The Plan to Reduce Income Inequality by Driving down the Wages of College Graduates

Georgetown University's Center on Education and the Workforce is proposing to increase the number of college graduates America turns out each year in order to create an oversupply and drive down the wage premium from 74% to 46% vs. high school graduates. If we don't do this, the report says, the college wage premium will rise to 96% by 2025, and that would be bad. The report, The Undereducated American by Anthony P. Carnavale and Stephan J. Rose and funded by the Lumina Foundation and the Bill and Melinda Gates Foundation, was released June 27, 2011.

The sheer blundering goofiness of this report is illustrated by its wildly-wrong assertion, at 33, that "if we continue following current trends, there will be 8 million more postsecondary-educated workers by 2025." In fact, according to this report from the US Department of Education, National Center for Education Statistics, there are now more than 1.5 million bachelor's degrees awarded every year (projected to be 1.8 million by 2019), and by 2025 America should have turned out at least 25 million new college graduates and 12 million with AA degrees. That's a total of 37 million, not very close to the 8 million stated in the Georgetown report.

[3 July 2011: An email suggests I misunderstood the assertion the authors were making and thus being incorrect and unfair in calling it a blunder. The suggestion is correct, and I apologize for my error.  I had (mis)read the report as saying the US is projected to generate only 8 million new college grads by 2025.  In fact, I now believe they actually said the US is projected to have only 8 million more college grads in the work force net of retiring college grads. So my comparison of their statement with current and projected graduation rates was apples to oranges, but I'm leaving those projections in because they are relevant to the next paragraph. Where this leaves us is essentially talking past each other: They don't address the question of how many jobs of what types will exist, but only calculate how much higher the ratio of college-goers to HS-only workers there would need to be to reduce the college wage premium to their target level. I point out that there is already a glut of college-goers compared to the actual and projected jobs that require college, and I have no opinion about the accuracy of their estimate (but am repelled by their policy objective and still see the internal inconsistency noted below).]

While the US higher education mill grinds on at this rate, how many new jobs will there be that require a bachelor's degree or more? The latest Bureau of Labor Statistics projections in 2008 only go to 2018. (Follow the link to ftp site and download Occupation.xls.) During that 10-year period it projects there will be 11,674,700 million new and replacement jobs that normally require a bachelor's degree or more. During that same 10-year period, the lowest of three Department of Education projections puts the number of new bachelor's degree holders at 16.6 million, for a 42% oversupply. No wonder so many recent graduates are shut out of college-appropriate jobs—or any jobs.

Another internal inconsistency in the report is its expressed concern that more qualified high school graduates don't pursue college because they perceive the expected return on their investment of time and money is not great enough, i.e., the college wage premium is too small and/or the likelihood of getting a better job after graduation is too small. At 32. The authors have no sensible proposal for how to get more people to pursue college degrees if the wage premium is too small and going to get smaller.

There are many good reasons to be for better quality education and for mass higher education, not least that it promotes equal opportunity, but we should not be misleading our youth and our policy makers by making claims for education that are not true. It's not true, if 21st Century trends continue, that there is any reasonable scenario of job creation in America that will enable all college graduates to find good jobs appropriate for their credentials—even if there is no increase in the number graduating each year. It's not true that an increased labor supply induces an increase in the number of jobs when so many powerful forces are pushing/pulling those jobs offshore. It's not true that because the average college grad earns more than the average high school grad that every college grad will do better or that the current average college wage premium will necessarily continue or increase. It's not true that the mix of jobs that will exist in America in the next 10 years or so will be vastly different from today's mix. It's not true that America will be able to create and keep most of the high-skill, well-paying jobs in the world and let only the menial jobs go offshore. It's not true that having an adequately skilled workforce, or even a superbly-skilled workforce, can be America's strategic or comparative advantage instead of just being a necessary condition for success like good transportation systems, good communications systems, good government, etc.—we are still competing on price with skilled people in the rest of the world. It's not true that we lost millions of jobs to Chindia because the Chindians are better educated or more skilled—in fact, the jobs were offshored despite the fact that so far they are less well educated and less skilled. It's not true that education policy is an important part of the policy changes we need to respond to our growing joblessness crisis—and believing that it is distracts us from actions that could create jobs in America.

Update on Thursday, August 11, 2011 at 11:05AM by Skeptic

There is a cheaper and more feasible way to reduce the college wage premium than boosting college enrollment, and its already happening without changing any education policy: Offshore more high-skill jobs.  German economist Dalia Marin has compared the experience of Germany and the USA in the 1990s (after implementation of NAFTA and the collapse of the Soviet Union) and found that the skilled wage premium went up in the USA and down in Germany.  The reason, she says, is that the USA outsourced primarily low- and medium-skill manufacturing jobs to Mexico and China, while Germany outsourced high-skill engineering jobs to Eastern Europe where there was a surplus of highly-trained, cheap labor.  Further, she notes that the USA skilled wage premium leveled off and started to decline in the 21st Century because the USA has been accelerating the offshoring of high-skill jobs like engineering, lawyering, financial analysis, and radiology. H/t Yves Smith.

Update on Saturday, August 13, 2011 at 02:38PM by Skeptic

John Schmitt points out in this excellent post (includes a chart of BLS data) that the earnings ranges of high school and college graduates have a large overlap and that the investment in a college education may not pay off for a large number of individuals who spend the time and money to get one. 

[S]omething approaching half of college graduates (the figure doesn’t allow for too much precision) make less than the top 25 percent of high school graduates. And somewhere approaching half of high school graduates make more than the bottom 25 percent of college graduates.

If we are comparing only medians and averages, we are missing an important part of the story. 

But getting back to the original post, if the wage premium for median or average college-goers shrinks even more, the large overlap between the two wage ranges means we should expect to see even more rational individuals and their families opting not to invest in college.

Update on Monday, August 15, 2011 at 09:56AM by Skeptic

Mejia et al. discuss their own projections of educated labor supply and demand and compare it with those of Carnavale et al. and Harrington and Sum here.  A big factor influencing whether one projects a shortage or surplus of skilled labor later in this decade is whether one assumes the BLS determinations of the minimum skill requirements for a particular job are accurate or assumes that the trend of college graduates actually working lower level jobs means the education requirements are rising.

Update on Thursday, August 2, 2012 at 04:26PM by Skeptic

Nancy Folbre reports at Economix that fewer than half of recent college graduates are employed in jobs that require college degrees and that their real entry level wages are lower than they were in 2000.  US college graduates are facing stiff competition from foreign workers here under H-1b visas, keeping wages for these jobs depressed.

Further, he [Professor Matloff] observes that high-tech companies insisting that there is a shortage of STEM workers with advanced degrees in the United States don’t seem willing to invest much in increased financial support for graduate education.

