Monday, September 3, 2012

The America That We Have Lost And The America That Has Replaced It

This article does a nice job of describing the US economy when stakeholder capitalism was the dominant religion.  Tax rates were much higher than they are today, but people still worked hard and businesses invested to satisfy consumer demand.  Productivity was also higher than it has been recently, and the gains from productivity were shared between labor and capital. A prosperous middle class was the fuel for economic growth. Things changed in the early 80's when shareholder capitalism was introduced to restore the "Guilded Age".  The tax system was made less progressive, with the help of economic charlatans, who told us that lower taxes would encourage people to work harder, and stimulate business investment.  That would promote economic growth, which would more than pay for the revenue lost from tax cuts. Government borrowing was required to replace the lost tax revenues.  The benefits from productivity were not shared between labor and capital either. Most of the gains from productivity went to capital, and wages for middle class Americans stagnated.  Asset bubbles and debt replaced  income growth in the middle class as the fuel for economic growth. On the other hand, corporate executives rewarded themselves with compensation plans that used to be reserved for the successful founders of businesses. Wall Street also found ways to take advantage of shareholder capitalism and the deregulation of the banking system.  An increasing share of corporate profits were captured by the financial services industry.  It looked like the good old days during the Guilded Age on Wall Street.

Globalization played a role in the restoration of the Guilded Age, but it was not singularly decisive. Some countries have been able to manufacture and export products and still pay decent wages. The US has become a low wage economy relative to Germany and other countries which adopted different ways of responding to globalization without putting all of the burden on labor.

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