Income Distribution Does Matter. It’s Wrong Now and Stopping Growth.

When people think about “income distribution” there’s a tendency to think of it only in terms of what different people or households have available to spend.  In other words, we focus on the fairness or equity of whether some households should only have a small amount of money to live off of vs. others who get a large amount of money to live off of.  The debates then often deteriorate into whether or not the households put forth effort (“worked”) for their income and therefore “earned” it.

But there’s more to the issue of income distribution.  A household’s income is not just determined by how much “effort” it’s willing to make or how much “investment” it’s made in the past.  So a household’s income isn’t just how much you work and what education/qualifications you have.  The general level of wages matters too.  And that’s determined at the macro level by institutional arrangements in society.

The nature of production is that it requires both capital and labor.  The joint product is then sold.  This is called productivity.  Part of the income distribution question is “how is the value from joint productivity split up between payments to capital and payments to workers”.

In the U.S. during the Golden Era, the period of World War II until the mid-1970’s, the social contract and institutional arrangements were that the benefits of increased productivity were split evenly between both capital and labor.  Both benefitted.  Starting around 1980 that deal was cancelled.  The social contract has increasingly moved to all gains from improved productivity going to capital and none to labor.  As a result, labor’s share of national income has consistently declined.  The Great Recession was a major blow.  It’s this change in the social contract that is the root source of the frustration and pain felt by so many households.

Garth Brazelton at Economics Revival explains why this matters now.  He explains why we are still in a recession, or at least why the 90% or so of us that work for  a living as opposed to living off of interest and profits are still in recession:

Who cares about double-dip. We never left. Why? because you can’t get out of a recession without consumers/labor income growth. While productivity has grown over the last few years, labor’s share of national income continues to plummet. This implies that others (capitalists / profit-makers) are ‘out of their recession’ but consumers and laborers are not.

The BLS has a nice publication here.

Ordinarily a low cyclical labor share isn’t necessarily a problem because firms can use profits to invest in new business ventures a eventually lower the unemployment rate and provide more compensation in a recovery. The problem here of course is that firms are too busy paying off past debts from poor decisions made a decade ago, or two skittish to do anything substantial with their profits at the moment. So that, in combination with the low labor share of income is like a double-whammy for consumers and laborers who see the haves continue to have and the have-nots continuing to have nothing.

We’ve Had Class Warfare Since 1980 – The Workers Lost

Whenever some politician, typically a progressive, begins to talk about redistribution of income,  the more conservative politicians, backed by “serious political pundits” counterattack by claiming “class warfare”.  It’s apparently one of the givens in Washington that any form of redistribution of income, be it by progressive taxes, measures to protect unions, help to the unemployed, or limits on the power of bank executives to pay themselves bonuses from bailout monies, is off-limits.  The problem with this self-censorship of the political debate is that it ignores reality. Class warfare was already launched 30 years ago in the early 1980’s.  The catch is that capital, that is the owners and managers of capital, declared the war and they’ve been winning.


As the graph shows, the share of non-farm income that goes to labor was relatively constant for the 30-some year “golden age” after World War II and until around 1980. It fluctuated significantly with the business cycle, but maintained a long-run relatively constant share. This was consistent with the institutional, cultural, and political economy arrangements of the period. There was essentially a social contract that said labor cooperated with capital to achieve productivity improvements with the understanding that gains would be shared: both workers and owners of capital would benefit. This is basis of the rising real median incomes that I’ve noted elsewhere for the period.

But starting in the 1980’s there was  a shift in American politics.  Initially it was with conservatives and Republicans, but it soon included Democrats. Capital came to be favored. Unions were disfavored. Income taxes were lowered on high incomes while payroll taxes (social security and Medicare) were raised on workers.  The result was a trend where workers found it difficult to keep pace.  In fact, their real incomes didn’t.  If workers were in the lower quintiles, their real incomes actually declined.  Starting in 2000 the trend accelerated.  Workers get less and less of the value of what’s produced.  Corporate profits and financiers get more and more.

Instead of false debates about debt ceilings based on provably false doctrines, I think this is the type of thing we should be debating in politics.  Is this good? I don’t think so. It feeds income inequality.  It’s part of what’s destroying the “American Dream” for hundreds of millions of Americans.