Maybe college students should seek jobs that seem less vulnerable to global competition, in fields like health sciences. But I just read an article about health care companies sending jobs overseas that gave me palpitations.

The economist Alan Blinder asserts that high educational requirements can make a job more rather than less “offshorable.” Most large American companies have already figured this out – but it’s not clear how many college students have.

Is Bill Gross crazy?

This post by Pimco founder Bill Gross is so contrary to bi-partisan conventional economic wisdom, you'll probably think I wrote it for him.  I didn't, but I endorse it highly. His tease:

The past several decades have witnessed an erosion of our manufacturing base in exchange for a reliance on wealth creation via financial assets.

 Fiscal balance alone will not likely produce 20 million jobs over the next decade. Government must take a leading role in job creation. 

A growing number of skeptics wonder whether college is worth the time or the cost.

How the Luckiest Generation lived the American Dream

I'm just back from my 50th class reunion at The College of Wooster where I was invited to summarize in ten minutes how we experienced the economy during our lives. I showed graphs of key statistics in PowerPoint about jobs, incomes, upward mobility, and effects on longevity.  A fundamental conclusion was, "No job, no income, no American Dream, premature death."  The most common comment I got was to the effect of, "I'd seen these bits of information before, but never all pulled together like this." There were numerous requests for copies, but since not a lot of retired septuagenarians have PowerPoint, I've converted the presentation to a narrated movie and posted it on YouTube.  Click the icon to view it. (If the YouTube icon doesn't show in your email or RSS update, you may have to click through to this Realitybase post to see it.)

This is a revised version of the video; the original version is here.  If you have PowerPoint you can download this narrated presentation in .PPT [revised 3/14/12 to add missing captions to one slide] and see the links to data sources.

Update on Monday, June 27, 2011 at 03:01PM by Skeptic

Nobel laureate economist Michael Spence has written "The Impact of Globalization on Income and Employment: The Downside of Integrating Markets" in the current issue of Foreign Affairs. (Subs req'd)  Essentially he says that in the 2 or 3 decades it may take for American and Chindian wages to converge to a common level, the US should brace itself for a continuation of the adverse trends of the 21st Century--a long period of high unemployment and rising inequity of incomes unless the US abandons laissez faire and intervenes.  He says European nations don't accept this outcome and neither should the US.

"Although everyone does benefit from lower-priced goods and services, people also care greatly about the chance to be productively employed and the quality of their work. Declining employment opportunities feel real and immediate; the rise in real incomes brought by lower prices does not. For example, according to recent surveys, a substantial number of Americans believe that their children will have fewer opportunities than they have had. The slow recovery from the recent economic crisis may be affecting these perceptions, which means that they might dissipate as the situation improves and growth returns. But the long-term structural evolution of the U.S. and global economies suggests that distributional issues will remain. These must be taken seriously."

. . . .

"The structural trends affecting the U.S. economy cannot be explained by changes in technology alone."

. . . .

"If giving technology as the preferred explanation for the U.S. economy's distributional problems is a way to ignore the structural changes of the global economy, invoking multinational companies (MNCs) as the preferred explanation is a way to overstate their impact. MNCs are said to underpay and otherwise exploit poor people in developing countries, exporting jobs that should have stayed in the United States.

"MNCs do, indeed, play a central role in managing the evolution of the global economy. They are the principal architects of global supply chains, and they move the production of goods and services around the world in response to supply-chain and market opportunities that are constantly changing. MNCs have generated growth and jobs in developing countries, and by moving to those countries some lower-value-added parts of their supply chains, they have increased growth and competitiveness in advanced economies such as the United States. A June 2010 report by the McKinsey Global Institute estimated that U.S.-based MNCs accounted for 31 percent of GDP growth in the United States since 1990."

. . . .

"What is needed instead of benign neglect is, first, an agreement that restoring rewarding employment opportunities for a full spectrum of Americans should be a fundamental goal. With that objective as a starting point, it will then be necessary to develop ways to increase both the competitiveness and the inclusiveness of the U.S. economy. This is largely uncharted territory: distributional issues are difficult to solve because they require correcting outcomes on the global market without doing too much damage to its efficiency and openness. But admitting that not all the answers are known is a good place to begin."

. . . .

"As important as education is, it cannot be the whole solution; the United States will not educate its way out of its problems. Both the federal and state governments must pursue complementary lines of attack. They should invest in infrastructure, which would create jobs in the short term and raise the return on private-sector investment in the medium to longer term. They should also invest in technologies that could expand employment opportunities in the tradable sector of the U.S. economy at income levels other than the very top. The private sector will have to help guide these investments because it has much of the relevant knowledge about where these opportunities might lie. But this effort will also require the participation of the public sector. The U.S. government already invests heavily in science and technology but not with job creation as its primary focus; that has generally been viewed only as a beneficial side effect. It is time to devote public funding to developing infrastructure and the technological base of the U.S. economy with the specific goal of restoring competitiveness and expanding employment in the tradable sector."

. . . .

"But even these measures may not be sufficient. Globalization has redefined the competition for employment and incomes in the United States. Tradeoffs will have to be made between the two. Germany clearly chose to protect employment in the industries of its tradable sector that came under competitive threat. Now, U.S. policymakers must choose, too.

"Some will argue that global market forces should simply be allowed to operate without interference. Tampering with market outcomes, the argument goes, risks distorting incentives and reducing efficiency and innovation. But this is not the only approach, nor is it the best one. The distribution of income across many advanced economies (and major emerging economies) differs markedly. For example, the ratio of the average income of the top 20 percent of the population to the average income of the bottom 20 percent is four to one in Germany and eight to one in the United States. Many other advanced countries have flatter income distributions than the United States, suggesting that tradeoffs between market forces and equity are possible. The U.S. government needs to face up to them."

. . . .

"The United States will not be able to deduce its way toward the solutions; it will have to experiment its way forward."

Update on Wednesday, July 6, 2011 at 07:10AM by Skeptic

Tim Rutten reports in LAT today:

He [Toby Harndon of Britain's Daily Telegraph] goes on to cite one recent poll that found 39% of Americans now believe the recession-battered economy is in "a long-term permanent decline" from which it "will never fully recover," and another survey that reported 57% of those questioned believe their children never will achieve the same standard of living they've enjoyed.

. . . .

The consequences of this lingering joblessness are amplified by the pervasive insecurity of those who are working — uncertainty about further job cuts and anxiety about the future, which growing numbers will face with little but underfunded 401(k)s and increasingly threatened Social Security and Medicare guarantees. Moreover, the decade just past was even worse for real private sector income growth than the 10 years following the onset of the Depression in 1929.

