, that'd be good to know.

I'm not actually asking anyone to agree with me about this

I'd actually decline to agree or disagree, until I understand what it is you're saying.

IMO our efforts should be put toward exploring alternatives.

Do you have any in mind, that you'd care to suggest or discuss?

"I'm stating that, as far as I'm concerned, capitalism as we practice it in this country has become detrimental to the broad public good. It's more harmful than not.

And it's not like there is anything magic, or special, or sacred, or correct, or constitutionally mandated about it. It's just a way to organize economic life. We can choose to do that any way we like."

For a while now it has been clear to me that this is your ever more certain conclusion.

Yet, this very post is an excellent example of where I would push back and ask you to take a broader look at whether it is capitalism, the nature of current government, the current state of the US economy (and the world economy) which will certainly change over the next ten years that is making you ever more strident that thesystem overall is failing.

This is a simple case of the system actually in some ways working. People in a small town have jobs. They make working class wages. The company moved the jobs there because the economic calculus was correct.

No, they aren't 80k programming jobs, they are factory floor assembly and packing jobs. They don't pay that much, anywhere. But for people that live in an area where $15 an hour is median income 400 more jobs in that range is a good thing. Even if you wouldn't want one.

Most people in this country work all there lives to get to where they can be out of debt and live a simple retirement primarily on SS and Medicare. Most. But most people are ok with that.

Want to change something meaningful? Make that part of their lives better. A welcome rest from the struggles of 50 years of honest work and raising a family.

SS and Medicare were designed as a safety net, there greatest benefit is as a minimal respite at the end of a long life of worry. If you want to create value, push up the quality of that part of peoples lives, when they can't do anything about it except take whats there, and then means test the heck out of it.

Then leave the rest of life for the majority of people to enter the fray, make the best of what their skills, ability and, yes, luck, can get them and catch the inevitable ones who can't survive that fray and give them that respite as they need the rest.

Capitalism is the absolute best way to accomplish all of that, appropriately governed.

To use an extreme case of 'working': nazi extermination camps. The whole KZ system (not all of it was about killing) was run far more efficiently than the Soviet Gulag in the sense that it got more out of its involuntary workers before they were 'used up'. So, let's be really careful in what sense we use the word 'working'. The question is: What is the purpose of the system and is it working in reality towards that goal? If it's greater welfare for the greater number, then in the US it is increasingly not working and I would even say there is deliberate and systematic sabotage. If it is about maximizing material and/or monetary value, then it is too increasingly failing (bubble - bursting - new bubble cycle), although to a lesser degree. If it is about maximizing the personal profits of a group that exerts control on the system, then it is working very well, esp. if it is just about short-term wins. To slay the goose that lays the golden eggs will provide you with a meal, i.e. a short-term win, while the living goose requires feeding, i.e. short-term loss. The working compromise is to just pluck the goose from time to time to pay for the feeding.

The question is: What is the purpose of the system and is it working in reality towards that goal?

That's a decent summation of my questions to russell, I think.

If it's greater welfare for the greater number, then in the US it is increasingly not working and I would even say there is deliberate and systematic sabotage.

Greater than what? I'd not have even commented on this if you'd said something like "maximizing individual welfare in a way that's minimally restrictive of personal liberty", but that doesn't really mean anything specific either.

If it is about maximizing material and/or monetary value, then it is too increasingly failing (bubble - bursting - new bubble cycle), although to a lesser degree.

I think that it's a mistake to try and link up wage inequality with the housing bubble, personally. They're simply two completely different things.

Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate. To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and, one may say, the natural state of things, which nobody ever hears of.

This bugs me, particularly when I see arguments characterizing the organization of labor as distortions of the market. Those with the means get to influence the rules, so they can have a better chance to keep and increase their means, so they can then dictate the rules, so they can then guarantee keeping and increasing their means. "Free" market.

If it is about maximizing material and/or monetary value, then it is too increasingly failing (bubble - bursting - new bubble cycle), although to a lesser degree. If it is about maximizing the personal profits of a group that exerts control on the system, then it is working very well, esp. if it is just about short-term wins.

