Incentivizing “Job Creators” Doesn’t Help Economy

Dean BakerDean Baker wrote an interesting article this morning, Should We Worry About Economic Stagnation Due to Weak Supply? It is primarily a response to work by Northwestern University economist Robert Gordon, who has argued that we are headed for a long period of slow growth. Baker scoffed at the idea, not because it is ridiculous, but just because economists have such a frightfully bad track record for making predictions about economic growth.

Baker also noted that there are two competing theories about growth among economists. First, there is the “robots will take all our jobs” theory. By this theory, soon productivity will go through the roof because McDonald’s won’t even have to employ people to make our McDoubles for us. Second, there is Gordon’s (and many others’) theory that productivity is going to stagnate. Baker, in his usual snarky way noted what this says about the economics profession:

This would be like a person going to a doctor for a check-up, with the doctor concluding that the patient is seriously obese and must immediately begin a strict diet and exercise regimen. The patient then goes to another doctor for a second opinion. This doctor is concerned about the patient being too thin and prescribes a high calorie diet to allow the patient to put on weight. This is the state of economics’ ability to predict productivity.

I want to add one thing to this issue, which Dean Baker is well aware of, but usually doesn’t mention. Productivity really doesn’t matter. At least it hasn’t for about four decades. There was a time when increased productivity led to higher wages. There was a partitioning between profits and wages. When productivity went up, profits went up and wages went up. It was a very equitable system where both capital and labor shared the benefits of productivity increases. No more:

Productivity and Real Wages

What this means is that if productivity doesn’t go up, the real wages of workers will be stagnant. But if productivity does go up, the real wages of workers will be stagnant. Dean Baker talks about this issue a lot in general terms: economic inequality is a policy decision. It isn’t God (or Market) given. So I have a very hard time caring about productivity growth when it means nothing for the average worker.

This too says something about the state of economics today: it is primarily concerned with the interests of the rich. In the late 1970s (and certainly by the 1980s), economists should have stood up and made a very big deal of the fact that productivity had become unmoored from the wages of workers. But as long as productivity led to higher profits, it didn’t matter. Who cares about the plebs? Am I right?!

Baker brought up another interesting point in the article. If productivity is going to be slower, then there is less risk of taking money from the “job creators.” If taxes must be kept low so that they will continue to innovate, and the innovations are going to be slow coming, it doesn’t mean as much to cut down the incentives of them to innovate. But I think the government should look at it differently (and should have been for the last four decades): if productivity increases are going to mean nothing for the vast majority of the population, why are we incentivizing to innovate at all? After all, all we are doing is giving them tax breaks to make more money that they don’t use to help the rest of the economy.

2 replies on “Incentivizing “Job Creators” Doesn’t Help Economy”

  1. I’d like to know what changed in 1973 or so to account for this divergence.

    • Frank Moraes says:

      That graph may be a tad deceptive: it looks at overall productivity but only manufacturing wages. (I picked it because it looked nice.) The break is normally put at the beginning of the Carter administration. I like Carter, but he was an economically conservative proto-New Democrat. The point, however, is that Carter and then Reagan didn’t exist in a vacuum. There were larger social forces at work. One is that whites had decided that blacks had had it too good and decided to harm themselves in the name of “getting the blacks.” Another is that norms that had controlled the avarice of the rich since World War II began to break down. The social contract — that capital had with works that prosperity would be shared — died. I’m sure there are other causes, but I know those two were at work.

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