Update on Sunday, October 16, 2011 at 10:57AM by Skeptic

Henry Blodget has posted an excellent presentation on Business Insider explaining, with the aid of 41 stunning charts, what the Wall Street protesters are so angry about. Hat tip Miguel at Simoleon Sense.

Update on Wednesday, November 23, 2011 at 10:58AM by Skeptic

A recent Pew Research Center study of Census data shows that after 40 years of setting up independent households, starting in about 1980 Americans are increasingly living in multigenerational households for economic reasons.

Update on Tuesday, January 31, 2012 at 11:14AM by Skeptic

Another way in which differences in family income are increasingly important is in college entry, persistence, and graduation rates, especially for women, according to Gains and Gaps: Changing Inequality in U.S. College Entry and Completion by Martha J. Bailey and Susan M. Dynarski. The Abstract:

We describe changes over time in inequality in postsecondary education using nearly seventy years of data from the U.S. Census and the 1979 and 1997 National Longitudinal Surveys of Youth. We find growing gaps between children from high- and low-income families in college entry, persistence, and graduation. Rates of college completion increased by only four percentage points for low-income cohorts born around 1980 relative to cohorts born in the early 1960s, but by 18 percentage points for corresponding cohorts who grew up in high-income families. Among men, inequality in educational attainment has increased slightly since the early 1980s. But among women, inequality in educational attainment has risen sharply, driven by increases in the education of the daughters of high-income parents. Sex differences in educational attainment, which were small or nonexistent thirty years ago, are now substantial, with women outpacing men in every demographic group. The female advantage in educational attainment is largest in the top quartile of the income distribution. These sex differences present a formidable challenge to standard explanations for rising inequality in educational attainment.

Several useful graphs are appended to this PDF paper.

Update on Friday, May 10, 2013 at 01:07PM by Skeptic

In the PowerPoint presentation, the link to source data for the 21st slide is broken, but the same content is available here:  http://stateofworkingamerica.org/chart/swa-mobility-figure-3u-elasticities-family/ 

Update on Tuesday, November 12, 2013 at 12:05PM by Skeptic

Two interactive graphics, The Decline of the American Job, 1974— and The Collapse of the American Job, 2008— in a special report, The 40-Year Slump, by Harold Meyerson in The American Prospect show where we are compared to our own past and currently to other developed nations, and what the trends are. The graphics are fully consistent with the disheartening Luckiest Generation story.  

Update on Monday, February 17, 2014 at 09:21AM by Skeptic

It's not just me.  Mac Deford's 50th reunion classmates express sadness and pessimism about what they see as America's decline and bleak future for their grandchildren. 

Update on Tuesday, January 6, 2015 at 03:05PM by Skeptic

The best comprehensive prensentation I have seen so far is by Jared Bernstein and Ben Spielberg. It is introduced on Bernstein's blog where there is a link to the PowerPoint presentation.  This is a direct PP link.  This is not a bullet point presentation that makes the reader figure out what the presenter would say if he/she were presenting.  Instead, it is rich with graphs, other data, links to professional studies, and clear prose to tie everything together.  It covers the facts of rising inequality since the 1970s, the several ways in which that has had adversely affected society, and a policy agenda to ameliorate or reverse the process.  A key item on the policy agenda is full employment.  Kudos to Bernstein and Spielberg.

American youth: Digitally skilled and unemployable.

According to conventional wisdom, technological advances and globalization mean that jobs are disappearing for people with outmoded skills and that new jobs are being created that require new skills. Americans whose jobs are offshored should retrain for the jobs of today and tomorrow. America will fall behind in the global competition without better and universal education to teach the skills necessary for the modern jobs that are being created in America.

Specifically, it is often said that the internet has changed everything, and that being comfortable with the paperless, wireless, digital, global, online, lightning-fast, on-demand, information age is the key that unlocks the door to modern jobs. American youth are notoriously proficient in these skills, and those over 55 are notoriously lacking in these skills and resistant to acquiring them. It follows that as industrial age jobs are disappearing and information age jobs are being created, young workers will fit right in and older workers will be left in the unemployment lines. In fact, however, there has been a strong trend in the opposite direction.

The employment-population ratio for 16-24 year-olds started declining in 2000—just as we were all getting computerized and networked. Meanwhile the employment-population ratio for those 55 and older has been increasing since 1993. In the Great Recession, youth employment has been devastated and mature worker employment has hardly been affected at all. If these trends are being driven by skills, conventional wisdom must be wrong about what skills are needed and the importance of education. More likely, it hasn't been a skills story but one about the advantages of incumbency and the need of older workers to keep working as retirement benefits have declined.

And let's do remember this. American jobs were not moved to Chindia in the last decade because the Chindians have better skills. That happened—and is continuing to happen—because Chindian workers are cheaper. Full stop. We've been emphasizing education and skills development in America for decades, and there is nothing apparent in the current emphasis that seems likely to change our output of skilled workers. Nor does the historical record indicate it would contribute much to domestic job creation if we did have more skilled workers. Skilled Chindians will still be cheaper, and young Americans will still be living with their parents as long as that's true.

Update on Tuesday, June 21, 2011 at 03:55PM by Skeptic

I've had questions about the increasing employment-population ratio for those 55+. So I separated the 55-64 group from the 65+ group.

Obviously, the percentages in the 65+ group are lower, but they follow the same pattern of decreasing to about 1984 and then increasing until 2008. But why? Looking only at the 55-64 group, there is a radically different pattern between men and women. Both of the following images are generated by the BLS labor force statistics in the Current Population Survey database, men first and then women:

What's interesting is that men 55-64 dropped out of the labor force in large numbers from 1970 to 1984, while women maintained their same participation rate during this period and then resumed their rapid rate of increase. What explains this?

Which party will do a better job of leading America's retreat from greatness?

Usually when I mention David Brooks it's to disagree with him, but he got it just right in yesterday's NYT op ed, Pundit Under Protest. He is very concerned, as am I, that the 2012 elections will not be about what they should be about.  The electorate is appropriately worried about how to avert a national decline from greatness, but--

[T]he two parties contesting this election are unusually pathetic.  Their programs are unusually unimaginative. Their policies are unusually incommensurate to the problem at hand.

. . . .

The election is happening during a downturn in the economic cycle, but the core issue is the accumulation of deeper structural problems that this recession has exposed — unsustainable levels of debt, an inability to generate middle-class incomes, a dysfunctional political system, the steady growth of special-interest sinecures and the gradual loss of national vitality.