This too. Eventually, the road to plutarchy and serfdom leads to degradation for all, or violent revolution, if degradation for all doesn't cover violent revolution. The informed Darwinist knows cooperation beats competition in the long run. But the guys in charge may very well die in luxury with Cialis running through their veins before it all turns to sh!t, so upward and onward.

I think that it's a mistake to try and link up wage inequality with the housing bubble, personally. They're simply two completely different things.

I would not say 'completely'. But I think both are results of the way the system currently runs. Total inequality can coexist with maximum efficincy in output. The system fails partially in both regards. The bubbles reduce the net output through the intermittent collapses.
---
I had expected that it would be noticed that 'the greater welfare for the greater number' is a classic socialist slogan.
In essence it means (I think): minimize inequality while maximizing output value until an optimal equilibrium is reached (i.e. a positive change in one would cause a greater negative change in the other).
About the practical application of this ideal people debate (and use violence) for quite some time now.

"I think that it's a mistake to try and link up wage inequality with the housing bubble, personally. They're simply two completely different things."

Slarti,

I actually believe you're wrong about this. Given that consumer spending has remained relatively constant at ~ 70% of the economy for the past 20 years, and given the following:

http://en.wikipedia.org/wiki/File:Gdp_versus_household_income.png

how would YOU explain the ability of consumers to continue contributing 70% to that delta in GDP over the past 10 years without back-filling missing wages with debt, mostly housing-backed debt?

On the more general questions of policy that would improve the macroeconomics of our labor market, I would suggest the following:

1. Return to pre-1980s organizing rules, making unionizing easier. When a greater percentage of the labor force is unionized, wages tend to rise across the board. This helps create a more equitable distribution of gains to all the factors of production.

2. More aggressively enforce anti-trust law and block more mergers and acquisitions that distort the market by giving firms too much pricing power (particularly in the labor market).

3. Maintain and even improve the social safety net so that workers who are laid off don't choose career regression out of desperation. From what I understand, a lot of German labor policy is oriented toward avoiding huge displacement in the labor market. I don't know what or how much of what they do is feasible in the US, but we could probably benefit from adopting some of their ideas. They also require significant labor representation on corporate boards, which sounds like a good idea to me.

In other words, make the power relations between labor and capital more equal than they've become over the past 30 or so years.

I'm sure people much smarter than I could come up with more and better suggestions.

Many institutions perpetuate, for generations or hundreds of years, which don't work well, or only work well for some folks.
They might even be a peculiar institution.

Which was justified precisely the same way.

I actually believe you're wrong about this. Given that consumer spending has remained relatively constant at ~ 70% of the economy for the past 20 years, and given the following:

http://en.wikipedia.org/wiki/File:Gdp_versus_household_income.png

how would YOU explain the ability of consumers to continue contributing 70% to that delta in GDP over the past 10 years without back-filling missing wages with debt, mostly housing-backed debt?

Are you saying wage inequality is the cause of the housing bubble? Or that the housing bubble might have been averted through higher wages? If not either of those, what?

Your response confuses me, and I don't think I can properly respond to your question until I better understand it.

My guess is wage stagnation helped cause the general bubble (or economic crisis, if you like), among other things. Economic demand was most certainly fueled for a number of years through households incurring debt, be it through home loans or credit cards. In any case, bad debt and lots of money chasing it were at the heart of the crisis. So, yeah, if working people were actually making money in proportion to the economic growth they were supporting by demanding goods and services (the goods and services they also helped produce), they wouldn't have needed to incur said debt in the first place.

I should add that some people did make lots of money, increasingly so - the ones at the top. So wage stagnation for most, but not all, is apiece with wage inequality.

they wouldn't have needed to incur said debt in the first place

So, you are saying there was no other choice for people other than to go buy a house they couldn't really afford? Or something else?

