Janus

Like you, I spent a good part of my day thinking about Janus, the Supreme Court decision that reduced the wage negotiation to an act of political speech. https://nyti.ms/2lBcoHS.

I then spent twenty minutes in each one of my three summer school courses guiding discussion and fielding questions on the economic significance of the ruling. Here, in abbreviated form, is what I said:

First, I told them what classical economists had written on the subject. Here is Adam Smith, who in 1776 wrote:

What are the common wages of labour depends every where 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 (I.viii.11).

Smith then answers his own question:

The masters,  being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, a 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. . . . 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 (I.viii.12).

He then adds:

But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. . . . 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 (I.viii.13).

The classical economists, at least, were never so dull as to believe that the “combinations” of “masters” were not as, or even more, political as “combinations” of “workmen.”

Next, I went into a brief history of labor union density. My students are intimately familiar with the $4.5T (in 2018 dollars) Congress appropriated in 1938 to defeat fascism in Europe and nationalism in Asia; with the tremendous boost in aggregate consumer spending that followed this, the largest public investment in all of history. They know that this investment, combined with the Marshall Plan, gave rise to three decades of steady economic growth and expansion.

What they may not have known is that it was within this same time frame that David and Chuck Koch’s father made his fortune, first building oil refineries for Adolf Hitler and Joseph Stalin, but then by capturing rents on the consumer demand generated in the US by Congress’s $4.5T outlay. Yes. Fascist German and Communist Russian public moneys are not drawn upon the US Treasury. But the consumer demand generated by Congress’s war bonds undoubtedly were. The point is, up and down  the Kochs built their fortunes on public largesse — fascist, communist, social democratic.

I next discuss why the bottom began to fall out of the economy in 1968. The critical events are as follows: (1) Japanese and German economies return to full employment and full industrial capacity placing downward pressures on prices and, so, rates of growth for investors in all three markets; (2) Richard Nixon’s 1971 devaluation of the dollar helped bring US manufactured goods back within the reach of domestic and foreign consumers; but devaluation of the dollar brought investors to seek higher growth economies in Asia, South America, and the Middle East; (3) the OPEC oil embargo of 1973 sent oil prices soaring which hit US markets specially hard; of the three major industrial economies only the US had eliminated light rail and high speed rail as alternatives to private automobiles.

Indeed, in this regard it is worth noting that President Nixon, a Republican, before devaluing the dollar, first tried to win passage of a plan for single-payer, universal healthcare; funding for high speed and inner city urban light rail; and virtually free public higher education. All three were shot down by labor unions that feared government incursion upon their turf: the UAW for transportation and the AFT for education. No one knew that it was the last, best opportunity for labor to secure all three.

Finally, I pointed out why, absent Democratic cooperation, first Nixon, then Jimmy Carter, then Ronald Reagan, and then Bill Clinton joined arms with Congress to deregulate financial markets, lower taxes on wealth, and lower barriers for investors to invest in high-risk/high-return financial instruments. Such instruments deliver high returns not on account of increases in productivity or economic expansion. They deliver high returns on account of speculation in financial markets.

Finally, in 1979, Jimmy Carter’s appointment as Fed Chair, Paul Volcker, raised interest rates to 20%, therein killing any hope of industrial growth. Investors liquidated as quickly as they could, forever killing any hopes of an industrial revival.

This sets the stage for a dramatic shift in how investors assign their wealth to different asset classes. Until 1968, I might have assigned some of my wealth to US manufacturing. After 1976, that expectation is comatose. By 1980, it is dead. This whole trajectory is brilliantly captured in the statistics we have for union density:

Essentially, the health of our economy corresponds to the health of it organized laborers. When labor unions enjoy high wages and superior benefits, and when labor membership is at its highest density, there the US economy is performing at peak performance. Where investors begin to recover their swagger, when their returns begin to climb, there the US economy begins to falter.

Why? To economists trained in the Cambridge School, this is absolutely no mystery. Consumer demand drives economic growth. Consumer demand is driven by disposable consumer income. Disposable consumer income is driven by the wages and benefits enjoyed by working Americans. It is that simple.

This fall, when my labor union comes to the table to bargain its wages, benefits, and working conditions — thanks to Janus — it will face a battery of highly compensated lawyers all in concert seeking to lower my wage — my marginal propensity to consume. Now, thanks to Janus, my side of the table will be staffed by a skeleton crew, only the lawyers I can afford out of the dues from members.

Every undergraduate knows how this will shape aggregate consumer demand. And how this will shape GNP. But, it will further pad the bank accounts of Janus’ principle funders: Chuck and David Koch.

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