Both parties describe our problems as dire and unprecedented in our lifetimes.  Yet neither party proposes any substantial departures from the policies that got us into this mess.  They are both doubling down on defending the status quo and giving mere lip service to the idea that it would be nice if things would get better for ordinary Americans in spite of that.  There is not, for example, any Presidential candidate and scarcely any prominent Member of Congress who proposes a growth agenda like we had from 1933 until about 1970. If we were to do what is necessary to create full employment and even modestly rising real middle-class incomes, that by itself would solve almost all of our federal, state, local, and family fiscal problems. Remember how we had rising employment, rising real wages, and governmental budget surpluses in the last five years of the 20th Century?

It is somewhat of a mystery why no candidate or party has seized the unoccupied pro-growth political territory.  Surely it would be popular with a majority of voters.  The only explanation I can think of for the absence of this voice in the political fray is that it would necessarily propose significant policy changes that would be deeply unpopular with the sources of campaign funds. What's your explanation for the absence of a pro-growth political movement? 

Canada has lousy health care.

Many Americans are convinced the Canadian healthcare system is lousy because, it is understood, patients have long waits for appointments, are subject to "rationing" of procedures, and regularly travel to the US to get better, faster treatment. Via Paul Krugman, we see that the healthcare system in Canada is almost as bad as in the US—but it only costs half as much per person. The other nations surveyed, UK, The Netherlands, Australia, New Zealand, and Germany, all ranked higher and cost less than either the US or Canada, according to a 2010 survey by the Commonwealth Fund. From the report:

Update on Monday, June 6, 2011 at 08:53AM by Skeptic

Krugman has followed up with this pie chart of Canadians getting US health care.

PK's source was an Aaron Carroll post at the Incidental Economist, which also debunks myths about differences in doctor satisfaction, doctor emigration trends, and infant mortality, and the supposed link between single payer and rationing.

Most Read Realitybase Posts in May

Is this what ended the American Dream? The Democratic Party lost its focus on economic security and prosperity and became more concerned with a range of other liberal values. This post had 10 times as many reads in three days as the second most popular post did in a month.

The American Dream died in February 1973 With graphs from multiple sources showing stagnation of inflation-adjusted middle class incomes since the 1970s after strong and steady post-WWII growth

The Citigroup Plutonomy Memos With key quotations from documents that are being disappeared.

The Dysfunction and Corruption of Our Healthcare System, Its Damage to the National Economy and other Basic Healthcare Matters (Guest Post) Describing a system that is destroying the American business economy and our ability to compete globally, which violates fundamental insurance risk principles, and which has inherent conflicts of interest that prevent quality national health care delivery and cost efficiency, and proposing a solution.

The history of US per-capita petroleum consumption will surprise you.  A graph and other data show US per-capita consumption of petroleum is down substantially from the 1970s, has been very stable since 1983 because of CAFÉ standards, and has fluctuated only slightly with retail price changes.

Why we should pay no attention to the macroeconomists behind the scientific curtain. Too many modern economists are over-involved in their pseudoscientific models and are not held accountable when their advice fails in the real world.

Comparative Advantage—The Unicorn of Free Trade A collection of sources and analyses demonstrating that the assumptions of classic Ricardian theory rarely if ever align with real-world conditions. Views of this 2009 post tend to spike every exam season.

One chart refutes three myths about US foreign trade. About Smoot-Hawley, the post-WWII export "boom," and "self-balancing" trade.

Two hypotheses why US CEO pay is so high Charts show that in the US CEO pay is about double that in other advanced countries, implying either that there is a shortage of talent in the US, or that the US CEO pay market is broken.

The US trade deficit is tribute paid to foreigners. And it's big. Nobel laureates Paul Samuelson and Paul Krugman and other prominent economists including Dani Rodrik, Alan Blinder, Martin Wolf, Larry Summers, Joseph Stiglitz, Dean Baker, and even Alan Greenspan have said that the US middle class is net worse off as a result of persistent trade deficits averaging 3% of GDP.

Is this what ended the American Dream?

As often as I repeat and document (here, for example) the fact that real incomes for middle- and low-income Americans plateaued in February 1973 (and incomes for middle- and low-income families and households before the end of the 1970s), I’m still puzzled as to why that happened.  Rick Perlstein offers an explanation in today’s NYT. 

His narrative seems to be that in the 1970s, after the shellacking of George McGovern by Nixon in 1972 and the re-writing of the Democratic delegate selection process that gave Carter the nomination in 1976, liberalism in the Democratic Party changed its agenda.  It became less about the bread and butter issues of economic security and shared prosperity and more about civil rights, the environment, getting out of Vietnam, and honest and transparent government.  The Humphrey-Hawkins legislation in 1978, which nominally requires the Fed to keep both inflation and unemployment low, was so watered down that the Fed has never let itself be influenced in the slightest by the unemployment half of the mandate.  Humphrey-Hawkins, like Pickett’s Charge, marks the end of an era instead of a consolidation of gains. 

It has seemed to me unlikely that we would ever find a single event, policy change, or market shift that explains the persistent stagnation of real middle and low incomes starting in the 1970s.  If there had been such an occurrence, surely it would have become obvious by now, wouldn't it?  Still Perlstein’s explanation—that there was a great political realignment and all of the endless string of tactical defeats for America’s middle and lower class incomes flow from that—seems rather plausible to me. One reason it seems plausible is that it’s a fair description of my own attitudes as a life-long Democrat.  I was not friendly to labor unions but saw them as more powerful than they needed to be, corrupt, bigoted, and on the wrong side about Vietnam, the environment, and civil rights.  I was a “business Democrat,” then a wary DLC follower, a New Democrat, and even a supporter of Pete Peterson's Concord Coalition.  In short, I was a part of the wing of the Democratic Party that took over.  I regret now what we did to the rest of America. 

In addition to these changes in the Democratic Party, I would think that the August 1971 Powell Memo to the US Chamber of Commerce and how big business and conservatives reacted to that was also very important.  They organized a generations-long ideological fight using think tanks, media control, curriculum influence, campaign finance, etc., and the opposition was never organized and to a shocking degree didn’t notice there was a game on. 

What do you think blew up the American Dream? 

Update on Saturday, May 28, 2011 at 03:15PM by Skeptic

My comment here may also have been influenced by this Yves Smith post a month ago. She has good quotes from Robert Scheer, The New Corporate World Order, a David Runciman review of Jacob Hacker and Paul Pierson, Winner-Take-All Politics, her own book, Econned, and other sources. They say, essentially, that it all started in the Carter Administration when the Right pushed and didn't meet much resistance--the tide was already ebbing for the middle class before the elections of Thatcher and Reagan. 

