Restoring the US Middle Class - 1

In the interest of restoring a viable middle class to the United States of America, I will reproduce sequentially chapters of my book in this space. The title is 'Occupy Wall Street Plan 12: A Proposal for Twelve Specific Governmental Actions to Correct Some Economic Imbalances in the United States of America Kindle Edition'

The book is available as a Kindle book here : https://www.amazon.com/Occupy-Wall-Street-Plan-Governmental-ebook/dp/B00UK97C84/ref=asap_bc?ie=UTF8

My hope is that a more viable middle class will reduce class tensions.


Occupy Wall Street Plan 12

1.Strengthen Labor Unions

Unions are Created by Law and Organizing

Union organizing and negotiating rights are created by Federal labor laws. When unions can organize and press for higher wages, the country benefits from higher incomes going to the middle class. It is true that unions can be messy organizations, but overall they succeed in raising middle class incomes when they can function freely. This will increase middle class purchasing power and help restore Aggregate Demand.

An inevitable result of raising wages through union activity will be that businesses have to raise prices to survive - that will require some adjustments to our trade policies as discussed below.

As an economist I am aware that statements about policy don't carry weight unless they are supported by statistics.

Unions’ Effects on Wages and GDP

Below I provide some statistics courtesy of infoplease.com and data360.org about the impact of declining wages on our GDP with a consequent need for increased union activity to raise wages, but first we look briefly at two competing economic philosophies.

By themselves, numbers don't carry any weight. The interpretation of the statistics provides the weight. But, numbers can be interpreted differently by folks with different viewpoints.

Classical Economic Theory

One likely interpretation of any statistic is the Classical Economic philosophy which encompasses Free Market doctrine. An interpretation from an observer with this focus will suggest that any statistic which implies any interference in free markets is bad for the economy.

To such Classical Economists, the very idea of unions is an anathema because unions try to organize workers so they can bargain collectively.

Keynesian Economic Theory

A Keynesian focus is another possible interpretation; this focus will suggest that Free Markets are useful but occasionally create such huge social misery that the government must intervene in order to secure the best result for society.

Wages and Unions

The hypothesis is that wages and consumer incomes have declined proportionally and as a share of GDP coincidentally with a decline in union membership in the United States since the 1950's. We might expect this decline to show up as a reduction in the share of GDP accounted for by personal consumption expenditures; we assume that most of any change in personal consumption expenditures is due to changes in disposable incomes, except for occasional borrowing binges such as occurred in 2005 to 2007.

Comparing the percentage share of GDP accounted for by personal consumption expenditures and also by Gross private domestic investment does indeed show that significant changes have occurred.

For example, in 1960 and 1970, consumption accounted for 63.0% and 62.4% of GDP respectively while investment accounted for 15.0% and 14.7% respectively.

We can take those as a desirable base relationship since the United States enjoyed good economic times in those years.

Looking forward to the current situation, we find that consumption expenditures have INCREASED their share of GDP to 70% or more consistently from 2002 to today.

BUT, we see that investment has DECLINED from a range of 15.0% of GDP to a low of 11.7% in the 2009, Q3.

Although this is the opposite of what the hypothesis above suggests, the relationship of consumption and investment does in fact support the concept that wages should be increased in order to support economic growth and increasing Aggregate Demand.

Here's why: Keynesian theory predicts that businesses increase investment when they expect a rising GDP in the future and decrease investment when they expect the opposite.

Business investment of 15% to 18% of GDP - which was the case between 1960 and 1980 - coincided with good economic times in our recent past.

Business investment of less than 12% of GDP coincided with a severe recession, regardless of the share of GDP accounted for by consumption.

Good economic times are accompanied by high business investment and bad economic times are accompanied by low investment.

Keynes theory suggests that businesses increase investments when they predict good economic times ahead. With high union wages - such as we had in the 1960's and 1970's - businesses are optimistic about the future and make investments.

Classical theory, on the other hand predicts that businesses will increase investment when interest rates are low. This theory is clearly inadequate to explain why business investment was at historically low levels of GDP in 2009 even though interest rates were at zero. One of the last times that business investment was that low was in 1930 when it was at 11.8%.

The policy implication of this is also clear: good economic times require that businesses expect high consumer demand in the future before they commit to investing in new plants and equipment.

Stronger unions will raise wages, create optimism about future demand and will result in increased business investment and Aggregate Demand.