I missed this last night:

I actually believe you're wrong about this. Given that consumer spending has remained relatively constant at ~ 70% of the economy for the past 20 years

which turns out to be not quite true

Although it is true that Americans raised their standard of living on debt over the 20 years leading up to 2008, it wasn't because the economy is 70% consumer spending. Thank goodness, or there would be no hope for long term recovery.

and today:

So, yeah, if working people were actually making money in proportion to the economic growth they were supporting by demanding goods and services (the goods and services they also helped produce),

which is exactly what happened as real wages almost exactly tracked inflation and real GDP growth for those same 20 years, after corrections.

which is exactly what happened as real wages almost exactly tracked inflation and real GDP growth for those same 20 years, after corrections.

Cite? Real wages for whom?

So, you are saying there was no other choice for people other than to go buy a house they couldn't really afford? Or something else?

No other choice but to maintain consumer demand (for housing or whatever), as they did, but by incurring debt, given stagnating wages and given that the debt was steadily fueled by investors buying it up.

Without getting into a big morality play about who was responsible, the point is that wages were not sufficient to fuel the demand side of the economy, and that debt was readily available to people without sufficient regard for their credit-worthiness. Those who borrowed did not go to the banks with guns and force them to lend. Nor did anyone force people to borrow, though some were happy to profit handsomely from that borrowing regardless of the long-term wisdom of it.

CCDG,

The link you give only measures from 2009 on, and does not further break down what proportion of gross *cost* of items like imports goes to each of the factors of production (e.g. laborer, exporter, importer, wholesaler, retailer etc.), as this commenter alludes to:

http://innovationandgrowth.wordpress.com/2010/05/28/no-its-not-70-of-economic-activity/#comment-1135

So the bulk of many expenditures for imports accrues to the benefit of domestic parties, even though it may only be domestic marketers, wholesalers, distributers, shippers etc., rather than domestic manufacturing workers.

Also, your claim that after adjusting for these supposed corrections harmonizes real wage growth with real GDP lacks a cite.

Slarti,

I apologize for not being clearer on what I was arguing, but I was not attempting to argue an indisputable causal relationship between the housing bubble and stagnant wages. Since at least the time of Hume, establishing a necessary connection between cause and effect has been recognized as problematic at best.

I was actually refuting your broader claim that THERE WAS NO RELATIONSHIP between the housing bubble and stagnant real wages. Here is what you said, specifically:

"I think that it's a mistake to try and link up wage inequality with the housing bubble, personally. They're simply two completely different things."

Note that the converse of what you say here isn't : "The lack of wage growth CAUSED the housing bubble" (or vice versa). It's merely : "There is a relationship between the housing bubble and lack of wage growth".

Now I am wary of equating a relationship that is something of an accounting identity with any kind of causal relationship, but I do think there was some connection between the two. How much of it is causal, I can't really say. But I do still think that your implication that the two are completely unrelated is not tenable.

I think this because:

1. As I mentioned before, most of our GDP is generated by consumer spending.

2. The marginal propensity to consume is greatest from the 80th percentile of income down.

3. This cohort of earners has not seen much, if any, real income growth the past 10-20 years.

4. Their spending, which rose in tandem with GDP growth, needed to be funded from somewhere else, like their existing wealth or credit.

5. The largest source of wealth, and a huge source of credit, for this cohort, is a primary residence.

So I think in order to maintain your position that there is *no connection* between the housing bubble and a lack of household income growth, you need to suggest another source for the capital that consumers used to maintain their spending in light of the unavailability of increased take-home pay to provide the means of paying a bigger mortgage bill.

One definition of a bubble, which I think is a good one, is the lack of a robust relationship between the cash flow underpinning the valuation of asset (fundamentals) and the market price of that asset. (The dot com bubble was a great example, where the stocks of companies that had shown NO ABILITY AT ALL TO GENERATE POSITIVE CASH FLOW AT ALL were bid up to absurd levels). So we could have had a pretty good run-up in housing prices without a *bubble* IF the bidding up in prices was based on wealthier home buyers, flush with increased take-home pay pushing up the price of housing. However, we didn't have that; we had bidding-up of prices based mostly on the extension of credit, which I think was the other big contributing factor. Take away one OR the other, and I can't see how we get a housing bubble.