Update on Monday, May 30, 2011 at 08:32AM by Skeptic

Robert Reich has good post on this general subject up today, but he doesn't get into the politics of it and he ascribes a larger importance to technology changes than I would (for reasons set forth in my comment below):

It’s easy to blame “globalization” for the stagnation of middle incomes, but technological advances have played as much if not a greater role. Factories remaining in the United States have shed workers as they automated. So has the service sector.

But contrary to popular mythology, trade and technology have not reduced the overall number of American jobs. Their more profound effect has been on pay. Rather than be out of work, most Americans have quietly settled for lower real wages, or wages that have risen more slowly than the overall growth of the economy per person. Although unemployment following the Great Recession remains high, jobs are slowly returning. But in order to get them, many workers have to accept lower pay than before.

Starting more than three decades ago, trade and technology began driving a wedge between the earnings of people at the top and everyone else. The pay of well-connected graduates of prestigious colleges and MBA programs has soared. But the pay and benefits of most other workers has either flattened or dropped. And the ensuing division has also made most middle-class American families less economically secure.

Update on Monday, May 30, 2011 at 01:43PM by Skeptic

Steve and Mike in comments focus on advancing technology deployment as eliminating jobs.  No doubt in my mind that that’s true, but until 2000 whatever jobs were eliminated were more than replaced by other jobs in America.  The employment to population ratio had its most rapid growth ever from about 1975 to 2000.  

The conventional wisdom is that increasing use of technology requires better trained workers, who should theoretically be paid more than the less skilled workers displaced by the technology.  The only time after 1973 we saw that effect was during the dot-com boom.  At all other times the presumed upward pressure on wages from increasing skill requirements was overwhelmed by other factors pressing wages down. 

Since the hit to wages came a quarter century before the hit to employment and wages generally trended down instead of up while employment was growing, it doesn’t seem to me that the advancing technology factor is an obvious cause of 38 years of wage stagnation. 

Update on Saturday, June 25, 2011 at 11:43AM by Skeptic

The following chart from Pew Research via Asymptosis is really interesting in that it shows New Coalition Democrats and Solid Liberals to be the most favorably inclined toward strong economic relations with China. In contrast, the Staunch Conservatives are the most inclined to get tougher with China. Is that a basis for a new coalition on trade between labor and conservatives? 

Electing the new IMF head may be a referendum on big banks.

Yves Smith has an interesting take on the maneuvering to name Dominque Strauss-Kahn's successor as head of the International Monetary Fund. Europeans are arguing that it makes special sense now to continue the tradition of having the IMF president be European because it appears the IMF's biggest near-term challenges are in Europe. However, the BRICs (Brazil, Russia, India and China) are making more than the usual amount of noise claiming it's their turn. Smith says that behind the scenes it's really about how diligent the IMF will be in promoting the interests of the biggest international banks:

Crudely speaking, the advanced economies are far more bank friendly than their “emerging” counterparts. China is actively hostile to neoclassical economics and unfettered capital markets. Efforts to make China safe for investment bankers have been rebuffed. India sailed though the global financial crisis relatively well by having capital controls and heavily regulated banks. Pretty much any country that has taken IMF medicine (such as the countries caught in the Asian crisis, like Indonesia, South Korea, and Thailand) also sees the IMF as an enforcer for major capital market firms and international banks. Japan, as a military protectorate of the US, has limited degrees of freedom. Even so, during the Asian crisis, it pushed for a bailout within the region (ie, outside the IMF) and that idea was quickly slapped down by the US.

I can't see much doubt about how this comes out.  Europe and the US together have enough voting power to impose their choice, and I can't see any possibility that Obama will go against Wall Street on this. Yves's post quotes from this Guardian article.

[ADDED at 10:55 a.m.]  Joseph Stilitz agrees in The Telegraph it's largely about the banks:

Behind the scenes there is a battle – between those who put the interests of the banks first and those who put the interests of the people first. Debt restructuring would affect the balance sheet of the banks. The longer restructuring is postponed, the more debt moves onto the books of the public, the more the banks are protected.

Stiglitz also says DSK made important strides in reforming the thinking inside the IMF and that it's important to maintain those departures from neoliberal economic doctrine.

We probably need better college graduates, but we certainly don't need more.

Ezra Klein continues his fine reporting on the economic effects of education here.  He's borrowed the following charts from Catherine Rampell at NYT. Some majors are less disastrous than others, but overall only 55.6% of grads under age 25 have jobs that require college degrees, and 22% are working in jobs that do not. (I don't know whether the other 22.4% includes graduate students or if they are all unemployed.)

College graduates in jobs for which they are overqualified in many cases have displaced qualified high school grads, whose unemployment rates are also soaring.  Further, having many more college graduates than there are degree-requiring jobs bids down the wages for those jobs.

A policy response is complicated. Obviously, at a national level we are wasting money to train up millions of young Americans who will get no substantial opportunity to use those skills. However, at an individual level the college credential--as distinguished from the skills--may help win the jobs competition with high school graduates. So, facilitating higher education for disadvantaged youth can be justified as giving them a better opportunity for even mediocre jobs. 

The difference between Obama and Republicans on free trade agreements

The difference is in the messaging to Americans who lose their jobs. Both the Obama Administration and Congressional Republicans want to enact three new free trade agreements that will offshore more American jobs. The Republicans want to enact the FTAs and say to the displaced workers, "Drop dead!" Obama wants to enact the FTAs and say to displaced workers, "Here's some federal money to get trained for jobs that already have a glut of applicants. Lotsa luck!"

As reported in Bloomberg Business Week:

The White House says it will not send Congress final legislation on three coveted free trade agreements unless lawmakers expand retraining assistance for American workers who lose their jobs because of foreign competition.

. . . .

The White House's insistence that the trade deals be linked to the TAA [Trade Adjustment Assistance] program comes as administration officials hold talks with Congress to finalize the agreements it reached with South Korea, Panama and Colombia. Republicans broadly support the pacts and Obama has said they are integral to his economic agenda.

Shale Gas Tutorial

The US Energy Information Agency has a fine, illustrated briefing on shale gas--how it differs from conventional natural gas, where it's found, how it's produced, what it's potential is. Most of us will find it very helpful in understanding the frequent news stories about shale gas.

If a deficit commission looked like America

The new California redistricting commission approved by voters in November 2008 requires a diverse membership reflective in certain ways of California's diversity.  Dave Johnson at Campaign for America's Future points out that neither the President's Simpson-Bowles Deficit Reduction Commission nor any other power center working on these issues has a membership that might be considered even slightly diverse. He shows us what an economically, educationally, occupationally, and linguistically representative commission would look like (emphasis his).

Why we should pay no attention to the macroeconomists behind that scientific curtain

Economist Peter Radford argues that much of modern macroeconomics is deliberately divorced from reality and does more harm than good in addressing current issues of political economy. For me, this evokes the Wizard of Oz.

