Wages versus Assets by David Atkins

Wages versus Assets
by David Atkins ("thereisnospoon")

The latest "bipartisan" cockamamie scheme to re-inflate the housing market now apparently involves giving immigration visas to foreigners who buy houses valued at $500,000 a year. There is so much wrong with this idea that it's hard to know where to start: the threat of absentee landlords, the booting out of people faced with foreclosure, the lack of concomitant work visas to accompany the immigration visas, etc. Joan McCarter at DailyKos has a good rundown.

There can be little question at this point that American public policy is dedicated almost entirely to benefiting wealthy people and corporate "people" over regular Americans. But examples like this one show that it's not just corruption: there's a strong bipartisan ideological component that is driving this insanity as well that is based on very flawed economic assumptions.

It would be comforting in a way to think that most every public official in Washington were eating luxurious dinners while rubbing their hands in glee at how best to destroy American families to benefit corporate contributors, so that those same public officials could buy houses in the Hamptons and eat filet mignon every night. Then it would just be a question of rooting them all out and putting "good" people into office. But that's not really how most people, including elected officials, operate. Some are overtly corrupt to be sure, but a large number of them think they're doing what they do for the right reasons.

Looking at the big picture, it's fairly obvious what has happened over the last 30 years. It has to do with a battle between the forces trying to raise wages, and the forces trying to raise assets. The asset side, of course, has won this battle in both parties. Enriching the wealthy through Reagan's trickle-down ideology was a symptom of the outcome of this battle, rather than the primary disease.
The real bipartisan agenda can be neatly summed up in this much overlooked but central Ronald Reagan quote from 1975:

"Roughly 94 percent of the people in capitalist America make their living from wage or salary. Only 6 percent are true capitalists in the sense of deriving income from ownership of the means of production...We can win the argument once and for all by simply making more of our people Capitalists."

Understanding this idea is the key to understanding what is happening in America today, without resorting to Snidely Whiplash caricatures of elected officials.

Simply put, in the 1970s America was hit with an inflation crisis that quickly became a stagflation crisis. There were also oil shocks involved. Simulataneously, the world was becoming increasingly globalized, which made it more difficult for American corporations to compete using American labor. Finally, as Hacker and Pierson have persuasively argued, big business banded together to begin more aggressive and cohesive lobbying efforts. These four trends were devastating politically for the middle class.

American public policy on both sides of the aisle reoriented itself away from a focus on wages and toward a focus on assets. Specifically, the idea was that wage growth was dangerous because it led to core inflation in a way that asset growth did not. American foreign policy became obsessed even more than it had been with maintaining access to oil, both to prevent future oil shocks and to prevent inflationary oil spirals. Wage growth was also dangerous because it would drive increasing numbers of American corporations to employ cheaper overseas labor.

But that left the question of how to sustain a middle class and functional economy while slashing wages. The answer was to make more Americans "true Capitalists" in Reagan's terms. Pensions were converted to 401K plans, thus investing about half of Americans into the stock market and creating a national obsession with the health of market indices. Regular Americans were given credit cards, allowing them to take on the sorts of debt that had previously only been available to businesses. Most crucially, American policymakers did everything possible to incentivize homeownership, from programs designed to help people afford homes to major tax breaks for homeownership and much besides.

Low prices on foreign-made goods were also a policy priority. This had a dual benefit for policymakers: lower prices offset stagnant wages, while keeping core inflation low. Free trade deals were also a major centerpiece of public policy in this context. Few politicians actually believed that these deals would help increase wages and jobs in America. But what they were designed to do is keep low-cost goods coming into America, while increasing the stock value of American companies exporting goods overseas, thus raising asset values.

Low interest rates were also important. Renters and savers suffer in a low-interest rate environment, but borrowers and asset owners do very well. Tax cuts, of course, are also helpful in offsetting the impact of wage stagnation.

Houses and stocks, then, are assets that rise independently of wages. Low-cost overseas goods and the easy availability of loans and credit provide offsets to low wages. Low interest rates and tax cuts help as well keep assets afloat as well. The bipartisan idea from a public policy standpoint was not simply to enrich the wealthy at the expense of the middle class. The idea was to make the American middle class dependent on assets rather than wages. I was at a conference many years back, the purpose of which was to bring corporate bigwigs together in defense of free trade against what they feared might be a protectionist backlash. One executive told me point blank that if only enough Americans were invested in the stock market, they wouldn't gripe about Halliburton and other similar companies because they would say, "Hey, I own part of that company!" When I objected that that only half of Americans were invested in the market at all, and of that figure far fewer had significant assets invested, he retorted that more Americans were invested in the market than I thought, and that policy needed to be designed to push more Americans to invest.

On its face, the idea is insane. In a capitalist system, assets do often rise in value. But they also decline, and often sharply. Without significant wage growth and redundancies in the economy that provide stability at the expense of efficiency for asset growth, the popping of economic bubbles produces Great-Depression-style economic pain. The only way an asset-based economy can work is if assets grow reliably forever into the future. Not even the most "pro-growth" policies can promise that. In fact, those policies usually inflate bubbles that ensure just the opposite.

When policymakers attempt to privatize Social Security and Medicare, they aren't necessarily supervillains hoping to turn America into a nation of nobles and peasants. Some are, but not all. The objective is to convert what they see as "useless" money sitting in the financial equivalent of a freezer, and put it to "productive" use in asset investments.

When policymakers bristle at pushing banks to accept principal reductions on mortgages in order to help people remain in their homes, it's not just that they're doing the banks' bidding. It's also that helping people stay in their homes would devalue housing-based assets, when the goal of policymakers is to re-inflate those assets as soon as possible. Policymakers don't want to stop foreclosures; they want to speed them up in order get rid of the "dead weight" that is preventing housing assets from rising again.

The recklessness and stupidity of this sort of approach to public policy should have been proven by the 2008 financial crisis that saw the rapid destruction of asset values in stocks, bonds, and housing. Predicating economic health on asset growth is a pipe dream: most people will never have enough assets to make it work, and asset growth is far too unstable to serve as the basis for a functional economy.

Whether they can articulate it or not, what has most progressives most incensed about the Obama Administration's domestic policy is that it has ultimately hewed to the same asset-based economic model. When the Administration could be progressive on cutting costs or ensuring equality without negatively impacting assets, it did so. That's what the ACA, the Ledbetter Act, the repeal of Don't Ask Don't Tell and numerous other left-leaning Administration moves were designed to do. But the Administration has been very reticent to take any actions that would negatively impact the value of assets.

America will only return to real economic health when the asset-crazed insanity of the last 30 years is brought to heel, and America returns to a public policy that is far more interested in wage growth and economic stability than it is in asset inflation. Until then, we can expect continued political and economic shocks from an angry electorate and an economy that has run off the rails due to 30 years of deeply misguided anti-inflation, pro-asset-growth ideology.