Prosperity Stops at Executive Suite
As Vice President George Bush will no doubt remind voters five or six times a day from now to November, the current expansion is the longest peacetime episode in our economic history. The 1961-69 upswing was propelled after mid-1965 by rising expenditures on the Vietnam War.
Good news for average Americans? Hardly. Since 1973, real wages have declined 15% and real family income, despite the second paychecks contributed by women, is $300 less in this sixth year of expansion than it was a decade and a half ago.
Although much of this erosion in living standards occurred in the 1970s, real wages have scarcely stirred since the end of the 1981-82 recession. The Frank Lorenzos of corporate America continue to clamor for wage reductions, and unions meekly settle for wage improvements smaller than the current inflation rate.
In the business media, corporate leaders boast of their success in controlling labor costs. J. F. Welch Jr. (a.k.a. Neutron Jack), General Electric’s presiding genius, and Lawrence A. Tisch, who has brought the talents and attitudes of a successful hotel magnate to the Columbia Broadcasting System, are celebrated not for exciting new products or innovations in TV programming but for their prodigies of corporate restructuring, the approved euphemism for firing hundreds or thousands of employees.
The words “lean and mean” better describe the growing cohort of Americans who somehow subsist below the poverty line, an alarming number of them homeless, than they apply to corporate moguls.
General Motors is an egregious illustration of self-help by top managers. During the past two years, GM’s market share has continued to shrink. Ford, still a substantially smaller corporation, actually earned more profit than GM in 1987 for the first time in living memory.
Presumably to console them for this wretched market record, 850 top GM executives divvied up more than $325 million in bonuses. GM’s 350,000 production workers got precisely nothing under their profit-sharing arrangement.
In the auto industry, quite aside from bonuses, top executives collect 12 to 18 times as much as blue collar types.
Their Japanese counterparts content themselves with a multiple of six to eight. Moreover, when business is bad, Japanese companies slash executive compensation first, a positively un-American practice.
But the strangest aspect of the current expansion is connected with the relationship between inflation and unemployment embodied in the 30-year-old Phillips curve. Alban William Housego Phillips inspected wages and unemployment data in Britain between 1861 and 1913 and concluded that as unemployment declined, wages rose.
American economists pounced on this empirical relationship, substituted prices for wages and fitted innumerable curves to our own unemployment and price data. During the 1950s and the ‘60s, the Phillips hypothesis held up quite well. Although it was a matter of dispute whether 5%, 4% or even 3% unemployment was the number that set off a sharp jump in prices, mainstream economists tended to rely upon some version of Phillips to guide their forecasts and analyses.
After 1973, the relationship deteriorated. Between 1982 and the present, it has lost what remained of its explanatory power. Unemployment has declined from 9.7% in the worst month of the 1981-82 recession to an April, 1988, figure of 5.4% without, thus far, setting off a price explosion or the ballooning of wages to which price inflation is presumed to be tightly linked. Many economists regard 5.4% unemployment as tantamount to full employment.
Here then is a puzzle. If inflation indeed is gently accelerating at least enough to alarm the jittery Fed to nudge interest rates upward, who are the culprits? Unions, the usual suspects, clearly are innocent.
Can it be that we are witnessing price inflation caused by widening profit margins, rising mortgage and consumer debt interest rates and higher import prices paid in substantial amounts to West German and Japanese exporters? German wages are substantially higher than ours, and Japanese wages are close to parity. If they fare so well in world markets and we do so poorly, it may just be that their managers are less greedy and more competent than ours.
Our 7 1/2-year experiment with Reaganomics has made the poor poorer and more numerous. It has further enriched the already wealthy.
Middle-class families work more hours to maintain living standards and still find themselves priced out of the market for new homes.
Reaganomics has diminished our international competitiveness, revived protectionism and made our economy hostage to the willingness of foreigners to continue to fund our trade and budget deficits.
Productivity rises only slowly, and, by the test of the venerated marketplace, Americans continue to favor foreign merchandise over home-produced alternatives. We still treat chief executives as heroes. It is hard to understand why.