There is an economist to defend any hair-brained policy proposal. Anything a politician cares to suggest can be given a well argued, and reasonable defense by a well respected and tenured professor from somewhere.

And when economists are hopelessly wrong? Are they fired? Are they pilloried and thrown out of their tenured positions to suffer the voluntary unemployment lines they condemn others to? Dean Baker has recently thrown a hissy fit over this. Of course not. Failed economists are a dime a dozen in our best schools. They are still teaching whatever they first thought. No amount of empirical data threatens their prestige. Why? Here’s the great scam: because economics is a self-contained, self-referential pursuit disconnected, very deliberately and carefully, from the dangers of having to be useful. It is thus immune from disproof. All that Popperian conjectures and refutations mumbo-jumbo is not applicable to economics. Economists have constructed their world so as not to have to be practical. Instead they are quasi-philosphers, quasi-mathemeticians, quasi-physicists, quasi-psychologists, and quasi-sociologists. By so being they can dodge between the bullets of practical questioning and never have to improve their art. Being quasi-everything is a great defense. You can confuse all the specialists and answer to no one. Except yourself.

These people should have the moral decency not to advance their theories as useful political policies, Radford says.

You’d think that, at the very least, they would stress test their advice. That they would check their theories against some evidence of their efficacy. That they would have the ethical decency to do no harm. Before, that is, and not after, they urge policies whose consequences, both intended and unintended, we all have to live through.

Radford says 19th Century economists began developing the cloak of pseudoscience (when science and respect for science were booming) to attempt to counter Marx's charge that they were merely mouthpieces for heartless and rapacious capitalism. 

No one doubts that the study of economies is a very serious and potentially socially valuable pursuit. Most of its great advances have been at times when there were big political and social upheavals and dangers that required insight into the way in which an economy works. A real one. Not a made up one. Early economists were intrigued and influenced by the processes and challenges of industrialization. Prior to that they had been embroiled in arguments over taxation and trade, both of which were contentious and relevant topics to the newly emerging nation states of the 1600 and 1700′s.

Then along came Marx, who thundered away at the disruptive issues of early capitalism and its satanic mills. His critique was sufficient to demand a right wing response, which came in the form of marginalism and Walrasian systemic thinking. Those advances were an attempt to make economics scientific and thus immune to the implied Marxist charge that the early theories were simply justifications for capitalist favoring policies.

That attempt to shift economics from being politically motivated towards being scientific, and thus cleansed of political taint, gathered momentum and led to even greater discord in the 1930′s and later. One part of economics wandered off into the supposed safety of the self referential community I mentioned above, content to manipulate ever more abstract models until it ended up with people like [Nobel laureate] Lucas openly calling his analysis utopian. The other channel was filled with people trying to engage a more “realistic” set of theories that recognized the vagaries and complexities of the world. But because those vagaries are intractable, or have been, to the tools economists inherited from their political economy origins, and because much of the subject’s key topics are still framed in 1800′s terminologies these realists have made less of an impression. They don’t appear as scientific. Their models are kluge-like and not filled with impressive mathematics. So the so-called scientists won. They invented “positive” economics, where theoretical discussions disdained empirical proof, and where math wizardry counted for more than connection with practical policy.

Which is why a recent poll of economics post-graduate students showed a belief that being good in math is more important to being a good economist, than knowing anything about the economy. Abstraction for abstraction’s sake is the watchword of modern mainstream economics.

Read the whole article in Real-World Economics Review Blog.

Executives inflate their own compensation with stock repurchase programs.

Exxon-Mobil and ConocoPhillips reported surging profits last quarter, and both used over half of net income to buy back their own stock in the open market.  No extraordinary dividends or bold new re-investment or acquisition programs. Center for American Progress, which has the figures here, points out that the effect—and probable intent—of such programs is to drive up share prices, which makes executive stock options more valuable. Warren Buffett explained and complained about this practice in the 2005 Berkshire Hathaway annual report (at 16).

Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement. Take, for instance, ten year, fixed-price options (and who wouldn’t?). If Fred Futile, CEO of Stagnant, Inc., receives a bundle of these – let’s say enough to give him an option on 1% of the company – his self-interest is clear: He should skip dividends entirely and instead use all of the company’s earnings to repurchase stock.

Let’s assume that under Fred’s leadership Stagnant lives up to its name. In each of the ten years after the option grant, it earns $1 billion on $10 billion of net worth, which initially comes to $10 per share on the 100 million shares then outstanding. Fred eschews dividends and regularly uses all earnings to repurchase shares. If the stock constantly sells at ten times earnings per share, it will have appreciated 158% by the end of the option period. That’s because repurchases would reduce the number of shares to 38.7 million by that time, and earnings per share would thereby increase to $25.80. Simply by withholding earnings from owners, Fred gets very rich, making a cool $158 million, despite the business itself improving not at all. Astonishingly, Fred could have made more than $100 million if Stagnant’s earnings had declined by 20% during the ten-year period.

Fred can also get a splendid result for himself by paying no dividends and deploying the earnings he withholds from shareholders into a variety of disappointing projects and acquisitions. Even if these initiatives deliver a paltry 5% return, Fred will still make a bundle. Specifically – with Stagnant’s p/e ratio remaining unchanged at ten – Fred’s option will deliver him $63 million. Meanwhile, his shareholders will wonder what happened to the “alignment of interests” that was supposed to occur when Fred was issued options.

A “normal” dividend policy, of course – one-third of earnings paid out, for example – produces less extreme results but still can provide lush rewards for managers who achieve nothing.

CEOs understand this math and know that every dime paid out in dividends reduces the value of all outstanding options. I’ve never, however, seen this manager-owner conflict referenced in proxy materials that request approval of a fixed-priced option plan. Though CEOs invariably preach internally that capital comes at a cost, they somehow forget to tell shareholders that fixed-price options give them capital that is free.

It doesn’t have to be this way: It’s child’s play for a board to design options that give effect to the automatic build-up in value that occurs when earnings are retained. But – surprise, surprise – options of that kind are almost never issued. Indeed, the very thought of options with strike prices that are adjusted for retained earnings seems foreign to compensation “experts,” who are nevertheless encyclopedic about every management-friendly plan that exists. (“Whose bread I eat, his song I sing.”)

Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.

More on the moral basis for limiting immigration and not offshoring American jobs

In my first post on this subject, I wrote this:

It is moral to give preferences to in-groups over outsiders, nuclear family over extended family, family over other community members, members of one's religion, political party, union, or other organization over non-members, tested and loyal members over applicants and probationary members, etc.  Neither our civilization nor even our species can survive without cohesive groups whose members are loyal to and support each other to the partial or total exclusion of others.  The ability to form and maintain groups of composition, function, and commitment appropriate to life's difficulties, perils, and threats is fundamental. 

