Nathan Gardels is the editor-in-chief of Noema Magazine.
U.S. President Joe Biden is doing the right thing in seeking to build back America’s manufacturing base through reshoring capacity in critical industries such as semiconductor fabrication while jumpstarting the transition to clean energy with massive investments in production and infrastructure.
By mandating domestic content in supply chains and linking the size of subsidies to new jobs that pay union-scale prevailing wages, the administration’s policies will go some distance in recovering non-college-educated labor’s share of national income.
Helping revive the communities and livelihoods of the working class will also, hopefully, quell the populist revolt of America’s blue-collar backbone driven by the very dislocations of globalization that are now being repaired. It is hard to believe that the president’s feisty performance outlining his policies in the recent State of the Union speech did not appeal to that constituency.
Wages Vs. Wealth
Yet, bolstering household income through wages alone may not be sufficient to sustain the working middle as we move ever deeper into a high-tech economy that threatens jobs no less than globalization. And it will not in and of itself shrink the wealth inequality gap, which is accelerating as the rich are getting richer.
On a global scale, Oxfam reports that, “The richest 1% grabbed nearly two-thirds of all new wealth worth $42 trillion created since 2020, almost twice as much money as the bottom 99% of the world’s population. … During the past decade, the richest 1% had captured around half of all new wealth.”
According to the coauthor of another recent study, “The richest people tend to own financial assets such as stocks and bonds.” Even taking into account the rise in prices from the 1980s on for those who could afford a home as their main asset, “stock market prices were the standout distinguishing factor [driving inequality], with a huge jump in value of U.S. stocks during those decades.”
In short, without savings for investment in financial assets, wages alone will never catch up with capital gains.
In his seminal book “Capital in the 21st Century,” Thomas Piketty crystallized this dynamic in his equation r > g. As he explained, net return on capital, “r,” which compounds in value upon itself, is always greater than the growth rate of economic output, “g,” to which wages are linked.
Even in a market tempered for the moment by higher central bank rates, this dynamic remains endemic to the way capitalism works.
While Piketty looked back at the historically cumulative causes of inequality, he didn’t much look forward to the impact of technological innovation, which is divorcing productivity growth and wealth creation from employment and income. To the extent that intelligent machines don’t displace whole categories of jobs and depress wages, coworking with such technologies will offer few openings for the non-college educated. Those whose job it will be to monitor and manage generative AI like GPT3 will have to be smarter than it is.
The bottom line is that it is not those earning a wage income from manually fabricating microchips, which process the algorithms of AI, who will reap the compounding value from productivity-enhancing and wealth-generating intelligent machines. It will be the investors with an equity stake in those companies that own them.
Policies that aim for greater equality through only increasing the labor share of income are stuck in paradigm inertia rooted in the zero-sum class struggles of a more labor-intensive industrial era, which no longer characterizes the tech-driven economy. The new paradigm for the rapidly approaching future would seek a greater labor share of wealth through an ownership stake that captures more of the value created by intelligent machines, which are diminishing the prospect of gainful employment. Both must work in tandem to raise wealth from the bottom up.
One way to head down this path, as hedge-fund manager Ray Dalio and left-leaning Nobel economist Joe Stiglitz proposed in Noema during the COVID crisis, would be to require companies that receive government subsidies and tax credits to assign a fair percentage of equity shares to a national savings plan, a kind of sovereign wealth fund with accounts owned individually by all citizens. They call this “universal basic capital.” In this way, taxpayers who labor for their livelihood and help underwrite successful companies building back America would also benefit from a growing return on capital just like the rich.
Another way would be to expand the Thrift Savings Plan for federal employees to all Americans. This matching contribution 401(k)-type investment fund has minted tens of thousands of millionaires and an overall average account balance of $164,000 across its 6.5 million members. Bipartisan legislation that would do this has already been introduced in the U.S. Congress. Such a wealth-building program for the average citizen would fit the new paradigm as a perfect complement to Biden’s Inflation Reduction and CHIPS Act.
There are still other examples. To provide a route to savings and investment for those earning less than $150,000 per year whose companies don’t provide pensions, California has introduced the CalSavers retirement plan. Following the new paradigm, Governor Gavin Newsom has also put in place a CalKIDS program that provides up to $1,500 for every low-income K-12 student deposited in an individually owned college savings account, the value of which will grow over time through diversified investments until they enter post-secondary education.
No doubt there are many other approaches to achieving the end of a greater labor share of wealth. The critical shift must first come through updating the paradigm of how wealth is created and distributed in the 21st century.
Labor should not just bargain for a greater share of income in enterprises where they will still be able to find jobs, but also own a share of the robots that will be generating the value they once did on the assembly lines of a smokestack economy.