Income gap and politics: It’s still the economy, stupid

By Don Cunningham on May 19, 2014

EDITOR’S NOTE: The following column was penned by LVEDC President and CEO Don Cunningham and first appeared in the May 19, 2014 issue of Lehigh Valley Business.

D Cunningham 9.2012It’s not often that complicated concepts can be crystalized in a short sentence. Bill Clinton’s 1992 presidential campaign staff achieved one of those moments of clarity with the internal mantra: It’s the economy, stupid.

It wasn’t a solution but an organizational reminder to focus on what mattered most to voters. The essence of political communications is to make the complicated appear simple. Campaigns don’t solve problems but, ideally, they do highlight what someone may focus on if elected.

Twenty-two years later, it’s still the economy, stupid. And the core challenge American workers face is no closer to going away than it was in 1992.

In his effort to unseat an incumbent president, Bill Clinton appealed to American workers by telling them what they knew: they were working harder and longer but earning less in real dollars while the cost of big-ticket items continued to grow.

Fast forward two decades and that trend has continued and grown. A recent Wall Street Journal article reported that since 1986, average hourly wages have increased by just 1 percent overall in real dollars.

The Washington Post presented an analysis last month on the cost of large purchases during roughly the same time frame. Between 1989 and 2010, the average cost of college rose by 307 percent, health care cost by 223 percent, and housing by 85 percent in actual dollars. By that same measure, wages went up by 70 percent.

The average American worker has absorbed a much greater share of health care and pension costs as companies have transferred those costs to workers. In the end, while workers made much less in real dollars in the 1970s and early 1980s, the landscape was in many ways more economically favorable.

William Galston wrote in the Wall Street Journal that between 1947 and 1973, economic output per hour rose at an annual rate of 2.8 percent. During that time, workers averaged annual raises of 2.6 percent. Companies shared the upside of productivity gains with their workforce.

Since 2000, productivity gains have averaged 2.3 percent a year while raises have averaged a 0.9 percent increase. Galston states that management and stockholders have reaped nearly all the growth in profits.

In fact, most executive compensation plans reward CEOs for keeping costs down and earnings up. Therefore, there is a natural economic incentive to keep labor costs down and to reduce legacy costs such as pensions and to pass health care costs to the employee.

Harold Meyerson in The Washington Post calls it the abandonment of an earlier American “stakeholder model,” where workers were valued partners, for a “shareholder model,” where the core goal is to maximize profits and stock value.

There are myriad reasons for this shift, not the least of which is the emergence of the global economy and even cheaper labor costs in other nations.

It’s this reality, however, that is the primary reason why so many workers have yet to celebrate the end of the recession and declare confidence in the American economy. One’s viewpoint of a situation always depends upon where one stands.

There is much fanfare now around the new book “Capital in the Twenty-First Century” by economist Thomas Piketty, who is rapidly becoming a household name, not typical for an economist. In a 600-page treatise, Piketty concludes if your own labor is your only asset, you are likely to keep losing ground.

I suspect that as workers continue to struggle to pay for homes, college educations, cars and health care, the issue of the income gap will continue to grow and grow and find its way into the next presidential election.

It remains the economy, stupid.

Optimal Target #2: High Value Business Services

EDITOR’S NOTE: The optimal industry target selection is based on the site-specific characteristics of the Lehigh Valley economy. Using results from the previously completed Co[...]

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