In a later post, I pointed to science suggesting there is a neurological cause—or at least a process—for unconsciously favoring in-group members, and other science suggesting a survival advantage to favoring in-groups in that natural selection may conserve and spread genes that are helpful to the group but not to individual group members.

Now, let's look at the other side of the argument and consider the implications: Let's suppose Americans do have a moral obligation to share with poverty-stricken or merely less-fortunate Chindians by enduring the joblessness and stagnant and declining wages that globalization causes in America. If that's true, must it not also be true that well-off Americans have on obligation to take less so that not-so-well-off Americans can have more? Both must be correct moral statements, or neither must be. There is no valid argument that low- and middle-income Americans have a moral duty to share with Chindians, but high-income Americans have no moral duty to share with low- and middle-income Americans, is there? And yet what has actually happened in America in recent decades, especially in the last ten years is that low- and middle-income Americans have shared with the Chindians and the high-income Americans have shared with nobody but have benefitted from a rising level of income inequality last seen in America in 1929.

And BTW, inequality in America is now higher than for any other long-term OECD member but Mexico and Turkey. From Catherine Rampell, Inequality Rising Across the Developed World.

Update on Tuesday, May 17, 2011 at 12:54PM by Skeptic

David Brooks' column today, Nice Guys Finish First, points out evidence that humans, unlike other primates, have a tendency to cooperation and altruism that moderates our selfish genes. This tendency fosters cohesive and effective groups and gives humans an evolutionary advantage. He suggests that these social tendencies are the source of ethics, emotion, morality, and religion. Whether it's genetic or not, our ability to form and maintain groups is indispensible to having an advanced economy--we can't do that if we cooperate with nobody, or if we try to cooperate with everybody to the same degree. 

Most Read Realitybase Posts in April

The Citigroup Plutonomy Memos With key quotations from documents that are being disappeared.

The Dysfunction and Corruption of Our Healthcare System, Its Damage to the National Economy and other Basic Healthcare Matters (Guest Post) Describing a system that is destroying the American business economy and our ability to compete globally, which violates fundamental insurance risk principles, and which has inherent conflicts of interest that prevent quality national health care delivery and cost efficiency, and proposing a solution.

The American Dream died in February 1973 With graphs from multiple sources showing stagnation of inflation-adjusted middle class incomes since the 1970s after strong and steady post-WWII growth

The history of US per-capita petroleum consumption will surprise you.  A graph and other data show US per-capita consumption of petroleum is down substantially from the 1970s, has been very stable since 1983 because of CAFÉ standards, and has fluctuated only slightly with retail price changes.

Two hypotheses why US CEO pay is so high Charts show that in the US CEO pay is about double that in other advanced countries, implying either that there is a shortage of talent in the US, or that the US CEO pay market is broken.

State of the Union, Part 2—The Great Recession is far worse than any other post-war recession, and there are big underlying long-term problems. Quotations from the President's vivid, dystopian description or our economic problems in his January 2010 address, supplemented with charts and data showing he did not overstate our problems.

US job creation has been declining since April 2000 and is now in freefall. Features a dramatic graph.

One chart refutes three myths about US foreign trade. About Smoot-Hawley, the post-WWII export "boom," and "self-balancing" trade.

What's the market alternative to this big government program? On a per-vehicle-mile-traveled basis, conventional command-and-control regulations have reduced deaths by 85%, tailpipe pollutants by 89%, and fuel consumption by 40%.

Comparative Advantage—The Unicorn of Free Trade A collection of sources and analyses demonstrating that the assumptions of classic Ricardian theory rarely if ever align with real-world conditions.

More on the disproportionate political power of the affluent

In Common Ground for Tea Partiers and Liberals, I suggested economic class distinctions are more important in elections and legislation than are ideologies.  I made the point again on Mark Thoma’s blog, The Rightward Shift in the Political Center of Gravity, and Apinak responded with a link to a 2005 paper by Princeton associate professor Martin Gilens, Inequality and Democratic Responsiveness.  Here are the abstract and part of the conclusion of the Gilens paper:

Abstract:  By allowing voters to choose among candidates with competing policy orientations and by providing incentives for incumbents to shape policy in direction the public desires, elections are thought to provide the foundation that links government policy to the preferences of the governed.  In this article I examine the extent to which the preference/policy link is biased toward the preferences of high-income Americans.  Using an original data set of almost two thousand survey questions on proposed policy changes between 1981 and 2002, I find a moderately strong relationship between what the public wants and what the government does, albeit with a strong bias toward the status quo.  But I also find that when Americans with different income levels differ in their policy preferences, actual policy outcomes strongly reflect the preferences of the most affluent but bear virtually no relationship to the preferences of the poor or middle-income Americans.  The vast discrepancy I find in government responsiveness to citizens with different incomes stands in stark contrast to the ideal of political equality that Americans hold dear.  Although perfect political equality is an unrealistic goal, representational biases of this magnitude call into question the very democratic character of our society.

. . . .

Conclusion

If government policy is uniquely responsive to the preferences of affluent Americans, as the evidence above suggests, by what mechanisms do the affluent exert their influence?  My data are not well suited to answering this question, and space constraints preclude even an adequate account of the possible mechanisms at work.  But the most obvious source of influence over policy that distinguishes high-income Americans is money and the willingness to donate to parties, candidates, and interest organizations.  For example, a study of donations to congressional candidates in 1996 finds that four-fifths of donors who gave $200 or more had incomes in the top 10 percent of all Americans. [Citation omitted.]  Since not only the propensity to donate but also the size of donations increase with income level, this figure understates—probably to a very large degree—the extent to which political donations come from the most affluent Americans. . . .

Here is another link to the Gilens paper.

Really simple macroeconomics: Why businesses, employees, and investors disagree on what to do about the economy, and why nobody wants to fix the trade deficit.

Recently, I emailed to some friends this Mark Thoma post, "A New, Progressive Washington Consensus Remains a Feasible Goal" and got back an email asking what "aggregate demand" means. This was my reply (slightly edited), which upon reflection seems worth sharing with Realitybase readers because it helps explain why the various political factions line up behind different policies to address our economic stagnation.