In fact, the relationship between personal income and housing is one metric that economists have used to help determine whether a housing bubble exists:

"That shift suggests a sustained change affecting the Canadian real estate market took place in either 2001 or early in 2002, which resulted in house prices growing at a faster rate since. That faster rate of housing price growth is clearly supported by a strong correlation with income growth, which means no bubble formed in the Canadian national housing market during this time.

By our operational definition, for an economic bubble to exist, the price of an asset that may be freely exchanged in a well-established market (houses in this case) first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might be realized from owning or holding the asset. For housing, that income is called rent.

However, we've since found that what people pay in rent, or housing in general, is itself a strong function of income. That observation is confirmed by a 2008 paper by Quan Gan and Robert J. Hill, who found that a strong linear relationship exists between house prices and income percentiles for housing markets Sydney, Australia, Dallas, Texas and the state of Texas."

From: http://politicalcalculations.blogspot.com/2010/03/canadian-housing-bubble.html

Again, this is not to say that that's the only way we could get a bubble, just how it happened to occur this time.

'5. The largest source of wealth, and a huge source of credit, for this cohort, is a primary residence.'

Lewis Carroll:

Enjoyed reading your last comment/analysis.

Although when I was last active as an income 'earner' I was well above the 80th percentile, I see in the above quote something essential to understanding the period when homeowners used housing equity as an ATM, as it is frequently expressed.

When I had 3 young adults ready for college, and since I had made some decent decisions in the real estate market, I had equity I could tap to cover those education expenses. I viewed this circumstance as follows (numbers not precise but close enough for illustrative purposes):

At a given current market value I had a 50% loan-to-value in my real estate.

I might consider the first 20% of equity as 'wealth' not likely to disappear overnight, and a lender could view this as available to 'secure' credit.

The other 30% equity is much riskier for a lender and if credit were extended might need to be viewed as unsecured credit, so this part is not 'wealth'.

So, for my purposes, I never borrowed above the 70% level, and I have never had any financial difficulties.

But what I saw others do in the last decade seemed to have no rules or principles at all, thus collapse.

Thanks for clarifying, LC.

But I do still think that your implication that the two are completely unrelated is not tenable.

Completely unrelated might have been a stretch. But I think the link is loose, and that the housing bubble needed much besides just wage stagnation.

If the original claim had been that z.b. wage stagnation plus low prime rate made fertile ground for the housing bubble, I think that would have been an uncontroversial thing. Now, it was me who brought up housing in the context of bubbles, but we had another bubble in semi-recent memory that was due, too, (in my limited awareness) to lots of money looking for a home plus overoptimistic expectations.

As far as I'm aware, the bubbles were mostly due to overestimation of the safety of a given investment. The housing bubble had the added factor that either people were in denial about the prospect of collapse, or simply never bothered to consider it.

In matters of this kind, though, I am only an egg.

Returning to IKEA for a moment, I wonder how a company that started under the horribly oppressive yoke of Scandinavian socialism ever got to be successful enough to start expanding abroad.

It seems likely that one factor in its early success might have been the fact that ordinary working Swedes, like IKEA employees, could afford to buy its products. I doubt that rich Swedes were a big enough market to sustain IKEA's growth.

Can IKEA's workers in Danville afford to buy IKEA's products on the wages IKEA pays them? I have no clue. But somebody had better be able to. And if I understand IKEA's market niche correctly, it had better be a lot of somebodies. Donald Trump can surely afford IKEA furniture, but I doubt he's IKEA's target customer.

--TP

Good Ole Boy,

Not that I am any kind of authority on it, but I see nothing at all wrong about what you did. If handled properly and responsibility, a home is an asset that can be useful in many ways. But it can also be abused.

My understanding is that this was the rationale behind the traditional 20% downpayment and income qualifications for gettting a 'conforming' mortgage.

AFAICT, if everyone did things the way you did them, we wouldn't have a problem.

Just my opinion. Probably worth what you paid for it.

I hope I didn't loose track and get this piece from someone in this thread, as it seems entirely relevant.

