Opinionator: Hard Times, For Some

Tom Edsall on politics inside and outside of Washington.

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Acemoglu, Daron, Autor, David, Binghamton (NY), Buffalo (NY), Congel, Robert J, Labor and Jobs, Obama, Barack, Scranton (Pa), Wages and Salaries, Wilson, Ralph Jr

On July 24, President Obama returned to Galesburg, Ill., to reiterate a promise he made in 2005 as a freshman Senator: to create new opportunities for the nation's beleaguered middle class.

I'm here to tell you today that we're not there yet. We all know that. We're not there yet. We've got more work to do. Even though our businesses are creating new jobs and have broken record profits, nearly all the income gains of the past 10 years have continued to flow to the top 1 percent. The average C.E.O. has gotten a raise of nearly 40 percent since 2009. The average American earns less than he or she did in 1999. And companies continue to hold back on hiring those who've been out of work for some time.

We all wish him luck, but he is battling long odds.

Cesar Suarez, Galesburg's director of economic development, puts the best face on Galesburg's five-decade-long downward trajectory. "Given the two challenges, the Great Recession and globalization, we have been doing pretty well," Suarez told me in a phone interview. The city's population has continued to fall, although less sharply than in the past. "Relatively speaking, that's good," Suarez said. "But it is a loss."

In a June 2005 speech to the graduating class at Galesburg's Knox College, Obama said:

America is a land of big dreamers and big hopes. So let's dream. Let's imagine what we can do to give every American a fighting chance in the 21st century.

That fighting chance has yet to materialize in Galesburg. The city was once a manufacturing center with major facilities operated by Maytag, Butler Manufacturing and the Outboard Motors Corporation. Now, of the 4,915 men and women working for the city's top 10 employers, 1,707 work for the government, and 1,241 are in health care. The ninth largest employer in Galesburg is Walmart, whose employees earn on average $11.75 an hour.

If completing college is crucial to getting a good job, Galesburg is behind the eight ball: 17.52 percent of its residents have a college or advanced degree, compared with 29.28 percent for all of Illinois and 27.36 percent for the entire United States.

Galesburg is a hard case, and so too are the other cities Obama is touring this week in an effort to prod Congressional Republicans to compromise on upcoming budget negotiations: Scranton, Pa., Syracuse, Buffalo and Binghamton, N.Y. Once vibrant manufacturing centers, they are now disproportionately dependent on service jobs and employment in hospitals, government and social assistance.

In Scranton, a stunning 41.3 percent of those over 18 have withdrawn altogether from the work force; the poverty rate is 20.4 percent, much higher than the statewide level of 12.6 percent. In Syracuse an even higher percentage, 42.4 percent, have withdrawn from the work force. The poverty rate there is 32.3 percent, compared with 14.5 percent statewide. Median household income in Scranton is $36,968, compared with $51,651 across all Pennsylvania; that figure is $31,689 in Syracuse, compared with $56,951 in all of New York State.

What about the other end of the income distribution? If labor is stagnating, how are the owners of capital doing? Walmart offers a clear example. While its employees in Galesburg earn $11.75 an hour, six members of the Walton family are listed by Forbes among the 400 richest Americans. The Waltons' total assets: $115.3 billion.

In Syracuse, while workers are crawling along the bottom, Bloomberg Businessweek identified Robert J. Congel as the richest man in Syracuse. He is the head of the privately held Pyramid Management Group, developer of malls and entertainment complexes. The Syracuse Post-Standard has reported that Congel is building an "opulent new $2.7-million-plus mansion" in addition to his "$3.6 million mansion in Skaneateles and a 500-acre hunting preserve/lodge known as Savannah Dhu in Wayne County."

If any city on Obama's tour has had it rough, it's Buffalo. Median household income is $30,230, just over half the state's $56,951 median. The city has a 29.1 percent poverty rate, twice the statewide rate. In 1960, Buffalo had a population of 532,759; 261,310 people live there now.

How about people who amassed fortunes in the city, like Robert Rich Jr., son of Robert Rich Sr., the founder of Buffalo-based Rich Foods? While Buffalo's fortunes have gone down, Rich's have gone up. In 2009, Forbes estimated his wealth at $1.9 billion; by 2012, his net worth had grown by half a billion dollars.

Or take Ralph Wilson Jr., who bought and established the Buffalo Bills football franchise in 1959 for $25,000. The most recent estimate puts the 2013 value of the Bills at $870 million.

Obama wants to raise living standards while powerful headwinds are pushing back. It's not only Republican opposition. National and global trends are forcing wages and salaries down and holding them there.