Origin of the Aggregate Demand Term.  Typically, economics texts start with the concepts of "supply" (what quantity of an item sellers will offer at various prices) and "demand" (how much buyers will buy depending on price) and how the interplay of those two forces results in a market-clearing price and affects suppliers' plans for expanding/contracting capacity to supply such stuff in the future (shifting next season from corn to beans to cotton, etc.).  Building on this, the texts turn to macroeconomic issues—how zillions of those individual markets, plus tax systems, transfer payments, savings rates, the money supply/velocity, etc. work together to influence things like unemployment, inflation, and "business cycles" (economy-wide expansion or contraction of total economic activity).  In the macroeconomic context, texts use the term "aggregate demand" for the sum of all buyers' purchases of all goods and services in the US.  Notice that in the micro context, the discussion tends to be about "tendencies" and "preferences" and "curves" and "elasticity/inelasticity" of demand "functions," but in the macro context aggregate demand generally means what actually was purchased and sold last month or last year; so maybe "aggregate demand" is not the most felicitous or obvious term to describe the sum of all actual transactions, but there we are. 

Here's how "aggregate demand" fits into the current political economy debate in Washington.

GDP and Aggregate Income.  The official definition of Gross Domestic Product ("GDP") is that it equals Personal Consumption Expenditures + Business Investment (in such things as offices and factories) + Government Expenditures (consumption and investment but not transfer payments like unemployment insurance or Social Security) + Net Exports (unfortunately for the US a negative number for the last 30+ years).  Each of these four buckets of production can only be sustained if the customers (personal, business, government, and foreign) keep buying at the same levels—thus, maintaining their respective contributions to aggregate demand.  (The GDP calculation doesn't know or care whether the money spent to support aggregate demand is from current income or is borrowed, as much of it was in the housing bubble.)  Except for build-ups and draw-downs of inventories, aggregate demand must (as a matter of the applicable double-entry accounting identity and common sense) equal aggregate production and sales. It's the production and sales that give people/institutions incomes that allow them to contribute to aggregate demand by buying more goods and services.  So if aggregate demand declines, aggregate incomes must also decline in the same amount, which is the opposite of what most of us desire.  Of course, incomes tend to decline more and faster for the least powerful and often not at all for the most powerful, a cause of increasing inequality. 

Keynesian Stimulus of Aggregate Demand by Government Deficit Spending.  It has been observed that aggregate demand varies from time to time depending on how much money people have to spend (which is strongly influenced by unemployment, wage rates, and the availability and cost of credit), their degree of optimism or pessimism about the future ("animal spirits" in Keynes's phrase), and other factors.  The key Keynesian insight about the Great Depression was that really deep, prolonged reduction of economic activity is not necessarily self-correcting as had always been assumed (and is still assumed by right-wing economists and the former Washington Consensus).  He showed how aggregate demand can get stuck at a low equilibrium level and is hard to get started again—because employment and wages, on which 70% of aggregate demand depends, are stuck or keep spiraling downward—and pessimism reigns.  Keynes said government should kick-start economic activity into self-perpetuating growth by temporary deficit spending to replace the part of aggregate demand that went missing from the private and business sectors (foreign trade was not a big factor in those days).  Note that if government increases spending but keeps its budget balanced by increasing taxation, there is little or no stimulative effect because personal and/or business aggregate demand is further reduced approximately a dollar for each dollar of increase in aggregate government demand/outlays.  Therefore, an unavoidable consequence of deficit hawkishness is that it precludes the use of Keynesian stimulus and tends to drive GDP down instead of up.  So who wants to eliminate the possibility of Keynesian stimulus by keeping the federal budget in balance? Lenders do. They are deathly afraid of inflation because the debt securities they hold will immediately lose market value as interest rates climb, and if held to maturity the loans will be repaid with dollars that have less purchasing power (which tends to make it easier for debtors to repay).

Business Investment Aggregate Demand Stimulus.  Republicans and business/finance interests typically argue that we can stimulate aggregate demand (and jump start the economy) by encouraging an increase in Business Investment by lower corporate tax rates, paying subsidies, providing other benefits that add to business profits, and reducing tax rates for high-earners.  Whether the economy as a whole responds or not, these policies are mighty welcome to businesses and their top executives. Although theory provides some support for such actions, the problem is that in recent decades we've been doing a lot of that and the macroeconomic benefits have been very poor to non-existent.  Businesses have not been investing in plant and equipment in America at historic rates but have been paying bigger dividends, buying back their own stock, buying other companies, and building facilities abroad.  Even when Acme Industries does buy some new machine tools for its Cleveland plant, if they buy those machines from Germany, to that extent there is no increase in aggregate demand or US GDP.  Thus, in our highly globalized economy, some part, maybe a large part, of any increased Business Investment demand "leaks" offshore.   

Personal Consumption Expenditure Aggregate Demand Stimulus.  Labor- and consumer-oriented Democrats (and Keynes) say government gets the biggest, most immediate and strongest aggregate demand increase for its deficit-spending buck by putting money into the hands of poor and middle class people who will spend every dime of it immediately—thus quickly increasing aggregate demand in the consumer expenditure bucket.  Obviously, this is in the self-interest of the recipients even if it doesn't work for the economy as a whole.  When the US economy was largely self-contained, such boosts to aggregate demand created opportunities for domestic businesses and their employees to produce more and earn more.  Now, however, to a considerable degree increased aggregate consumer demand "leaks" to offshore factories and service centers and stimulates increased production and incomes in Chindia instead of here. 

Net Exports Are Killing Us.  The part of the GDP equation that is being largely neglected by politicians is Net Exports.  Obama has announced a goal of increasing exports by a certain implausible amount, but if imports increase by the same amount (as they probably will), there will be no improvement in Net Exports and no resulting improvement in GDP.  He's blowing smoke in our faces.  Further, as net offshoring of jobs continues, the wages and salaries associated with the lost jobs are pulled out of aggregate consumer demand domestically.  Similarly, businesses, pursuing cheaper labor and other cost advantages, are reducing their aggregate demand for new/expanded domestic plant and equipment in America and are investing instead in Chindia—adding to aggregate business demand and incomes there instead of here.  These effects and the "leakage" of remaining domestic consumer demand and business demand for imported capital goods create a continuing economic downdraft that is apparently stronger than the lift from any Keynesian countercyclical government deficit spending.  To my great frustration, we are arguing in Washington about how to get the economy back to the trend line and ignoring the fact that the trend line has been plunging downward for at least 11 years.  Deck chairs. Ice bergs. Arrrgh!  Why is this balance-of-trade ice berg being neglected in Washington—by Republicans and Democrats? I think it's because Wall Street, multinational corporations, and other powerful interests are profiting handsomely from the status quo, and both parties are heavily reliant on these interests to finance their election campaigns.

Update on Sunday, May 8, 2011 at 06:33AM by Skeptic

As an example of business using profits to repurchase their own equity shares we have this from Center for American Progress:

The King's Speech--American version

Jimmy Kimmel has the trailer. 

http://www.youtube.com/watch?v=SnxNnJYziMY