[...] I call your attention to it in part because in this diary yesterday, when I focused on slavery as the cause of the Civil War, some criticized me by saying that it was a difference in economics. Yet slavery was the very basis of the Southern economy. Today we may no longer have chattel slavery, but the differences between the economic approaches of the North and South remain starkly different, starting with the approach towards unions.
Read the rest and argue some more!

Or even lose track.

Many good points and questions here, I will try to make a good reply.

It sounds as if you're using a different sense of the word, and I am wondering what that sense is.

Yes, that is correct. When I say "it's broken" I don't mean "it utterly fails to function", I mean it fails to achieve objectives that are both attainable and desirable.

So, for "it's broken" perhaps substitute "we need, and can have, something better".

The thing that "what we do now" does not do well is distribute the wealth created by the economy anything like evenly across the population. For this discussion I'll leave out terms like "fairly", or "equitably", or any other moral or ethical category. I think those things are important, however for the moment I just want to focus on nuts and bolts.

Here is a list of countries along with various measures of the inequality of their income distribution.

If you look at, frex, the CIA GINI coefficient, you will see the US has a value of 45. Our UN GINI coefficient is 40.8.

These are well out of alignment with nations that are otherwise similar to us. Industrial nations, with mature robust economies, rule of law, representative government, etc. Our peers as far as income inequality are developing countries where a small number of folks own everything, or kleptocracies, or Singapore.

Nations with *much lower measures of income inequality* have strong economies, robust industrial, manufacturing, financial, and technology sectors, very good quality of life, have high degrees of civic and personal freedom and autonomy.

So clearly there is no necessary relationship between those things - all of them desirable - and a high level of inequality of income.

And our level of wealth inequality is much greater than income inequality.

So, who cares? If everybody has a bite to eat and a clean well-lighted place to bed down, why does it matter if a few folks have a very, very, very, very, very large amount of the wealth of the nation?

It matters because inequality of wealth and income is strongly correlated with social disunity. People begin to not trust their society, their government, their social institutions, and each other.

It also matters because political and social agency - your ability to act independently and effectively, your ability to make meaningful free choices in life - are limited to a very real degree by the resources you can bring to bear, and specifically by the resources you can bring to bear *relative to other actors*.

As a practical matter, for a self-governing polity of responsible people, high levels of financial inequality are not good.

I'm not talking about leveling all wealth and income to some common denominator. I'm talking about not having 1% of the population control over 40% of the wealth.

And that is what we have. If it continues, it will break us.

To touch on Marty's comment, I agree it would be great if we could make up for our relatively high degree of financial inequality with a strong, reliable social safety net.

What we have now is inadequate to our needs. And what we have now is under constant, determined, and sustained attack.

So I don't think that's going to save our bacon.

What I recommend as an alternative is reforming our social, legal, economic, and political institutions so that more of the wealth created by our economy finds its way to less wealthy people, and less to more wealthy people.

As a practical matter, that means more to folks who work - labor - and less to folks whose contribution to production is capital. I will add management in with capital, because they generally are some combination of proxy for capital and/or free rider skimming cream off the top.

There are lots of ways to do that. Remove the assumption that the only stakeholders in any given enterprise that management is responsible to are the owners. Build legal and economic incentives for worker ownership. Limit the ability of corporations to merge, and re-merge, and merge once again.

Blah blah blah.

None of this is mysterious. It's just not what we do.

We should change what we do. Our current way of organizing our economy is not written in stone, it is not mandated by the Constitution. It's not even what we've always done, even during and after industrialization. It is not only possible to have a robust market-based economy without the preference for the rights of capital and the highly skewed distribution of income and wealth that we have, lots of other countries do it now, today.

It's doable.

It's completely our choice to live as we do. I think it's a bad choice. I'm against it. I'm against it because it's harmful.

"lots of other countries do it now, today."

Unfortunately, this part of your discussion falls down. No industrialized country does what you describe.