The devaluation of wage and salary work can be seen in Figure 1. The chart illustrates the marked shift over the past three decades in the distribution of national income in the United States from labor (in the form of wages, salaries and fringe benefits) to capital (in the form of interest, capital gains and other returns on investment).

Figure 2 from the Bureau of Labor Statistics provides additional evidence of this shift. The graph shows that what was once a pattern of American workers' pay rising in proportion to productivity gains is no longer the case: the rate of wage increase is now far below the rate of productivity growth.

The decline in labor's share of income is not restricted to the United States. It is a worldwide phenomenon, as Loukas Karabarbounis and Brent Neiman of the University of Chicago's Booth School of Business show in their June 2013 paper, "The Global Decline of the Labor Share." Their work shows, surprisingly, that the shift away from labor in pro-union Nordic countries is stronger than it is in the United States. Figure 3 reveals the pattern, with the eight largest economies marked in red.

Karabarbounis and Neiman argue that the negative consequences (the loss of wages for those workers who bear the brunt of the declining share of income going to labor) are outweighed by the positive results (the drop in the price of consumer goods resulting from lower production costs), culminating in a net gain to the general welfare:

Measurements of welfare gains or losses are essentially economists' quantitative answer to the question, "So what?" Because the declining price of investment goods in our model allows the economy to produce and consume more with a given amount of labor, people in the model economy are better off. The welfare gains are a measure of how much better off they are from this (in terms of increased consumption).

Though in the real world there clearly are some workers that do worse as labor share declines, we use our model to note that the decline in labor share in response to the investment price change is overall a positive thing – the world is generally better off due to the cheaper computers, etc. If, on the other hand, the same labor share decline were hypothetically caused by higher profits that would on average make people in our model economy worse off.

The idea of an overall net gain is not likely to provide comfort to Obama as he tries to improve the lot of those in the bottom-to-middle of the income distribution. David Autor, an economist at M.I.T., argues that the welfare gains cited by Karabarbounis and Neiman will flow to the affluent, those who need no help:

It's likely that a rising capital share disproportionately benefits the owners of capital (these are people, of course) and disproportionately displaces relatively middle and low skill workers who are likely to be relatively substitutable with machines —particularly workers performing routine clerical, production and monitoring tasks. This means that the reduction in labor demand generally lowers earnings opportunities for less educated and lower wage workers. Conversely, rising capital productivity enhances the incomes of those who own capital or intellectual property, and those who are complemented by the new capital (e.g., software engineers, financiers, doctors, researchers). In short, the process of capital biased technical change (if that's what it is) likely contributes to our inequality problem even as it raises aggregate wealth.

Autor adds that "the bulk of the costs are often borne by those least able to afford them, and the bulk of the benefits often accrue to those who least need them. "

Daron Acemoglu, who is also an economist at M.I.T., argues that the welfare gains claimed by Karabarbounis and Neiman are "not a bygone conclusion":

There have been important changes in labor market institutions in many O.E.C.D. economies, the U.S. and the U.K. first among them, but also in Germany and Scandinavia. In this case, the welfare implications are more complex. If we started from a neutral position and capital gets stronger, this would be a bad thing. If, on the other hand, somehow labor was excessively strong, reducing the return to capital and thus thwarting job creation, redressing this imbalance might be good.

Economic analysts more to the left take this critique a step further. Leo Pantich and Sam Gindin, political scientists at York University in Canada, are co-authors of the recently published book "The Making of Global Capitalism." In an e-mailed response to a Times inquiry, Gindin wrote:

The economist-speak of "net welfare gains" needs to be unpacked. The net gains are to the economy as a whole but this says nothing about the main issue being addressed — the distribution of such "net benefits." Nor does it really speak to whether those potentials for growth can be realized in a sustained way if domestic demand is simultaneously repressed by the stagnation of working class incomes. The point about the especially large decline in labour share in the Nordic countries relates, in our analysis, to the fact of their increasing integration into global capitalism and the consequent intensified competition among corporations and states anxious to attract or retain capital. States with a more egalitarian income chose, or were compelled — given those pressures and their commitment to globalization — to move more rapidly towards the international "norms."

The essential political question emerging from this debate is whether the forces driving down labor's share of income, exacerbating inequality and vastly increasing the wealth of those at the top can be redirected to produce more equitable and beneficial results while fostering continued growth.

"What do we do," Noah Smith, an economist at Stony Brook University, asks in the Atlantic, "if the 'endowment of human capital' with which people are born gets less and less valuable?"

Has the train left the station? Has the momentum behind the hollowing out of middle class jobs and the increasing replacement of human beings by machines gained so much strength that it cannot be reversed? Obama has put the goal of a revived middle class at the top of his agenda, but he has not publicly voiced an understanding of the size and scope of the problem he seeks to address.

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