The curious absence of class struggle

Mis en ligne le 06 janvier 2008

Statistics Canada repor­ted recently that the earned income of the « ave­rage » Canadian — the so-called median income — was the same in 2004 as in 1982. After we sub­tract infla­tion to keep the pur­cha­sing power of a dollar roughly constant, it turns out that median income, before taxes, did not rise at all over those 22 years. Yet during that same time the Canadian eco­nomy grew, in real per capita terms, by more than half. But only the very well-paid – those above the 90th per­cen­tile of the income dis­tri­bu­tion – saw any signi­fi­cant increase in earned income ; and the higher up the ear­nings ladder, the grea­ter the growth. What has been going on ?

It’s not so much the rich get­ting richer ; it’s the very, very rich

Canada’s expe­rience is not unique. We are fol­lo­wing the same pat­tern as the United States – as usual, a bit more mutedly and a few steps behind. In the 30 years after the Second World War, the U.S. income dis­tri­bu­tion did not vary much, as the ave­rage American worker’s ear­nings grew in tandem with a robustly expan­ding eco­nomy.
Things chan­ged abruptly star­ting about 1973 ; pro­duc­ti­vity growth col­lap­sed, and the eco­nomy lapsed into a long infla­tio­nary stag­na­tion. Eventually, North America reco­ve­red, but the fruits of growth no longer flowed in the same pro­por­tion to the ave­rage worker. Between 1975 and 2005, median family income in the U.S. increa­sed by only 28% (with most of that coming in 1993-2000) while the eco­nomy ove­rall grew by 86% in per capita terms. Between 2000 and 2005, median U.S. family income actually fell slightly.
Meanwhile, those at the top of the heap have been doing better than ever. The ave­rage ear­nings of the highest 1 per cent of the U.S. income pyra­mid rose a very heal­thy 160% bet­ween 1975 and 2005, while the income of the rare­fied top 10th of 1 per cent soared 350%, in real terms, from $800,000 (U.S.) in 1975 to some $3.6-million by 2005.

