“After a year-long analysis of seven developed countries and six sectors,” global management consultancy company McKinsey has “concluded that demand matters for productivity growth and that increasing demand is key to restarting growth across advanced economies.” Which means—surprise, surprise—higher wages for the workforce. The report by James Manyika, Jaana Remes and Jan Mischke was published in the Harvard Business Review. Their analysis marks a shift from the prevailing paradigm of the past several years in which poor productivity growth was viewed as largely a function of supply-side factors such as excessively “rigid” labor markets (hence the call to make it easier to hire and fire workers, and reduce unionization), insufficiently low tax rates (hence the drive to reduce corporate tax rates), a largely unskilled labor force (hence the push for more H1-B visas for Silicon Valley jobs), and too little global competition (hence the need for more, not less free trade).
If deficient demand (and a concomitant commitment to full employment) is not considered relevant as far as productivity goes, the policy framework is very different. Fiscal policy is diminished because there is little point in “wasting” limited financial resources on fiscal stimulus, higher real wages, or a restructuring of the private debt overhang. And economic inequality doesn’t even factor into the equation at all. Rising inequality, growing polarization and the vanishing middle class have all been seen as unfortunate, but inevitable byproducts of globalization, rather than drivers of slow potential growth.
By contrast, the McKinsey analysis leads to a very different policy outcome—one that places demand management and full employment at the heart of macroeconomic policy-making. In fact, there is a historical basis to support the authors’ view that demand does matter when considering the issue of productivity. The post-WWII period until the OPEC induced recessions of the early-1970s was a time during which wage gains grew in line with productivity increases. The resultantly higher wages thus provided an incentive for firms to invest in labor-saving machinery, with the upshot that productivity growth surged further as a result. That all began to change some 40 years ago, as market fundamentalism and “supply-side” policies began to supersede traditional Keynesian demand management. The link between productivity and wage gains was severed (more national income went to corporate profits) and wage gains were suppressed (because labor was seen simply as a cost input, rather than a source of demand).
This redistribution of national income in favor of corporations away from the workforce removed the incentives businesses had to invest in the modernization of their capital stock (ultimately impacting productivity growth). Even as profits rose, incomes remained stagnant for a large proportion of the population. Globalization and offshoring entrenched this new low wage-growth orientation of businesses, in combination with domestic labor market deregulation and de-unionization. Fiscal policy was gradually de-emphasized in favor of ‘independent’ central bank-led monetary policy, but the problem of deficient demand and wage stagnation was masked for a time as the use of financial engineering pushed ever-increasing debt onto the household sector (as they used borrowing to compensate for stagnant growth in income). As Bill Mitchell wrote in 2012, “Riskier loans were created and eventually the relationship between capacity to pay and the size of the loan was stretched beyond any reasonable limit.” Mitchell also wrote, “The household sector, already squeezed for liquidity” by virtue of non-existent wage growth, was “enticed by the lower interest rates and the vehement marketing strategies of the financial engineers” to take on more debt.
Meanwhile, the increasing financialization of the global economy enabled the rich to have their cake (profits) and eat it (by channeling them to offshore tax havens). Corporate CEOs, the so-called “risk-takers,” increasingly negotiated to have their compensation packages tied to stock price appreciation, which incentivized companies to use cash flow for stock buybacks, rather than invest in plant and equipment. The scale of these buybacks was analyzed by economics professor William Lazonick, who documented that between 2003 and 2012, the 449 companies who comprised the S&P index “used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market.” As stock prices rose, so too did the CEO/directors’ overall compensation packages until the whole system cracked in 2008.
The only real surprise is that it took so long for the likes of McKinsey to recognize what was blindingly obvious to most people for decades. Without a hint of irony, the authors of the report cite the famous example of Henry Ford in the early part of the 20th century. Ford had the rare insight among the entrepreneurs of his day that workers were not simply a cost input, but an important source of demand for the products they were producing: “When other employers followed suit, it became clear that Ford had sparked a chain reaction. Higher pay throughout the industry helped lead to more sales, creating a virtuous cycle of growth and prosperity.”
But Ford was not the originator of this insight. John Atkinson Hobson, a British economist in the latter part of the 19th century and first part of the 20th century, was one of the first to champion a high wage economy. Reflecting the insights of the McKinsey authors some 150 years earlier, Hobson argued that wage suppression was unhealthy and immoral. He advocated redistributing income to low earners—that is, moving toward greater equality—which he argued would reduce the capacity of the wealthy to save and place more spending power into the hands of those with higher consuming propensities. He also supported greater labor unionization and was one of the early advocates of social welfare and public education (providing support, for example, to David Lloyd George’s “People’s Budget” introduced by the future British prime minister when he was chancellor of the exchequer in 1909). Essentially, Hobson promoted the notion of a “high-wage economy” to mitigate the problem of “an accumulation of Capital in excess of that which is required for use, and this excess will exist in the form of general over-production.”
Hobson and his co-author, A.F. Mummery, made the case that if productivity growth outstripped real wages growth, you would have “under-consumption,” the upshot being that overproduction would ensue. (Of course, as Bill Mitchell has trenchantly observed, the authors were developing these insights a century before financial deregulation and the democratization of credit facilitated private debt binges, both of which masked and deferred the effects of under-consumption, while simultaneously increasing financial fragility, as the 2008 crisis illustrated.)
In any case, the insights of Hobson, Henry Ford and later Keynes are finding resonance today. We have an economy where workers, who have traditionally relied on real wages growth to fund consumption growth, have found themselves increasingly cut off from the fruits of national prosperity as their wage gains have been suppressed in the interests of securing higher profits. The usual justification for this shift in income away from workers to corporations is that the latter use the resultant profits to stimulate investment, which will ultimately benefit the company as a whole (including its workforce). But another byproduct of overly financialized economies is that corporate profits historically used for productive ventures have instead gone into stock buybacks, fueling the speculative asset bubbles that have percolated across the global economy.
It is also clear that the thrust of policies antithetical to labor continues unabated under Trump and his oligarch supporters, the most recent manifestation being the Janus v. AFSCME, now being heard by the Supreme Court. This is a case that has the potential to strip unions of a major source of income, the latest blow to a movement where only 9 percent of the American workforce is currently unionized. These oligarchs (the Koch brothers, the Mercer family, the Bradley Foundation, etc.) have long buttressed successive federal governments (and a number of “right to work” states), which have supported their agendas via privatization, outsourcing, the removal of any campaign finance restrictions, and welfare-to-work requirements, to list a few of the most pernicious examples.
The substantial redistribution of national income toward capital over the last 30 years has undermined the capacity of households to maintain consumption growth without recourse to debt, and increasingly hindered the economy’s growth capacity. But the “secular stagnation” described by economists such as Lawrence Summers is a phenomenon that is the product of conscious policy choices, not some kind of inevitable fate that afflicts helpless economic actors as in an ancient Greek tragedy. Rather, economic stagnation and sluggish productivity are the outcomes of conscious policy choices. They reflect a profound failure of sensible macroeconomic demand management. McKinsey is the latest to affirm this economic reality. But will policy-makers act on their insights, or do we have to wait for the onset of yet another global economic crisis before the problems they describe are truly addressed?