While I am very interested in many parts of what you say here, the facts are obviously skewed, and I want to take exception to one popular meme that I am getting more tired of by the week, as everyone from Obwi to Vanity Fair keep repeating it.

The problem with the way the 1% is now being counted, income for sure, wealth somewhat less surely, is that it assumes that the income is being taken from the US economy. While it is 1% of reported US income, it represents income from multinational corporations that gain income from subsidiaries all over the world, most of which don't get counted as part of US GDP.

That 1% is then compared to productivity gains in the US, compared to gains in US wages, etc. The problem is that those companies, thus their management have made significant growth, increased wages and quality of living in countries all over the world. They just happen to get paid here.

So, does that mean we can't improve things here? No. But it challenges the very core of your objection in a truly global view. They aren't extracting wealth from the US economy on the backs of the workers here, they are benefiting from contributing to massive global growth that isn't happening here.

It seems likely that one factor in its early success might have been the fact that ordinary working Swedes, like IKEA employees, could afford to buy its products. I doubt that rich Swedes were a big enough market to sustain IKEA's growth.

Can IKEA's workers in Danville afford to buy IKEA's products on the wages IKEA pays them? I have no clue. But somebody had better be able to. And if I understand IKEA's market niche correctly, it had better be a lot of somebodies. Donald Trump can surely afford IKEA furniture, but I doubt he's IKEA's target customer.

The current model of Ikea makes use of the West-to-East wage gradient, moving its production further eastwards when a country 'goes West'. GDR citizens could not really afford IKEA furniture, although they produced it for BRD/FRG consumers. Now that the GDR joined the rest of Germany, IKEA moved its production (south)east. Should the Balkan countries rise their standard of living and wages to Central European levels, the company will move on again, I presume.
It's not just IKEA. Car parts producers and most recently a well-known manufacturer of cell-phones went the same way.

The problem with the way the 1% is now being counted, income for sure, wealth somewhat less surely, is that it assumes that the income is being taken from the US economy. While it is 1% of reported US income, it represents income from multinational corporations that gain income from subsidiaries all over the world, most of which don't get counted as part of US GDP.

This is a very interesting point, one which I'd like to know more about. Perhaps your information here is from personal knowledge, perhaps from other sources. In either case, if you wouldn't mind expanding this I'd appreciate it.

As far as "what other countries do", the thing I'm saying other countries do that we don't is distribute income and wealth more evenly across their population. That statement is based on publicly available information. It's not clear to me how your comment above makes something like, frex, the CIA GINI numbers less relevant. Perhaps you could explain.

Do investors in other developed countries not also invest in multinational enterprises?

Why doesn't their income from global investment cause extreme disparities of wealth in their countries?

In other words, how does your comment make what I'm saying here any less relevant?

It matters because inequality of wealth and income is strongly correlated with social disunity.

And that disunity springs from...what? Some expectation of a level of equality of outcome?

Where did that notion spring from, do you think? Just taking myself as one datum from the larger herd, I wasn't raised having that expectation, so I recognized that whatever resentment/envy I felt toward the richer of my peers (and I assure you, there were a LOT of them; my hometown had a large and well-separated upper class) was of my own creation.

The suggestion that income inequality is the root cause of social disunity is not really that well-founded. Correlation ain't causation; I'm sure you don't need to be reminded of that, but your argument does seem to rest on that assumption.

What I recommend as an alternative is reforming our social, legal, economic, and political institutions so that more of the wealth created by our economy finds its way to less wealthy people, and less to more wealthy people.

As a practical matter, that means more to folks who work - labor - and less to folks whose contribution to production is capital. I will add management in with capital, because they generally are some combination of proxy for capital and/or free rider skimming cream off the top.

There are lots of ways to do that. Remove the assumption that the only stakeholders in any given enterprise that management is responsible to are the owners. Build legal and economic incentives for worker ownership. Limit the ability of corporations to merge, and re-merge, and merge once again.

I've heard you say this kind of thing before, and I appreciate that you've shared your thoughts with me. What I'm looking for, russell, is along the lines of what specific (or general, even) steps do you imagine will get us from where we are to where you imagine we can be, and what kind of ongoing framework of laws will be required to keep us there.