These figures chal­lenge the cen­tral faith that has guided eco­no­mic policy in the U.S., Canada and other market eco­no­mies for more than half a cen­tury : the assump­tion that eco­no­mic growth can be har­nes­sed for the bene­fit of all citi­zens, not just the rich.
The U.S. pic­ture – in pat­tern, if not quite in degree – is mir­ro­red in Canada. While Canadians have expe­rien­ced some real growth at the low end of the income spec­trum since the early 1980s – and incomes of fami­lies have gene­rally increa­sed a bit more than those of indi­vi­duals – essen­tially all of the action has been at the very top. (The income mea­sure is before taxes and govern­ment trans­fer pay­ments. Those off­sets miti­gate inequa­li­ties in market-deri­ved income – more so here than in the U.S. – but my focus here is on the out­comes being gene­ra­ted in the market eco­nomy.)
A fas­ci­na­ting study by Professors Michael Veall of McMaster University and Emmanuel Saez of the University of California used income tax sta­tis­tics to trace the pro­por­tion of total income going to top ear­ners from 1920 through 2000 in Canada and the U.S., as the accom­pa­nying graph shows. The shares of the top 1 per cent have taken remar­ka­bly simi­lar U-shaped paths in the two coun­tries. Those at the top, as com­pa­red to eve­ryone else, are pretty much back to where they were in the Roaring Twenties.
The share of the merely very well-paid – say, those bet­ween the 90th and 95th per­cen­tiles of income – waned shar­ply in the 1930s and ’40s, but, unlike the top 1 per cent, their share of the pie has increa­sed only very little in the U.S. and not at all in Canada.
These facts raise a lot of ques­tions. What hap­pe­ned in the late 1970s to cause the top incomes to start increa­sing so stron­gly ? And why, after three decades of heal­thy growth in the incomes of most North Americans from 1945 through 1975, have the ear­nings of the great majo­rity in both the U.S. and Canada stop­ped gro­wing in pace with the ove­rall expan­sion of the eco­nomy ?
There are no defi­ni­tive ans­wers, but plenty of theo­ries. What is clear is that the income share of the ultra-rich nose­di­ved in the Second World War, as ear­nings from capi­tal (pri­ma­rily inter­est and divi­dends) withe­red. The impo­si­tion of highly pro­gres­sive income taxes during war­time and in the after­math – the top mar­gi­nal tax rate in 1944 in Canada was 95% – as well as a more ega­li­ta­rian social consen­sus, com­bi­ned to limit the recon­cen­tra­tion of wealth in the U.S., Britain, Canada and other indus­trial coun­tries. Although the share of the top ear­ners has now essen­tially reco­ve­red to pre-war levels in the U.S., with Canada and Britain not far behind, in Japan and most of the conti­nen­tal European coun­tries, top income shares have increa­sed little since their steep fall more than a half-cen­tury ago.
The trends sug­gest that the neo-conser­va­tive move­ment that gained strength in the U.S. after the stag­fla­tion of the 1970s, and amid gro­wing concern over the excesses of the wel­fare state, may have crea­ted a social and poli­ti­cal envi­ron­ment more tole­rant of winner-take-all beha­viour. This was cap­tu­red by the words of Gordon Gekko in Oliver Stone’s 1987 film, Wall Street : « Greed is good. » And it has been spec­ta­cu­larly illus­tra­ted by the remar­kable rise in senior exe­cu­tive com­pen­sa­tion, espe­cially in the U.S. In the 1960s and ’70s, CEO com­pen­sa­tion at the top 50 American com­pa­nies ave­ra­ged about 40 times the ave­rage worker’s pay. By 2003, it was more than 350 times.
The pos­sible rea­sons for this spec­ta­cu­lar dis­con­nect from his­to­ri­cal norms are much deba­ted in U.S. aca­de­mic and poli­ti­cal circles. Some argue that the increase of top exe­cu­tive pay simply mir­rors the growth in the size and market value of firms in an expan­ding global eco­nomy.
As recently as the 1970s, most exe­cu­tives in large cor­po­ra­tions were regar­ded as bureau­cra­tic mana­gers and paid accor­din­gly. But in the 1980s, the rise of the leve­ra­ged buy-out made exe­cu­tive jobs less secure and placed a high pre­mium on entre­pre­neu­rial « tur­na­round skills. » These fac­tors tied reward to risk and made the market for CEO talent much more com­pe­ti­tive.
Ironically, rules that require the publi­ca­tion of top exe­cu­tive com­pen­sa­tion may also be contri­bu­ting to the remar­kable growth of pay packages. This is because the new trans­pa­rency has put pres­sure on boards to match or exceed the pay of exe­cu­tives in com­pe­ti­tor com­pa­nies, thus cau­sing a self-rein­for­cing upward spiral. Whatever the rea­sons, the media have also helped to create the « cele­brity CEO, » a type not unlike top ath­letes and enter­tai­ners. The indi­vi­dual comes to per­so­nify the team and is rewar­ded com­men­su­ra­tely, in an « eco­no­mics of super­stars. »
Professors Veall and Saez argue that the dra­ma­tic rise of the top income shares in Canada has likely been driven by the increase in the U.S., which began a little ear­lier. The market for top exe­cu­tive talent straddles the border, so the com­pe­ti­tion from sky­ro­cke­ting com­pen­sa­tion in the United States – or simply the demons­tra­tion effect of what was hap­pe­ning in the U.S. – has trans­la­ted to com­pa­rable indu­ce­ments here. As evi­dence, they note that the top income shares of fran­co­phone Quebeckers have not increa­sed to nearly the same extent as the top shares in other pro­vinces, or of anglo­phones in Quebec. If com­pe­ti­tion from the U.S. is indeed the dri­ving factor, this would be expec­ted, consi­de­ring the lower job mobi­lity of fran­co­phones.
The phe­no­me­non of extreme concen­tra­tion of income among the « super­stars » and their like – does not fully explain the stag­na­tion, over the past 30 years, of the real incomes of the vast majo­rity of wor­kers. It is not true that the income of a Bill Gates comes lar­gely at the expense of the rest of us. So what has hap­pe­ned ?
Again, infor­med opi­nion is divi­ded, and again, des­pite broadly simi­lar expe­rience in Canada, the issues are much more deba­ted in the U.S. than here. There are three prin­ci­pal, rela­ted expla­na­tions : (1) the decline of unio­ni­za­tion in the U.S., as com­pe­ti­tive pres­sure redu­ced labour’s bar­gai­ning power, par­ti­cu­larly in manu­fac­tu­ring ; (2) trade libe­ra­li­za­tion and the glo­ba­li­za­tion of labour supply, in some com­bi­na­tion of cheap imports, out­sour­cing (nota­bly to India and China) and immi­gra­tion ; and (3) a sharp increase in demand for the skills needed to handle new tech­no­lo­gies, par­ti­cu­larly rela­ted to com­pu­ters – so-called « skill-biased tech­ni­cal change. »
These fac­tors, taken toge­ther, have redu­ced the demand for less skilled people (and thus put down­ward pres­sure on their wages) while increa­sing the pre­mium for a high level of tech­ni­cal skill. All of this has skewed the U.S. income dis­tri­bu­tion toward the top, but, apart from examples like Bill Gates and Steve Jobs, it has little to do with the remar­kable growth of the ultra-rich.
The puzzle remains as to why income stag­na­tion for the great majo­rity of Americans, des­pite robust growth for the eco­nomy as a whole and spec­ta­cu­lar gains for those at the very top, has not pro­du­ced more of an outcry.
One obvious reason is that, by defi­ni­tion, there are so few at the very top. We simply don’t rub shoul­ders with them, except vica­riously in the cele­brity media, where the ultra-rich pro­vide mass enter­tain­ment value.
More fun­da­men­tally, inequa­lity of « consump­tion » counts for more than the abs­tract inequa­lity of income.
Thanks to fal­ling prices of things like cell­phones, flat-screen TVs and air travel and desi­gner knock-offs of all kinds, consu­mer inequa­li­ties bet­ween the rich and eve­ryone else may appear actually to have nar­ro­wed.
Meanwhile, buoyant employ­ment and debt-aug­men­ted consump­tion (fuel­led by home equity loans and stea­dily decli­ning per­so­nal savings rates) have com­bi­ned to create a fur­ther impres­sion of mass pros­pe­rity, des­pite the income sta­tis­tics.
But the rosy appea­rances are finally star­ting to fade as the U.S. eco­nomy sof­tens, the real estate bubble deflates and the pre­si­den­tial cam­paign gets into full swing.
So expect to hear a lot more about div­vying up the income pie south of the border. Canadians – who are expe­rien­cing the same trends but just a step behind – should defi­ni­tely start paying atten­tion.
Peter J. Nicholson is President of the Council of Canadian Academies. The opi­nions expres­sed are the author’s own

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