I'm really not closed off to what you're saying, because I don't understand it well enough to have an opinion. All I know is that a change in the status quo needs strong incentives or strong force for change, and I don't see where either of those might be coming from, yet. In your estimation, I mean.

'What I recommend as an alternative is reforming our social, legal, economic, and political institutions so that more of the wealth created by our economy finds its way to less wealthy people, and less to more wealthy people.'

I would like to see the outcome direction described here as well, but it is my estimate that the negative drivers that have taken us where we are now are more cultural, moral, and ethical than in your list of institutions above.

When I was the age when I would have had one of those jobs in Danville, I would have worked all the overtime I could get, as would most of my peers, and that willingness and effort would have been my ticket to save some of what I earned and spend some to educate/train myself to do better in the future. Are you suggesting that we now evolved to a cultural environment where such is not possible? Actually, I see too many contrary examples in my daily experiences to believe that to be the case.

Build legal and economic incentives for worker ownership. Limit the ability of corporations to merge, and re-merge, and merge once again.

A couple of thoughts here. First, does worker ownership entail workers going down with the ship if a business fails? Would workers be asked to sign the bank loans, the lease agreements, to personally guarantee the business' debts? None of my employees are asked to do that. Recently, and I assure you without my knowledge, a secretary and a lawyer made a couple of truly stupid decisions that exposed my firm to 3mm plus in malpractice liability. My partner and I got very lucky and were able to fix the problem through lots of late night work, a couple of good rulings and about 2 months worth of really carpy sleep loss and worry. Whose money etc was on the line? Mine. I assume sole responsibility for gains, losses and bad results. That's pretty much the standard model. None of my employees contribute new business. None of my employees--I'm talking about degreed professionals--could make a living on their own. Are you saying the law should require me to gift over the good part of my business and I only get stuck with the bad?

Russell, when laws like the kind you are hinting at come into effect, the only entities that can deal with them are those who are so large they can carry the cost of compliance. Small and middle sized companies don't have that kind of depth. GE can hire or outsource compliance. Operations with 150 employees don't have that kind of extra administrative heft or the money to get along in that kind of world.

Slarti, GOB, CCDG, or anyone else,

WITHOUT looking it up, take a guess at the wealth distribution in the US. Specifically, fill in this table:

Top 20% own _____ of total wealth
2nd 20% own _____
3rd 20% own _____
4th 20% own _____
5th 20% own _____

I would be very curious to know how your everyman's picture of this distribution compares to 1)what the distribution actually is, 2)what a 5,000-person poll recently thought it is, and 3)what the same sample of run-of-the-mill Americans thought it SHOULD be.

--TP

I read a lot in the last years about ways companies use to get lots of overtime out of employees without paying a cent for it. No, not overtime paid better but overtime not paid at all.

They aren't extracting wealth from the US economy on the backs of the workers here, they are benefiting from contributing to massive global growth that isn't happening here.

Adding to this, harping on the top 1%, in addition to begging the question addressed by CCDG, ignores the status of the top four quintiles and doesn't factor in skills, training, work ethic, deferred gratification, education level etc.

We're not an agrarian or manufacturing society anymore. At least not much. There will always, no matter what gov't says or does, be folks who have limited capabilities, who don't or can't take advantage of free education through grade 12, who won't or can't find a way to obtain further training and job skills and these people will always be at the margins.

Most people, however, make a decent living, have a home, food, a reasonable standard of living. Using the top 1% as the standard ignores the fact that a significant majority of adults over thirty, and certainly over forty, live pretty well. Young people just starting out or still in school have less. That changes over time. Wealth distribution changes with age and time in service.

tp,
I didn't look it up but I think the numbers are around 80, 15,5,0,0 , might be skewed higher(90, 8, 2, 0, 0). The bottom 3 quintiles effectively have no wealth.

Which is why I harp on the protection and enhancement of means tested SS and Medicare to ensure that the bottom three quintiles not only avoid abject poverty, but should have a reasonably respectful retirement.

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